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Strategic Equity Capital Plc (SEC)

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Thursday 30 September, 2021

Strategic Equity Capital Plc

Final Results

Strategic Equity Capital PLC

RESULTS FOR THE YEAR ENDED 30 JUNE 2021

The Directors of Strategic Equity Capital plc are pleased to announce the Company’s results for the year ended 30 June 2021.




Capital Return

As at
30 June
2021

As at
30 June
2020



% change

Net asset value (“NAV”) per Ordinary share

350.05p

239.74p

46.0%

Ordinary share price

311.00p

195.75p

58.9%

Comparative index*

6,213.89

3,834.48

62.1%

Discount of Ordinary share price to NAV

(11.2)%

(18.3)%

Average discount of Ordinary share price to NAV for the year


(17.7)%


(16.6)%

 

Total assets (£000)

223,759

152,114

47.1%

Equity Shareholders’ funds (£000)

221,569

151,747

46.0%

Ordinary shares in issue with voting rights

63,296,844

63,296,844

-

   




Performance

Year ended
30 June
2021

Year ended
30 June
2020

NAV total return for the year

46.8%

(9.1)%

Share price total return for the year

59.9%

(13.8)%

Comparative index* total return for the year

65.2%

(12.3)%

Ongoing charges

1.07%

1.11%

Ongoing charges (including performance fee)

1.07%

1.11%

Revenue return per Ordinary share

1.34p

0.38p

Dividend yield

0.5%

0.6%

Proposed final dividend for the year

1.60p

1.25p

   


Year’s Highs/Lows

High

Low

NAV per Ordinary share

353.4p

230.7p

Ordinary share price

317.0p

177.0p

*FTSE Small Cap (ex Investment Trusts) index

Chairman’s Statement

Introduction

The effects of Covid on the global economy and stock markets have been pronounced, and not always predictable. As we stand today GDP in most major economies is back close to pre-Covid levels. In fact, in the USA and China, the World’s two largest economies, it is now higher as are stock markets nearly everywhere and in the US significantly so. This is in many ways astonishing and can be attributed in part to the extraordinary monetary and fiscal stimulus programmes enacted by central banks and governments in response to Covid.

Following some years of underperformance the UK stock market is generally considered to be relatively cheap in comparison to other major stock markets. While the FTSE 100 has rallied over the Company’s year it is still almost 10% off its previous highs and lagging other major indices. Of course, the UK has a heavy weighting in lowly rated sectors such as financials and resources but even adjusting for sector weighting differences it remains at multi-year discounts to other developed markets, in particular the US. As a result global investors are beginning to take increasing interest in this market.  In addition, and as noted before, UK smaller companies have been unloved for some time and although we have seen a major rally recently many opportunities still abound. On this basis the Board continues to believe that our investment management team will be able to generate good long term returns for shareholders in the Company.

Performance

During the twelve months to 30 June 2021, the Company’s NAV per share (on a total return basis) increased by 46.8%. The FTSE Small Cap ex Investment Trusts Total Return Index (“FTSE Small Cap Index”), which we use for comparison purposes only, increased by 65.2%. Over the same period, the share price of the Company increased by 59.9% on a total return basis.  The majority of the relative NAV underperformance was experienced over Q4 when the Trust lagged the FTSE Small Cap Index by 12.9% during the exceptional rebound in stock markets. This was largely driven by lack of exposure to cyclical sectors which of course reflect the investment strategy which typically avoids these areas.

Returns, on both an absolute and relative basis, have been encouraging over the medium term which the Board considers to be a truer measure of performance; over the three years ending 30 June 2021, the NAV total return was 11.0% on an annualised basis, against the annualised benchmark return of 9.8%.

The recent strong absolute NAV performance has been underpinned by a number of positive developments at portfolio companies. In addition, two of our investments, Equiniti and Proactis, were the subject of recommended offers from private equity firms late in the period and at substantial premiums to their pre-bid share prices. This performance is discussed more fully in the Investment Manager’s Report on page 10 of the Annual Report.

Development of the Company

Ken Wotton (Managing Director, Public Equity at Gresham House) has now been Lead Manager of the Company for over  a year. Working closely with Adam Khanbhai and the wider and growing Public Equity Team Ken’s strong leadership has already started to produce encouraging results.

The appointment of Gresham House has resulted in no fundamental change in strategy but to maximise engagement opportunities the Company is now focused on investments that have a market capitalisation in the region of £100m to £300m at the point of entry. Following a detailed portfolio review, the team has fully exited seven investments (including two post period end) and initiated positions in six new holdings (including one post period end). The evolution of the portfolio, and the principles behind its construction, are discussed in more detail in the Investment Managers Report on page 12 of the Annual Report.

Gresham House Asset Management directly and indirectly, through its in-house fund Gresham House UK Micro Cap Fund, purchased 3,141,413 shares in the Company during the year.

The Board is pleased with the progress made by Gresham House over the past year and the investment returns achieved. While the discount at which the shares trade has significantly narrowed in this period it remains at a level higher than is appropriate. Therefore the Board considers the narrowing of the discount as the critical strategic objective for the coming twelve months.

In September the Board announced the appointment of Liberum Capital Limited as the Company’s sole brokers.  The Board are optimistic that, working with Gresham House, they will help attract new investors over time. The Board is grateful for all the efforts of the Company’s former broking team, who had advised the Company for many years.

In addition to the two tenders offers already announced (see below) a number of initiatives are underway with the intention to enhance the effectiveness of the marketing activities of the Company to both professional, institutional and retail investors. Recent actions include the appointment of KL Communications as the Company’s PR agency and the appointment of Liberum Capital Limited as the Company’s sole stockbrokers. These new advisors, working together with Gresham House and Aberdeen Standard Investments, have developed a strategic marketing plan which is currently being implemented. In aggregate these actions will not only add further significant resource but it will lead to greater coordination between all parties.  The Board welcomes these developments and looks forward to additional and increased focus being brought to bear on delivering both performance and effective marketing to the Company’s shareholders.

Discount and Discount Management

The average discount to NAV of the Company’s shares during the period was 17.7%, compared to the equivalent 16.6% figure from the prior year. The discount range was 9.0% to 26.1%. The share price discount to NAV ended the period at 11.2%.

On 28 May 2021 the Board announced two contingent tenders as part of its commitment to take action to address the persistent discount.

2022 Contingent Tender

A contingent tender offer in 2022 will take place, should the ordinary shares trade at a wider than average discount of 8% over the 12 months ending 30 June 2022.  In this event, the Board will undertake a tender offer for up to 10% of the Company’s issued share capital (excluding shares held in treasury) shortly after the 2022 AGM (the “2022 Tender Offer”).  The tender price will be equal to a 3% discount to NAV (less costs) per ordinary share.  In the event that shareholders tender in excess of their basic entitlement of 10 per cent., such excess applications will be satisfied on a pro rata basis to the extent that other shareholders tender less than (or none of) their basic entitlement.

2024 Contingent Tender

In addition to the 2022 Tender Offer, a further tender offer will occur if, over the three year period ending 30 June 2024, the NAV total return per ordinary share lags the FTSE Small Cap (ex Investment Trusts) Index on a total return basis (the “2024 Tender Offer”). In the event that the 2024 Tender Offer is triggered, the Board will undertake a tender offer for up to 15% of the issued share capital of the Company (excluding shares held in treasury) shortly after the 2024 AGM at a tender price equal to a 3% discount to NAV (less costs) per ordinary share. In the event that shareholders tender in excess of their basic entitlement of 15%, such excess applications will be satisfied on a pro rata basis to the extent that other shareholders tender less than (or none of) their basic entitlement.

The Board continues to believe that, over the long term, performance is the key factor that determines the discount to NAV that the Company’s share price trades. The investment management changes made over the course of 2020 appear to be bearing fruit, and with the newly increased emphasis on marketing we believe there is scope for the discount to narrow further in the coming year.

The Board

David Morrison retired from the Board of Directors as a non-executive Director on the 30 March 2021. The Board is grateful to David for the contribution he has made to the Company during his time on the Board in a period of high activity and change.

The Board has formed a committee to consider the appointment of a new Director and I hope to be able to announce the successful candidate in due course.

As I have already announced I shall be retiring from the Board at the AGM in November 2022. The Board will go through a rigorous selection process for the new Chairman in due course.

Gearing and Cash Management

The Company has maintained its policy of operating without a banking loan facility. This policy is periodically reviewed by the Board in conjunction with the Investment Manager. The Board, together with the Investment Manager, has a conservative approach to gearing because of the concentrated nature of the portfolio. No gearing has been in place at any point during the period. Cash balances are generally maintained to take advantage of suitable investment opportunities as they arise.

