Annual Financial Report

Strategic Equity Capital plc Report & Financial Statements for the year ended 30 June 2011 The Full Annual Report and Accounts can be accessed via the Company's website at: www.strategicequitycapital.com or by contacting the Company Secretary by telephone on 01392 412122. Investment Objective The investment objective of the Company is to achieve absolute returns (i.e. growth in the value of investments) rather than relative returns (i.e. attempting to outperform selected indices) over a medium-term period, principally through capital growth. The Company's investment policy can be found in the Report of the Directors in the Report of Financial Statements for the year ended 30 June 2011. Investment Manager's Strategy The Investment Manager, SVG Investment Managers Limited ("SVGIM"), employs a strategy to invest in publicly quoted companies which create value through strategic, operational and management change. SVGIM follows a practice of constructive corporate engagement and aims to work with management teams in order to enhance shareholder value. A more detailed explanation can be found in the Investment Manager's Report below. Shareholder information Financial calendar Company's year-end 30 June Annual results announced September Annual General Meeting November Company's half-year 31 December Half yearly results February announced Share price The Company's Ordinary shares are listed on the London Stock Exchange. The mid-market price is quoted daily in the Financial Times under `Investment Companies'. Share dealing Shares can be traded through your usual stockbroker. Share register enquiries The register for the Ordinary shares is maintained by Computershare Investor Services plc ("Registrar"). In the event of queries regarding your holding, please contact the Registrar on 0870 707 1285. Changes of name and/or address must be notified in writing to the Registrar. NAV The Company's net asset value is announced weekly to the London Stock Exchange. Website Further information on the Company can be accessed via the Company's website www.strategicequitycapital.com Capital structure Issued share capital 70,122,203 Ordinary shares of 10p each: Â£7,012,220. At 30 June 2011 the issued share capital of the Company was 70,122,203 Ordinary shares. All shares have equal voting rights. Financial summary At 30 June % 2011 2010 change Performance Total returnÂ¹ 55.35% Capital return Net asset value (statutory) per 103.35p 66.72p 54.90% Ordinary share Ordinary share price (mid-market) 93.00p 51.25p 81.46% Discount of Ordinary share price to 10.01% 23.19% net asset value Total assets (Â£'000) 73,877 51,403 43.72% Equity shareholders' funds (Â£'000) 72,470 51,222 41.48% Total expense ratio (TER)Â² 1.52% 2.09% Revenue return per Ordinary share 0.40p 0.31p Dividend yield 0.44% 0.60% Proposed final dividend for year 0.44p 0.30p 46.67% Ordinary shares in issue with voting rights (excluding shares held in treasury) 70,122,203 6,770,474 (8.66%) Ordinary shares held in treasury - 3,045,500 (100.00%) Year's Highs/Lows High Low Net asset value per Ordinary share 104.51p 65.69p Ordinary share price 93.00p 51.00p Discount of Ordinary share price to net asset value 27.06% 9.00% Â¹Total return is the increase per share in net asset value plus dividends paid. Â²Total expense ratio calculated as the total expenses divided by the average shareholders' equity. Chairman's report Introduction I am pleased to report that the Company made good progress in all areas over the past twelve months to 30 June 2011, delivering strong and market beating performance, narrowing its discount, reducing its undrawn commitments to unlisted investments and improving its size and liquidity. The Manager's focus on undervalued companies with strong competitive positions in growing niche markets worked well. The portfolio also benefitted from its high exposure to companies with a high proportion of overseas earnings and an ability to pass on inflationary pressures. It is pleasing to see that the same holdings which contributed to last year's excellent performance have continued to deliver strong performance as the corporate cycle has moved on. Performance As at 30 June 2011 the Company had net assets of Â£72.5 million (103.35p per share). This represented an increase of 54.90% over the previous year, and was driven by a combination of factors including: continued strong operating performance from mature portfolio holdings, amplified by the Company's investment in Strategic Recovery Fund II, and the absence of any "problem" holdings within the portfolio. The Company's performance per share was considerably better than that of comparable markets; it outperformed the FTSE Small Cap Companies (ex Investment Trust) Index by 30.8%. The Company's Net Asset Value ("NAV") per share has cumulatively outperformed the comparable index over 5 years by 6.4%, and over 3 years by 16.2%. This increasingly consistent performance partially reflects the refinements made to the investment process following the financial crisis, and has confirmed my confidence in the Company's investment strategy. Including dividends paid the Company delivered a total return to shareholders of 82.05% over the 12 months (based on share price). The discount to NAV at which the Company's shares trade narrowed again to an average of 19.14% over the year, and ended the period at 10.01%, a three year low. It is worth noting that the level of the discount has been narrowing consistently since the end of 2009, and is now much more in line with other smaller company focused investment trusts. Discount Management During the year, the Company bought back 6,648,271 shares, at an average discount to NAV of 12.8%, at a cost of Â£5.96m. All these shares were cancelled. The Board remains committed to buying back shares when it believes that to do so is in the best interests of the shareholders generally, in particular with a view to reducing the discount volatility and generating modest enhancements to the NAV remaining shares. However, as SVG Capital plc (the Investment Managers parent company) and connected parties hold 26.13% of the issued share capital, the Board intends to seek approval of the independent shareholders of a waiver of certain obligations that may arise under the City Code as a result of further share buybacks. It is expected that the General Meeting at which this approval will be sought will be held immediately following the conclusion of this year's Annual General Meeting and a separate circular will be sent to shareholders regarding this meeting. The Board There were no changes to the Board over the period. The Board has operated effectively during the period and I believe that the current composition of the Board is appropriate. Investment Manager The Manager has agreed to provide the Company with protective notice in the event of the shareholders of the Company voting against its continuation. As adopted by shareholders at the General Meeting in November 2010, the new management fee arrangements are in place and are set out below in the Report of the Directors. Banking Arrangements The Company currently has a Â£5.0 million revolving facility with RBS which expires on 14 July 2012. This facility is currently unutilised. Following the better than expected reduction in undrawn commitments to unlisted investments, the Board has authorised the Manager to use this facility to increase investment flexibility over the short term. Dividend The Directors continue to expect that returns for shareholders will derive primarily from the capital appreciation of the shares rather than from dividends. The Board is proposing a final dividend of 0.44p per Ordinary share for the year ended 30 June 2011, payable on 17 November 2011 to holders on the register as at 21 October 2011. AGM The AGM of the Company will be held at 11.30am on 8 November 2011 at the offices of SVG Investment Managers Limited, 61 Aldwych London WC2B 4AE. Continuation Vote Shareholders have the opportunity to vote on an ordinary resolution to continue the Company as an investment trust at each annual general meeting. As the Company met its annual investment performance and discount tests (having substantially outperformed, on a NAV total return basis, the FTSE SmallCap (ex Investment Companies) Index over the three years ended 30 June 2011 and with the average discount at which the Company's shares traded over the three months to 30 June 2011 being narrower than that of the UK Smaller Companies sector over that period), the Board is recommending shareholders to vote in favour of the continuation Resolution. If that Resolution is not passed, the Company will be entitled to give notice terminating the Investment Manager's appointment without any compensation being payable to the Investment Manager in lieu of notice. Marketing Activities The Manager and the Company's broker continue to work together to broaden the shareholder base. I am optimistic that the Company's narrowing discount, improving long term track record and increased size should all help to achieve this goal over the coming year. Outlook The Board shares the Manager's belief that the prospects for the Company are good. This reflects the attractive valuation of the portfolio and the Manager's increasingly successful track record of identifying undervalued companies with the potential to experience significant uplifts through strategic, operational and management change. J Hodson 21 September 2011 Directors The Directors as at the date of this report and who served during the year, all of whom are non-executive, are as follows: John Hodson (Chairman) Sir Clive Thompson (Deputy Chairman) John Cornish Michael Phillips Ian DighÃ© Investment Manager's report Investment Strategy Our strategy is to invest in publicly quoted companies which will create value through strategic, operational and management change. We follow a practice of constructive corporate engagement and aim to work with management teams in order to enhance shareholder value. We aim to build a consensus with other stakeholders, and prefer to work alongside like-minded co-investors as leaders, followers or supporters. We try to avoid confrontation with investee companies as we believe that there is strong evidence that overtly hostile activism generally generates poor returns for investors. We are long-term investors; we typically aim to hold companies for the duration of three year investment plans that include an entry and exit strategy and a clearly identified route to value creation. The duration of these plans can be shortened by transactional activity or lengthened by adverse economic conditions. Before investing we undertake an extensive due diligence process, assessing market conditions, management and stakeholders. Our investments are underpinned by valuations, which we derive using private equity-based techniques. These include a focus on cash flows, the potential value of the company to trade or financial buyers and potentially beneficial changes in capital structure over the investment period. Our typical investee company has a market capitalisation of under Â£150m at the time of initial investment. We believe that smaller companies provide the greatest opportunity for our investment style as they are relatively under-researched, often have more limited resources, and frequently can be more attractively valued. We believe that this approach, if properly executed, will generate favourable risk adjusted returns for shareholders over the long term. Market Background The period initially saw a strong recovery in UK stock markets led by cyclical sectors in the second half of 2010. This was followed by a mild sell-off in the first half of 2011 driven primarily by macroeconomic concerns and a plethora of disruptive world events including the earthquake in Japan and the "Arab Spring" uprisings. On balance, the corporate outlook remained positive, with continued earnings growth and debt reduction. Rather the threat of sovereign debt defaults in peripheral Europe, and then the dawning realisation that printing money and negative real interest rates would prolong rather than solve the debt crisis, led to risk aversion. Smaller companies marginally underperformed the FTSE 100 index by 1% over the twelve months. Once again, the best performing segment of the market was the FTSE 250 index, to which the Company has little exposure. This may have been driven higher by larger institutional investors attempting to chase smaller company returns in relatively liquid companies. One of the consequences of this macro uncertainty was very subdued M&A activity in the UK market. Both takeovers of public companies and secondary fundraisings were few and far between. In addition liquidity among most markets seized up at the beginning of 2011, with trading volumes among FTSE 100 and 250 companies materially lower than prior years. Although smaller companies also suffered from poor liquidity from March until May, June volumes rebounded somewhat. Performance Performance over the period was driven principally by stock specific factors, with self help and recovery situations driving the growth in net asset value. Within the context of our corporate engagement strategy the tactic of investing in highly cash generative, niche market leaders, with a high proportion of overseas earnings and avoiding companies with exposure to UK public or consumer spending has worked well again. High market volatility and low volumes combined with substantial changes to forecast earnings and ratings to produce some very large share price movements over the period. E2V was the standout performer, delivering a total return of 170% as the results of its restructuring combined with a recovery in end markets led to substantial earnings improvement and a return to the dividend list. Gooch & Housego delivered a return in excess of 100% before the position was exited. RPC, having completed its three year restructuring programme, made an attractive acquisition, returned 84% and entered the FTSE 250. Lavendon returned 83% following significant reduction in its debt, and the announcement of a nascent recovery in its end market and the commencement of an operational review. Finally KCOM returned 81% after successfully completing its restructuring programme and increased its dividend substantially. Other holdings also achieved returns significantly in excess of the market. 