TIDMHGT
HgCapital Trust plc
The Directors present the Annual Financial Report of the Company for the year
ended 31 December 2008. The financial information set out below does not
constitute the Company's statutory accounts for the years ended 31 December
2008 or 2007. The full Annual Report and Accounts can be accessed via the
Company's website at www.hgcapitaltrust.com/results.htm or by contacting the
Company's Registrar (Computershare Investor Services plc) on telephone number
0870 707 1037.
Investment objective
The objective of the Company is to provide shareholders with long-term capital
appreciation in excess of the FTSE All-Share Index by investing in unquoted
companies.
The Company provides investors with exposure to a diversified portfolio of
private equity investments primarily in the UK and Continental Europe.
Financial highlights of 2008
+0.5% Positive net asset growth (assuming historic dividends are reinvested)
-12% Fall in share price compared with a 30% decrease in the FTSE All-Share
Index and a 44% fall in the FTSE Small Cap Index
55% A high level of net assets available in liquid funds to deploy in
attractive opportunities, equating to GBP5.16 per share
GBP92m Continued realisations in the year despite challenging market conditions
+14% Average annual operating profit growth for our top 10 investments over
the last 12 months
+15% Ten year total return per annum versus 1% per annum from the FTSE
All-Share Index
>4x Growth in value of shares over 10 years
Chairman's statement
This introductory statement forms part of the Directors' Report which
continues below.
The Board believes that the Company, with a substantial holding of cash, is
well positioned for a recession that will generate opportunities to acquire
good businesses at reasonable prices
The year in review
Dramatic changes in financial markets made 2008 a turning point in the balance
of advantage between being fully invested or holding liquid assets, ready for
investment at significantly lower prices than have been seen for several
years. Your Company entered 2008 with liquid funds of GBP80 million,
representing one-third of net assets, and finished the year with GBP130 million,
equating to GBP5.16 per share, 55% of net assets, available for deployment as
the recession progresses, revealing opportunities to acquire good businesses
at attractive prices.
Our Manager, HgCapital, has rigorously pursued a policy of realising
investments before markets turned. Since June 2005 the Company has exited 30
investments, receiving proceeds totalling GBP295 million and representing 2.7x
original cost. The Manager has continued to achieve good realisations, even in
a falling market: since June 2007, when the credit crisis began to unfold, the
Company has completed 14 realisations, with proceeds of GBP186 million, and
still delivering 2.6x original cost.
Realisations in the first half of 2008 added substantially to net asset value,
which reached GBP10.32 per share at the 30th June valuation. The sale of Addison
Software and Orbiscom added further to net asset value in the second half, but
the fall in ratings of listed equities, magnified by the effect of gearing in
the underlying investments, has extinguished these gains from realisations,
leaving net asset value at GBP9.29 per share, slightly down on the start of the
year.
Performance record
Year Net assets Revenue
available
ended attributable Net asset Ordinary for ordinary Earnings Dividends
31 December to ordinary value per share price shareholders per per
shareholders ordinary p Gross GBP'000 ordinary ordinary
GBP'000 share p revenue share p share p
GBP'000
1999 89,863 346.5 289.0 3,901 2,481 9.6 8.00
2000 103,521 411.0 356.5 7,332 4,623 17.9 14.50
2001 95,795 380.3 294.0 3,893 2,420 9.6 8.00
2002 83,837 332.9 219.5 3,528 2,148 8.5 8.00
2003 99,987 397.0 289.5 7,106 3,969 15.8 -**
2004 122,040 484.5 451.5 4,905 2,649 10.5 12.00
2005 156,487 621.3 583.5 4,963 2,965 11.8 8.00
2006 187,135 743.0 731.0 7,769 4,519 17.9 10.00
2007 238,817 948.2 782.5 12,129 7,446 29.6 14.00
2008 234,094 929.4 668.5 12,068 7,445 29.6 25.00*
* Final dividend for the year ended 31 December 2007, declared on 13 March 2008, paid on
12 May 2008.
** Change in accounting standards relating to recognition of dividends.
Valuation
The net asset value published in these results is based on the fair value of
unquoted investments at the reporting date. These have been valued based on
the International Private Equity and Venture Capital Valuation Guidelines
(`IPEV'); how the Company applies these guidelines is described in note 1 to
the financial statements and the guidelines can be found in full at
www.privateequityvaluation.com. In November 2008, in light of the financial
market turmoil and stock market volatility, the Board of IPEV publicly
reaffirmed its commitment to fair value as the best measure of valuing private
equity portfolio companies and investments in private equity funds.
Against a background of economic recession, volatility in equity market
ratings and the credit crisis, valuing private businesses is challenging and
valuations must be subject to uncertainty. The Manager has undertaken a
rigorous valuation of each investment at 31 December 2008 and the Board has
thoroughly probed the valuation methodology and examined these proposed
valuations in detail against the IPEV guidelines. Valuations have been based
on estimates of maintainable earnings made in the light of up-to-date
management accounts reporting trading to November 2008 or later, and these
estimates have been reviewed in the light of more recent figures as they
became available. The Company's policy is not to revalue upwards any new
investment until audited accounts for a full year since acquisition become
available: however, in view of the deterioration in market conditions, all new
holdings have been reviewed and all but one have been written down. Across the
portfolio, sixteen investments have been written down in value or written off
completely, while four have been revalued upwards to reflect improved trading,
in two cases reversing earlier write-downs where management action has
successfully turned the business around. One investment remains at cost. The
balance of the portfolio comprises small legacy assets awaiting final
realisation.
The principal factors that affect the valuation of each investment are:
current estimates of maintainable earnings; the stock market rating of
comparable businesses; the marketability discount applied; changes in the
amount of debt in the business; the gearing effect of that debt, which tends
to magnify the increase or decrease in the value of equity; and, in the case
of investments whose functional currency is not sterling, the change in the
exchange rate. The Annual Report and Accounts will contain, for the first
time, graphical analyses of these movements in NAV and of the sources of
change in the valuations of unrealised investments. In aggregate, in the first
half of the year values appreciated reflecting improving trading results; in
the second half the overwhelming driver of falling values was the decline in
stock market ratings of comparable businesses, despite most of our investments
trading ahead of or in line with the previous year.
A number of the Company's investments reported profits ahead of last year; a
majority of these were businesses based in Germany and the Nordic region,
reflecting the value of the diversification across several economies that the
Manager's pan-European focus provides. This also gave rise to a substantial
foreign exchange gain as sterling fell against the Euro. A portion of this
gain has been protected through a foreign exchange hedge, which is explained
in the notes to the financial statements.
Performance
As a consequence, the total return on assets (NAV plus dividend) over the
whole year was +0.5%, which while disappointing compares well against a
decrease of 30% in the FTSE All-Share Index and a decrease of 44% in the FTSE
Small-Cap Index. The Company's net asset value at year-end was GBP9.29 per
share.
Total return to shareholders (share price growth plus dividend) was -12.0%,
which was substantially better than the relevant FTSE indices. The Company's
share price fell from GBP7.83 at the end of 2007 to GBP6.69 at the end of 2008, a
discount of 28.1% to the net asset value.
The Company's long-term returns to shareholders continue to be strong, with a
total return (share price plus dividend) over the last ten years of 15.4%
p.a., some 14.2% p.a. above the total return on the FTSE All-Share Index. The
strong long-term performance delivered by HgCapital as Manager was recognised
when the Company was chosen, for the fourth consecutive year, as Private
Equity Investment Trust of the Year in the Investment Week awards. We
congratulate the Manager and its staff for their hard and dedicated work in
achieving this consistently high level of performance.
During the year, the Company received GBP91.6 million from the realisation of
investments (2007: GBP106.4 million) and invested GBP26.0 million (2007: GBP50.8
million) in new and follow-on investments.
Revenue return was 29.6 pence per share (2007: 29.6 pence). Each year the
Board recommends a dividend based on the revenue return that year, so as to
maintain its status as an investment trust; this year the Board recommends an
unchanged final dividend of 25.0 pence per share (2007: 25.0 pence).
The market in the Company's shares
In 2007 there began a trend of widening discounts against NAV across the whole
sector of private equity investment trusts and investment trusts in general,
and this continued in 2008. Your Company's shares have traded at a narrower
discount than most of its peers, reflecting its very substantial holding of
liquid assets in the form of gilts. However, across the sector, discounts have
been reported at levels never previously seen, largely reflecting the time lag
between the dramatic fall in market ratings and the publication of valuations;
in some cases this has been exacerbated by the risks arising from
over-commitment to new funds. As updated valuations are published, discounts
to net asset value may be expected to tighten; however, the Board believes
that among the other factors that have led to such discounts is the
uncertainty felt in the market about how recessionary conditions are affecting
trading in underlying investments, the risk that they will breach banking
covenants, the response of banks to any breach, refinancing risk and the
likelihood that holding periods will lengthen resulting in lower annual
returns. Your Board, and HgCapital, have always considered it important to
provide comprehensive and transparent reports and we welcomed Sir David
Walker's report Guidelines for Disclosure and Transparency in Private Equity
as a contribution to greater standards of transparency across the private
equity sector. To assist shareholders' understanding of the prospects and
risks of our portfolio, we are publishing, in the Review of Principal
Investments section below, more information than ever before about our
principal investments. This section describes each business, the Manager's
investment rationale, the source of the investment and how the Manager
accomplished the acquisition, the strategy of the Manager in adding value,
trading performance and exit strategy. A general update will also be provided
when the half-year valuation is published in August and in our interim
management statements in May and October.
The Board has regularly set out its policy with regard to the repurchase of
shares: at a time when there appears to be surplus capital and conditions for
new investment appear to be unfavourable, the Board will consider returning
capital to shareholders, usually through the market purchase of shares;
consequently, the Board is once again asking shareholders to renew the power
to purchase shares at the forthcoming Annual General Meeting. However, the
Board's current view is that it is strongly in shareholders' interests to
retain capital for investment, and that the purchase of shares would make
little difference to the discount, which is driven by wider economic
uncertainties, not an excess of supply over demand for the Company's shares.