Dividend

For the year ended 30 June 2021 the basic revenue return per share was 1.34p (2020: 0.38p; 2019: 2.11p).  Following the Covid-19 related dividend cuts announced by many investee companies in the previous financial year, the Board is pleased to report that much of the portfolio has resumed the payment of dividends, although in aggregate this remains at a level below that of 2019.

Accordingly, the Board is proposing a final dividend of 1.60p per share for the year ending 30 June 2021 (2020: 1.25p per share, 2019: 1.5p per share, 2018: 1.0p per share), payable on 17 November 2021 to shareholders on the register as at 15 October 2021. This payment will fully utilise this year’s earnings and also require a transfer from revenue reserves of £167k (equivalent to 0.26p per share). Following this distribution, the Company will have revenue reserves of £876k (equivalent to 1.38p per share).

Outlook

Although we may be past the worst of the Covid pandemic in the developed World, like influenza Covid in one form or another is likely to become a recurring, annual visitor. Going forward its effects on the the global economy are, however, unlikely to be as severe as in 2020. Global GDP has rebounded more rapidly than expected, largely due to the combined effects of the global vaccine roll out and QE. Although tapering will occur at some point we remain relatively optimistic that interest rates are unlikely to rise significantly for now.

The UK stock market has been out of favour with international investors for some time but this looks to be changing. As noted last year, on most comparisons the domestic market appears cheap and within it smaller companies still offer good value.

The evolution of the Company’s portfolio over the past year has set it up to prosper in this low interest rate environment. Allied with the new and enhanced marketing programme, we expect to see the discount narrow further as we move towards next year’s first announced tender.

The Board, once again, thanks you for your continued support.

Richard Hills

Chairman

29 September 2021
The Investment Manager’s Report

Investment Strategy

In the following section, we have provided shareholders with a detailed explanation of our strategy and investment process.

Our Strategic Public Equity strategy

The appointment of Gresham House as Manager in May 2020 and the subsequent appointment of Ken Wotton as Lead Fund Manager in September 2020, alongside Adam Khanbhai has not led to a fundamental change of strategy for SEC.

However, while the stated investment strategy, area of focus and core approach are unchanged they are now being more strictly applied. Further, with the additional and experienced resource of the Gresham House platform and its extensive network, the strategy can also be pursued more effectively.

Our investment focus is to invest into high quality, publicly quoted companies which we believe can materially increase their value over the medium to long term through strategic, operational or management change. To select suitable investments and to assist in this process we apply our proprietary Strategic Public Equity (“SPE”) investment strategy. This includes a much higher level of engagement with management than most investment managers adopt and is closer in this respect to a true private equity approach to investing in public markets companies. Our path to achieving this involves constructing a high conviction, concentrated portfolio; focusing on quality business fundamentals; undertaking deep due diligence including engaging our proprietary network of experts; and maintaining active stewardship of our investments. Through constructive, active engagement with the management teams and boards of directors, we seek to ensure alignment with shareholder objectives and to provide support and access to other resource and expertise to augment a company’s value creation strategy.

We are long-term investors and typically aim to hold companies for three-to-five years to back a thesis that includes an entry and exit strategy and a clearly identified route to value creation. 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 and the potential value of the company to a trade or financial buyer. The outputs of this approach deliver investments with one or more of the following characteristics: mispriced cash flow; underappreciated strategic value; and opportunity for positive strategic change.

Investment focus

We seek to invest in high quality companies in attractive end markets with the potential to deliver superior long term capital growth for shareholders. We have clear parameters for what we will invest in and areas which we will deliberately avoid. We do not invest into turn-around situations or inherently weak companies.

We proactively seek out the following characteristics:

  • Portfolio companies should be operating in a sector or niche market that offers opportunities for structural growth or a stable, competitive environment providing the scope to take market share.
  • Quality is indicated by management capability and track record; sustainable competitive advantages such as strong, defensible intellectual property, a sustainable and attractive market position, and premium growth rates relative to competitors.
  • Companies should have the potential to deliver strategic value, by exhibiting characteristics valued highly by potential trade buyers in their sector.
  • Financially, companies should be able to demonstrate a fundamentally profitable business model, strong cash generation, attractive returns on capital and superior operating margins.
  • High-quality management is desirable, although we may seek to strengthen this as part of our constructive active engagement process.
  • The investment case should not be compromised on ESG grounds. We will actively seek to diligence key ESG risks and opportunities pre investment and monitor and engage to drive improvements and mitigate risks over the life of our investments.
  • The shareholder register should be aligned with SEC’s objectives and we will aim to engage with other investors to seek consensus on strategy and key value drivers. We actively avoid companies with the following characteristics which we believe increase the downside risk and potential volatility of returns.
  • SEC will not invest in extractive sectors (oil and gas, mining), nor ‘balance sheet’ financials (banks, insurers), as the manager believes that success in these businesses is often driven by macro factors like commodity prices rather than operational aspects under the control of management.
  • We do not back early-stage companies with unproven business models or speculative growth projections orthose reliant on binary outcomes (such as biotech/tech companies reliant on the regulatory approval of new products, for example).
  • We seek to avoid businesses in financial distress or deep turnaround situations where the spread of risk and reward may be too wide and where the return on fund management resource is highly uncertain.
  • We typically avoid companies operating in commoditised industries or those with intrinsically low operating margins or cash conversion.
  • We typically avoid companies with controlling shareholders, and those with poor governance and/or weak financial systems and oversight unless we see a clear catalyst for these characteristics to change and unlock value. However, encouraging improvement in aspects of ESG may form part of the investment thesis and is a core focus of our due diligence and ongoing monitoring activity.

Smaller company focus

We believe that UK Smaller Companies represent a structurally attractive part of the public markets. Academic research demonstrates that smaller companies in the UK have delivered substantial outperformance over the long term (see Figure 1 on page 7 of the Annual Report). This is partially because there is a large number of under-researched and under-owned businesses that typically trade at a valuation discount to larger companies (see Figure 2 on page 7 of the Annual Report) and relative to their prospects. A highly selective investor with the resources and experience to navigate successfully this part of the market can find exceptional long-term investment opportunities.

The key attractions of smaller companies are:

  • Inefficient markets – Smaller companies remain under-researched and below the radar for most investors thus creating an opportunity for those willing to devote time and resource to this area.
  • A large universe – Most UK listed companies are in the smaller companies category and are listed on the main market or AIM. Two-thirds of UK listed companies have a market capitalisation below £500m, offering a large opportunity set for smaller company specialists.
  • Valuation discounts – Such discounts, arising for whatever reason, present attractive entry points at which the intrinsic worth of a company’s long-term prospects are undervalued.
  • M&A activity – Smaller companies often offer strategic opportunities within their niche markets and can become attractive, bolt-on acquisitions to both trade and private equity buyers. These buyers provide an additional source of liquidity and realisation of value for smaller company investors.

Portfolio construction

We will maintain a concentrated portfolio of 15-25 high conviction holdings with prospects for attractive absolute returns over our investment holding period. The majority of portfolio value is likely to be concentrated in the top 10-15 holdings with other positions representing potential “springboard” investments where we are still undertaking due diligence or awaiting a catalyst to increase our stake to an influential, strategic level. At acquisition no holding can represent more than 10% of the portfolio but a successful investment could grow over time to reach 15% of net assets before ongoing trimming or a sale of the holding would occur.

Bottom-up stock picking determines SEC’s sector weightings which are not explicitly managed relative to a target benchmark weighting. The absence of certain sectors such as Oil & Gas, Mining, Banks and Insurers, as well as limited exposure to overtly cyclical parts of the market, typically result in a portfolio weighted towards, but not exclusively, the Software, Healthcare and Business Services sectors, in addition to higher quality businesses in other areas. The underlying value drivers are typically company specific and exhibit limited correlation even within the same broad sectors. Figure 3 on page 8 of the Annual Report sets out the sector exposure of the Fund as at 30 June 2021.

Our smaller company focus and specialist expertise leads us to prioritise companies with a market capitalisation between £100m and £300m at the point of investment. The Investment Managers will not make an initial investment into any company with a market capitalisation of less than £100m. This focus, in combination with the size of the Trust and its concentrated portfolio approach, provides the potential to build a strategic and influential stake in the highest conviction holdings. In turn this provides a platform to maximise the chance that our constructive active engagement approach will be effective and ultimately successfully contribute to shareholder value creation.

This point is best demonstrated with numbers. The Manager believes that in order to provide a strong platform for engagement an equity stake of at least 5% and in many cases 10% is desirable, either in isolation or conjunction with other GHAM managed funds. Thus, at the point of initial investment an illustrative portfolio of £200m made up of 20 holdings might include:

  • 10 positions representing 75% of the portfolio’s value (£150m) and averaging a 7.5% direct equity stake in the underlying investment. At an average position size of £15m, the implied average market capitalisation of these holdings would be £200m.
  • 10 positions representing 25% of portfolio value (£50m) and averaging a 2.5% direct equity stake. At an average position size of £5m, the implied average market capitalisation would be £400m.