4imprint gained 40% across the year, driven by continued recovery and growth in its US operation. Lupus also gained 40% on the back of continued debt reduction, returning to the dividend list and evidence of market share gain in flat, depressed markets. Pinewood gained 40% over the year, with the company being successfully bid for by a major shareholder in June 2011. Mecom and Allocate returned 27% and 4% respectively over the year. Mecom's operational and financial turnaround has continued to meet and exceed our expectations except for a recovery in the top line in the Netherlands. It also signalled a return to the dividend list in the autumn of 2011. The share price has proven to be volatile and often driven, incorrectly in our view, by sentiment towards the UK newspaper sector. We believe that it remains grossly undervalued. Allocate started the year well with a significant contract win in the Australian market. Disruption among its NHS customer base led investor sentiment lower during the Spring of 2011, but the company's trading update in June confirmed it had achieved its forecasts. On the negative side Wilmington fell 19% following a profit warning driven by a false recovery in its training division, and Statpro which returned -2% across the year as the market digested the implications of the decision to invest substantial capital into the new SaaS based product. Top 5 contributors to performance Company Valuation Period attribution Â£'000 % E2V Technologies plc 8,406 13.9 Strategic Recovery Fund II 11,807 8.5 RPC Group plc 6,351 8.3 KCOM Group plc 6,336 6.4 Lavendon Group plc 5,970 5.1 Bottom 5 contributors to performance Company Valuation Period attribution Â£'000 % Wilmington Group plc 2,149 (0.9) Redstone plc - (0.2) Western & Oriental - (0.1) Kewill plc 2,560 - CVS Group plc 1,503 0.3 Once again, there were far fewer negative contributors to performance than positives over the period, with Wilmington being the only material disappointment over the year. Redstone and Western & Oriental were legacy holdings exited during the year. Both Kewill and CVS are relatively new investments and we anticipate steady value creation over the usual investment horizon. Dealing activity The level of portfolio activity was in line with our stated investment strategy of three year holding periods with Â£21.9m of disposals (excluding distributions from unlisted investments) in the period representing around 32.8% of the weighted average NAV. In addition Â£545k of net distributions were received from unlisted investments. Â£16.1m of purchases were made (excluding purchases of unlisted investments) with 42% of purchases representing money into new investments, the remainder being additions to existing holdings. The primary sources of proceeds over the period were from the full exit of successful mature holdings, top slicing strong performers and continued clearing out of the tail of the portfolio. Full successful exits were made in Gooch & Housego (Â£2.9m), Spirent (Â£2.6m), and Intec. All three investments achieved in excess of 2x cash multiples, with Gooch generating an IRR of 283%. The position in Pinewood was realised following the takeover bid, raising Â£2.3m. Strong performances from RPC, KCOM and E2V necessitated some top slicing, raising Â£4.7m, Â£2.3m and Â£2.5m respectively. A run up in the Statpro share price in the Spring enabled a further realisation of Â£1.3m. The longstanding position in Thorntons was reduced in the run up to Christmas due to weather related trading concerns, realising Â£1.8m. Finally, small legacy positions in Filtronic, Redstone and Western & Oriental were fully exited. We deployed the proceeds into building the existing holdings and establishing small to medium weights in three new investments. Existing positions in Lupus and Mecom were taken to full weights, accounting for purchases of Â£3.4m and Â£2.4m respectively. Â£3m was deployed funding the RPC rights issue and subsequent modest opportunistic top ups and modest top ups were made in Allocate and KCOM. The background to these investments has been detailed in prior reporting periods. Â£6.8m was deployed in new investments, mainly Wilmington (Â£2.9m), Kewill (Â£2.5m) and CVS (Â£1.3m), all being made through market purchases. Wilmington is a provider of specialist business information and training services. The Company's investment was predicated on a stable core earnings base from the business information division and initial signs that the depressed legal training business had begun to recover in the first few months of 2011. This recovery has proven to be a false dawn. In addition the company has subsequently experienced faster than anticipated decline in small but profitable legacy print products, which has necessitated accelerating spend to transition the products to a digital format. Whilst the business remains strongly cash generative and offers a dividend yield of more than 6%, we are examining whether more attractive medium term returns exist elsewhere. Kewill is a global provider of niche software and technology solutions for supply chain and logistics management. It is a market leader in a fragmented market, has more than 40,000 users worldwide many of whom have been customers for many years. It is strongly cash generative and has sound management. The board has been refreshed during the past year and is focused on re-invigorating growth. The valuation is highly undemanding given the quality of the company and scope exists for accelerating shareholder returns. CVS is the UK's leading provider of veterinary services. CVS operates more than 220 practices, enjoying a market share of 12% and a relative market share of 3x larger than the next largest competitor. In addition, it operates its own crematorium and diagnostics services and sells veterinary medicine and premium food products online. Following several years of a debt funded consolidation strategy, it experienced negative like for like sales growth in the first half of 2010. This necessitated two profit warnings, and led to a substantial fall in the share price. The Company's investment at this point was predicated on like for like sales stabilising, the strong underlying cash flows of the business, its attractive cash flow yield, and scope to improve returns through operational consolidation of recent acquisitions. Our bar for new investments remains high in terms of asset quality, valuation and risk adjusted prospective returns. We maintain an active pipeline of new investments, executed both through market purchases and in addition through secondary fundraisings. The latter have been few and far between of late, but we anticipate a gradual pick up over the next year and remain actively engaged with the corporate broking community to ensure we have sufficient time to conduct due diligence on the best potential opportunities. Portfolio Review The portfolio remained highly focused, with a total of 18 holdings and with the top 10 holdings accounting for 86.8% of the portfolio at the end of the financial period. The portfolio remains predominantly invested in quoted equities, however the percentage of the portfolio invested in unlisted securities (including SRF II) changed from 16.5% to 19.3% at the end of the period due to their strong performance. 3.2% of the net assets was invested in cash at the period end. Top 10 holdings A summary of the top 10 investments at 30 June 2011, which represented approximately 85.4% of net assets (2010: 76.5%), is given below: 2011 2010 Date of % of % of % of Sector first Cost Valuation invested invested net Company Classification investment Â£'000 Â£'000 portfolio portfolio assets Strategic Recovery Fund II Unquoted investments Jul 2009 4,695 11,807 16.6 13.9 16.3 E2V Technologies Technology Oct 2009 3,076 8,406 11.8 8.5 11.6 Lupus Capital Manufacturing Apr 2007 5,086 6,597 9.2 4.4 9.1 RPC Group Manufacturing Feb 2007 3,489 6,351 8.9 9.8 8.8 KCOM group Telecoms May 2007 2,959 6,336 8.9 9.0 8.7 Lavendon Group Support Nov 2009 3,991 5,970 8.4 6.6 8.2 services Mecom Group Media Aug 2005 7,482 5,570 7.8 5.1 7.7 4imprint Group Support Feb 2006 4,885 5,200 7.3 7.9 7.2 services Allocate Software Technology Dec 2009 2,485 3,096 4.3 5.0 4.3 Kewill Technology Mar 2011 2,507 2,560 3.6 0.0 3.5 Sector spilt Percentage Technology 21.6 Unquoted investments 19.0 Manufacturing 18.3 Support services 16.7 Media 11.4 Telecoms 8.7 Retail 2.7 Net cash 1.6 Size split Percentage (by market capitalisation) Â£100m-Â£300m 37.3 <Â£100m 24.6 Unquoted 19.0 >Â£500m 8.8 Â£300m-Â£500m 8.7 Net cash 1.6 Portfolio (excl Investment (money weighted) Companies) Index Price/Earnings ratio FY1 11.3X 12.4X Dividend yield 2.9% 3.0% Price/Book ratio 1.9X 0.5X Prices/Sales ratio 0.8X 0.5X SVGIM cash flow yield 14.2% N/A Forecast earnings growth (FY1) 7.3% 8.1% Net debt to EBITDA 1.3X 1.6X Source: Factset Portfolio Analysis System Unlisted investments The investment in SRF II has progressed well in terms of distributions received and the likely lifespan of the fund which is better than expected at the time of its acquisition. The company has received additional distributions of Â£1.0m from SRF II and Â£0.5m from Vintage Mizuho I, bringing the total distributions from unlisted investments to Â£1.5m for the year, slightly below the Â£1.7m calls made for the SRF II. The SRF II investment period ended in June 2011 and the fund is now a distributing vehicle. The manager continues to anticipate the fund will be fully returned by the end of June 2013. The outstanding commitments relating to Vintage is Â£2.0m and the manager has communicated that it does not expect to make any further net draw downs. Top 10 Investee Company Review 4imprint Group is the fourth largest distributor of promotional products in the world with an international network of companies in the UK, USA, Hong Kong and Europe. We have been involved with the company since a change of management in 2003. The company has benefitted recently from material upgrades to forecast earnings. The US business has continued to grow strongly and we believe its value is significantly in excess of the value of the whole company. Funds managed by SVGIM currently hold approximately 13% of the company's equity. Allocate Software is the leading workforce optimisation software applications provider for global organisations with large, multi-skilled workforces. It is the clear European market leader in the healthcare vertical market, where the compelling return on investment for clients is driving significant growth. It is also the clear lead provider of optimisation software for the global offshore and defence markets. A strong management team is focused on delivering continued profitable growth, maximising the commercial potential of the product suite. SVG became a major shareholder as part of a placing to fund the acquisition of its Nordic equivalent, Timecare AB, in December 2009. The company has subsequently made two further acquisitions of complimentary businesses - Dynamic Change in the UK and RosterOn in Australia. Funds managed by SVGIM currently hold approximately 7% of the company's equity. E2V Technologies is a global market leader in the design and manufacture of specialist electronic components and low volume/high value and high reliability semiconductors, predominantly for the medical, aerospace, defence and industrial markets. An ill-timed acquisition in September 2008 funded by debt left the balance sheet of the business over-stretched as the economic downturn began. A new finance director, well known to SVGIM, was appointed in May 2009. The management team has acted to raise equity to pay down debt as well as restructure the UK and French cost base, a process which is now largely complete. The company made its initial investment