Realisations
Realisations during the year totalled GBP91.6 million, of which GBP68.2 million
came from five major sales: The Sanctuary Spa, Clarion Events and Classic
Copyright in the first half and Addison Software and Orbiscom in the second
half. All of these realisations have achieved proceeds above the values at
which they were held in the Company's balance sheet. These major realisations
returned a realised gain over their December 2007 book value of GBP35.8 million.
Brief descriptions of these investments can be found in the Manager's review.
Investments
As I have noted in statements over the last two years, as market conditions
have become more challenging, value creation will rely all the more on organic
growth and margin enhancement. The Board is reassured that HgCapital's
investment style, which has always been to work actively with management to
define and deliver strategies that add value to the underlying business and,
when necessary, to take radical action to turn a business around, is well
suited to these more uncertain times. This increasingly differentiates
HgCapital Trust from other private equity investment vehicles, many of which
are becoming funds of funds in which the Board and Manager are remote from the
underlying investments.
The Manager acquired only three businesses this year, investing in total GBP18.9
million on behalf of the Company: Casa Reha, a German care home operator;
Achilles, a UK provider of purchasing services in the energy and transport
industries; and KVT, an industrial distribution business in Germany. Further
information on all new investments can be found in the Manager's report and on
the Company's web-site at www.hgcapitaltrust.com.
The Board and the Manager are united in believing that the dramatic fall in
equity markets in recent months has created excellent conditions for new
investment. However, the recession will be deep and recovery is likely to be
slow, with the implication that private equity managers should be patient and
selective in deploying funds. It remains the case that some owners of
businesses are only adjusting their expectations slowly to changed market
conditions. The banking crisis that puts pressure on owners to sell also
continues to impede the use of leverage to fund acquisitions.
The market correction of 2008 marks the end of a long and benign period for
investment; the recession of 2009 is the starting point for a new phase of
investment at less demanding prices. The Company enters this new phase with
substantial liquid funds and late in 2008 the Board and the Manager agreed on
terms for the company to commit to invest GBP250 million, and up to a further
GBP50 million, alongside HgCapital's new fund, Hg6. The investment phase for
these funds will begin in 2009 and take place over 4 to 5 years, matching the
forecast recovery from recession, which should in turn lead to an improved
market for realisations. The Company's commitment, and revised fee
arrangements with the Manager, were described in full in a circular to
shareholders issued in December 2008 and accessible via the Company's website.
I draw readers' attention to the unique characteristic of this commitment,
namely that, should the Company have insufficient cash to invest in any new
investment, it can opt out. This flexibility gives a high level of protection
from the potential effects of over-commitment that have seriously impacted
other investment trusts. At a general meeting in January 2009, shareholders
approved these new arrangements and a change in the Company's Articles to
prolong the life of the Company to accommodate this new phase in the
investment cycle.
Prospects
The immediate prospects for all businesses remain uncertain, and the Manager
has taken further steps to monitor and manage its portfolio companies closely,
taking action to protect and enhance value and anticipating any potential
breaches of bank covenants. The Manager has also reorganised internally in
order to focus on the sectors where it has the strongest franchise and
potential deal-flow. This also results in larger deal teams to facilitate
deeper due diligence on potential investments and negotiation of bank funding
on a club basis in the absence of underwritten syndicated loans.
With substantial funds under management, HgCapital has the flexibility to
underwrite acquisitions with more equity than before and refinance with debt
at a later date. Future deals may include more mezzanine-level funding which,
until recently, had been largely squeezed out by easy bank lending.
The best private equity managers find opportunity in change and thrive on
adapting to it. We can expect deal structures to evolve to meet new
conditions, but the fundamental skills involved in identifying businesses with
potential, redefining their strategy, and driving improvement remain the same.
The Board retains confidence in the Manager's ability to take advantage, with
due caution and patience, of the new market conditions.
Following realisations, the Company holds a reduced portfolio of unquoted
investments that are diversified across sectors and economies, and largely
oriented towards non-cyclical growth. This provides a base for value creation
in coming years. The Company also has the benefit of strong liquidity to grow
the portfolio at advantageous prices. The Board therefore believes the Company
is well placed to resume its growth in value when market conditions settle
down, while taking advantage of the market correction to acquire good
businesses at reasonable prices. The Board is confident that, for many
investors, an allocation to a well-managed private equity portfolio remains
appropriate, especially with the liquidity, transparency and governance
offered by an investment trust. HgCapital Trust has created value for
shareholders for more than a decade and the Board believes it will continue to
provide patient investors with an efficient vehicle for gaining exposure to a
diversified portfolio in an asset class that offers attractive long-term
prospects for growth.
Roger Mountford
Chairman
19 March 2009
Historical total return* performance
One year Three years Five years Seven years Ten years
% p.a. % p.a. % p.a. % p.a. % p.a.
Net asset value 0.5 16.6 21.1 15.7 16.0
Share price (12.0) 6.8 21.0 15.3 15.4
FTSE All-Share Index (29.9) (4.8) 3.5 1.5 1.2
FTSE Small Cap Index (43.9) (15.4) (3.3) (2.2) 1.4
Based on the Company's share price at 31 December 2008 and allowing for
dividends to be reinvested, an investment of GBP1,000 ten years ago would now be
worth GBP4,183.
An equivalent investment in the FTSE All-Share Index would be worth GBP1,124.
* Total return assumes all dividends have been reinvested.
Investment activity
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Invested 40 25 20 20 15 22 35 45 50 26
(GBPmillion)
Realised 30 18 26 27 31 47 52 62 106 92
(including
income)
(GBPmillion)
Manager's Report
HgCapital Trust plc gives the investor access to a diversified
private equity portfolio run by an experienced and well-resourced Manager who
makes investments in well-established companies over a number of geographies
and sectors.
We believe our approach will continue to reward investors with
superior performance, both relative to the public markets and its peers over
the long term.
Investing in private equity
Private equity
Private equity provides medium to long-term financing to unlisted
companies to support their growth and success. In return for their investment,
investors receive a share of the equity in the businesses they finance.
Private equity investments aim to deliver higher returns than public equity
over a rolling period of five to ten years. Investments are typically held for
three to seven years before they are realised, with potential interim proceeds
during this period also achievable.
Advantages of private equity
Compared with investment in the public markets, a private equity
investor has significant advantages:
- More investment opportunities: there are significantly more
private than listed companies;
- Better access to information: the ability to conduct detailed
market, financial, legal and management due diligence;
- More control for the private equity manager over the management
of the business and the timing of its sale;
- Alignment of interest of investors and private equity management,
leading to better decision making: the opportunity to act like an owner rather
than a fund manager, with the benefit of representation on the Board; and
- Management talent: the ability to attract high calibre management
into the underlying investments and the alignment of that management's
interests to the success of the investment through equity participation.
Investment profile
Private equity investments are less liquid than public equities.
To compensate for this, they offer greater control and more
attractive returns. Over the ten years from 1997 to 2007 UK private equity
funds outperformed the FTSE All-Share Index by 13.9% per annum and
outperformed relevant asset classes over this period*.
Individual private equity investments have a risk profile which is
dependent on the nature of the underlying business. Investing in a diversified
portfolio helps to mitigate some of these risks; the quality of company
selections by the private equity manager and its ability to successfully
manage its portfolio further mitigates risk.
Private Equity Investment Trusts
A Private Equity Investment Trust (`PEIT') offers the opportunity
to participate in a diversified portfolio of private equity investments. By
buying shares in a PEIT, which are freely traded, the investor benefits from
liquidity while participating in the potentially superior returns of a private
equity portfolio. In addition, PEITs allow investors access to private equity
without having to commit to the ten year lock-in and minimum investment
required when investing in private equity via limited partnerships.
Listed Private Equity (LPEQ) refers to public companies who invest
in private equity whose shares are listed and traded on a primary stock
exchange. In Europe, primary exchanges include the London Stock Exchange and
Euronext. Some private equity companies quoted on the London Stock Exchange
are structured as investment trusts. All listed private equity companies offer
the opportunity to participate in private equity investments in mainly
unlisted companies or portfolios of funds, without the need to be a very
wealthy individual or institution.
The Company
The Company's objective is to provide shareholders with long-term
capital appreciation, by usually taking a minority position in all investments
made by HgCapital. This approach provides investors with exposure to a diverse
portfolio of private equity investments across Western Europe run by a well
resourced and experienced manager.
*Source: BVCA Performance Measurement Survey 2007.
Manager's strategy
HgCapital provides access to attractive investment opportunities by
acting as lead investor in middle market buyouts in Western Europe
Middle-market buyout focus
- HgCapital focuses on middle market buyouts with enterprise values
of between GBP50 million and GBP500 million.
- The middle market offers a high volume of companies with proven,
consistent financial performance and defensible market positions.
- Companies are small enough to provide opportunities to drive
operational improvements, yet large enough to attract quality management and
to offer multiple exit options across market cycles.
- Companies offer multiple value creation levers giving the
potential to effect material operational improvements.
Pan-regional
- HgCapital focuses on investments in Western Europe, with the
majority of activity taking place in the UK, Benelux, German speaking
countries and the Nordic region.
- Local offices and local expertise, combined with a common culture
and consistent processes, underpin HgCapital's ability to produce strong
performance.
Broad coverage
- HgCapital`s dedicated sector teams provide investors with access
to the substantial majority of private equity activity within their target
size range and across their relevant geographies.
Clear investment criteria
- HgCapital applies a rigorous and commercial investment approach
when evaluating all investment opportunities ensuring that only the most
attractive investments are completed, irrespective of an opportunity's sector
or geography.
- HgCapital seeks companies with protected business models and
predictable revenues, which offer a platform for growing market share or have
the potential for significant performance improvement.
- HgCapital targets situations where significant change is taking
place and where the Manager's specialist knowledge and skills can make a real
difference.
Manager's tactics
HgCapital aims to deliver attractive investment returns through the
combination of deep sector knowledge, strong operational skills and the
application of deep resources across the investment life cycle
Sector specialisation
- HgCapital's well-resourced sector teams combine the domain
knowledge and expertise of a trade buyer with the flexibility of a financial
investor.