Overall, at inception, the weighted average market capitalisation of this illustrative portfolio would therefore be £250m. Given a three-to-five year investment cycle it is reasonable to expect SEC to hold 50% or more of its portfolio in companies with a market capitalisation of £300m or below, at any given time. This is approximately where we are today (see Figure 4 Value by market cap band). At a larger aggregate fund size it would be reasonable to expect the average market capitalisation to increase in line with SEC’s capacity to take influential stakes in larger businesses or retain those stakes as they grow.

Figure 4 on page 8 of the Annual Report sets out the market capitalisation range of the Trust as at 30 June 2021. While most new investments for SEC will be in companies with a market capitalisation below £300m at the point of investment we expect the portfolio at any given moment to represent a blend of investments at varying stages of maturity within our long-term investment thesis.

Once purchased there is no upper limit restriction on the market capitalisation of an individual investment. We will run active positions regardless of market capitalisation provided they continue to deliver the expected contribution to overall portfolio returns and subject to exposure limits and portfolio construction considerations.  

Based on current market levels and the size of SEC we would expect the average market capitalisation of portfolio companies to be in the range of £250-500m. In Bull markets the average is likely to be higher than in Bear markets. Over the four and a half years since December 2016 the average portfolio market capitalisation has been maintained within this range (see Figure 5 on page 9 of the Annual Report).

The average market capitalisation of portfolio holdings decreased to £367m as at 30 June 2021 compared to £405m as at 30 June 2020 despite the significant increase in share prices experienced over this period. On a like for like basis, using share prices as at 30 June 2021, the average market capitalisation of portfolio holdings has decreased significantly from £506m as at 30 June 2020 to £367m as at 30 June 2021; this has been driven by portfolio rebalancing activity over the year. We have exited some larger capitalisation holdings such as Ergomed, 4Imprint, Numis, JTC and Strix where the investment thesis had largely played out (the unweighted average market cap was £513.1m at point of final realisation) and replaced them with new holdings such as Inspired Energy, Fintel, Ten Entertainment, LSL Property Services and Idox with a lower average market capitalisation (unweighted average market cap of £194.0m at point of first investment).

We set out a description of the Top 10 holdings as at 30 June 2021 in the Investment Manager’s Report on page 12 of the Annual Report together with a high level summary of the investment case and recent developments for each position.

Constructive Active Engagement Approach

As far as possible, SEC aims to build consensus with other stakeholders. We want to unlock value for shareholders, but also create stronger businesses over the long term. The objective is to develop a dialogue with management so that the GHAM team and its network are seen as trusted advisors.

Operating with a highly-focused portfolio, SEC’s management team can build and maintain a deep understanding of its portfolio companies and their potential. The team engages with company management teams and boards in a number of areas including:

  • Strategy – Working with boards to ensure business strategy and operations are effectively aligned with long term value creation and focused on building strategic value within a company’s market.
  • Corporate activity – Support for acquisition and divestment activity through advice, network introductions and provision of cornerstone capital.
  • Capital allocation – Seeking to work with boards to optimise capital allocation by prioritising the highest return and value added projects and areas of focus for investment of both capital and resource.
  • Board composition – Ensuring that boards are appropriately balanced between executive and non-executive directors and contain the right balance of skills and experience; we actively use our talent network to introduce high quality candidates to enhance the quality of investee company boards as appropriate.
  • Management incentivisation – Ensuring that key management are appropriately retained and incentivised to deliver long term shareholder value with schemes that fit with GHAM’s principles and are well aligned to our objectives as shareholders.
  • ESG – Leveraging the Gresham House sustainable investing framework and central resource to help to identify, understand and monitor key ESG risks and opportunities as well as seeking to drive enhancements to a company’s approach where there are critical material issues with a particular focus on corporate governance.
  • Investor Relations – Helping management teams to hone their equity story, select appropriate advisors and target their investor relations activities in the most effective way to ensure that value creation activity is understood and reflected by the market.

Engagement is undertaken privately, as far as possible. The team will also work to leverage its extensive network to the benefit of portfolio companies. We seek to make introductions to our network in as collaborative way as appropriate where we believe there is an opportunity to support initiatives to create shareholder value. As an example, we recently introduced a high-quality non-executive director to the board of Wilmington to provide insight and expertise in the area of digital remote learning, a key component of the company’s future growth strategy. We have also engaged with an increasing number of portfolio companies regarding their ESG strategy and remuneration policy; we believe both areas are critical to delivering long term shareholder value in line with our stated strategy.

For the companies, a further benefit is that SEC has historically supported investee companies with capital to strengthen their financial position or to undertake M&A where this is aligned with strategy and long term value creation. Recent examples during the financial year have been: Inspired where SEC, along with other investors provided acquisition capital to support the purchase of the remaining minority interest in Ignite Energy; Hostelworld where the Fund participated in a placing of new equity to strengthen its balance sheet to provide additional liquidity to weather the short term impact of Covid disruption to the travel sector; and Medica where SEC participated in a placing to support the acquisition of US-based RadMD.

In summary, we follow a practice of constructive corporate engagement and aim to work with management teams in order to enhance shareholder value. We attempt to build a consensus with other stakeholders and prefer to work collaboratively alongside like-minded co-investors.   

Portfolio review for the twelve months to 30 June 2021

Over the course of the financial year we have made good progress with the transition of the portfolio: purchasing six new holdings (including one post period end) which represented 21% of NAV at the end of the period, fully exiting seven positions (including two post period end) which represented 26% of NAV at the start of the period, and adding to a number of core positions. At the end of the period the number of influential equity stakes where GHAM funds, in aggregate, hold a 5% or more equity stake now stands at nine, and represents 55% of the portfolio by value.  A number of enhanced engagement initiatives are now underway with portfolio companies across a number of areas such as board composition, ESG strategy, long term management incentive plans and digital transformation activities.

Market Background

Over the twelve months to the end of June, the FTSE Smaller Companies (ex Investment Trusts) Index (“the index”) rose 65.2% on a total return basis outperforming both the FTSE All Share (+21.5%) and FTSE AIM (+42.5%). At a stock level the strength was broad based, although cyclical sectors, and in particular financials and industrials, generally led the recovery.

The first four months of the period saw a muted headline market as investors and companies alike digested the medium-term implications of Covid on business models, valuations and company prospects. However the market rebounded sharply in November as vaccine approvals drove optimism that Covid restrictions could soon be lifted, with the index up more than 30% over Q4 alone. This theme played out further in the new year as the successful vaccine rollout and reduction in restrictions, both in the UK and globally, contributed to an increasingly bullish economic outlook and drove the index to close near record highs.

This optimism was also reflected in an exceptionally strong rebound in corporate activity during the first half of 2021. The UK IPO market has been the most active for more than two decades so far during 2021 with analysts at stockbroker Liberum estimating that more than £10bn has been raised during the first 8 months of the year, already more than any year since 2000 with several months of the year remaining.  Similarly, record amounts of “dry powder” in private equity funds, combined with still discounted valuations, has triggered a frenzy of takeover activity in the UK equity market ranging from small caps right through to the FTSE100. This represents a double-edged sword for investors who benefit from a short-term share price uplift but then may lose out on the long-term potential of good quality companies that leave the public markets. As an illustration of this point, two holdings, Equiniti and Proactis, were subject to takeover offers from private equity during the period; this is likely to be an ongoing theme.

Performance Review

The net asset value (“NAV”) increased 46.8%, on a total return basis, over the twelve months to the end of June, closing at 350.1p per share; just shy of the all time high reached late in the period. This represents an increase of 23% since the start of 2020 (ie pre-Covid) although this figure masks significant volatility over the last 18 months, with the NAV ultimately increasing 88% from the low point reached in March 2020 during the initial stages of the Covid pandemic. The early stages of the recovery were somewhat tentative with portfolio company valuations remaining depressed due to the significant uncertainty created by the first wave of Covid lockdowns. Following the approval of vaccines in November 2020 a sustained, substantial and broad based rebound in share prices ensued, supporting the healthy growth in NAV experienced over the period.

Whilst a strong absolute NAV performance was delivered over the period, performance lagged the index. The majority of this relative drag was experienced during the exceptional market recovery during the last two months of 2020. This can partly be attributed to the net cash balance, which averaged 7% over the period and was a drag on relative performance. The larger factor however was the lack of exposure, due to the nature of the investment strategy, to the cyclical sectors which led the performance of the market as noted previously. By way of illustration, there was only one material negative contributor to performance (Clinigen; discussed in more detail subsequently); by and large the NAV underperformance relative to the index was driven more by what was not owned, rather than what was.

Despite the strong gains experienced over the year, we remain confident of the portfolio’s prospects as we look towards 2022; valuations for portfolio holdings remain modest and, for many companies, significant strategic progress has been delivered over the last 12 months which puts them in a strong position to capitalise on the improving backdrop. These developments are covered in more detail for key holdings in the ‘Top 10 Investee Company Review’ on page 12 of the Annual Report.