during December 2009 via a placing and a deeply discounted rights issue to refinance the balance sheet. The restructuring has been executed flawlessly and the company is returning to a growth track. Funds managed by SVGIM currently hold approximately 10% of the company's equity. KCOM Group is a provider of communications solutions to businesses and the public sector in the UK. It has a very strong regional consumer-based business based around Hull in East Yorkshire. Following discussions instigated by shareholders the company announced major changes to its management team in November 2008. Following further consultation with shareholders the company has implemented an innovative remuneration package that closely aligns shareholders and management. Since then, the company has undergone a strategic review and announced an important network sharing deal with BT Group. The positive impact of these changes and the company's growth potential are beginning to be appreciated by the market, helped by the increase in dividend over the year of 150% and an ongoing dividend growth commitment of 10% p.a. Funds managed by SVGIM currently hold approximately 5% of the company's equity. Kewill is a leading global provider of software and services to simplify global trade and logistics. Its applications are used to reduce complexity and automate manual processes across supply chains, in areas such as sourcing, customs, compliance, transportation, storage, finance, visibility and connectivity. The company was founded in 1972 and has sales activities in the UK, Europe, North American and Asia. Kewill has generated consistent returns to shareholders during the past eight years and its revenues proved resilient during the credit crisis. Historic strong cashflows have been used to acquire complementary businesses in its sectors. We believe that a recent refresh of the Board, combined with a medium term improvement in the macro environment, augur well for accelerating organic growth, continued operating margin progression and shareholder value creation. M&A activity is a recurrent feature in its sector and we believe it unlikely that Kewill will remain independent in the long term. Funds managed by SVGIM currently hold approximately 3% of the company's equity. Lavendon Group is the market leader in the rental of powered aerial work platforms in both Western Europe and the Gulf States. The group entered the current downturn having over-spent on equipment, and with an overstretched balance sheet. The nature of powered access equipment is such that capital expenditures can be reduced materially for a significant amount of time without detriment to the fleet. We believe that the company will generate significant surplus cash flow over the next two years which will be used to pay down debt and thus create value for equity shareholders. We invested in the company via a fundraising in late 2009 which brought the company's debt down to high but manageable levels, and have been actively engaged with the board to help drive improved returns. Since 2009, the company has met its debt reduction targets, announced an operational and strategy review and executive board changes, including the appointment of an advisor to SVGIM as CEO of its European operations. Funds managed by SVGIM currently hold approximately 10% of the company's equity. Lupus Capital is a leading international supplier of building products to the door and window industry, and the world's leading manufacturer of marine breakaway couplings. The company has significant operations in nine separate countries across Europe, the Americas, Asia and Australasia. The building products division enjoys clear market leadership in a number of niches, with a highly diversified customer base, serving both the new build and RMI (repair and maintenance) markets. The building products division has been adversely impacted by the significant fall in residential construction activity experienced since 2007, which, combined with a geared balance sheet, led to a material fall in the share price through 2008. Despite end markets continuing to trade at low ebb, the building products division generates double digit margins with strong cash flow. The marine couplings business operates in a structural growth market and is a very high quality asset. We began building our stake in the company in late 2009 following the appointment of a new chairman, who has subsequently reconstituted the executive management and non-executive board. Since then, strong cashflows have reduced the debt burden substantially. We believe the company trades at a material discount to its sum of parts valuation and that there is substantial upside from a medium term recovery in the end markets of the building products division. Funds managed by SVGIM currently hold approximately 6% of the company's equity. Mecom Group is a European media business. The group owns over 300 printed titles and over 200 websites in its four divisions, with substantial operations in the Netherlands, Denmark, Norway and Poland, generating readership of 23 million per week and attracting 32 million unique website users per month. The company has undergone substantial corporate restructuring in the last two years having over-extended its balance sheet through acquisitions in the run up to the recession. We have engaged extensively with the company, investigating the progress of its turn around, assisting it with investor relations and lobbying on its behalf for greater coverage by the analyst community. Having originally invested in 2005 and fully realised the cost of that investment before the recession struck, we have revisited the investment case and added to our holding, selectively building it to a high weight over the past 12 months. We believe that the company is worth multiples of its current share price based on precedent transactions and should create substantial value through de-gearing and dividends. Funds managed by SVGIM currently hold approximately 5% of the company's equity. RPC Group is Europe's leading manufacturer of rigid plastic packaging. Following lobbying from SVGIM and another shareholder acting in concert the group has initiated a strategic and operational review and made substantial changes to its board. The CEO has performed well against RPC's new objectives, leading to a significant reduction in group debt and ongoing focus on improving return on invested capital. As the restructuring ended, RPC acquired its smaller Scandinavian competitor, Superfos, funded by a mixture of debt and new equity. The Superfos transaction has the scope to deliver significant shareholder value through hard synergies, underpinning double digit earnings growth for the next three years. While this is a longer term investment we believe that there is still more for the taking, particularly when taking into account the scope for more favourable raw materials pricing. Funds managed by SVGIM currently hold approximately 4% of the company's equity. Wilmington provides information and training services to professional business customers in the legal services, financial services and healthcare sectors as well as pockets of the public sector. The company's business information division provides a number of must-have products to its client base and enjoys significant recurring revenues and strong cashflow. Digital delivery accounts for 75% of sales, and is forecast to account for virtually all information sales within 3 years. Demand for Wilmington's legal training services fell materially in the wake of the financial crisis. The core customer base for these services includes small and medium sized legal firms which have come under financial pressure as conveyancing and SME M&A volumes have fallen to almost unprecedented lows. A cyclical recovery is likely here, although may take longer than we had originally anticipated. Nevertheless, the company generates substantial cashflows, pays a generous well covered dividend, and has grown overseas sales so that they now represent a quarter of sales. Funds managed by SVGIM currently hold approximately 4% of the company's equity. Outlook Until the impact of the global financial crisis is fully worked through, and a solution to the currently high levels of Government indebtedness is found, global stock markets are likely to remain turbulent. Yet swings in markets and tough economic conditions should not distract investors from the excellent progress that public companies in the UK have made in the past three years. Levels of corporate indebtedness are reaching 20 year lows and operating margins are at record high levels. In addition the attractive governance and commercial benefits of a UK Listing mean that the UK stock market has now overtaken the Japanese as the second largest in the world, and that UK listed companies have by far the highest proportion of non-domestic earnings of any major market. For stronger, quality companies, the outlook for continued strong share price performance continues to look positive. The market continues to project double digit earnings growth and in excess of 3% dividend yield. Many companies have significant flexibility to grow dividends, buy back shares or initiate value-enhancing M&A. Historically, the Company has benefitted significantly from M&A as both trade and private equity investors' acquisition criteria often match our investment criteria and focus. The lack of trading volumes among larger companies, a seizure in IPOs, a lack of secondary fundraisings and very limited M&A placed immense commercial pressure on the brokerage houses. This should ultimately lead to less market efficiency, and increases opportunities for the Company to add value through its investment strategy. SVG Investment Managers Limited 21 September 2011 All statements of opinion and/or belief contained in this Investment Manager's report and all views expressed and all projections, forecasts or statements relating to expectations regarding future events or the possible future performance of the Company represent SVG Investment Managers Limited's own assessment and interpretation of information available to it at the date of this report. As a result of various risks and uncertainties, actual events or results may differ materially from such statements, views, projections or forecasts. No representation is made or assurance given that such statements, views, projections or forecasts are correct or that the objectives of the Company will be achieved. Extracts from the Report of the Directors The statement on corporate governance forms part of the Report of the Directors. The Directors present their report and financial statements for the year ended 30 June 2011. The Company has been incorporated with an indefinite life. The Company is registered in England with number 5448627. Business Review The Business Review should be read in conjunction with the Chairman's report and the Investment Manager's report above, and the statement on corporate governance below. The purpose of the Business Review is to provide an overview of the business of the Company by: - Analysing development and performance using appropriate key performance indicators ("KPI's"). - Outlining the principal risks and uncertainties affecting the Company. - Describing how the Company manages these risks. - Explaining the future business plans of the Company. - Setting out the Company's environmental, social and ethical policies. - Providing information about persons with whom the Company has contractual or other arrangements which are essential to the business of the Company. - Outlining the main trends and factors likely to affect the future development, performance and position of the Company's business. Review of the Business of the Company The principal activity of the Company is to conduct business as an investment trust. The Company is currently an investment company in accordance with the provisions of Section 833 of the Companies Act 2006. The Directors do not envisage any change in the Company's activity in the future. The Company has received approval from HM Revenue & Customs as an investment trust under Section 1158 of the Corporation Tax Act 2010 for the year ended 30 June 2011 ("Section 1158"). This approval is subject to there being no subsequent enquiry under corporation tax self assessment. Under Section 1158 companies can obtain `approved' status for tax purposes, meaning that such companies do not pay capital gains tax on any profits arising on disposals of their investments and in turn shareholders are only subject to capital gains tax on the disposal of their shares in the investment trust. The principal requirements for retaining `approved' status are: no single holding, at the time of investment, may exceed 15% of gross assets; 70% of total income must constitute investment income from securities; and no more than 15% of such investment income may be retained. It is the opinion of the Directors that the Company has directed its affairs so as to enable it to continue to qualify for approval as an investment trust for the year ended 