- Deep sector knowledge optimises relevant deal flow and efficient
investment selection.
- Dedicated teams cover the Healthcare, Industrials, Services and
TMT sectors. In addition, over the last four years HgCapital has built a
specialist team to identify businesses that will operate, construct and
develop renewable energy projects in Western Europe.
Active portfolio management
- A dedicated team of experienced portfolio management
professionals develop, execute and monitor value-enhancement strategies for
each of HgCapital's investments.
- HgCapital typically invests as the lead, majority shareholder of
portfolio companies and appoints HgCapital executives to the companies' boards
to participate in business planning and to work with management.
- HgCapital regularly reviews the performance of all its
investments to quickly identify any issues and ensure potential value is
maximised.
Deep resources
- Continual investment in all areas of the HgCapital business
ensures that high quality resources can be applied to each stage of the
investment life cycle.
- HgCapital's team of approximately 80 people is well-positioned to
produce strong returns from a well-diversified portfolio of investments which,
HgCapital believes, will continue to be superior to the returns generated by
comparable public equity markets.
Manager's review - the market
Current market conditions are challenging but present significant
opportunities
2008 was a challenging year for the European buyout market.
The crisis in the global financial system reduced credit
availability and the ability of investors to finance new transactions.
Simultaneously, the sharp downturn in the European economy, seen in the second
half of the year, put pressure on corporate profits. Against this uncertain
backdrop, European buyout deal volumes fell markedly to EUR69 billion, 54% down
on the prior year.
Although not immune from tightening credit conditions, the European
middle market has been less affected than the larger capital markets and
leverage, albeit limited, remains available for high quality assets. HgCapital
believes it is well placed to continue to structure profitable transactions in
the current environment. We have historically adopted a conservative approach
to leverage and are not reliant on plentiful debt finance in order to deliver
strong returns to clients. Over the past 10 years over 80% of value creation
in HgCapital's buyout deals has come through operational improvements in the
underlying portfolio businesses, with less reliance on debt and financial
structuring. Going forward, this emphasis on developing and growing portfolio
investments will remain a key focus for HgCapital.
We see significant opportunities for private equity arising from
the current economic environment. Falling public market valuations will
present the opportunity to acquire high quality assets at attractive prices.
An increasing number of businesses needing to restructure, refinance or drive
operational change will further increase opportunities for equity providers.
Historically, private equity investments made through an economic downturn
have been particularly successful and we believe the coming period will
represent an exciting opportunity.
Manager's review - the portfolio
Despite challenging economic conditions, trading in the unrealised
portfolio has been generally positive
All investments referred to in this report, excluding the
investment in Hg Renewable Power Partners LP, are held by HGT LP. The Company
is the sole limited partner in HGT LP.
HgCapital Trust (the `Company') invests alongside other clients of
HgCapital. Typically, the Company's holding forms part of a much larger
majority interest held by HgCapital clients in buyout investments in companies
with an enterprise value (`EV') of between GBP50 million and GBP500 million. The
Manager's review generally refers to each transaction in its entirety, apart
from the tables detailing the Company's participation or where it specifically
says otherwise.
The Company's net asset value decreased slightly over the year,
moving from GBP238.8 million to GBP234.1 million as declines in the unrealised
portfolio were largely offset by investments realised significantly in excess
of their book value. During the period, the decrease in unrealised valuations
was GBP35.1 million and the realised proceeds in excess of the book value as at
31 December 2007 were GBP35.8 million. The increase in NAV from realisations has
occurred due to a number of exits throughout the year being achieved at a
significant uplift to prior book value. The decrease in unrealised valuations
comes despite satisfactory trading performance in the portfolio. The
unrealised value of most of the Company's investments is calculated with
reference to the valuation ratings of a basket of publicly traded comparable
companies. As a result, the large declines seen in public market ratings have
led to a fall in the book value of a majority of the unrealised investments.
Given the volatile economic conditions during the year, the Company
adopted a cautious approach to new investment, investing a total of GBP26.0
million (2007: GBP50.8 million), mainly in three businesses. These new
investments were made in Achilles (UK, GBP75 million EV), Casa Reha (Germany,
EUR327 million EV), and KVT (Switzerland, CHF 530 million EV).
During the year, the Company invested a further EUR0.8 million out of
its EUR21 million commitment to the EUR303 million Hg Renewable Power Partners
fund. The fund's focus is on long-term investments in renewable power projects
using proven technologies, including wind, solar, small hydro, landfill gas
and waste-to-energy in Western Europe (see the Renewable Energy section below
for further details).
Despite challenging market conditions the Company realised
significant proceeds during the year (including gross income received)
amounting to GBP91.6 million (2007: GBP106.3 million). These proceeds arose
principally from the sale of Addison, Clarion, Classic Copyright, Hofmann,
Orbiscom and The Sanctuary Spa.
Attribution analysis of current year movements in net asset value
GBP'000
Opening net asset value as at 1 January 2008 238,817
Gross revenue 12,068
Expenditure (3,505)
Taxation (2,498)
Dividends paid (6,297)
Realised proceeds in excess of 31 December 2007 book value 35,755
(excludes gross revenue)
Net unrealised depreciation of investments (35,114)
Carried interest (5,132)
Closing net asset value as at 31 December 2008 234,094
Realised and unrealised movements in net asset value during 2008
Net unrealised depreciation Realised proceeds in excess
of investments GBP'm of 31 December 2007 book
value GBP'm (excludes gross
revenue)
Addison - 11.0
The Sanctuary - 9.0
Pulse 6.9 -
Orbiscom - 4.9
Classic Copyright - 4.5
Clarion Events - 3.2
Schleich 2.4 -
Clinphone - 1.5
PBR - 0.7
Rolfe & Nolan - 0.6
Other (1.0) 0.4
FTSA (2.0) -
Cornish Bakehouse (2.3) -
SLV (2.6) -
Elite (2.6) -
Sporting Index (2.8) -
Euro Hedge (2.8) -
KVT (4.1) -
Atlas (4.3) -
Voyage (4.6) -
SHL (4.9) -
Fabory (5.0) -
WET (5.4) -
Total (35.1) 35.8
At the end of 2008, the Company held a portfolio of 37 investments
(2007: 45), of which the 10 principal investments represent over 76% of the
portfolio's value. Over the course of 2008 the top 10 companies grew operating
profit at an average of 14% year on year. Whilst it cannot be immune from the
global downturn, this remaining portfolio is diversified by sector and
geography served, and holds companies which should be long-term winners given
the markets they serve, the nature of their business, and their competitive
position. There will, of course, be challenges along the way.
The Company continues to follow International Private Equity and
Venture Capital Valuation Guidelines for the valuation of unrealised
investments. These guidelines require these investments to be shown at fair
value. Valuations of all direct investments have been based on, or checked
against, ratings in public markets. As a result, recent falls in public equity
markets have forced the Company to write down a number of investments despite
many showing generally robust trading through the year. This has led to
written down investments representing 33% by value of the portfolio (2007:
7%). Despite this, HgCapital still believes these investments have potential:
historically it has realised investments at an average of nearly 2x prior book
value since becoming independent in December 2000.
The Company's ten largest investments are generally performing
well, generating year-on-year growth in earnings. Profiles of these companies
can be found in the Review of Principal Investments section of this report.
At the same time, a number of investments performed below
expectations in the year. Most notably:
- SHL, a provider of objective psychometric testing, has been
impacted by falling recruitment activity.
- FTSA, a manufacturer of crash test dummies, WET, a manufacturer
of automotive components, and KVT, a distributor of industrial expanders, have
all been affected by the pronounced downturn in the automotive industry.
- Fabory, a distributer of industrial fasteners, has also been
affected by some weakening in its end markets, although operational
improvement programmes are proceeding well.
Over the last four years, the focus of the portfolio has shifted
towards Continental Europe, with over half the Company's investments by value
headquartered outside the UK.
We believe that the recent fall in public and private market
valuations will offer significant opportunities to acquire high quality assets
at attractive prices. HgCapital is well positioned to exploit these
opportunities when they arise, given its focused investment strategy, compact
existing portfolio and well resourced team.
In the current market, the Company also benefits from strong
liquidity, holding GBP129.9 million in liquid funds at year-end, available for
reinvestment.
The Manager expects to use a portion of the funds committed by the
Company for investment alongside HgCapital 5 for the purpose of making further
investments in existing portfolio companies. This will enable the Manager to
continue to take advantage of opportunities to make value-accretive add-on
acquisitions, of which it has made 60 to date in the MUST 4 and HgCapital 5
portfolios. New investments by the Company are expected to be made from funds
committed for investment alongside HgCapital 6.
Asset class+
Cash & other assets 53%
Unquoted 47%*
Deal type by value++
Buyout 92%
Renewable energy 4%
Expansion 2%
Funds 2%
Valuation++
Earnings-based 55%
Written down 33%
Net assets 6%
Cost 5%
Other 1%
Geographic spread by value++
UK 44%
Nordic Region 22%
Germany 20%
Benelux 7%
Rest of Europe 4%
North America 2%
Switzerland 1%
Sector by value++
Healthcare 25%
TMT 24%
Consumer & Leisure 22%
Industrials 15%
Services 8%
Renewable energy 4%
Funds 2%
Vintage by value++
2008 13%
2007 26%
2006 33%
2005 11%
Pre 2005 17%*
+ Percentages are based on net assets
++ Percentages are based on fixed assets and accrued interest and are shown by
value
*12% relates to Pulse Staffing Limited
Investments
Selective investments in businesses which should perform across
market cycles
Company Sector Activity Deal Type Cost
GBP'000
Casa Reha Healthcare Care home operator Buyout 8,140
King Luxembourg (KVT) Industrials Distributor of industrial Buyout 5,535
fasteners
Achilles TMT Supplier qualification Buyout 5,226
systems
Other 631
New investments 19,532
BMFCO (t/a Fabory) Services Distributor of industrial (3,480)
fasteners
Investment syndication (3,480)
Pulse Staffing Healthcare Flexible staffing services Buyout 5,682
in healthcare sector
Portfolio purchase Secondary 2,711
Hg RPP LP Renewable Renewable energy fund Fund 606
energy
Other investments 936
Further investments 9,935
Total investment by 25,987
the Company
Figures below refer to the total size of each acquisition,
including debt raised from third parties, made by HgCapital on behalf of its
clients, including the Company.