Top Five Absolute Contributors to Performance

Security Valuation 30 June 2021 Period Contribution to return
£000 (basis points)
Tyman 13,207 833
Tribal 16,870 670
Medica 25,023 410
Wilmington 13,532 385
Ergomed* - 320

*Fully realised during the period

Tyman, a manufacturer of technical window and door components, saw its share price more than double as an improving trading outlook in their key US market drove upgrades whilst strong operational delivery supported margins and helped to reduce their leverage. Tribal, an educational software and services provider, rerated over the course of the period as a number of material new contracts were signed which evidenced increasing traction of their next generation ‘Tribal Edge’ platform. Medica, a teleradiology services provider, saw it shares recover over the course of 2021 as scanning activity in hospitals returned to more normalised levels. Wilmington, a B2B information and training provider, recovered as strong operational management and a shift to digital delivery channels saw it deliver a resilient performance despite Covid restrictions disrupting to face to face training. Ergomed, a clinical trials and pharmacovigilance specialist, continued its run of exceptional performance with significant upgrades and further M&A in the period; the holding was divested in the latter stages of 2020 due to the strength of the share price. 

Bottom Five Absolute Contributors to Performance

Security Valuation 30 June 2021 Period Contribution to return
£000 (basis points)
Clinigen 16,566 (303)
4Imprint* - (39)
Numis* - (17)
Idox 2,627 2
LSL Property Services 10,451 21

*Fully realised during the period

Only three investments that delivered negative returns over the period.  Clinigen, a specialist pharmaceuticals a pharmaceutical services provider, was the only significant detractor over the period. The company issued two profit warnings over the period. The first, early in the period, was due to the launch of generic version of Clinigen’s Foscavir product in the EU; whilst this was expected the timing was a negative surprise and led to modest downgrades. The second, late in the period, was more significant and related to weak sales of oncology drugs, and in particular key product Proleukin, due to Covid-related disruption of cancer diagnosis and treatment pathways over the last 12 months. These developments are discussed in more detail on page 13 of the Annual Report. Holdings in 4Imprint, a US focused supplier of promotional merchandise, and Numis, a small and mid-cap investment bank, were both exited early in the period and prior to the recovery in markets. This was in spite of resilient trading and relatively robust share prices, as opportunities with a better risk vs reward balance were, in our opinion, available elsewhere.  

Portfolio Review

The portfolio remained highly focused with a total of 19 holdings and the top 10 accounted for 68% of the NAV at the end of the period. 3% of the NAV was held in cash at the period end.

Over the period positions in 4Imprint, Ergomed, Numis, JTC and Strix were exited. The investments delivered IRRs of 22%, 72%, 2%, 40% and 48% respectively. Profits were taken in Ergomed as the shares more than doubled over the period driven by strong trading and M&A. 4Imprint has been a very strong performer in the fund for over a decade; the position was exited as the shares were viewed as highly rated relative to other opportunities in the market. Numis, a small non-core holding, was exited also in order for capital to be redeployed elsewhere in the portfolio. JTC and Strix both reported impressive results in 2020, however this was reflected in a strong share price performance and lofty valuations and as a result the positions were exited. Positions in Equiniti and Proactis were realised after the period end following successful bids for the companies by private equity firms Siris Capital and Pollen Street Capital respectively.

New investments were initiated in Inspired (formerly Inspired Energy), a leading UK corporate energy services and procurement specialist; Ten Entertainment, the UK’s number two ten pin bowling operator and Fintel (formerly SimplyBiz), a leading provider of technology enabled regulatory solutions and services to Independent Financial Advisors; LSL Property Services,  a leading UK provider of predominantly B2B focused real estate services; Idox, a provider of niche software solutions to the public sector. Post period end a toehold investment was initiated in Nexus Infrastructure, a leading UK provider of specialist infrastructure and engineering services to the housebuilding, transport, and commercial sectors.

Changes in sector weightings have seen exposure to Healthcare decrease from 34.7% to 26.2% following the exit from Ergomed, whilst Financial Services has decreased marginally from 23.8% to 23.1% due to the impact of exits from Numis and JTC being offset by the new investment in Fintel. Technology has increased from 7.8%% to 10.8% due to the strong performance of Tribal and Proactis combined with the new investment in Idox. Exposure to Travel and Leisure, Real Estate and the Industrial Goods and Services sectors have increased mainly due to new investments Ten Entertainment, LSL Property Services and Inspired Energy respectively. Exposure to Media and Construction and Materials has remained broadly constant.

Top 10 Investee Company Review (as at 30 June 2021)

Medica

Description

Is the leading provider of teleradiology services in the UK, providing outsourced interpretation and reporting of MRI, CT and plain film (X-ray) images, primarily to the NHS hospital radiology departments. This includes both out-of-hours (aka ‘Nighthawk’) and routine reporting. Formerly owned by Close Brothers Private Equity, following a 2013 buyout, the company listed on the London Stock Exchange in 2017.

Thesis

The demand for radiology services in the UK is growing rapidly driven by the increasing sophistication and clinical application of medical imaging, compounded by an ageing population with increasing incidence of chronic conditions and cancer that require on going monitoring. The NHS struggles to meet this demand internally due to a severe (and long term) shortage of qualified radiologists. Medica’s technology platform and roster of over 500 consultant radiologists addresses this issue safely and economically, enabling the company to deliver consistently high (double digit) levels of growth. The company has historically delivered strong financial progress, growing revenues over 60% between 2016 and 2019, although this has been disrupted in the short term due to the impact of Covid on the healthcare system. We believe the medium term outlook is positive and that the combination of a high growth, high margin, low capital operating model is highly valuable and underappreciated by the market.

Developments in the period

Covid has led to disruption to scanning activity levels in NHS hospitals which as had a material impact on Medica’s business, with revenue down 21% year on year in 2020. Despite this, the company has remained profitable, cash generative and well capitalised which has enabled them to take the opportunity to strengthen relationships with its NHS customers and to continue to invest in technology to increase the efficiency and flexibility of the company’s reporting platform. As part of this investment, and in partnership with Qure.ai, the company has recently started to incorporate AI support tools into its offering; initially to enhance radiologist reporting of urgent stroke cases. Late in 2020 the company acquired an Irish peer, Global Diagnostics Ireland, for €16m, leading to double digit upgrades and extending the company’s footprint outside the UK. It followed this up with the acquisition of US based imaging contract research business (iCRO) RadMD for up to £16m, funded by a placing that was supported by SEC. In our view these developments increase the long term strategic value of the company and put it in a strong position to capitalise as healthcare activity returns to more normalised levels over the course of 2021.

XPS

Description

Is the only listed defined benefit pensions specialist in the UK. The company offers pensions actuarial, administration, compliance and advisory services. Formerly owned by Close Brothers Private Equity, the company listed on the LSE in 2017.

Thesis

Following a large merger with Punter Southall, the company warned on profits mid-way through 2019 and suffered a material de-rating. We initiated our position at this point as we believe the quality and longevity of the cash flows to be very attractive and mispriced at its prevailing valuation. The company has a largely predictable core business with the opportunity to enhance returns through continued market share gains, supportive regulatory tailwinds and accretive bolt-on acquisitions. Consolidation in the market provides further opportunity for XPS to take market share over the medium term, whilst the company’s National Pension Trust ‘master trust’ business offers valuable optionality over the long term.

Developments in the period

The company demonstrated the resilience of its business model over the course of 2020. Many of the services that XPS offers to its clients are non-discretionary in nature and driven by the ever increasing regulatory burden in the pensions industry, and this proved to be the case with revenues growing 6% organically in the twelve months to March 2021. Strong demand for investment advice, as is expected during periods of market volatility, offset marginal weakness in less discretionary project work. With the integration of Punter Southall now complete, XPS is well poised to continue to gain share both organically and inorganically. Although the mooted merger between industry giants Aon and Willis Towers Watson was terminated, XPS is likely to be a beneficiary of the disruption this process caused. Trading at sub 11x EBITDA and over 4.5% dividend yield, we believe the quality, growth and cash generating potential of the business is underappreciated by the market.

Tribal

Description

Is a global provider of products and services to the international education, training and learning markets. Today, the company focuses its activities on student records and administration systems and quality review inspection services.

Thesis

Tribal is a strategically valuable and high-quality asset, albeit one in a relatively mature market. The company is executing well on a strategy to reduce its overheads and develop its next generation cloud-based software platform, Tribal Edge which will enable the business to capitalise on its leading positions in the UK, Australasian and Asian markets. The benefits from these initiatives are yet to be fully reflected in its financial metrics, and will further increase its potential value to a strategic acquirer. Given the recurring nature of its revenues, its high-quality long-term customer base and market leading position we believe the company should generate higher margins and warrant a substantially higher rating than it does today.