30 June 2011 and the Company will continue to seek approval under Section 1158 each year. Investment objective The investment objective of the Company is to achieve absolute returns (i.e. growth in the value of investments) rather than relative returns (i.e. attempting to out-perform selected indices) over a medium-term period, principally through capital growth. Investment policy The Company invests primarily in equity and equity-linked securities quoted on markets operated by the London Stock Exchange where the Investment Manager believes the securities are undervalued and could benefit from strategic, operational or management initiatives. The Company also has the flexibility to invest up to 20% of the Company's gross assets at the time of investment in securities quoted on other recognised exchanges. The Company may meet all calls on its undrawn loan commitment to Strategic Recovery Fund II ("SRF II") and to Vintage 1 Limited ("Vintage"). Subject thereto, until such time as all of the undrawn loan commitment to SRF II has been called or, if earlier, SRF II's investment period has expired, save for investments pursuant to its commitments to SRF II and Vintage, the Company will not make any further investments in unquoted securities. Thereafter, the Company may invest up to 20% of its gross assets at the time of investment in unquoted securities, provided that, for the purpose of calculating this limit, any undrawn commitment to Vintage which may still be called shall be deemed to be an unquoted security. The maximum investment in any single investee company will be no more than 15% of the Company's investments at the time of investment. The Company will not invest more than 10%, in aggregate, of the value of its total assets at the time the investment is made in other listed closed-end investment funds provided that this restriction does not apply to investments in any such funds which themselves have published investment policies to invest no more than 15% of their total assets in other listed closed-end investment funds. Other than as set out above, there are no specific restrictions on concentration and diversification. The Board does expect the portfolio to be relatively concentrated, with the majority of the value of investments typically concentrated in the securities of 10 to 15 issuers across a range of industries. There is also no specific restriction on the market capitalisation of issues into which the Company will invest, although it is expected that the majority of the investments by value will be invested in companies with a market capitalisation of less than Â£300 million. The Company's Articles of Association permit the Board to take on borrowings of up to 25% of the net asset value at the time the borrowings are incurred for investment purposes. Investment Manager The Investment Manager appointed by the Company is SVG Investment Managers Limited ("SVGIM"). Established in 2002, the Public Equity Team of SVGIM were one of the first in the UK to invest in publicly traded equities using private equity techniques. The team now consists of five investment professionals who combine a number of complimentary skill sets, including corporate finance, traditional fund management, research and private equity disciplines. SVGIM currently has funds under management of over Â£200m. Performance Over the year to 30 June 2011, net assets have increased by 41.5% to Â£72.5 million (54.9% on a per share basis). Further information on the performance of the Company's portfolio is contained in the Investment Manager's report above. The Company's investment objective is one of capital growth and it is anticipated that returns for shareholders will derive primarily from capital gains. The Board only intends to declare final dividends where necessary. The Board recommends a final dividend of 0.44p (2010: 0.30p) per Ordinary share, amounting to Â£309,000 (2010: Â£230,000). Share capital At the year end the Company's issued share capital comprised 79,815,974 Ordinary shares, with 3,045,500 shares held in treasury (2010: 79,815,974 in issue and 3,045,500 held in treasury) representing 3.82% of the shares in issue). At general meetings of the Company, the holders of Ordinary shares are entitled to one vote for every share held. On 25 February 2011 the Company cancelled its entire holding of 3,045,500 Ordinary shares that were held in Treasury. Performance Analysis using Key Performance Indicators At quarterly Board meetings the Directors consider a number of key performance indicators to assess the Company's success in achieving its objective, principally: the NAV per Ordinary share, the movement in the Company's share price, the discount of the share price in relation to the NAV and the total expense ratio. - The Company's Statement of comprehensive income is set out below. - The NAV per Ordinary share at 30 June 2011 was 103.35p (2010:66.72p). - The mid market share price at 30 June 2011 was 93.00p (2010:51.25p). - The discount to NAV at 30 June 2011 was 10.01% (2010: 23.19%). - The total expense ratio at 30 June 2011 was 1.52% (2010: 2.09%). Principal Risks and Uncertainties Associated with the Business General Changes in economic conditions (including, for example, interest rates, foreign exchange rates and rates of inflation), industry conditions, competition, changes in the law, political and diplomatic events and trends, tax laws and other factors can substantially affect the value, adversely or positively, of investments made by the Company and, therefore, the Company's performance and prospects, in addition to the value of the shares. Market risk The Company's investments are subject to normal market fluctuations and the risks inherent in the purchase, holding or selling of equity securities and related instruments, and there can be no guarantee that the quoted value of the Company's investments will be realisable in the event of a sale. Market price and discount volatility The market price of the shares, as well as being affected by the Company's net asset value, also takes into account prevailing interest rates, supply and demand for the shares, market conditions and general investor sentiment. As a result, the total market value of the shares in the Company may vary considerably from the net asset value per share of the Company. In addition, other factors such as a concentrated shareholder base may contribute to infrequent trading or volatile share price movements. Details of the discount management policy can be found in the Chairman's report above. At the AGM held on 9 November 2010 the Company was authorised to make market purchases of its own shares up to a limit of 11,507,894 Ordinary shares. On 8 April 2011 the Company appointed Canaccord Genuity Limited to manage a programme to buyback Ordinary shares within certain pre-set parameters (the "buyback programme") which ended on 16 June 2011. During this time a total of 3,950,000 representing 4.95% of Ordinary shares where purchased for cancellation. Subsequently a further 2,698,271 representing 3.38% of Ordinary shares were purchased for cancellation making a total of 6,648,271 representing 8.33% of Ordinary shares cancelled during the course of the year to 30 June 2011. Reliance on the Investment Manager The Investment Manager has the right to resign as the Investment Manager under the Investment Management Agreement. The Investment Manager must give 12 months written notice to the Company. Such a resignation could have an adverse effect on the Company's performance and prospects. Nature of investee companies The investment portfolio is focused towards small and mid sized companies. These companies may involve a higher degree of risk than larger sized companies. In addition, while the investment policy of the Company is to identify and invest in companies that the Investment Manager believes are undervalued, there is a risk that the Investment Manager may be unable to deliver on the strategic, management and operational initiatives identified at the time of initial investment and, as such, companies may not prove to be capable of generating additional value for shareholders and so would not assist in achieving the Company's investment objective. Concentrated portfolio The majority of the Company's portfolio is invested in 10 to 15 companies operating in a number of industries, as was the initial intention. As a result the portfolio could carry a higher degree of risk than a more diversified portfolio. As the Company's objective is to achieve absolute returns rather than returns relative to a particular index or benchmark over a medium term period, the portfolio is managed without comparison to any stockmarket index. As a result there will be periods when the Company's performance will not correlate with such indices. Borrowing and gearing At 30 June 2011, the Company had not drawn down under a revolving credit facility of Â£5 million with The Royal Bank of Scotland. In accordance with the current loan facility's covenant, gross borrowings shall not be more than 20% of adjusted portfolio valuation at any time. The use of gearing can magnify both gains and losses in the asset value of the Company, dependent on the value of the portfolio at the time. This is in accordance with the Company's Articles of Association which permit borrowings of up to 25% of the net asset value at the time the borrowings are incurred. Unlisted investments The Company may invest a proportion of its gross assets in companies that are not listed or admitted to trading upon any recognised stock exchange. These investments may be illiquid and difficult to realise and more volatile than investments of larger, longer-established businesses. The SRF II valuation is updated monthly and other unlisted investments are updated at least once every six months. Overseas investments The Company may invest up to 20% of its gross assets in companies listed or traded on recognised stock exchanges other than the London Stock Exchange. In any instances where the Company does not hedge its currency exposure, the movement of exchange rates between sterling and any other currencies in which the Company's investments are denominated may have a material effect, unfavourable as well as favourable, on the return otherwise experienced on the investments made by the Company. Although the Investment Manager will seek to manage any foreign exchange exposure in relation to the Company, there is no assurance that this can be performed effectively. Currency hedging may force the Investment Manager to realise underlying investments as well as affecting the overall value of the portfolio and the net asset value per share. Movements in the foreign exchange rate between sterling and the currency applicable to a particular shareholder may have an impact upon that shareholder's returns in its own currency of account. Debt investments Any debt securities that may be held by the Company will be affected by any changes to interest rates. Future trends Both the Chairman's report and the Investment Manager's report above contain `Outlook' sections setting out their view of the future. Charges against capital The Company's current accounting policy is to charge its operational costs to revenue, with the exception of any performance fee, which will be charged wholly to capital. In the event of the Company making a revenue loss or becoming liable to a performance fee, it may need to liquidate some of its investments to pay operational costs or the performance fee or both. Regulatory risks A breach of Companies Act regulations and FSA/London Stock Exchange rules may result in the Company being liable to fines or the suspension of the Company from the London Stock Exchange. The Board, with its advisers, monitors the Company's regulatory obligations both on an ongoing basis and at quarterly Board meetings. If the Company did not comply with the provisions of Section 1158 of the Corporation Tax Act 2010 ("Section 1158"), it would lose investment trust status and become subject to corporation tax on realised capital gains. In order to minimise this risk, the Directors, the Investment Manager and the Company Secretary monitor the Company's compliance with the key criteria of Section 1158 on a monthly basis. At quarterly Board Meetings, compliance with these provisions is discussed in detail between the Board, the Investment Manager and the Company Secretary. Financial risks The financial situation of the Company is reviewed in detail at each Board meeting, monitored and approved by the Board and the Audit Committee. Financial instruments As part of its normal operations, the Company holds financial assets and financial liabilities. Full details of the role of financial instruments in the Company's operations are set out in Note 18 to the financial statements. Social, Environmental, Community and Employee Issues The Company has no employees and the Board consists entirely of non-executive Directors. As an investment trust, the Company has no direct impact on the environment and as such has no policies in this area. In carrying out its activities