New investments
Casa Reha
In January 2008, HgCapital completed the EUR327 million buyout of
Casa Reha, one of the leading German providers of elderly care services,
specialising in high quality, affordable assisted living. Casa Reha has a
nationwide portfolio of 52 homes providing over 7,000 beds and a further
portfolio of homes currently under development. The business is highly
profitable and has a track record of delivering strong revenue growth both
organically and through acquisition. Casa Reha is well placed to exploit
future opportunities in the German care home market which is largely insurance
and state funded.
Achilles
In July 2008, HgCapital acquired Achilles for a consideration of
GBP75 million. Achilles is a global leader in buyer-sponsored
supplier data management and validation services. Achilles operates
schemes where buyers in a certain industry require their multiple suppliers to
provide information (e.g. environmental compliance information) to the
Achilles online database in order to be considered for a contract. Achilles
currently operates 30+ schemes in 22 countries and demonstrates rapid growth
in both revenues and profitability.
KVT
In August 2008, HgCapital agreed with a Swiss private equity house
to fund jointly the acquisition of KVT for a consideration of CHF530 million.
KVT is a leading distributor of specialist fasteners and expanders
headquartered in Switzerland, generating its main sales domestically and in
Germany and Austria. The business has a market leading position, well invested
infrastructure and a high degree of revenue visibility from a diverse customer
base and offers the opportunity for continued growth in existing markets and
further international expansion. It will not be immune from the global
downturn but we still believe in its long-term growth prospects.
Pulse
In May 2008 HgCapital agreed to buy Bridgepoint Private Equity's
holding in Pulse Staffing Limited for GBP6.0 million. Pulse is one of the UK's
leading providers of labour management, recruitment and deployment services in
the healthcare sector. HgCapital originally invested in the business alongside
Bridgepoint (then NatWest Private Equity) in 1999. The investment performed
well over the period 2000 to 2003 showing strong growth and paying down
acquisition debt. From 2003 to 2005 changing NHS strategy and regulation
impacted Pulse's performance such that the investment was written down. In
recent years Pulse has repositioned itself under new management to reduce
reliance on NHS business and is demonstrating significantly improving
performance, with EBITDA up 500% in 2008 over 2007.
Realisations
Continued realisations in the year, despite challenging market
conditions
During 2008, HgCapital realised total proceeds of GBP428 million on
behalf of its clients, including GBP91.6 million for the Company. HgCapital has
successfully completed 9 significant exits during the year despite challenging
market conditions. As a result, HgCapital now has a small, focused portfolio
and is well positioned to take advantage of future investment opportunities.
Company Sector Exit Route Cost Proceeds * Cumulative Current year
GBP'000 GBP'000 gain/(loss)** gain/(loss)***
GBP'000 GBP'000
The Sanctuary Spa Consumer & Trade sale 2,409 22,435 20,026 9,029
Leisure
Addison TMT Trade sale 2,296 18,800 16,504 11,218
Clarion Events TMT Financial 4,965 12,614 7,649 3,280
sale
Hofmann Industrials Financial 4,747 11,469 6,722 348
sale
Classic Copyright TMT Financial 6,033 8,850 2,817 7,364
sale
(t/a Boosey &
Hawkes)
Orbiscom TMT Trade sale 2,981 5,512 2,531 4,928
Xtx (Xyratex) TMT Quoted 1,277 3,740 2,463 19
share sale
Clinphone Healthcare Quoted 316 2,270 1,954 1,461
share sale
Rolfe and Nolan TMT Trade sale 14 1,446 1,432 610
Other (7) 12,817 2,535 (10,282) 333
Full realisations 37,855 89,671 51,816 38,590
Schenck Industrials Release of - 373 373 115
escrow
BMFCO (t/a Fabory) Services Profit on - 358 358 358
syndication
Other 343 1,192 849 559
Partial realisations 343 1,923 1,580 1,032
& deferred proceeds
Total realisations 38,198 91,594 53,396 39,622
* Includes gross revenue received during the year
** Realised proceeds including gross revenue received, in excess of residual
cost
*** Realised proceeds including gross revenue received, in excess of 31
December 2007 book value and accrued interest
Realisation figures below refer to the total value of each
transaction, including, where appropriate, repayment of third party debt.
Proceeds to clients including the Company are stated net of any such
repayment.
FULL REALISATIONS
Addison
HgCapital completed the EUR72 million management buyout of Addison in
June 2005. Addison is a leading German application software company that
provides business-critical solutions to two related markets - tax accountancy
and small to medium enterprises. The business was recapitalised in October
2007 returning 0.8x cost to clients, and was sold to Wolters Kluwer NV in
October 2008 returning a further GBP96.2 million to clients and achieving
returns over the life of the investment of 3.7x original cost.
Clarion Events
HgCapital completed the GBP45 million management buyout of Clarion
Events in October 2004. Clarion is the largest independent exhibition and
diversified conference business in the UK, developing, organising and owning a
portfolio of 60 business and consumer events. HgCapital successfully sold the
business in February 2008 and returned GBP74 million of capital to clients,
achieving a 2.5x multiple of original cost.
Classic Copyright (t/a Boosey & Hawkes)
HgCapital completed the GBP75 million buyout of Classic Copyright
(Holdings) Limited in December 2003. Classic Copyright, trading as Boosey &
Hawkes, is one of the world's largest publishers of classical music, with a
14% market share. It has a catalogue of classical music copyrights including
works by composers such as Rachmaninoff, Strauss and Stravinsky. The business
was sold in April 2008 returning GBP29.6 million to clients, equivalent to 1.5x
original cost. This relatively disappointing performance is a result of the
price paid in the expectation of higher growth, which did not materialise.
Clinphone
HgCapital completed its investment in Clinphone Holdings in
December 1996. Clinphone is a UK based company engaged in providing web-based
solutions enabling the capture and transfer of data in clinical trials of new
pharmaceutical products. HgCapital exited the business via an IPO during June
2006, selling down the last of its shares in August 2008. Over the life of the
investment, it returned 3.3x original cost.
Hofmann
HgCapital completed the EUR138 million buyout of Hofmann in November
2005. Headquartered in Boxberg-Schweigern, Germany, Hofmann is a
market-leading provider of frozen food products as well as related on-site
catering for small business canteens and social organisations such as care
homes, hospitals, and schools in Germany and Austria. In January 2008,
HgCapital sold the business to a private equity buyer returning 2.4x original
cost.
Orbiscom
In August 2001, HgCapital completed an early stage investment in
Orbiscom. Orbiscom sells a payment platform to credit and debit card issuers,
whereby a unique transaction number is substituted for the permanent card
number. By using this "proxy number", the card-holder avoids disclosing
his/her details to the merchant or indeed, the web. In December 2008, the
business was sold to Mastercard returning GBP24.7 million to clients and
delivering 1.8x original cost with a residual interest subject to performance.
Orbiscom is the last of the early-stage technology investments made by
HgCapital.
Rolfe & Nolan
In March 2003, HgCapital completed the GBP17.3 million
public-to-private management buyout of Rolfe & Nolan. The business is the
number two global supplier of back-office processing software to the
exchange-traded derivatives industry. The company supports over 250 bank,
brokerage and exchange clients in 20 countries providing business critical
processing software and services, with a majority of revenues on recurring or
subscription contracts. The business was recapitalised in 2004 and 2007
returning GBP35.8 million to clients, and was sold to a strategic buyer in July
2008 returning a further GBP8.4 million to clients and achieving overall returns
of 2.6x original cost.
The Sanctuary Spa
In November 1995, HgCapital made its initial investment in the
Sanctuary Spa. The Sanctuary Spa operates the women's day health spa, The
Sanctuary, in Covent Garden and also owns a range of beauty products
distributed through The Sanctuary and Boots the Chemist. In January 2008, the
company was sold to PZ Cussons returning proceeds of GBP50.2 million to clients
giving a total return over the life of the investment of 7.0x original cost.
Xtx (Xyratex)
In September 2003, HgCapital completed the GBP107 million acquisition
of Xyratex, a world leader in the hard disk and network storage technology
market for over 20 years. An IPO of the business on NASDAQ was achieved in
June 2004. HgCapital's final remaining shares in Xyratex were sold in early
2008 for GBP23.6 million, resulting in a total return over the life of the
investment of 2.2x original cost.
Other realisations
Other disposals totalling proceeds of GBP2.5 million include the sale
of quoted shares in PRA International Limited. Azinger Ltd, Profiad Ltd, and
Burns e-Commerce Solutions were also realised. These had previously been
written off. Axiom, which had been underperforming in recent years, was sold
to a trade buyer in Finland.
PARTIAL REALISATIONS
Fabory
Fabory is a full-line wholesale distributor of industrial fasteners
with a market-leading position in the Benelux markets. The initial investment
was completed in October 2007; a portion of this investment was syndicated to
co-investors during February 2008.
Other
Other partial realisations included the release of escrow proceeds
in respect of Schenck and PBR and the sale of the Company's interest in Biffa
plc, which was tendered at the acquiring consortium's offer price.
Review of principal investments
1 VISMA www.visma.com
Date Invested: May 2006
Original Enterprise Value:NOK 4.3 billion
Total HgCapital Clients' Equity: 53%
Business Description
- VISMA is the number one provider of business software and related
services to small and medium-sized enterprises in the Nordic region.
- The company provides accounting, resource planning and payroll
software, outsourced book-keeping, payroll services and transaction process
outsourcing to a customer base of over 200,000 companies.
Investment Rationale
- Strong organic growth in revenue, with good visibility from a
highly recurring and predictable customer base.
- Significant potential to improve margins to industry standard
levels.
- Country specific markets with high barriers to entry driven by
local regulatory requirements: highly fragmented market with significant
potential for acquisition led growth.
Sourcing and Conversion
- HgCapital had completed a significant number of other SME
software investments in Western Europe and sourced the deal by contacting the
CEO directly.