Developments in the period

The business has demonstrated the resilience of its business model throughout 2020 with limited disruption to trading or operations from Covid. The main strategic focus of the business remains the development of Tribal Edge; the last twelve months have seen material progress with the release of the first module to customers in Australia and the UK. On the back of its development plans, the company has started to see significant commercial traction in the market with a number of major contract wins in the period including one with Nanyang Technological University in Singapore, worth up to £17m over 8 years. The company also announced the acquisition of Semestry Ltd for £4.5m which adds scheduling and timetabling capabilities to Tribal’s Edge product suite. Post period end the company reported strong interim results with modest upgrades on the back of continued contract momentum. Importantly, that progress on Tribal Edge development and sales continued and helped to support an impressive 14% yoy increase in exit ARR. We are encouraged by the progress made to date and look forward to further developments as the company continues to execute on its strategy.

Clinigen

Description

Is a speciality pharmaceutical and services company, its primary activities include: acquiring, licencing and revitalising hospital only critical care medicines; and providing patient access to its own or other pharmaceutical companies’ products, whether to meet unmet medical needs or for use in clinical trials. The company grew rapidly post listing in 2012, both organically and through targeted acquisitions. Over the course of our investment, the company has undertaken investment to deliver an international platform of services across the patient and drug lifecycle and a broad portfolio of medicines across a range of treatment areas, including oncology.

Thesis

Clinigen is a unique business with a platform than can supply medicines globally, on a licensed and unlicensed basis, into care settings and clinical trials. This platform serves areas of long term structural growth driven by increasingly demand for, and complexity of, healthcare treatments combined with a retrenchment of ‘big pharma’ from secondary markets and non-blockbuster products. It is estimated that 80%of the world’s population continues to have limited or no access to the right medicines, at a time when physician and patient knowledge and requirement for appropriate medicines is enhancing. Additionally, a profusion of novel treatments are now being developed by small biotech firms, with limited capabilities beyond drug development, that require specialist service from providers like Clinigen to support molecules through clinical trials and to commercialisation. Given the long term potential and strategic value of this services platform, and the highly cash generative nature of the products portfolio, Clinigen is substantially undervalued on a sum of the parts basis.

Developments in the period

The company issued two profit warnings over the period. The first, early in the period, was due to the launch of generic version of Clinigen’s Foscavir product in the EU; whilst this was always expected the timing was a negative surprise and led to modest downgrades. The second, late in the period, was more significant and related to weak sales of oncology drugs, and in particular key product Proleukin, due to Covid-related disruption of cancer diagnosis and treatment pathways over the last 12 months. Although much of this latter headwind is likely to reverse (eventually), the timing is unclear and the warning throws into question the success of the sizable acquisition of Proleukin, and more broadly the product-focused M&A strategy of the company. The Chairman stepped down in July and was replaced by Elmar Schnee (ex-Jazz Pharmaceuticals) who we expect to undertake a strategic review of the business in the short term. In August, the CFO also left the business which enables the company to find a high quality replacement with a skill set more aligned to the current challenges that it faces. In our view Clinigen would be better served by instead deploying capital into its market leading services platform that is exposed to long term structural growth drivers and, importantly, has higher quality of earnings with limited product-specific risk; this platform is highly valuable in our view. Even on current depressed analyst expectations, Clinigen trades at c.10x EV/EBIT; the company remains heavily discounted on both a headline and a sum of the parts basis in our view. Additionally, a number of late stage third party trials are currently underway utilising Proleukin which offer ‘free’ optionality on significant upside if any of them are successful. Over the medium term, there are multiple routes available to the Board to realise value, including a strategic reset, a divestment of part(s) of the business, or a sale in whole. There was reported interest from private equity house Advent International in the middle of 2020; this interest is unlikely to have been deterred by the 20% reduction in the share price since that point  in time. We also note with interest that activist Elliott Management recently disclosed a stake in the Company.

Inspired (formerly Inspired Energy)

Description

Is a leading UK B2B corporate energy and ESG services specialist. The company works with their clients, generally large corporates, to procure energy cost effectively, audit and report their usage of it, and help them to optimise their energy efficiency. The company has a strong focus on sustainability with a number of services that help their clients measure, report and improve their ESG performance.

Thesis

Inspired is a leader in the growing, but fragmented, corporate energy services market. The increasing complexity of corporate energy requirements, and increasing regulatory and sustainability imperatives will support continued strong organic growth for the company with a likely ‘flight to quality’ leading to further increases in market share. The business model of the business is strong with high quality of earnings from long term contracts, high margins (40% EBITDA margin) and return on capital and good cash conversion. The fund’s initial investment was made as part of a placing intended to strengthen the balance sheet and provide firepower for the company to undertake a number of bolt on acquisitions to continue to consolidate its position in the market. Although the company’s revenues were depressed due to lower corporate energy usage over lockdowns, there is significant opportunity for a rebound in revenues, and in the share price, when there is a return to a more normalised environment. Over the medium term there are strategically attractive opportunities, both organic and inorganic, to gain market share and broaden the range of services offered, particularly in ESG-related areas.

Developments in the period

The company delivered results that were in line with expectations, although trading remained subdued due to Covid restrictions over the period weighing on corporate energy usage. The core corporate division experienced a significant 20% organic decline in revenues as a result, although through management actions margins and cash conversion was robust. The corporate order book grew 10% yoy which bodes well for the company’s trading prospects into the latter stages of 2021 and beyond. The non-core SME-focused division, which represented less than 10% of Group revenues was weaker, and in November the company announced that they had sold this part of the business to the management team for £10.5m. Over the period four acquisitions were completed: Ignite Energy, previously a 40% owned associate that provides energy optimisation services; and LSI Energy Holdings, Businesswise, and GEM, all of which provide energy assurance services and bolster the company’s core offering. In addition to this, the company launched a range of ESG consultancy and data measurement services; following this the company renamed itself to Inspired plc to reflect the increasing importance of non-energy related services to its proposition. Strategically, all of these developments are positive and are in line with our investment thesis.

Wilmington

Description

Is a B2Bmedia business that provides business information, training and events products. The company consists of a portfolio of brands that focus on niche sectors including risk (i.e. insurance), compliance, banking, accounting, legal services, healthcare providers and pharmaceuticals.

Thesis

Wilmington generates high teens EBITA margins, high teens+ ROCE and good cash conversion. More than 80%of revenues in the main publishing and information divisions are delivered digitally, typically on a subscription basis, and with high levels of client retention. Growth has been held back in recent years and we believe the presence of a new chairman, CEO and CFO will improve the company’s execution and management of the portfolio to drive shareholder value. Given its strong position in attractive markets it is capable of mid-single digit organic growth; delivery of this against very modest current market expectations could support a substantial re-rating of the stock. In the absence of a re-rating, we believe the company has the potential to become a takeover target.

Developments in the period

Early in the period the company grappled with the disruption that Covid wrought on it’s ability to run face to face training and events; these areas together represented c.40% of the company’s revenue. Pleasingly Wilmington has been successful in mitigating much of this impact through a combination of cost savings and migration of training and events on to online delivery formats. More recent updates show the business outperforming expectations; the business delivered an increase in profits over the twelve months to June despite the disruption experienced; this is a reflection of the strong management actions taken and the strategic progress made in digitising the business. Importantly, the cash performance was also very strong, and with leverage now below 1.0x the company is well positioned to take advantage of any strategic inorganic opportunities that may present themselves. Finally, late in the period the company announced a change to its operating model and reporting structure in order to emphasis its strategic focus on GRC (Governance, Risk and Compliance) related activities. It is increasingly clear that Wilmington will emerge from the crisis a leaner, more digitally focused and more valuable company. We were pleased to note the appointment of William Macpherson as a non-executive director early in the new year; as former CEO of QA and Kaplan International we believe he brings highly valuable experience and expertise to the board.

Tyman

Description

Is a leading international supplier of engineered components to the door and window industry in the new build and repair and maintenance (RMI)markets. Around two-thirds of its profits are from North America.

Thesis

The company has, through organic and inorganic investment, increased its market leadership, strengthened the product proposition and delivered strong historic returns on investment. The company has the potential to replicate its North American manufacturing template to its operations in Europe and the Rest of the World to achieve material efficiencies, and is well placed to benefit from a recovery of U.S. single family housing activity to long term historical levels.

Developments in the period

The company has been a standout performer in the period. Operational improvements instigated by Jo Hallas, who joined as CEO in 2019, positioned the business well to navigate the challenges posed by Covid. As a result the company was able to maintain strong levels of customer service, gain market share and drive improvements in margin over the period. Over the last nine months improving market conditions and encouraging order intake, particularly in its key US market, led to significant upgrades and a rerating of the stock as investors gained increasing confidence in the company’s outlook, and balance sheet position. A new high profile chairman, Nicky Hartery, was also appointed in the period. Late in the period management presented at a capital markets day, where they outlined continuing opportunities for product development, share gain and margin enhancement, as well defining a compelling ESG strategy for the company. Despite the strength of the share price over recent months the company remains modestly valued at 9x EBITDA given the organic and inorganic prospects available to drive value over the medium term.