and in relationships with suppliers, the Company aims to conduct itself responsibly, ethically and fairly. Investment Management Agreement The Company's investments are managed by SVG Investment Managers Limited under an agreement dated 12 July 2005. The Investment Manager's appointment is subject to termination on 12 months notice given at any time by either party. There are no specific provisions contained within the Investment Management Agreement relating to compensation payable in the event of termination of the agreement other than entitlement to fees, including performance fees, which would be payable within any notice period. However, the Investment Management Agreement expressly permits, in the event that a continuation resolution proposed at any annual general meeting is not passed, the Company may give notice terminating the Investment Manager's appointment without any compensation being payable to the Investment Manager in lieu of any period of notice otherwise required under the Investment Management Agreement. At regular Board meetings the Directors keep under review the performance of the Investment Manager. In the opinion of the Directors the continuing appointment of SVG Investment Managers Limited as Investment Manager is in the best interests of shareholders as a whole. Investment Manager's fees The Investment Manager is entitled to receive from the Company a basic fee together, where applicable, with a performance fee. Existing basic fee Previously, a basic management fee was payable to the Investment Manager at the annual rate of 1% of the adjusted NAV of the Company. In order to avoid double charging of basic management fees payable to the Investment Manager by the Company, the NAV of the Company is reduced by the aggregate of the value of the Company's limited partnership interest in SRF II and the amount of the Company's undrawn loan commitment to SRF II. The basic management fee accrues weekly and is payable quarterly in arrears. Following shareholder approval at a General Meeting held on 9 November 2010, the basic fee is now the lower of (i) the basic fee as calculated under the previous fee arrangements and (ii) 1.0% per annum of the Company's market capitalisation. Performance fee arrangements At a General Meeting held on 9 November 2010 shareholders approved a new performance fee for the Investment Manager. The changes were made to better align the respective interests of shareholders with the Investment Manager with the parallel benefit of providing a better incentive for the Investment Manager to continue to deliver a strong investment performance over the longer term. The Company's performance is now measured over a rolling three year period ending on 30 June in each year, the first performance period having commenced on 1 July 2008 and ended on 30 June 2011. The Company's performance is measured by comparing the NAV total return per share over a performance period against the total return performance of the FTSE SmallCap (ex. Investment Companies) Index (calculated before any accrual for any performance fee to be paid in respect of the relevant performance period) at the end of the relevant performance period exceeds both: (i) the NAV per share at the beginning of the relevant performance period as adjusted by the aggregate amount of (a) the total return on the FTSE SmallCap (ex. Investment Companies) Index (expressed as a percentage) and (b) 2.0% per annum over the relevant performance period ("Benchmark NAV"); and (ii) the high watermark (which is the highest NAV per share by reference to which a performance fee was paid previously). Currently, the Investment Manager # will be entitled to 15% of the excess over the higher of the Benchmark NAV per share and the high watermark. Payment of a performance fee that has been earned will be deferred to the extent that the amount payable exceeds 1.75% per annum of the Company's NAV at the end of the relevant performance period (amounts deferred will be payable when, and to the extent that, following any later performance period(s) with respect to which a performance fee is payable, it is possible to pay the deferred amounts without causing that cap to be exceeded or the relevant NAV total return per share to fall below the relevant Benchmark NAV per share and the relevant high watermark). Administration Agreement Under an agreement dated 12 July 2005, company secretarial services and the general administration of the Company are undertaken by Capita Sinclair Henderson Limited ("CSH") for a fee for the year to 30 June 2011 of Â£71,000. The fee is subject to annual review based on the UK Retail Price Index. In the event that there is an increase in the issued share capital of the company, the fee will be adjusted upwards by agreement between the Company and CSH. The agreement may be terminated by either party giving notice of not less than six months. Payment of Suppliers It is the Company's policy to obtain the best possible terms for all business and therefore there is no consistent policy as to the terms used. The Company agrees with its suppliers the terms on which business will take place and it is our policy to abide by those terms. Trade creditors at 30 June 2011 were Â£Nil(2010: Â£Nil). General Meetings At a General Meeting held on 9 November 2010 Shareholders approved amendments to the Investment Management Agreement as described above. Going Concern The Company's investment objective and investment policy, which are described above and which are subject to regular Board monitoring processes, is designed to ensure that the Company is invested mainly in liquid, listed securities. The Company retains title to all assets held by its custodian, and has agreements relating to its borrowing facilities with which it has complied during the year. Cash is held only with banks approved and regularly reviewed by the Investment Manager. Note 18 to the accounts sets out the financial risk profile of the Company and indicates the effect on the assets and liabilities of falls (and rises) in the value of securities and market rates of interest. The Board made the decision last year to give shareholders the opportunity to vote on an ordinary resolution to continue the Company at every AGM, provided that the NAV total return per share over the three years ending on the preceding 30 June has outperformed the total return on the FTSE SmallCap (ex-Investment Companies) Index over the same period and the average discount over the three months ending on the preceding 30 June is not wider than the average discount of the UK smaller companies sector over that period. The Directors believe, in the light of the above and the controls and review processes noted above and bearing in mind the nature of the Company's business and assets, that the Company has adequate resources to continue in operational existence for the foreseeable future. The Board is pleased to confirm that the Company met both of the performance tests as at 30 June 2011. The Board is particularly pleased by the Company's strong investment performance, with the NAV total return per share outperforming the total return on the FTSE SmallCap (ex-Investment Companies) Index by 16.2 percentage points over the three years ended 30 June 2011 (and by 30.8 percentage points over the 12 months ended 30 June 2011, making the company one of the best performers in its peer group over that period). For this reason, the Board continues to adopt the going concern basis in preparing the accounts. Auditors Ernst & Young LLP have expressed their willingness to continue in office as Auditor and a resolution proposing their re-appointment will be submitted at the forthcoming Annual General Meeting. Company number 5448627. On behalf of the Board John Hodson Chairman 21 September 2011 Statement of Directors' responsibilities in respect of the financial statements An ongoing process, in accordance with the guidance supplied by the Financial Reporting Council's Internal Control: Guidance for Directors on the Corporate Governance Code, has been established for identifying, evaluating and managing risks faced by the Company. This process is regularly reviewed by the Board. The risk management process and systems of internal control are designed to manage rather than eliminate the risk of failure to achieve the Company's objectives. It should be recognised that such systems can only provide reasonable, not absolute, assurance against material misstatement or loss. Internal control assessment process Risk assessment and the review of internal controls are undertaken by the Board in the context of the Company's overall investment objective. The review, which has been in place for the year ended 30 June 2011 and up to the date of this report, covers the key business, operational, compliance and financial risks facing the Company. In arriving at its judgement of what risks the Company faces, the Board considers the Company's objectives in light of the following factors: - the nature and extent of risks which it regards as acceptable for the Company to bear within its overall business objective; - the threat of such risks becoming reality; - the Company's ability to reduce the incidence and impact of risk on its performance; and - the cost to the Company and benefits related to the Company and third parties of operating the relevant controls. Against this backdrop the Board has split the review into four sections reflecting the nature of the risks being addressed. The sections are as follows: - corporate strategy; - published information and compliance with laws and regulations; - relationship with service providers; and - investment and business activities. Given the nature of the Company's activities and the fact that most functions are subcontracted, the Directors obtain information from key third party suppliers regarding the controls operated by them. To enable the Board to make an appropriate risk and control assessment, the information and assurances sought from third parties include the following: - details of the control environment; - identification and evaluation of risks and control objectives; - assessment of the communication procedures; and - assessment of the control procedures. The key procedures which have been established to provide effective internal controls are as follows: - investment management is provided by SVGIM. The Board is responsible for the implementation of the overall investment policy and monitors the action of the Investment Manager at regular meetings; - the provision of administration, accounting and company secretarial duties are the responsibility of CSH. The Audit Committee reviews the internal controls report of CSH on an annual basis; - custody of assets is undertaken by HSBC Global Services; - the duties of investment management, accounting and custody of assets are segregated. The procedures of the individual parties are designed to complement one another; - the non-executive Directors of the Company clearly define the duties and responsibilities of their agents and advisers in the terms of their contracts. The appointment of agents and advisers is conducted by the Board after consideration of the quality of the parties involved; the Board monitors their ongoing performance and contractual agreements; - mandates for authorisation of investment transactions and expense payments are set by the Board; and - the Board reviews detailed financial information produced by the Investment Manager and the Company Secretary on a regular basis. The Company does not have an internal audit function. All of the Company's management functions are delegated to independent third parties whose controls are reviewed by the Board. It is therefore felt that there is no need for the Company to have an internal audit function. However, this need is reviewed annually. Company Secretary The Board has direct access to the advice and services of the Company Secretary, CSH, which is responsible for ensuring that Board and Committee procedures are followed and that applicable regulations are complied with. The Company Secretary is also responsible to the Board for ensuring timely delivery of the information and reports and that statutory obligations of the Company are met. Dialogue with shareholders Communication with shareholders is given a high priority by both the Board and the Manager. Shareholders can communicate with the Board by writing to the Company Secretary at the address disclosed on page 4 of the Company's Annual Report & Accounts. Major shareholders of the Company are offered the opportunity to meet with the Investment Manager and the Directors in order to ensure that their views are understood. All shareholders are encouraged to attend and vote at the Annual General Meeting, during which the Board and the Investment Manager are available to discuss issues affecting the Company and shareholders have the opportunity to address questions to the Investment Manager, the Board and the Chairmen of the Board's standing committees. The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards ("IFRS") adopted by the European Union ("EU"). Under Company law the Directors must not approve the financial statements unless they are satisfied that they present fairly the financial position, the financial performance and cash flows of the Company for that period. In preparing these financial statements, the Directors are required to: - select suitable accounting policies in accordance with IAS8: Accounting Policies, Change in Accounting Estimates and Errors, and then apply them consistently; - present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; - provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company's financial position and financial performance; - state that the Company has complied with International Financial Reporting Standards, subject to any material departures disclosed and explained in the financial statements; and - make judgements and estimates that are reasonable and prudent. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy, at any time, the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors, to the best of their knowledge, state that: - the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and loss/profit of the Company; and - the Chairman's report, Investment Manager's report and Report of the Directors include a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that it faces. The Directors confirm that, so far as they are each aware, there is no relevant audit information of which the Company's Auditor is unaware, and each Director has taken all the steps that ought to have been taken as a Director to make himself aware of any relevant audit information and to establish that the Company's Auditor is aware of that information. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Non-Statutory Accounts The financial information set out below does not constitute the Company's statutory accounts for the period ended 30 June 2011 and 30 June 2010 but is derived from those accounts. Statutory accounts for 2011 will be delivered to the Registrar of Companies in due course. The Auditor has reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and (ii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditor's report can be found in the Company's full Annual Report and Accounts at www.strategicequitycapital.com. Statement of comprehensive income for the year ended 30 June 2011 Year ended 30 June 2011 Year ended 30 June 2010 Revenue Capital Revenue Capital return return Total return return Total Note Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Investments Gains on investments at fair value through profit or loss - 27,131 27,131 - 12,674 12,674 Exchange losses - - - - (1) (1) 8 - 27,131 27,131 - 12,673 12,673 Income Dividends 2 1,253 - 1,253 1,087 - 1,087 Interest 2 26 - 26 16 - 16 Underwriting commission 2 23 - 23 24 - 24 1,302 - 1,302 1,127 - 1,127 Expenses Investment Manager's fee 3 (473) - (473) (396) - (396) Other expenses 4 (469) - (469) (447) - (447) Total expenses (942) - (942) (843) - (843) Net return before finance costs and taxation 360 27,131 27,491 284 12,673 12,957 Finance costs (50) - (50) Interest payable (50) - (50) Total finance costs (50) - (50) (50) - (50) Net return before taxation 310 27,131 27,441 234 12,673 12,907 Taxation 5 - - - - - - Net return and total comprehensive income for the year 310 27,131 27,441 234 12,673 12,907 pence pence pence pence pence pence Return/ (loss) per Ordinary share Basic 7 0.40 35.60 36.00 0.31 16.72 17.03 The total column of this statement represents the Company's profit and loss account. The supplementary revenue and capital return columns are both prepared under guidance published by the Association of Investment Companies ("AIC"). All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. Statement of changes in equity for the year ended 30 June 2011 Share Capital Note Share premium Special Capital redemption Revenue capital account reserve reserve reserve reserve Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 For the year ended 30 June 2011 1 July 2010 7,981 5,246 60,398 (23,014) - 611 51,222 Net return and total comprehensive income for the year - - - 27,131 - 310 27,441 Dividends paid 6 - - - - - (230) (230) Treasury shares cancelled (305) - - - 305 - - Share buy backs (665) - (5,963) - 665 - (5,963) 30 June 2011 7,011 5,246 54,435 4,117 970 691 72,470 For the year ended 30 June 2010 1 July 2009 7,262 2,070 60,398 (35,687) - 607 34,650 Net return and total comprehensive income for the year - - - 12,673 - 234 12,907 Dividends paid 6 - - - - - (230) (230) New shares issued in the year 719 3,176 - - - - 3,895 30 June 2010 7,981 5,246 60,398 (23,014) - 611 51,222 Balance sheet as at 30 June 2011 30 June 30 June 2011 2010 Note Â£'000 Â£'000 Non-current assets Investments held at fair value through profit or loss 8 71,336 49,859 Current assets Other receivables 10 217 177 Cash and cash equivalents 15 2,324 1,367 2,541 1,544 Total assets 73,877 51,403 Current liabilities Other payables 11 1,407 181 1,407 181 Total assets less current liabilities 72,470 51,222 Net assets 72,470 51,222 Capital and reserves: Share capital 12 7,011 7,981 Share premium account 14 5,246 5,246 Special reserve 14 54,435 60,398 Capital reserve 14 4,117 (23,014) Capital redemption reserve 14 970 - Revenue reserve 14 691 611 Total shareholders' equity 72,470 51,222 pence pence Net asset value per share Basic 16 103.35 66.72 The financial statements were approved by the Board of Directors and authorised for issue on 21 September 2011. They were signed on its behalf by J Hodson Chairman 21 September 2011 Statement of cash flows for the year ended 30 June 2011 Year ended Year ended 30 June 2011 30 June 2010 Note Â£'000 Â£'000 Operating activities Net return before finance costs and taxation 27,491 12,957 Adjustment for gains on investments (27,131) (12,673) Interest paid (50) (50) Operating cash flows before movements in working capital 310 234 Increase in receivables (39) (72) Increase in payables 22 39 Purchases of portfolio investments (17,367) (25,168) Sales of portfolio investments 23,451 20,212 Net cash flow from operating activities 6,377 (4,755) Financing activities Equity dividends paid 6 (230) (230) Shares bought back in the year (5,190) - Shares issued in the year - 3,895 Net cash flow from financing activities (5,420) 3,665 Increase / (decrease) in cash and cash equivalents for the year 957 (1,090) Cash and cash equivalents at start of the year 1,367 2,457 Cash and cash equivalents at 30 June 2011 15 2,324 1,367 Notes to the financial statements for the year ended 30 June 2011 1.1 Corporate information Strategic Equity Capital plc is a public limited company incorporated and domiciled in the United Kingdom and registered in England and Wales under the Companies Act 2006 whose shares are publicly traded. The Company is registered as a public limited company and is an investment company as defined by Section 833 of the Companies Act 2006. The Company carries on business as an investment trust within the meaning of Section 1158 of the Corporation Tax Act 2010. The financial statements of Strategic Equity Capital plc for the year ended 30 June 2011 were authorised for issue in accordance with a resolution of the Directors on 21 September 2011. 1.2 Basis of preparation and statement of compliance The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board (as adopted by the EU), interpretations issued by the International Financial Reporting Interpretations Committee, and applicable requirements of United Kingdom company law, and reflect the following policies which have been adopted and applied consistently. Where presentational guidance set out in the Statement of Recommended Practice ("SORP") for investment trusts issued by the AIC (as revised in 2009) is consistent with the requirements of IFRS the Directors have sought to prepare financial statements on a basis compliant with the recommendations of the SORP. Convention The financial statements are presented in Sterling, being the currency of the Primary Economic Environment in which the Company operates, rounded to the nearest thousand. Segmental reporting The Directors are of the opinion that the Company is engaged in a single segment of business, being investment business. 1.3 Accounting policies Investments All investments in the scope of IAS 39 held by the Company are classified as "fair value through profit or loss". As the Company's business is investing in financial assets with a view to profiting from their total return in the form of interest, dividends or increase in fair value, listed equities and fixed income securities are designated as fair value through profit or loss on initial recognition. The Company manages and evaluates the performance of these investments on a fair value basis in accordance with its investment strategy. Investments are initially recognised at cost, being the fair value of the consideration, excluding transaction costs associated with the investment which are charged to the Statement of comprehensive income and allocated to capital. After initial recognition, investments are measured at fair value, with movements in fair value of investments and impairment of investments recognised in the Statement of comprehensive income and allocated to capital. Gains and losses on investments sold are calculated as the difference between sales proceeds and cost. Capital distributions from SRF II are accounted for on a reducing cost basis; cash received is first applied to reducing the historical cost of an investment; a realised gain will be recognised only when the cost has been reduced to nil. For investments actively traded in organised financial markets, fair value is generally determined by reference to Stock Exchange quoted market bid prices at the close of business on the Balance sheet date, without adjustment for transaction costs necessary to realise the asset. In respect of unquoted instruments, or where the market for a financial instrument is not active, fair value is established by using recognised valuation methodologies, in accordance with International Private Equity and Venture Capital ("IPEVC") Valuation Guidelines. New investments are initially carried at cost, for a limited period, being the price of the most recent investment in the investee company. This is in accordance with IPEVC Guidelines as the cost of recent investments will generally provide a good indication of fair value. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. Trade date accounting All "regular way" purchases and sales of financial assets are recognised on the "trade date" i.e. the day that the entity commits to purchase or sell the asset. Regular way purchases, or sales, are purchases or sales of financial assets that require delivery of the asset within a time frame generally established by regulation or convention in the market place. Income Dividends receivable on quoted equity shares are taken into account on the ex-dividend date. Where no ex-dividend date is quoted, they are brought into account when the Company's right to receive payment is established. Other investment income and interest receivable are included in the financial statements on an accruals basis. Dividends receivable from UK registered companies are accounted for net of imputed tax credits. Income on fixed income securities is recognised on a time apportionment basis from the date of purchase so as to reflect the effective yield on the securities. Expenses All expenses are accounted for on an accruals basis. Transaction costs and other expenses incurred on the acquisition of an investment classified as fair value through profit or loss are not included within the cost of that investment but are charged immediately through the Statement of comprehensive income and allocated to capital. The Company's investment management and administration fees, finance costs (including interest on the bank facility, calculated on the effective interest rate method) and all other expenses are charged through the Statement of comprehensive income. These expenses are allocated 100% to the revenue column of the Statement of comprehensive income. The Investment Manager's performance fee is allocated 100% to the capital column of the Statement of comprehensive income. In the opinion of the Directors the fee is awarded entirely for the capital performance of the portfolio. Cash and cash equivalents Cash in hand and at bank and short-term deposits which are held to maturity are carried at fair value. Cash and cash equivalents are defined as cash in hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value. Bank overdrafts that are repayable on demand which form an integral part of the Company's cash management are included as a component of cash and cash equivalents for the purpose of the Statement of cash flows and balance sheet. Bank loans and borrowings All bank loans and borrowings are initially recognised at cost, being the fair value of the consideration received, less issue costs where applicable. After initial recognition, all interest-bearing loans and borrowings are subsequently measured at amortised cost, any difference between cost and redemption value being recognised in the Statement of comprehensive income over the period of the borrowings on an effective interest rate basis. Taxation Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the Statement of comprehensive income except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the Balance sheet date, and any adjustment to tax payable in respect of previous years. The tax effect of different items of expenditure is allocated between revenue and capital on the same basis as the particular item to which it relates, using the Company's effective rate of tax, as applied to those items allocated to revenue, for the accounting year. Deferred income tax is provided on all temporary differences at the Balance sheet date between the tax basis of assets and liabilities and their carrying amount for financial reporting purposes. Deferred income tax liabilities are measured on an undiscounted basis at the tax rates that are expected to apply to the year when the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the Balance sheet date. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Dividends payable to shareholders Interim dividends to shareholders are recognised as a liability in the period in which they are paid. Final dividends to shareholders are recognised as a liability in the year in which they have been declared and approved by the shareholders. The final dividend is proposed by the Board and is not declared until approved by the shareholders at the Annual General Meeting following the year end. Dividends are charged to the Statement of changes in equity. Share capital transactions Incremental costs directly attribute to the issuance of shares recognised as a deduction from equity. When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributed costs, is recognised as a deduction from equity. Repurchased shares are either classified as treasury shares and are presented as a deduction from stockholders' equity, or are cancelled. Foreign currency transactions The currency of the Primary Economic Environment in which the Company operates is Sterling which is also the presentational currency. Transactions denominated in foreign currencies are translated into Sterling at the rates of exchange ruling at the date of the transaction. Investments and other monetary assets and liabilities are converted to Sterling at the rates of exchange ruling at the Balance sheet date. Exchange gains and losses relating to investments and other monetary assets and liabilities are taken to the capital column of the Statement of comprehensive income. Use of estimates The preparation of financial statements requires the Company to make estimates and assumptions that affect items reported in the Balance sheet and Statement of comprehensive income at the date of the financial statements. Although the estimates are based on best knowledge of current facts, circumstances, and, to some extent, future events and actions, the Company's actual results may ultimately differ from those estimates, possibly significantly. Use of significant estimates - In respect of unquoted instruments, or where the market for a financial instrument is not active, fair value is established by using recognised valuation methodologies, in accordance with International Equity and Venture Capital ("IPEVC") Valuation Guidelines. New investments are initially carried at cost to recent investments will generally provide a good indication of fair value. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. 1.4 New standards and interpretations not applied IASB and IFRIC have issued the following standards and interpretations which are not effective for the year ended 30 June 2011 and have not been applied in preparing these financial statements. International Accounting Standards (IAS/IFRS) Effective date IFRS 7 Amendments enhancing disclosures about transfers of financial assets 1 July 2011 IFRS 9 Financial Instruments: Classification & Measurement 1 January 2013 IFRS 10 Consolidated Financial Statements 1 January 2013 IFRS 12 Disclosure of Interests in Other Entities 1 January 2013 IAS 1 Amendments to revise the way other comprehensive income is presented 1 July 2012 IAS 27 Reissued as IAS 27 Consolidated and Separate Financial Statements (as amended in 2011) 1 January 2013 The Directors do not anticipate that the initial adoption of the above standards, amendments and interpretations will have a material impact on the Group's financial statements in the period of initial application. 2 Income 30 June 2011 30 June 2010 Â£'000 Â£'000 Income from investments: UK dividend income 1,253 1,087 Liquidity fund income 26 16 1,279 1,103 Other income: Underwriting commission 23 24 23 24 1,302 1,127 Total income comprises: Dividends 1,253 1,087 Interest 26 16 Underwriting commission 23 24 1,302 1,127 Income from investments: Listed UK 1,253 1,087 Listed overseas 26 16 1,279 1,103 3 Investment Manager's fee 30 June 2011 30 June 2010 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Management fee 473 - 473 396 - 396 A basic management fee is payable to the Investment Manager at the lower of (i) the annual rate of 1% of the adjusted Net Asset Value of the Company or (ii) 1% per annum of the market capitalisation of the Company. In order to avoid double charging of basic management fees payable to the Investment Manager by the Company, the NAV of the Company is reduced by the aggregate of the value of the Company's Limited Partnership interest in SRF II and the amount of the Company's undrawn loan commitment to SRF II. The basic management fee accrues weekly and is payable quarterly in arrears. Prior to the General Meeting in November 2010, the Management fee had been calculated at 1% of the adjusted Net Asset Value of the Company, adjusted for SRF II as described above. The Investment Manager is also entitled to a performance fee, details of which are given in the Report of the Directors above. No performance fee has been payable in either year. 4 Other expenses 30 June 2011 30 June 2010 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Secretarial services 71 - 71 73 - 73 Auditors' remuneration for: Audit services* 24 - 24 24 - 24 Directors' remuneration 95 - 95 89 - 89 Other expenses 279 - 279 261 - 261 469 - 469 447 - 447 * No non-audit fees were incurred during the year. 5 Taxation 30 June 2011 30 June 2010 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Corporation tax at 27.5% (2010: 28%) - - - - - - The Company is subject to corporation tax at 27.5%, the average rate for the current tax year. As at 30 June 2011 the total current taxation charge in the Company's revenue account is lower than the standard rate of corporation tax in the UK (27.5%). The differences are explained below: 30 June 2011 30 June 2010 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Net return on ordinary activities before taxation 310 27,131 27,441 234 12,673 12,907 Theoretical tax at UK corporation tax rate of 27.5% (2010: 28%) 85 7,461 7,546 66 3,548 3,614 Effects of: - UK dividends that are not taxable (345) - (345) (303) - (303) - Gains on investment - (7,461) (7,461) - (3,611) (3,611) - Unrelieved expenses 260 - 260 191 - 191 - Expenses not deductible for tax purposes - - - 46 63 109 - - - - - - Factors that may affect future tax charges The Company has Â£5,945,000 management expenses (2010: Â£4,989,000) that are available to offset future taxable revenue. It is considered too uncertain that there will be sufficient future taxable profits against which these expenses can be offset and therefore, in accordance with IAS 12, deferred tax asset of Â£1,547,000 (2010: Â£1,397,000) in respect of these amounts has not been recognised. Deferred tax is not provided on capital gains and losses arising on the revaluation or disposal of investments because the Company meets (and intends to continue for the foreseeable future to meet) the conditions for approval as an investment trust company. 6 Dividends Under the requirements of Section 1158 Corporation Tax Act 2010 no more than 15% of investment income generated from qualifying shares and securities may be retained by the Company. These requirements are considered on the basis of dividends declared in respect of the financial year as shown below. 30 June 2011 30 June 2010 Â£'000 Â£'000 Net return after taxation per Company accounts 310 234 Final dividend proposed of 0.44p (2010: 0.30p) per share (309) (230) Revenue retained for Section 1158 purposes 1 4 7 Return per Ordinary share 30 June 2011 30 June 2010 Weighted Weighted average average Net number of Per Net number of Per return Ordinary share return Ordinary share Â£'000 shares pence Â£'000 shares pence Total Return per share 27,441 76,214,492 36.00 12,907 75,785,546 17.03 Revenue Return per share 310 76,214,492 0.40 234 75,785,546 0.31 Capital Return per share 27,131 76,214,492 35.60 12,673 75,785,546 16.72 8 Investments 30 June 2011 Â£'000 Investment portfolio summary Listed investments at fair value through profit or loss 57,542 Unlisted investments at fair value through profit or loss 13,794 71,336 30 June 2011 Listed Unlisted Total Â£'000 Â£'000 Â£'000 Analysis of investment portfolio movements Opening book cost 58,106 4,470 62,576 Opening investment holding (losses)/gains (16,719) 4,002 (12,717) Opening valuation 41,387 8,472 49,859 Movements in the year: Purchases at cost 16,078 1,719 17,797 Sales - proceeds (21,894) (1,557) (23,451) - realised (losses)/gains on sales (922) 400 (522) Increase in unrealised appreciation 22,893 4,760 27,653 Closing valuation 57,542 13,794 71,336 Closing book cost 51,368 5,032 56,400 Closing investment holding gains 6,174 8,762 14,936 57,542 13,794 71,336 A list of the top 10 portfolio holdings by their aggregate market values is given in the Investment Manager's report above. Transaction costs incidental to the acquisitions of investments totalled Â£99,000, (2010: Â£308,000 including costs associated with the acquisition of SFR ll of Â£223,000) and disposals of investments totalled Â£44,000 (2010: Â£31,000) for the year. 30 June 2011 Total Â£'000 Analysis of capital gains Losses on sale of investments (522) Movement in investment holding gains 27,653 27,131 The Company is required to classify fair value measurements using a fair value hierarchy that reflects the subjectivity of the inputs used in measuring the fair value of each asset. The fair value hierarchy has the following levels: - Quoted bid prices (unadjusted) in active markets for identical assets or liabilities ("level 1"). - Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) ("level 2"). - Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) ("level 3"). The level in the fair value hierarchy within which the fair value measurement is categorised is determined on the basis of the lowest level input that is significant to the fair value of the investment. The following table analyses within the fair value hierarchy the Company's financial assets and liabilities (by class) measured at fair value at 30 June 2011. Financial instruments at fair value through profit and loss Level 1 Level 2 Level 3 Total Â£'000 Â£'000 Â£'000 Â£'000 Equity investments and limited 57,542 11,807 1,987 71,336 partnership interests Liquidity funds - 2,150 - 2,150 Total 57,542 13,957 1,987 73,486 Investments whose values are based on quoted market prices in active markets are classified within level 1, include active listed equities. The Company does not adjust the quoted price for these instruments. Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within level 2. As level 2 investments include positions that are not traded in active markets and/ or subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/ or non-transferability, which are generally based on available market information. Level 3 instruments include private equity, as observable prices are not available for these securities, the Company has used valuation techniques to derive the fair value. In respect of unquoted instruments, or where the market for a financial instrument is not active, fair value is established by using recognised valuation methodologies, in accordance with International Private Equity and Venture Capital ("IPEVC") Valuation Guidelines. There were no transfers between levels for the year ended 30 June 2011. The following table presents movements in level 3 instruments for the year ended 30 June 2011 by class of financial instrument. Total equity investments Â£'000 Opening balance 1,524 Disposals during the year (145) Total gains for the year included in the Statement of 608 comprehensive income Closing balance 1,987 9 Significant interests The Company had holdings of 3% or more in the following companies: Name of Class of 30 June 2011 investment Share Percentage held Journey Group Ordinary 10.85 4imprint Group Ordinary 7.50 Allocate Software Ordinary 6.82 Lupus Capital Ordinary 4.50 Lavendon Group Ordinary 3.46 Unlisted investments:: Strategic Recovery Fund II Partnership interest 16.29 10 Other receivables 30 June 2011 30 June 2010 Â£'000 Â£'000 Dividends receivable 204 167 Accrued income 3 - Other receivables and prepayments 10 10 217 177 11 Other payables 30 June 2011 30 June 2010 Â£'000 Â£'000 Amounts due to brokers 430 - Amounts due to broker regarding share buy back 773 - Other payables and accruals 1,407 181 12 Called up share capital Number Â£'000 Allotted, called up and fully paid Ordinary shares of 10p each: At 1 July 2010 79,815,974 7,981 Treasury shares cancelled (3,045,500) (305) Share buy backs (6,648,271) (665) At 30 June 2011 70,122,203 7,011 13 Own shares held in treasury 30 June 2011 30 June 2010 Â£'000 Â£'000 Nil (2010: 3045,500) Ordinary shares of 10p each - 305 The cost of the shares held in treasury, Â£Nil (2010: Â£1,884,000), has been taken to the special reserve. All the shares held in treasury we cancelled at par value on 25 February 2011. 