- HgCapital worked closely with management to complete a complex
public-to-private transaction on an accelerated timetable.
Portfolio Management
- Plan: Grow through acquisition and organically in high potential
niche areas. Improve EBITDA margins to industry standard levels through
increased operational focus in the business units.
- Initiatives: Supported management in making and integrating 16
bolt-on acquisitions to date. Implemented operational improvements driving
margin expansion from 14% to 18% within 18 months.
Performance
- Current trading: Performance in the year remained strong, with
significant growth in both sales and EBITDA.
- Exit strategy: Approaches have already been received from a
number of private buyers. An IPO or trade sale to software/publishing
companies provide alternative exit options.
Company's Investment - VISMA
Sector Location Year of Residual Unrealised Accrued Total Valuation
investment cost GBP'000 value interest value methodology
GBP'000 GBP'000 GBP'000
TMT Nordic 2006 13,326 12,638 1,753 14,391 Earnings-based
Region
2 Pulse www.pulsejobs.com
Date Invested: June 1999
Original Enterprise Value: GBP67 million
Total HgCapital Clients' Equity: 74%
Business Description
- Pulse is one of the UK's leading providers of comprehensive
labour management, recruitment and deployment services in the healthcare
sector.
- The company works in partnership with healthcare organisations in
the public and private sectors to provide staffing, management services and
consultancy.
Investment Rationale
- Leading player in the healthcare staffing sector with
opportunities for growth in related sectors.
- Further growth possible through launch of new services around the
core business.
- Opportunity to reduce costs and improve margins.
Sourcing and Conversion
- HgCapital completed the public-to-private acquisition of Pulse in
1999, with Bridgepoint Private Equity acting as joint bidder.
- In 2008 HgCapital acquired Bridgepoint's stake in Pulse to become
the lead investor in the business.
Portfolio Management
- Plan: Grow organically and through acquisition, continued
rationalisation of cost base to boost margins
- Initiatives: Increased focus on non-healthcare job sectors,
continued cost reduction programme, launched new services around core business
offering.
Performance
- Current trading: Both revenues and EBITDA are significantly up
year on year. The business has no external borrowings.
- Exit strategy: Pulse is anticipated to be a target for both
private equity and trade buyers.
Company's Investment - Pulse
Sector Location Year of Residual Unrealised Accrued Total Valuation
investment cost GBP'000 value interest value methodology
GBP'000 GBP'000 GBP'000
Healthcare UK 1999 6,131 12,858 - 12,858 Earnings-based
3 Mondo www.mondominerals.com
Date Invested: October 2007
Original Enterprise Value: EUR230 million
Total HgCapital Clients' Equity: 91%
Business Description
- Mondo is the world number two in talc mining and processing. The
company's core markets are the European paper and paint industries.
- Mondo supplies the majority of talc for paper producers in the
highly regional market of Finland, the rest of the Nordic region and Northern
Europe.
Investment Rationale
- Mondo's core customer base is the paper industry which provides
sustainable long-term demand. The product is a critical, but low cost,
component of the manufacturing process.
- The opportunity also exists to push into other high margin
applications.
- Opportunity for significant improvements in operating
efficiencies, especially as the company was carved out of a larger
conglomerate.
Sourcing and Conversion
- HgCapital's German office was directly introduced to management
by the CEO of an existing portfolio company.
- As a result, HgCapital was able to move quickly and developed a
strong relationship with management.
Portfolio Management
- Plan: Grow sales modestly in strategic markets, deliver
operational improvements and significantly increase EBITDA margins through
2011.
- Initiatives: Driving of sales in higher margin, non-paper market.
Implementation of operational improvements, switching of milling operations
from oil to electricity and the hedging of nickel prices.
Performance
- Current trading: Performance remains robust, with sales broadly
flat as planned, but a significant increase in EBITDA. The effect of nickel
price decline has largely been mitigated through the company's hedging policy.
- Exit strategy: Mondo is anticipated to be an attractive target
for both private equity and trade buyers.
Company's Investment - Mondo
Sector Location Year of Residual Unrealised Accrued Total Valuation
investment cost GBP'000 value interest value methodology
GBP'000 GBP'000 GBP'000
Industrials Nordic 2007 7,004 8,475 1,293 9,768 Earnings-based
Region
4 Schleich www.schleich-s.com
Date Invested: December 2006
Original Enterprise Value: EUR165 million
Total HgCapital Clients' Equity: 76%
Business Description
- Schleich is the leading producer of classic plastic toy
figurines, such as farm and wildlife animals, historical characters and The
Smurfs.
- Its products, trading under the well recognised brand Schleich-S,
are sold in over 30 countries, including its home market of Germany, the US,
the UK and France.
Investment Rationale
- Schleich's figurines are attractive to retailers, given their low
seasonality and high sales per square metre.
- Relatively high barriers to entry, given the wide product range,
retailer network and a high quality manufacturing process.
- Revenue growth is supported by continual innovation in the
product range.
Sourcing and Conversion
- Local corporate finance advisors invited HgCapital into a limited
auction process.
- HgCapital secured the support of the CEO in the transaction,
based upon the plan for the business and the team's track record in the German
market.
Portfolio Management
- Plan: Drive sales growth organically in existing markets and
through international expansion. Capture margin improvement through increased
scale and the streamlining of the management structure.
- Initiatives: Established new retail relationships in the US;
revised local product selection and in-store displays to drive growth;
reviewed manufacturing footprint.
Performance
- Current trading: Continued growth in both revenues and EBITDA
during the year.
- Exit strategy: Several multi-national toy makers represent
natural trade buyers; stable profits and risk profile could also support an
IPO.
Company's Investment - Schleich
Sector Location Year of Residual Unrealised Accrued Total Valuation
investment cost GBP'000 value interest value methodology
GBP'000 GBP'000 GBP'000
Consumer & Germany 2006 4,634 7,420 1,321 8,741 Earnings-based
Leisure
5 Casa Reha www.casa-reha.de
Date Invested: January 2008
Original Enterprise Value: EUR327 million
Total HgCapital Clients' Equity: 51%
Business Description
- Casa Reha is a leading private German provider of elderly care
services, specialising in high quality, affordable assisted living.
- Founded in 1995, Casa Reha has a nationwide portfolio of 52 homes
providing around 7,000 beds.
Investment Rationale
- The market offers multiple opportunities for expansion, both
organically and through acquisition.
- Business model benefits from strong earnings visibility and low
capex and working capital requirements for growth.
Sourcing and Conversion
- The Healthcare team identified Casa Reha during a strategic
review of German care homes and approached the then owner (Advent) in
mid-2007.
- HgCapital was able to complete due diligence and hold discussions
with management and the vendor prior to the launch of a formal auction
process.
Portfolio Management
- Plan: Prioritise organic growth, targeting a significant increase
in bed numbers, in order to capture anticipated private sector market growth
of 6%-7% p.a., as charitable/local authority sector stagnates through
under-investment.
- Initiatives: Increased the rate of openings of new homes and
continued building the pipeline of future homes. New organisational structure,
customer relationship management tools and other initiatives were implemented
to maintain profitability of existing homes.
Performance
- Current trading: Like-for-like sales grew and EBITDA was broadly
flat in 2008.
- Exit strategy: The business should be a strong IPO candidate or
attractive to large-cap private equity buyers.
Company's Investment - Casa Reha
Sector Location Year of Residual Unrealised Accrued Total Valuation
investment cost GBP'000 value interest value methodology
GBP'000 GBP'000 GBP'000
Healthcare Germany 2008 8,140 7,878 - 7,878 Written
down
6 Sporting Index www.sportingindex.com
Date Invested: November 2005
Original Enterprise Value: GBP73 million
Total HgCapital Clients' Equity: 70%
Business Description
- Sporting Index is a sports spread betting firm, with a leading
market share in the UK.
- It aims to offer more markets, more `fun bets', and more choice
than any other sports spread betting company.
Investment Rationale
- The core sports spread betting business is robust, cash
generative and growing steadily, providing a base from which to expand the
group.
- Industry is fragmented offering opportunities to expand by
acquisitions.
- New products and new geographies offer further opportunities for
growth.
Sourcing and Conversion
- HgCapital identified the company in 2002 and maintained close
contact with management over the following three years, before completing an
acquisition of the business in November 2005.
Portfolio Management
- Plan: Develop direct marketing abilities and customer database to
increase retention and usage; develop new distribution channels for spread
betting; expand international client base.
- Initiatives: Refocused development expenditure away from mass
market games, instead focusing on sale of pricing expertise to third parties;
delivered cost cutting programme and realignment of resources to front line
profit making activities.
Performance
- Current trading: Sales and profit grew year on year.
- Exit strategy: The company will be positioned for a trade exit,
most likely to an industry consolidator.
Company's Investment - Sporting Index
Sector Location Year of Residual Unrealised Accrued Total Valuation
investment cost GBP'000 value interest value methodology
GBP'000 GBP'000 GBP'000
Consumer & UK 2005 7,186 4,405 2,229 6,634 Written
Leisure down
7 Voyage www.voyagecare.com
Date Invested: April 2006
Original Enterprise Value: GBP322 million
Total HgCapital Clients' Equity: 52%
Business Description
- Voyage is an operator of small community-based homes for adults
with learning disabilities and associated physical disabilities, autistic
spectrum disorders, complex needs and acquired brain injury.
- At completion, the company had 1,600 beds in 242 homes across
England and Scotland.
Investment Rationale
- Significant shortage of supply for residential care at this level
leaves opportunity for growth.
- Voyage enjoys a strong market position and a high quality estate
of stable, cash generative properties.
Sourcing and Conversion
- HgCapital took advantage of a "broken auction" that had collapsed
due to a breakdown in communications between bidder and seller.
Portfolio Management
- Plan: Continued growth through the roll-out of new homes, margin
improvement through the consolidation of sites to improve occupancy, close
control of cost inflation and move to a higher margin, professional led model.
- Initiatives: Implemented move towards a professional led model,
focused on control of costs, continued successful roll out of new homes,
supported management in reviewing acquisition targets.