Fintel (formerly SimplyBiz)

Description

Is a leading provider of essential support services, software and data to professional financial advisers, financial intermediaries and product providers. It serves over 5,600 intermediary firms and more than 350 financial institutions in the UK. Since its inception in 2002 the group has expanded rapidly via a combination of organic growth and bolt-on acquisitions, the most recent of which was the 2019 transformational strategic acquisition of Defaqto.

Thesis

Fintel is a market leader in the structurally growing IFA market. Its services deliver the benefits of scale to the long tail of IFAs that want to remain independent, and to product providers that want to target distribution into this segment. The company has the opportunity to grow earnings materially through adding member firms, cross / upselling technology and data services to enable digitisation of the IFA channel, and enhancing services provision to the product provider segment. Successful execution of this strategy will improve margins and quality of earnings substantially, supporting rerating and creating a strategically valuable asset.

Developments in the period

Management held a capital markets day in late 2020 in which they detailed their digital transformation strategy and their ambitions for the business. Encouragingly they reiterated their medium term financial targets of 5-7% revenue growth, 35-40% EBITDA margin and recurring revenues of 70-80% of total revenues. These targets are consistent with the investment thesis articulated above, and, if achieved, have the potential to create significant shareholder value. Reflecting the increasingly broad proposition offered, the company changed their name to Fintel plc early in 2021. The also appointed a new chairman and CFO at a similar time in order to support the evolving strategic ambitions of the company. Trading over 2020 was resilient despite some disruption to their end market due to Covid. Core subscription intermediary customers increased over the period, as did the number of fintech contracts. Both are positive forward indicators for the business, and this improving trajectory was subsequently confirmed with a bullish trading update released post period end which showed 10% growth in revenues and 12% growth in EBITDA over the first six months of 2021.

Brooks Macdonald Group

Description

Is an investment and wealth management services provider. The company provides a range of investment management services and advice to individuals, pension funds, institutions, charities and trusts. It also provides offshore fund management and administration services. The company manages £16.5bn of assets from offices across the UK and the Channel Islands.

Thesis

The company has historically had one of the strongest rates of organic growth in its sector given its relationship with independent financial advisers and its large exposure to self invested personal pension schemes. New management have undertaken ‘catch-up’ investment to fit the increased size of the group and are now focusing on growing the group margin and matching the performance of the international business to the successful onshore business. The company is highly cash generative and has a healthy net cash balance. More recently, management have successfully demonstrated the potential of the company to undertake highly accretive acquisitions; Brooks stands to benefit from the ongoing consolidation in the industry as either (or both) an acquirer or a target.

Developments in the period

Over the first half of the period, Brooks delivered a strong bottom line performance with margins increasing to over 25%, benefiting from operational excellence initiatives that were a key plank of the strategy put in place in late 2017. This was also supported by the delivery of synergies guided to following the acquisitions of Cornellian Asset Management in 2019, and Lloyds Bank Channel Islands wealth management and funds business in 2020. The well regarded CEO, Caroline Connellan stepped down in May, handing over to Andrew Shepherd who has been with Brooks since 2002 and is well known to the industry and to us. She leaves the company is a strong position, and with the operational foundations now in place the business is focused on driving growth; this was pleasingly delivered with the company reporting a return to positive net flows in the final quarter of their financial year ending June 2021. The growing momentum in funds under management evidences both the increasing traction of their strategy as well as the supportive backdrop for the wealth management space. There has been significant M&A activity in the space recently (cf Saunderson House and Charles Stanley) which underpins the strategic value of the company. Neither the improving growth and margin prospects nor the potential for M&A appears to factored into the company’s modest valuation of less than 10x EBITDA.

LSL Property Services

Description

Is a market leading UK provider of predominantly B2B services to the real estate sector. The company operates across three divisions: in financial services LSL provides compliance services, product access and software to mortgage brokers via its Primus mortgage network; in surveying LSL provides residential property surveys primarily to financial institutions; in estate agency LSL owns and franchises a number of estate agency brands including Marsh and Parsons, Your Move, Reeds Rain and LSLi.

Thesis

The investment thesis is predicated on a strategic shift away from the more cyclical real estate agency segment, which had historically been a focus, to the market leading financial services segment which is an asset light, high quality of earnings, high margin business. This has potential to achieve a step change in organic growth, improve return on capital, and generate significant shareholder value. This strategy, which has been in place since the appointment of David Stewart as CEO in May 2020, is already starting to bear fruit with a number of divestments and strategic deals struck over the course of 2021. Given the quality and growth potential of the financial services division, the company is significantly undervalued on a sum of the parts basis.

Developments in the period

The company reported increasing momentum in trading across all divisions from December 2020 and into 2021 as the UK real estate sector burst back to life spurred by the end of lockdowns, government initiatives such as the stamp duty holiday and record low interest rates. This drove substantial upgrades and a strong share price performance towards the end of the period. Whilst this was positive, our thesis is based on the long term strategic plan laid out by management rather than any short term gyrations in the property market; on this front there were a number of important developments in 2021. First, the company acquired Mortgage Gym and Direct Life Quote Holdings in order to accelerate the digital proposition in the financial services division. Second, a landmark deal was struck with private equity firm Pollen Street Capital to form JV to create a scale player in the mortgage broking space; the JV is to be run by Simon Embley who subsequently stepped down from his position as chairman of LSL to be replaced by NED Bill Shannon. Third, a five year agreement was signed to provide mortgage and protection advise to The Property Franchise Group’s network of over 400 sites. Finally, non-core minority stakes in LMS and Tm Group were divested for total consideration of £32m leaving the company with a strong net cash balance sheet. Although the property market has cooled somewhat in recent months, the company continues to report trading in line with expectations for the year and remains very well positioned to continue to execute against its strategy.

Outlook

We continue to expect a strong economic recovery in the UK during the second half of 2021, driven by vaccine penetration, the removal of lock down restrictions, and extensive monetary and fiscal stimulus. At a market level, the discounted valuation applied to the UK and to UK smaller companies in particular remains material. This is still the case despite the exceptionally strong performance since November 2020, and is evidenced by the continuing voracious appetite of foreign suitors, both private equity and strategic, for listed UK assets. We expect this to be an enduring theme which, in conjunction with improving sentiment towards UK markets, will support valuations over the medium term.

Nevertheless, there are a number of potential bumps in the road. The sunny economic outlook is clouded somewhat by heightened inflationary pressures, temporary or otherwise, and contradictory signals from the employment market are compounded by the impending unwind of the government furlough scheme. Further disruption from future Covid variants also remains a possibility that can not be ruled out, whilst the long term effects, particularly secondary and tertiary effects, of the pandemic are yet to be fully understood. As such, the extreme uncertainty that has hung over many sectors and companies will continue to limit short-term visibility. This is likely to drive elevated profit warnings, both positive and negative as the year progresses.

In this context we anticipate heightened volatility at the individual stock level. However, we believe that volatility, while creating some challenges, will provide an attractive environment in which we can unearth good long-term investment opportunities at attractive valuations. The economic environment and lingering Covid-19 discontinuity will provide agile smaller businesses with strong management teams the opportunity to take market share and build strong long-term franchises.

We continue to believe that our fundamental focused investment style has the potential to outperform over the long term. We see significant opportunities for long term investors to back quality growth companies at attractive valuations in an environment where agile smaller businesses with strong management teams can take market share and build strong long-term franchises. We will maintain our focus on building a high conviction portfolio of less cyclical, high quality, strategically valuable businesses which we believe can deliver strong returns through the market cycle regardless of the performance of the wider economy.