14 Reserves Capital Capital reserve reserve arising on arising on Capital Share Special investments investments redemption Revenue premium reserve sold held reserve reserve Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Opening balance 5,246 60,398 (10,297) (12,717) - 611 Net losses on realisation of investments - - (522) - - - Increase in unrealised appreciation - - - 27,653 - - Treasury shares cancelled - - - - 305 - Share buy backs - (5,963) - - 665 - Retained net revenue for the period - - - - - 310 Dividends paid - - - - - (230) As at 30 June 2011 5,246 54,435 (10,819) 14,936 970 691 15 Reconciliation of net cash flow to net debt 30 June 2011 30 June 2010 Â£'000 Â£'000 Opening net funds 1,367 2,457 Increase / (decrease) in cash and cash equivalents in year 957 (1,090) Closing net funds 2,324 1,367 At Net At 30 June 2010 cashflow 30 June 2011 Â£'000 Â£'000 Â£'000 Cash at bank 167 7 174 Liquidity funds 1,200 950 2,150 1,367 957 2,324 Note that in the cash flow statement, amounts outstanding for the share buy back (Â£773,000; 2010:Â£Nil) have not been included in the movement in payables calculation as this does not constitute an operating activity but rather a financing activity. 16 Net asset value per Ordinary share The net asset value per Ordinary share is based on net assets of Â£72,470,000 (2010: Â£51,222,000) and on 70,122,203 (2010: 76,770,474) Ordinary shares, being the number of shares in issue at the year end, less the number of shares being held in treasury of nil (2010: 3,045,500). 17 Capital commitments and contingent liabilities The Company has a commitment to invest â‚¬2,160,000 (2010: â‚¬2,160,000) in Vintage I and an outstanding commitment to SRF II of Â£Nil(2010: Â£2,367,000). 18 Analysis of financial assets and liabilities The Company's financial instruments comprise securities, cash balances (including amounts held in liquidity funds) and debtors and creditors that arise from its operations, for example, in respect of sales and purchases awaiting settlement and debtors for accrued income. The Company has little exposure to credit and cash flow risk. Credit risk is due to uncertainty in a counterparty's ability to meet its obligations. The Company has no exposure to debt purchases and ensures that cash at bank is held only with reputable banks with high quality external credit ratings. All the assets of the Company which are traded on listed exchanges are held by HSBC Global Services, the Company's Custodian. Bankruptcy or insolvency of the Custodian may cause the Company's rights with respect to securities held by the Custodian to be delayed or limited. The Board review the Custodian's annual controls report and the Manager's management of the relationship with the Custodian. Due to timings of investment and distributions, at any one time the Company may hold significant amounts of surplus cash. Any funds in excess of those required to meet daily operation requirements are invested in Institutional Liquidity Funds. These are highly liquid assets monitored by the Investment Manager. As at 30 June 2011 the Company had Â£2.2 million (2010: Â£1.2 million) invested in such funds. The maximum exposure to credit risk is Â£3,731,000 (2010: Â£1,548,000). The Company finances its operations through its issued capital, existing reserves and a Â£5.0 million revolving credit facility which remains undrawn at 30 June 2011. The principal risks the Company faces in its investment portfolio management activities are: - market price risk, i.e. the movements in value of investment holdings caused by factors other than interest rate movement; - interest rate risk; - liquidity risk; and - foreign currency risk. The Investment Manager's policies for managing these risks are summarised below and have been applied throughout the year: Policy (i) Market price risk The Company's investment portfolio is exposed to market price fluctuations which are monitored by the Investment Manager. Adherence to the investment objectives and the limits on investment set by the Company mitigates the risk of exposure to any one particular type of security or issuer. If the investment portfolio valuation fell by 20% from the 30 June 2011 valuation (2010: 20%), with all other variables held constant, there would have been a reduction of Â£14,267,000 (2010: Â£9,972,000) in the return before taxation and equity. An increase of 20% in the investment portfolio valuation would have had an equal and opposite effect on the return before taxation and equity. (ii) Cash flow interest rate risk exposure The Investment Manager is permitted to borrow up to 20% of the Company's adjusted portfolio valuation in accordance with the current facility loan covenant, and uses a Â£5,000,000 revolving credit facility for this purpose, at variable rates to be determined prior to any drawdown. No amounts were drawn down during the year (2010: Â£Nil) The Company's bank accounts earn interest at a variable rate which is subject to fluctuations in interest rates. The Company holds cash in liquidity funds. Income from these funds is dependent on the performance of the funds. If interest rates had reduced by 1% from those obtained at 30 June 2011 (2010: 1%), it would have the effect, with all other variables held constant, of reducing the net return before taxation and equity by Â£17,000 (2010: Â£16,000). If there had been an increase in interest rates of 1% there would have been an equal and opposite effect in the net return before taxation and equity. The calculations are based on cash at bank and liquidity funds as at 30 June 2011 and these may not be representative of the year as a whole. Non-interest rate risk exposure The remainder of the Company's portfolio and current assets are not subject directly to interest rate risk. Details of the risk profile of the Company are shown in the following tables. The interest rate risk profile of the Company's financial assets at 30 June 2011 was: Cash flow No interest interest rate risk rate risk financial financial Total assets assets Â£'000 Â£'000 Â£'000 Sterling Ordinary shares 57,542 57,542 - Unlisted 11,807 11,807 - investments Liquidity funds 2,150 - 2,150 Cash 174 - 174 Receivables* 207 207 - 71,880 69,556 2,324 Euros Unlisted 1,987 1,987 - investments 1,987 1,987 - Total 73,867 71,543 2,324 * Receivables exclude prepayments which under IAS 32 are not classed as financial assets. The interest rate risk profile of the Company's financial assets at 30 June 2010 was: Cash flow No interest interest rate risk rate risk financial financial Total assets assets Â£'000 Â£'000 Â£'000 Cash flow Sterling Ordinary shares 41,387 41,387 - Unlisted investments 6,948 6,948 - Liquidity funds 1,200 - 1,200 Cash 167 - 167 Receivables* 167 167 - 49,869 48,502 1,367 Euros Other investments 1,524 1,524 - 1,524 1,524 - Total 51,393 50,026 1,367 * Receivables exclude prepayments which under IAS 32 are not classed as financial assets. The interest rate risk profile of the Company's financial liabilities at 30 June 2011 was: No interest rate risk financial Total liabilities Â£'000 Â£'000 Sterling Creditors 1,407 1,407 All amounts are due in three months or less. The interest rate risk profile of the Company's financial liabilities at 30 June 2010 was: No interest rate risk financial Total liabilities Â£'000 Â£'000 Sterling Creditors 181 181 All amounts are due in three months or less. (iii) Liquidity risk The Investment Manager may invest on behalf of the Company in securities which are not readily tradable, which can lead to volatile share price movements. It may be difficult for the Company to sell such investments. Although the Company's AIM quoted investments and unquoted investments are less liquid than securities listed on the London Stock Exchange, the Board seeks to ensure that an appropriate proportion of the Company's investment portfolio is in invested in cash and readily realisable investments, which are sufficient to meet any funding requirements that may arise. (iv) Foreign currency risk - Needs Updating The Company invests in a private equity fund denominated in Euros. In addition, the Company's loan may be drawn down in US Dollars or Euros as well as Sterling. The Company is, therefore, subject to foreign currency risk. During the year the Sterling/Euro exchange fluctuated 11% from a low of 1.1073 on 30 June 2011 to a high of 1.2251 on 23 August 2010, before closing at 1.1073 on 30 June 2011 (2010: 1.2214). If the Sterling/Euro exchange rate had decreased by 15% from that obtained at 30 June 2011 (2010: 15%), it would have the effect, with all other variables held constant, of increasing net profit and equity shareholders' funds by Â£351,000 (2010: Â£198,000). The calculations are based on the value of the investment in Vintage I as at 30 June 2011 and this may not be representative of the year as a whole. The balance exposed to foreign currency risk is Â£1,987,000. The bank facility, which since 14 July 2009 (before this date the facility was for Â£10 million) is a Â£5.0 million revolving credit facility with The Royal Bank of Scotland plc, incurs interest at the rate of 1.0% over LIBOR or EURIBOR. The facility may be drawn down in Sterling, US Dollars or Euros. The facility was undrawn at 30 June 2010. The undrawn balance incurs interest at the rate of 0.2%. The facility is available until 13 July 2012 in accordance with the current loan facility's covenant, gross borrowings shall not be more than 20% of the adjusted portfolio valuation at any time. Fair values of financial assets and financial liabilities The carrying value of the financial assets and liabilities of the Company is equivalent to their fair value. Managing Capital Capital structure The Company is funded through shareholders' equity, cash reserves and an existing Â£5.0 million loan facility with The Royal Bank of Scotland plc, which was not utilised as at 30 June 2011. The Company's Articles of Association permit the Board to borrow up to 25% of the Company's net asset value at the time of borrowing. Capital is managed so as to maximise the return to shareholders while maintaining an appropriate capital base to allow the Company to operate effectively in the marketplace and to sustain future development of the business. The Company pays such dividends as are required to maintain its investment trust status, and may also from time to time return capital to shareholders through the purchase of its own shares at a discount to net asset value. Capital constraints The Company operates so as to qualify as a UK investment trust for UK tax purposes. Inter alia, this requires that no investment may exceed 15% by value of the Company's portfolio at the point of investment. The Company's capital requirement is reviewed regularly by the Board. 19 Related party transactions The Investment Manager: SVG Investment Managers Limited is regarded as a related party of the Company. The Investment Manager may draw upon advice from the Industry Advisory Panel ("IAP") of which Sir Clive Thompson, a Director of the Company, is a member. The IAP was established to provide advice to SVGIM in relation to the strategy, operations and management of potential investee companies. The amounts paid to the Investment Manager are disclosed in note 3 above. The amount due to the Investment Manager at 30 June 2011 was Â£134,000 (30 June 2010: Â£109,000). In June 2009 SVGIM entered into a Commission Sharing Arrangement with four executing brokers. Under this arrangement the amount of commission received by SVGIM in relation to trading activities was carried out on behalf of the Company for the period to 30 June 2011 was Â£9,000(30 June 2010:Â£6,000). The amount outstanding at year end was Â£Nil (2010:Â£6,000). Notice of Annual General Meeting The Annual General Meeting of Strategic Equity Capital plc will be held at the offices of SVG Investment Managers Limited at 61 Aldwych, London WC2B 4AE at 11.30 am on Tuesday 8 November 2011. The notice of this meeting can be found in the Annual Report and Accounts at: www.strategicequitycapital.com National Storage Mechanism A copy of the Annual Report and Financial Statements will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: www.hemscott.com/nsm.do. ENDS Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.

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