Performance
- Current trading: Performance in 2008 was strong, with significant
growth in both sales and EBITDA..
- Exit strategy: Projected exit to either a secondary or a trade
buyer, although an IPO is also possible.
Company's Investment - Voyage
Sector Location Year of Residual Unrealised Accrued Total Valuation
investment cost GBP'000 value interest value methodology
GBP'000 GBP'000 GBP'000
Healthcare UK 2006 8,755 4,179 2,277 6,456 Written
down
8 Americana www.bench.co.uk
Date Invested: March 2007
Original Enterprise Value: GBP180 million
Total HgCapital Clients' Equity: 45%
Business Description
- Americana is a branded apparel business, manufacturing and
marketing the Bench brand targeted at the youth market.
- The company predominantly operates through UK wholesale channels,
with increasing wholesale revenues in continental Europe, and is building a UK
retail presence.
Investment Rationale
- Bench is a strong brand that can be developed internationally.
- The company had a proven track record of growing revenue and
profits and an excellent supply chain based in China.
Sourcing and Conversion
- HgCapital was previously in contact with the Chairman and had
been monitoring the company for over two years.
- HgCapital secured the deal as it was able to convince the
founders that it could address the challenges that faced the business, namely
management succession and international expansion.
Portfolio Management
- Plan: Grow wholesale revenues internationally using new and
existing distribution agreements and increased investment in sales and
marketing; pilot retail expansion and expand if successful.
- Initiatives: Accelerated roll-out of retail concept; strengthened
management team; implemented rigorous management reporting and business
planning.
Performance
- Current trading: Sales were up but profit was down in 2008.
Profits are projected to recover in 2009.
- Exit strategy: Options include a trade sale or secondary buyout.
Company's Investment - Americana
Sector Location Year of Residual Unrealised Accrued Total Valuation
investment cost GBP'000 value interest value methodology
GBP'000 GBP'000 GBP'000
Consumer & UK 2007 4,625 4,483 1,251 5,734 Earnings-based
Leisure
9 Achilles www.achilles.com
Date Invested: July 2008
Original Enterprise Value: GBP75 million
Total HgCapital Clients' Equity: 79%
Business Description
- Achilles is a global leader in buyer-sponsored supplier data
management and validation services.
- The company has 22 offices worldwide and has more than 32,000
customers, with focus on industries with "high cost of supplier failure" (e.g.
oil & gas, construction).
Investment Rationale
- Achilles is a global market leader in a market with high barriers
to entry.
- The company enjoys high visibility of future earnings and shows
strong organic growth rates.
- The market offers multiple expansion opportunities both into new
industries and new geographies.
Sourcing and Conversion
- HgCapital joined a competitive auction process designed to find a
private equity buyer as an alternative to a utility which had previously bid
for the business.
- Management was attracted to HgCapital given our prior experience
of subscription-based businesses in the TMT sector.
Portfolio Management
- Plan: Extract more value from existing schemes through product
additions, roll out existing schemes in new geographies and industries and
drive margin expansion.
- Initiatives: Implemented review of best practices across business
and rolled out across geographies.
Performance
- Current trading: Still relatively early, but so far trading has
been on plan, with continued strong growth in sales and EBITDA.
- Exit strategy: Exit options for Achilles are potentially via an
IPO, secondary or a trade sale to a software company, outsourcer or B2B
exchange.
Company's Investment - Achilles
Sector Location Year of Residual Unrealised Accrued Total Valuation
investment cost GBP'000 value interest value methodology
GBP'000 GBP'000 GBP'000
TMT UK 2008 5,226 5,226 - 5,226 Cost
10 Elite (t/a SiTel) www.sitelsemi.com
Date Invested: June 2005
Original Enterprise Value: $74 million
Total HgCapital Clients' Equity: 80%
Business Description
- SiTel designs chip sets for the home wireless voice and data
applications market.
- Customers include global manufacturers of home cordless telephone
systems, such as Siemens and Panasonic.
Investment Rationale
- SiTel has a strong market position and had delivered strong
revenue growth.
- Fully outsourced operations (a fabless business model) allowing a
high return on capital.
- Significant customer lock-in provides visibility of earnings.
- Strong market growth and opportunity to drive revenues further
through growth into adjacent niche markets.
Sourcing and Conversion
- SiTel was carved out as an integrated unit from a US parent.
- Initially a limited auction, HgCapital gained exclusivity early
in the process.
Portfolio Management
- Plan: Transition to a fully outsourced model, drive organic
growth and expand into new markets.
- Initiatives: Managed move to a fabless business model, driving
growth through focused R&D spend; reduced inventory levels to improve cash
flow.
Performance
- Current trading: Trading remains very challenging and EBITDA
declined significantly in 2008. However, the business is now free of external
debt.
- Exit strategy: SiTel will most likely be sold to a competitor
looking to consolidate its market position.
Company's Investment - Elite / SiTel
Sector Location Year of Residual Unrealised Accrued Total Valuation
investment cost GBP'000 value interest value methodology
GBP'000 GBP'000 GBP'000
TMT Benelux 2003 5,749 3,490 1,721 5,211 Written
down
Renewable energy
Hg Renewable Power Partners LP
In June 2006, the Company made a commitment of EUR21 million to Hg
Renewable Power Partners LP, a dedicated renewable energy fund managed by
HgCapital. The EUR303 million fund is one of the largest raised to date for
renewable energy investments in Europe and is focused on long-term investments
in renewable power projects using proven technologies, including wind, small
hydro, landfill gas and waste-to-energy in Western Europe.
Renewable energy benefits from a highly favourable regulatory and
policy environment with climate change solidly on the political agenda. The
investment in the fund will give the Company exposure to a diversified
portfolio of assets offering both income and capital appreciation in a rapidly
growing sector.
The fund has investments in eight wind projects in construction or
operation totalling 200 MW and four biogas projects that are in operation
totalling 2 MW. It has made investments in companies that develop wind
projects, giving it the right to acquire a further 286 MW of wind projects.
The fund's investments are in France, Germany, Ireland, Italy, Sweden and the
United Kingdom.
The fund's portfolio now includes the following investments:
Tir Mostyn
A 21.25 MW operating wind farm in North Wales. The original
investment was made in November 2004, with construction completed in October
2005. The wind farm has now been operating for over three years.
Sorne Wind
A 32 MW operating wind farm in Donegal, Ireland. This investment
was made in July 2005, with the farm entering operation in November 2006.
Picardy Wind
A portfolio of four wind farms in Northern France in operation or
under construction with a total capacity of 47.5 MW. The initial investment
was made in July 2006. Two operating projects total 23.5 MW and the other two
are under construction.
Wind Direct
A business that installs, owns and operates wind turbines on UK
industrial sites, providing its customers with low cost, direct energy
supplies. The investment was made in 2006 and includes one 4 MW site in
operation and one entering construction, with 15 sites in development.
Havsnäs
A 95.4 MW project is under construction, located in central Sweden.
The investment, which is the first project-financing of renewable generation
in the Nordic market, was completed in March 2008. The project will be the
largest on-shore wind farm in Sweden. Construction began in April 2008 and
commercial operation will begin in April 2010.
RidgeWind
A United Kingdom wind farm developer with 300 MW of wind farms in
development, including two projects totalling 52 MW that have secured planning
permission, and the 16 MW Bagmoor project that is in construction. The Bagmoor
project is located in Lincolnshire. Commercial operations are expected to
begin in 2009.
Rewind
An investment of EUR2.1 million was made in August 2006, in return
for the option to acquire a 120 MW portfolio of wind farms in Sicily.
Bayern Energie
Four operating anaerobic digestion (biogas) plants with a combined
capacity of 1.4 MW in Germany. Our involvement in this project was terminated
during the year with no further costs.
Cost and valuation of the Company's holding
Company Deal type Residual cost Valuation Valuation
GBP'000 GBP'000 Methodology*
Hg Renewable Power Partners Renewable 4,409 4,319 Net assets
LP energy
The difference between cost and valuation is due to establishment and running costs,
fees, foreign exchange movements in the fund and the revaluation of investments.
*The primary valuation methodology applied to the fund's investments is a discounted
cash flow basis.
Investment portfolio|
Company Sector Principal Residual Total Year of Portfolio Cum.