Portfolio as at 30 June 2021

% of invested portfolio at % of invested portfolio at
% of
Date of first Cost Valuation 30 June 30 June net
Company Sector Classification Investment £000 £000 2021 2020 Assets
Medica Healthcare Mar 2017 19,120 25,023 11.6% 7.1% 11.3%
XPS Financial Services Jul 2019 16,851 19,842 9.2% 6.5% 9.0%
Tribal Technology Dec 2014 11,742 16,870 7.8% 7.0% 7.6%
Clinigen Healthcare Jul 2014 17,126 16,566 7.7% 14.9% 7.5%
Inspired Energy Industrial Goods & Jul 2020 9,099 13,678 6.3% - 6.2%
Services
Wilmington Media Oct 2010 13,068 13,532 6.3% 5.1% 6.1%
Tyman Construction&Materials
 
Apr 2007 6,656 13,207 6.1% 7.3% 6.0%
Fintel Financial Services Oct 2020 8,573 11,046 5.1% - 5.0%
Brooks Macdonald Financial Services Jun 2016 8,386 10,711 5.0% 5.0% 4.8%
LSL Property Services Real Estate Mar 2021 10,353 10,451 4.8% 4.7%
Hostelworld Travel & Leisure Oct 2019 9,137 9,754 4.5% 4.1% 4.4%
Benchmark Healthcare Jun 2019 6,734 9,712 4.5% 3.6% 4.4%
Equiniti Financial Services Mar 2016 10,187 9,472 4.4% 9.8% 4.3%
Hyve Media May 2020 6,454 9,368 4.4% 3.3% 4.2%
Ten Entertainment Travel & Leisure Oct 2020 6,058 8,147 3.8% - 3.6%
Alliance Pharma Healthcare May 2017 3,910 6,726 3.1% 5.3% 3.0%
Harworth Real Estate Jul 2016 2,674 4,567 2,1% 2.5% 2.1%
Proactis Technology Nov 2017 9,309 4,457 2.1% 1.5% 2.0%
Idox Technology Mar 2021 2,596 2,627 1.2% - 1.2%
Total Investments 215,756 97.4%
Cash and cash equivalents 7,580 3.4%
Net current liabilities (1,767) (0.8%)

Total shareholders’ funds      221,569     100.0%

Portfolio as at 30 June 2021 – Sector split by industry

Sector Percentage
Healthcare 26.2
Financial Services 23.1
Technology 10.8
Media 10.3
Travel & Leisure 8.0
Real Estate 6.8
Industrial Goods & Services 6.2
Construction & Materials 6.0
Net cash 2.6

Portfolio as at 30 June 2021 – Size split by market capitalisation

Size Percentage
Greater than £500m 20.8
£300m - £500m 20.2
£100m - £300m 54.4
Less than £100m 2.0
Net cash 2.6

Ken Wotton/Adam Khanbhai

Gresham House Asset Management

29 September 2021

Statement of Comprehensive Income

Year ended 30 June 2021
Revenue Capital
return return Total
£'000 £'000 £'000
Investments
Gains on investments held at fair value
through profit or loss
- 69,767 69,767
- 69,767 69,767
Income 
Dividends 2,382 - 2,382
Interest 1 - 1
Total income 2,383 - 2,383
Expenses
Investment Manager’s fee
(894) - (894)
Other expenses (643) - (643)
Total expenses (1,537) - (1,537)
Net return before taxation 846 69,767 70,613
Taxation - - -

Net return and total comprehensive income for the year
846 69,767 70,613
Return per Ordinary share 1.34p 110.22p 111.56p

The total column of this statement represents the Statement of Comprehensive Income prepared in accordance with IFRS. The supplementary revenue and capital return columns are both prepared under guidance published by the AIC. All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year.
Statement of Comprehensive Income

Year ended 30 June 2020
Revenue Capital
return return Total
£'000 £'000 £'000
Investments
Losses on investments held at fair value
through profit or loss
- (15,551) (15,551)
- (15,551) (15,551)
Income 
Dividends 2,260 - 2,260
Interest 45 - 45
Total income 2,305 - 2,305
Expenses
Investment Manager’s fee
(1,134) - (1,134)
Other expenses (931) - (931)
Total expenses (2,065) - (2,065)
Net return before taxation 240 (15,551) (15,311)
Taxation - - -

Net return and total comprehensive income for the year
240 (15,551) (15,311)
Return per Ordinary share 0.38p (24.54)p (24.16)p

Balance Sheet

As at
30 June 2021
As at
30 June 2020
£'000 £'000
Non-current assets
Investments held at fair value though profit or loss 215,756 138,158
Current assets
Trade and other receivables 423 55
Cash and cash equivalents 7,580 13,901
8,003 13,956
Total assets 223,759 152,114
Current liabilities
Trade and other payables (2,190) (367)
Net assets 221,569 151,747
Capital and reserves
Share capital 6,986 6,986
Share premium account 31,737 31,737
Special reserve 24,567 24,567
Capital reserve 154,126 84,359
Capital redemption reserve 2,264 2,264
Revenue reserve 1,889 1,834
Total shareholders’ equity 221,569 151,747

Net asset value per share
350.05p 239.74p

Ordinary shares in issue
63,296,844 63,296,844

Statement of Changes in Equity

For the year ended
30 June 2021
Share capital Share premium
account
Special
reserve

Capital reserve
Capital redemption reserve Revenue reserve Total
£000 £000 £000 £000 £000 £000 £000
1 July 2020 6,986 31,737 24,567 84,359 2,264 2,545 151,747
Net return and total comprehensive income for the year - - - 69,767 - 846 70,613
Dividends paid - - - - - (791) (791)
30 June 2021 6,986 31,737 24,567 154,126 2,264 1,889 221,569
For the year ended
30 June 2020
Share capital Share premium
account
Special
reserve

Capital reserve
Capital redemption reserve Revenue reserve Total
£000 £000 £000 £000 £000 £000 £000
1 July 2019 6,986 31,737 25,595 99,910 2,264 2,545 169,037
Net return and total comprehensive income for the year - - - (15,551) - 240 (15,311)
Dividends paid - - - - - (951) (951)
Share buy-backs - - (1,028) - - - (1,028)
30 June 2020 6,986 31,737 24,567 84,359 2,264 2,545 151,747

Statement of Cash Flows

Year Ended 30 June Year Ended 30 June
2021 2020
£000 £000
Operating activities
Net return before taxation 70,613 (15,311)
Adjustment for (gains)/losses on investments (69,767) 15,554
Adjustment for revaluation of foreign currency balances - (3)
Operating cash flows before movements in working capital 846 240
(Increase)/decrease in receivables (368) 77
Increase/(decrease) in payables 366 (752)
Purchase of portfolio investments (61,324) (59,880)
Sales of portfolio investments 54,950 60,024
Net cash flow from operating activities (5,530) (291)
Financing activities
Equity dividend paid (791) (951)
Shares bought back in the year - (1,171)
Net cash outflow from financing activities (791) (2,122)
Decrease in cash and cash equivalents for year (6,321) (2,413)
Cash and cash equivalents at the start of the year 13,901 16,311
Revaluation of foreign currency balances - 3
Cash and cash equivalents at 30 June 7,580 13,901

Principal and Emerging Risks

The Board believes that the overriding risks to shareholders are events and developments which can affect the general level of share prices, including, for instance, inflation or deflation, economic recessions and movements in interest rates and currencies which are outside of the control of the Board.

The principal risks and uncertainties are set out on pages 21 and 22 of the Annual Report for the year ended 30 June 2021, which is available at www.strategicequitycapital.com.

Responsibility statement of the Directors in respect of the Annual Financial Report

We confirm that to the best of our knowledge:

  • the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
  • the Strategic Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.

We consider the Annual Report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.

Going Concern

A continuation vote is proposed at each Annual General Meeting of the Company. In the event that any such resolution is not passed, the Directors will be required to bring forward proposals to liquidate, open-end or otherwise reconstruct the Company. The Directors have considered the application of the Statement of Recommended  Practice for Financial Statements of Investment Trust Companies and Venture Capital Trusts, which states that, even if an investment company is approaching a wind-up and shareholders have yet to vote on the issue and provided that the Board has not concluded that there is no realistic alternative to winding up the company, it will usually be more appropriate for the financial statements to be prepared on a going (rather than non-going) concern basis.

In assessing the Company’s ability to continue as a going concern the Directors have also considered the Company’s investment objective, detailed on the inside front cover, risk management policies, detailed on pages 15 and 16 of the Annual Report, capital management (see note 16 to the financial statements in the Annual Report), the nature of its portfolio and expenditure projections and believe that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future and for at least 12 months from the date of this Report. In addition, the Board has had regard to the Company’s investment performance (see page 1 of the Annual Report), the price at which the Company’s shares trade relative to their NAV (see page 1 of the Annual Report) and ongoing investor interest in the continuation of the Company (including feedback from meetings and conversations with Shareholders by the Company’s advisers).

The Directors performed an assessment of the Company’s ability to meet its liabilities as they fall due. In performing this assessment, the Directors took into consideration the uncertain economic outlook in the wake of the Covid-19 pandemic including:

• cash and cash equivalents balances and the portfolio of readily realisable securities which can be used to meet short-term funding commitments;

• the ability of the Company to meet all of its liabilities and ongoing expenses from its assets;

• revenue and operating cost forecasts for the forthcoming year;

• the ability of third-party service providers to continue to provide services; and

• potential downside scenarios including stress testing the Company’s portfolio for a 15% fall in the value of the investment portfolio; a 50% fall in dividend income and a buy-back of 5% of the Company’s Ordinary share capital, the impact of which would leave the Company with a positive cash position.