location valuation*
cost investment value Value %
GBP'000 GBP'000
%
1 VISMA Holdings + TMT Nordic 13,326 14,391 2006 13.2% 13.2%
Region
2 Pulse Staffing Ltd + Healthcare UK 6,131 12,858 1999 11.8% 25.0%
3 Mondo Minerals Co-op + Industrials Nordic 7,004 9,768 2007 9.0% 34.0%
Region
4 Schleich Luxembourg SA Consumer & Germany 4,634 8,741 2006 8.0% 42.0%
+ Leisure
5 Casa Reha SARL + Healthcare Germany 8,140 7,878 2008 7.2% 49.2%
6 Sporting Index Group Consumer & UK 7,186 6,634 2005 6.1% 55.3%
Ltd + Leisure
7 Voyage Group Ltd + Healthcare UK 8,755 6,456 2006 5.9% 61.2%
8 Americana Consumer & UK 4,625 5,734 2007 5.3% 66.5%
International Holdings Leisure
Ltd
9 Achilles Group TMT UK 5,226 5,226 2008 4.8% 71.3%
Holdings Limited +
10 Elite Holding SA (t/a TMT Benelux 5,749 5,211 2005 4.8% 76.1%
SiTel) +
11 Hg Renewable Power Renewable Europe 4,409 4,319 2006 4.0% 80.1%
Partners LP + Energy
12 Atlas Energy Group Ltd Services UK 8,153 4,261 2007 3.9% 84.0%
+
13 SLV Electronik SARL + Industrials Germany 5,962 3,850 2007 3.5% 87.5%
14 BMFCO UA (t/a Fabory) Services Benelux 7,391 2,964 2007 2.7% 90.2%
+
15 Cornish Bakehouse Consumer & UK 4,200 2,207 2007 2.0% 92.2%
Investments Ltd + Leisure
16 Weston Presidio Fund North 2,271 2,137 1998 2.0% 94.2%
Capital III, LP America
17 Hoseasons Group Ltd + Consumer & UK 2,197 2,133 2003 2.0% 96.2%
Leisure
18 SHL Group Holdings 1 Services UK 6,489 1,975 2006 1.8% 98.0%
Ltd +
19 King Luxembourg Sarl Industrials Switzerland 5,535 1,428 2008 1.3% 99.3%
(t/a KVT)
20 Software (Cayman), LP TMT UK 530 1,261 2006 1.2% 100.5%
- re Blue Minerva
21 Hirschmann Electronics Industrials Germany - 1,129 2004 1.0% 101.5%
Holdings SA +
22 Software (Cayman), LP TMT UK 253 585 2007 0.5% 102.0%
- re Guildford
23 PBR Holding SA + Healthcare Europe - 209 2002 0.2% 102.2%
24 Tiger Capital Ltd + TMT UK 632 135 2008 0.1% 102.3%
25 Doc M SARL Healthcare Germany - 128 2004 0.1% 102.4%
26 ACT Venture Capital Fund Ireland 38 70 1994 0.1% 102.5%
Ltd
27 Crest Avenue Ltd + Fund Ireland 41 41 1992 0.1% 102.6%
28 Addison Luxembourg SA TMT Germany - - 2005 - 102.6%
+
29 W.E.T Holding Industrials Germany 7,619 - 2003 - 102.6%
Luxembourg SA +
30 FTSA Holdings Ltd + Industrials North 6,813 - 2006 - 102.6%
America
31 Wastebidco Ltd Industrials UK - - 2007 - 102.6%
32 Wand / Yankelovich LP Fund North 7 - 1992 - 102.6%
America
33 SGI (Holdings) Ltd + Services UK 1,720 - 1999 - 102.6%
34 Schenck Process SA + Industrials Germany - - 2005 - 102.6%
35 Newchurch Ltd Healthcare UK 1,295 - 2000 - 102.6%
36 Lantor plc (formerly Industrials Ireland - - 1992 - 102.6%
South Wharf plc)
37 Hofmann M.M. SA + Industrials Germany - - 2005 - 102.6%
Hg5 Euro Hedge n/a n/a - (2,801) 2008 (2.6%) 100.0%
Total 136,331 108,928 100.0% 100.0%
+ Through its management of the Company and other funds, HgCapital holds more than 50% of the
voting equity shares
* Including investment valuation of GBP94,732,000 and accrued interest GBP14,196,000. See Note 11
to the Financial Statements
| The above investments, other than Hg Renewable Power Partners LP,
are held through the Company's investment in HGT LP. See Note 1 of the
Financial Statements.
Income statement
for the year ended 31 December 2008
Note Revenue return Capital return Total return
2008 2007 2008 2007 2008 2007
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Gains on investments and 10 - - 641 55,714 641 55,714
government securities
Carried interest 3(b) - - (5,132) (6,189) (5,132) (6,189)
Income 2 12,068 12,129 - - 12,068 12,129
Investment management fee 3(a) (643) (840) (1,930) (2,519) (2,573) (3,359)
Other expenses 4(a) (932) (669) - - (932) (669)
Return/(deficit) on ordinary 10,493 10,620 (6,421) 47,006 4,072 57,626
activities before taxation
Taxation on ordinary activities 6(a) (3,048) (3,174) 550 756 (2,498) (2,418)
Transfer to/(from) reserves 7,445 7,446 (5,871) 47,762 1,574 55,208
Return/(deficit) per ordinary 7 29.56p 29.56p (23.31p) 189.63p 6.25p 219.19p
share
The total return column of this statement represents the Company's profit and
loss. The supplementary revenue and capital return columns are prepared under
guidance published by the Association of Investment Companies. All recognised
gains and losses are disclosed in the Revenue and the Capital columns of the
Income Statement and as a consequence no Statement of Total Recognised Gains
and Losses has been presented.
The movements in reserves are set out in note 17 to the financial statements.
All revenue and capital items in the above statement derive from continuing
operations.
No operations were acquired or discontinued during the year.
The following notes form part of these financial statements.
Balance sheet
as at 31 December 2007
Note 2008 2007
GBP'000 GBP'000
Fixed assets
Investments held at fair value
Quoted at market valuation - 6,482
Unquoted at Directors' valuation 94,732 147,885
9 94,732 154,367
Current assets
Debtors 11 16,258 13,906
Government securities 12 124,014 79,723
Cash 13(a) 5,841 117
146,113
Creditors - amounts falling due within one 14 (6,751) (9,296)
year
Net current assets 139,362 84,450
Net assets 234,094 238,817
Capital and reserves
Called up share capital 16 6,296 6,296
Share premium account 17 14,123 14,123
Capital redemption reserve 17 1,248 1,248
Capital reserve - realised 17 238,606 197,852
Capital reserve - unrealised 17 (40,943) 5,682
Revenue reserve 17 14,764 13,616
Total equity shareholders' funds 234,094 238,817
Net asset value per ordinary share 7 929.4p 948.2p
These financial statements were approved and authorised for issue by the Board
of Directors on 19 March 2009 and signed on its behalf by:
Roger Mountford, Chairman
Richard Brooman, Director
The following notes form part of these financial statements.
Cash flow statement
for the year ended 31 December 2008
Note 2008 2007
GBP'000 GBP'000
Net cash inflow/(outflow) from operating 4(b) 1,550 (2,259)
activities
Taxation paid (5,514) (2,137)
Capital expenditure and financial
investment
Purchase of fixed asset investments (25,987) (50,757)
Proceeds from the sale of fixed asset 86,027 103,283
investments
Net cash inflow from capital expenditure 60,040 52,526
and financial investment
Equity dividends paid 8 (6,297) (3,526)
Net cash inflow before management of 49,779 44,604
liquid resources
Management of liquid resources
Purchase of government securities 12 (185,679) (181,486)
Sale/redemption of government securities 12 141,624 134,731
Net cash outflow from management of liquid (44,055) (46,755)
resources
Increase/(decrease) in cash in the period 13(a) 5,724 (2,151)
Reconciliation of movements in shareholders' funds
for the year ended 31 December 2008
Called up Share Capital
redemption
Note share premium Capital Revenue
reserve
capital account reserves reserve Total
GBP'000
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 31 December 2007 6,296 14,123 1,248 203,534 13,616 238,817
Net (deficit)/return from - - - (5,871) 7,445 1,574
ordinary activities after
tax
Dividends paid 8 - - - - (6,297) (6,297)
At 31 December 2007 16,17 6,296 14,123 1,248 197,663 14,764 234,094
At 31 December 2005 6,296 14,123 1,248 155,772 9,696 187,135
Net return from ordinary - - - 47,762 7,446 55,208
activities after tax
Dividends paid 8 - - - - (3,526) (3,526)
At 31 December 2006 16,17 6,296 14,123 1,248 203,534 13,616 238,817
The following notes form part of these financial statements.
Notes to the financial statements
1. Principal activity and accounting policies
The principal activity of the Company is that of an investment trust company.
The Company is an investment company as defined by section 833 of the
Companies Act 2006 and an investment trust within the meaning of section 842
of the Income and Corporations Taxes Act 1988.
Basis of preparation
The accounts have been prepared in accordance with applicable UK law and
Accounting Standards (GAAP) and with the Statement of Recommended Practice
`Financial Statements of Investment Trust Companies' (SORP), dated January
2003 and revised in December 2005. All of the Company's operations are of a
continuing nature. Further details on going concern are provided in the
Directors' Report.
Organisational structure
In May 2003, the Company entered into a partnership agreement with HGT General
Partner Limited and MUST 4 Carry LP. A limited partnership, HGT LP, was
constituted to carry on the business of an investor with the Company being the
sole limited partner in this entity.
Under the partnership agreement, the Company made a capital commitment of its
non-cash investment portfolio to HGT LP, with the result that the Company now
holds an investment in HGT LP and all fixed asset investments, excluding the
investment in Hg Renewable Power Partners LP, are now held by HGT LP. Note 9
and the Investment Portfolio above present the underlying investments held by
HGT LP. The income and capital accruals relating to the investments held in
HGT LP are shown in notes 2 and 11. Carried interest paid to the Founder
Partner is shown on the Income Statement as it is the first charge on
investment gains.
The agreement stipulates that the associated income and capital profits, after
payment of the carried interest and the General Partner share, are distributed
to the Company and consequently these amounts (including the associated cash
flows) are shown in the appropriate lines within the Income Statement, Cash
Flow Statement and the related notes.
Investment income and interest receivable
As stated above, all income of HGT LP is distributed to the Company and this
income is recognised and shown as income in the Financial Statements of the
Company. The accounting policies below apply to the income of HGT LP.
Income from equity investments, including taxes deducted at source, is
included in revenue by reference to the date on which the investment is quoted
ex-dividend. Where the Company elects to receive dividends in the form of
additional shares rather than cash dividends, the equivalent of the cash
dividend is recognised as income in the revenue account and any excess in the
value of the shares received over the amount of the cash dividend is
recognised in Capital reserve - realised. Interest income is accounted for on
an accruals basis. Dividends receivable on equity shares where there is no
ex-dividend date and on non-equity shares are brought into account when the
Company's right to receive payment is established.
Management fee and finance costs
The annual investment management fee and finance costs are charged 75% to
Capital reserve - realised and 25% to the revenue account.
This is in line with the Board's expected split of long-term returns, in the
form of capital gains and income respectively, from the investment portfolio
of the Company.
Expenses
All expenses are accounted for on an accruals basis. All administrative
expenses, excluding the management fee, are charged wholly to the revenue
account. Expenses that are incidental to the purchase or sale of an investment
are included within the cost or deducted from the proceeds of the investment.
Foreign currency
All transactions in foreign currencies are translated into sterling at the
rates of exchange ruling at the dates of such transactions. Foreign currency
assets and liabilities at the balance sheet date are translated into sterling
at the exchange rates ruling at that date. Exchange differences arising on the
translation of foreign currency assets and liabilities are taken to Capital
reserve - realised.
Taxation
Income taxes represent the sum of the tax currently payable, withholding taxes
suffered and deferred tax. Tax is charged or credited in the income statement.