Based on this assessment, the Directors are confident that the Company will have sufficient funds to continue to meet its liabilities as they fall due for at least 12 months from the date of approval of the financial statements, and therefore have prepared the financial statements on a going concern basis.

Resolution 11 at this year’s Annual General Meeting represents the annual continuation vote by Shareholders on the Company’s future. The Board believes this resolution to be in the best interests of the Company and its members as a whole, and strongly recommends that Shareholders should vote in favour of Resolution 11 as each Director intends to do in respect of her or his own beneficial shareholdings.

Related Party Transactions

The amounts payable to the Investment Manager are disclosed in note 3 of the Annual Report. The amount due to the Investment Manager for management fees at 30 June 2021 was £403,000 (2020: £nil). The amount due to the Investment Manager for performance fees at 30 June 2021 was £nil (2020: £nil).

Fees paid to Directors are disclosed in the Directors’ Remuneration Report on page 36 of the Annual Report. Full details of Directors’ interests are set out on page 37 of the Annual Report.

Notes

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 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 Sections 1158/1159 of the UK Corporation Tax Act 2010.

The financial statements of Strategic Equity Capital plc for the year ended 30 June 2021 were authorised for issue in accordance with a resolution of the Directors on 29 September 2021.

1.2 Basis of preparation and statement of compliance

The financial statements of the Company have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006, 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 in October 2019 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.

The financial statements of the Company have been prepared on a going concern basis, on the assumption the continuation vote is passed by Shareholders at the forthcoming Annual General Meeting. The Board has also considered the impact of Covid-19 and believe this will have a limited financial impact on the Company’s operational resources and existence.

The Directors performed an assessment of the Company’s ability to meet its liabilities as they fall due. In performing this assessment, the Directors took into consideration the uncertain economic outlook in the wake of the Covid-19 pandemic including:

• cash and cash equivalents balances and the portfolio of readily realisable securities which can be used to meet short-term funding commitments;

• the ability of the Company to meet all of its liabilities and ongoing expenses from its assets;

• revenue and operating cost forecasts for the forthcoming year;

• the ability of third-party service providers to continue to provide services; and

• potential downside scenarios including stress testing the Company’s portfolio for a 15% fall in the value of the investment portfolio; a 50% fall in dividend income and a buy-back of 5% of the Company’s Ordinary share capital, the impact of which would leave the Company with a positive cash position.

Based on this assessment, the Directors are confident that the Company will have sufficient funds to continue to meet its liabilities as they fall due for at least 12 months from the date of approval of the financial statements, and therefore have prepared the financial statements on a going concern basis.

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, unless otherwise stated to the nearest one pound.

Segmental reporting

The Directors are of the opinion that the Company is engaged in a single segment of business, being investment business.

2. Income

Year ended 30 June 2021
Revenue Capital
return return Total
£'000 £'000 £'000
Income from investments   
UK dividend income 2,382 - 2,382
2,382 - 2,382
Other operating income
Liquidity interest 1 - 1
Total income 2,383 - 2,383

   

Year ended 30 June 2020
Revenue Capital
return return Total
£'000 £'000 £'000
Income from investments   
UK dividend income 2,260 - 2,260
2,260 - 2,260
Other operating income
Liquidity interest 45 - 45
Total income 2,305 - 2,305

3. Investment Manager’s fee

Year ended 30 June 2021
Revenue Capital
return return Total
£'000 £'000 £'000
Management fee 894 - 894
894 - 894

   

Year ended 30 June 2020
Revenue Capital
return return Total
£'000 £'000 £'000
Management fee 1,134 - 1,134
1,134 - 1,134

A basic management fee is payable to the Investment Manager at annual rate of 0.75% of the NAV of the Company. The basic management fee accrues daily and is payable quarterly in arrears.

The Investment Manager is also entitled to a performance fee, details of which are set out below.

The Company’s performance is measured over rolling three-year periods ending on 30 June each year, by comparing the NAV total return per share over a performance period against the total return performance of the FTSE Small Cap (ex Investment Trusts) Index. A performance fee is payable if the NAV total return per share (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 Small Cap (ex Investment Trusts) 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 previously paid).

The Investment Manager is entitled to 10% of any excess of the NAV total return over the higher of the Benchmark NAV per share and the high watermark. The aggregate amount of the Management Fee and the Performance Fee in respect of each financial year of the Company shall not exceed an amount equal to 1.4% per annum of the NAV of the Company as at the end of the relevant financial period.

A performance fee of £nil been accrued in respect of the year ended 30 June 2021 (30 June 2020: £nil).

4. Other expenses

Year ended 30 June 2021
Revenue Capital
return return Total
£'000 £'000 £'000
Secretarial services 148 - 148
Auditors’ remuneration for:
Audit services* 35 - 35
Directors’ remuneration 135 - 135
Other expenses^ 324 - 324
643 - 643

   

Year ended 30 June 2020
Revenue Capital
return return Total
£'000 £'000 £'000
Secretarial services 148 - 148
Auditors’ remuneration for:
Audit services* 30 - 30
Directors’ remuneration 142 - 142
Other expenses^ 611 - 611
931 - 931

*No non-audit fees were incurred during the year

^ Other expenses include £63,000 of costs in relation to the Company’s General Meeting requisition (2020: £359,000 in relation to the change in Investment Manager). 

5. Taxation

Year ended 30 June 2021
Revenue Capital
return return Total
£'000 £'000 £'000
Corporation tax at 19.00% - - -
- - -

   

Year ended 30 June 2020
Revenue Capital
return return Total
£'000 £'000 £'000
Corporation tax at 19.00% - - -
- - -

The Company is subject to corporation tax at 19.00%. As at 30 June 2021 the total current taxation charge in the Company’s revenue account is lower than the standard rate of corporation tax in the UK.

6. Return per Ordinary share

Year ended 30 June 2021
Revenue Capital
return return Total
pence pence Pence
Return per Ordinary share 1.34 110.22 111.56
1.34 110.22 111.56
Year ended 30 June 2020
Revenue Capital
return return Total
pence pence Pence
Return per Ordinary share 0.38 (24.54) (24.16)
0.38 (24.54) (24.16)

Returns per Ordinary share are calculated based on 63,296,844 (30 June 2020: 63,362,889) being the weighted average number of Ordinary shares, excluding shares held in treasury, in issue throughout the year.

7. Investments

30 June 2021
£000
Investment portfolio summary:
Quoted investments at fair value through profit or loss 215,756
215,756

   

30 June 2020
£000
Investment portfolio summary:
Quoted investments at fair value through profit or loss 138,149
Unquoted investments at fair value through profit or loss 9
138,158

Under IFRS 13, 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:

Investments whose values are based on quoted market prices in active markets are classified within level 1 and include active listed equities.

The definition of level 1 inputs refers to ‘active markets’, which is a market in which transactions take place with sufficient frequency and volume for pricing information to be provided on an ongoing basis. Due to the liquidity levels of the markets in which the Company trades, whether transactions take place with sufficient frequency and volume is a matter of judgement, and depends on the specific facts and circumstances. The Investment Manager has analysed trading volumes and frequency of the Company’s portfolio and has determined these investments as level 1 of the hierarchy.

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 are 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 IPEV Valuation Guidelines.

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 2021.

Financial instruments at fair value through profit or loss

30 June 2021 Level 1
£000
Level 2
£000
Level 3
£000
Total 
£000 

Equity investments
215,756 - - 215,756
Liquidity funds - 2,457 - 2,457
Total 215,756 2,457 - 218,213

   

30 June 2020 Level 1
£000
Level 2
£000
Level 3
£000
Total 
£000 
Equity investments and limited partnership interests 138,149 - 9 138,158
Liquidity funds - 7,456 - 7,456
Total 138,149 7,456 9 145,614

There were no transfers between levels for the year ended 30 June 2021 (20120: none).

8. Nominal Share capital

Number £000
Allotted, called up and fully paid Ordinary shares
of 10p each:
Ordinary shares in circulation at 30 June 2020 69,858,891 6,986
Shares held in Treasury at 30 June 2020 (6,562,947) (656)
Ordinary shares in issue per Balance Sheet at 30 June 2020 63,759,589 6,376
Shares bought back during the year to be held in Treasury - -
Ordinary shares in issue per Balance Sheet at 30 June 2021 63,296,844 6,330
Shares held in Treasury at 30 June 2021 6,562,047 656
Ordinary shares in circulation at 30 June 2021 69,858,891 6,986

These are not statutory accounts in terms of Section 434 of the Companies Act 2006.  Full audited accounts for the year to 30 June 2021 will be sent to shareholders in October 2020 and will be available for inspection at 1 Finsbury Circus, London EC2M 7SH, the registered office of the Company. The full annual report and accounts will be available on the Company’s website www.strategicequitycapital.com

The audited accounts for the year ended 30 June 2021 will be lodged with the Registrar of Companies.


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