Deferred taxation is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where transactions or
events that result in an obligation to pay more tax in the future, or the
right to pay less, have occurred at the balance sheet date. This is subject to
deferred assets only being recognised if it is considered more likely than not
that there will be suitable profits from which the future reversal of the
underlying timing differences can be deducted. Timing differences are
differences between the Company's taxable profits and its results, as stated
in the financial statements, which are capable of reversal in one or more
suitable periods.
Investments
The general principle applied is that investments should be reported at "fair
value" in accordance with FRS26 and the International Private Equity and
Venture Capital (`IPEV') Valuation Guidelines, October 2006 edition. Where
relevant, the Company applies the policies stated below to the investments
held by HGT LP, in order to determine fair value of its investment in HGT LP.
Quoted: Quoted investments are designated as held at fair value, which is
deemed to be bid market prices.
Unquoted: Unquoted investments are also designated as held at fair value and
are valued using the following guidelines:
(i) initially, investments are valued at cost including fees and transaction
costs, unless (iv) is required;
(ii) after the receipt of the first audited financial statements following
initial investment, companies are valued based on the level of maintainable
earnings, an appropriate earnings multiple and the application of a
marketability discount, unless (iv) is required;
(iii) where more appropriate, investments are valued with reference to their
net assets rather than to their earnings; and
(iv) appropriate provisions are made against all individual valuations where
necessary to reflect unsatisfactory financial performance or a fall in
comparable ratings, leading to an impairment in value.
Derivative financial instruments: Derivative financial instruments are held at
fair value and are valued using quoted market prices or dealer price
quotations for financial instruments traded in active markets.
Both realised and unrealised gains and losses arising on investments are taken
to capital reserves.
Capital reserves
Capital reserve - realised
The following are accounted for in this reserve:
(i) gains and losses on the realisation of investments;
(ii) losses on investments within the portfolio where there is little prospect
of realisation or recovering any value;
(iii) realised exchange differences of a capital nature; and
(iv) expenses, together with the related taxation effect, charged to this
reserve in accordance with the above policies.
Capital reserve - unrealised
The following are accounted for in this reserve:
(i) increases and decreases in the valuation of investments held at the year
end; and
(ii) unrealised exchange differences of a capital nature.
2. Income
2008 2007
GBP'000 GBP'000
Income from investments
UK unquoted investment income 4,387 4,748
Foreign unquoted investment income 2,728 3,557
UK dividends 11 41
Gilt interest 4,704 3,650
11,830 11,996
Other income
Deposit interest 119 133
Other interest income 119 -
238 133
Total income 12,068 12,129
Total income comprises:
Dividends 11 41
Interest 12,057 12,088
12,068 12,129
3 (a) Investment management fee
Revenue return Capital return Total return
2008 2007 2008 2007 2008 2007
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investment management fee 935 745 2,805 2,235 3,740 2,980
VAT (recovered)/charged (292) 95 (875) 284 (1,167) 379
643 840 1,930 2,519 2,573 3,359
Details of the investment management, custodian and administration contracts
are disclosed in the Directors' Report below. The investment management fee is
levied quarterly in arrears. Investment management fees are charged 75% to
capital and 25% to revenue. For details regarding the VAT recovery, see Note
19.
3 (b) Carried interest
2008 2007
GBP'000 GBP'000
Carried interest 5,132 6,189
The carried interest payable ranks as a first distribution of capital gains on
the investments held in HGT LP, a limited partnership established solely to
hold the Company's investments, and is deducted prior to such gains being paid
to the Company in its capacity as Limited Partner. The gross amount of capital
gains of HGT LP during the period is shown on the Income Statement. Details of
the carried interest contract are disclosed in the Directors' Report below.
4. Other expenses
(a) Operating expenses
2008 2007
GBP'000 GBP'000
Custodian and administration fees 260 249
Directors' remuneration (note 5) 170 138
Current Auditors' remuneration - audit services 32 -
- taxation and interim review 6 -
Previous Auditors' remuneration - audit services - 32
- taxation and interim review 5 7
Legal and other administration costs 459 243
932 669
The Company's total expense ratio (`TER') calculated 1.06% 1.32%
as a percentage of
average net assets and including expenses, after
relief for taxation, was:
(b) Reconciliation of net return before taxation to net cash flow from operating
activities
2008 2007
GBP'000 GBP'000
Total return before taxation 4,072 57,626
Gains on investments held at fair value (641) (55,714)
Movement on carried interest (1,057) 1,452
Increase in accrued income (1,904) (5,237)
Decrease in debtors 5 15
Increase/(decrease) in creditors 1,076 (397)
Tax on investment income included within gross income (1) (4)
Net cash inflow/(outflow) from operating activities 1,550 (2,259)
5. Directors' remuneration
The aggregate remuneration of the Directors, excluding VAT where applicable,
for the year to 31 December 2008 was GBP170,000 (2007: GBP133,000). Further
information on the Directors' remuneration is disclosed in the Annual Report
and Accounts.
6. Taxation on ordinary activities
(a) Analysis of charge in the year
Revenue return Capital return Total return
2008 2007 2008 2007 2008 2007
GBP'000 GBP`000 GBP'000 GBP`000 GBP'000 GBP`000
Current tax:
UK corporation tax 2,988 3,174 (550) (756) 2,438 2,418
Prior year adjustment 60 - - - 60 -
Total current tax (note 6(b)) 3,048 3,174 (550) (756) 2,498 2,418
(b) Factors affecting current tax charge for the year
The tax assessed for the year is higher than the standard rate of
corporation tax in the UK for a large company (28%; 30% to 31 March 2008).
The differences are explained below:
2008 2007
GBP'000 GBP'000
Revenue return on ordinary activities before taxation 10,493 10,620
UK corporation tax at 28% thereon (30% to 31 March 2,991 3,186
2008)
Effects of:
Non taxable UK dividends (3) (12)
Tax deductible expenses in capital (550) (756)
Tax relief to the capital account 550 756
Tax in relation to the prior year 60 -
57 (12)
Current revenue tax charge for the period (note 6(a)) 3,048 3,174
In the opinion of the Directors, the Company has complied with the
requirements of Section 842 ICTA 1988 and will therefore be exempt from
corporation tax on any capital gains made in the year.
7. Return and net asset value per ordinary share
2008 2007
Revenue and capital returns per share are shown below and
have been calculated using the following:
GBP7,445,000 GBP7,446,000
Net revenue attributable to equity shareholders after
taxation
Net capital (deficit)/gains for the year (GBP5,871,000) GBP47,762,000
Total return GBP1,574,000 GBP55,208,000
Number of shares in issue 25,186,755 25,186,755
Revenue return Capital return Total return
2008 2007 2008 2007 2008 2007
Return per ordinary share 29.56p 29.56p (23.31p) 189.63p 6.25p 219.19p
The net asset value per share of 929.4p (2007: 948.2p) was calculated by
dividing equity shareholders' funds of GBP234,094,000 (2007: GBP238,817,000) by
the number of shares in issue at the year-end of 25,186,755 (2007:
25,186,755).
8. Dividends on ordinary shares
Company Register Payment date 2008 2007
date
GBP'000 GBP'000
Final dividend (14.0p) for the year 23 March 1 May 2007 - 3,526
ended 31 December 2006 2007
Final dividend (25.0p) for the year 27 March 11 May 2008 6,297 -
ended 31 December 2007 2008
6,297 3,526
The proposed final dividend is subject to approval by shareholders at the
Annual General Meeting and has not been included as a liability in these
financial statements.
The total dividends payable in respect of the financial year, which form the
basis of the retention test as set out in section 842 of the Income and
Corporation Taxes Act 1988, are set out below:
2008
GBP'000
Revenue available for distribution by way of dividend for the year 7,445
Proposed final dividend of 25.0p for the year ended 31 December 2008 (6,297)
(based on 25,186,755 ordinary shares in issue at 31 December 2008)
Undistributed revenue for section 842 purposes * 1,148
* Undistributed revenue comprises 9.7% of income from qualifying
investments of GBP11,830,000 (see note 2).
9. Fixed assets investments
2008 2007
GBP'000 GBP'000
Investments held at fair value through profit and loss
Investments held by HGT LP
Investments quoted on the London or Dublin Stock - 2,761
Exchanges
Investments traded on NASDAQ - 3,721
Unquoted investments 90,413 144,330
Other investments held by the Company
Unquoted investments 4,319 3,555
94,732 154,367
Equity shares 19,501 48,982
Non-equity shares 7,569 8,673
Convertible securities - 200
Fixed income securities 70,463 96,512
Derivative instruments (2,801) -
94,732 154,367
Quoted Unquoted Total
GBP'000 GBP'000 GBP'000
Opening valuation as at 1 January 2008 6,482 147,885 154,367
Opening unrealised appreciation (33) (5,792) (5,825)
Opening book cost 6,449 142,093 148,542
Movements in the year:
Additions at cost 312 25,675 25,987
Disposals - proceeds (8,162) (77,865) (86,027)
- realised gains on sales 1,401 46,428 47,829
Closing book cost of investments - 136,331 136,331
Closing unrealised depreciation - - (38,798) ( 38,798)
investments
- financial derivative instruments - (2,801) ( 2,801)
Closing valuation of investments as at 31 - 94,732 94,732
December 2008
Investments included in the above are indirectly held by the Company through
its investment in HGT LP, as set out in Note 1.
The Company has indirect equity holdings of 10% or more of the equity shares
in the companies listed below:
Company Country of Number of equity shares Effective
incorporation equity %
Atlas Energy Group Ltd UK 4,706,450 47.1%
Cornish Bakehouse Investments UK 382,170 38.2%
Ltd
Elite Holding SA (t/a SiTel) The Netherlands 4,884 15.6%
FTSA Holdings Ltd UK 1,129,815 19.5%
Hoseasons Group Ltd UK 267,358 12.2%
Mondo Minerals Co-op Finland 1,252,217 11.4%
Pulse Staffing Ltd UK 31,229,096 41.8%
SGI (Holdings) Ltd UK 3,432,784 16.2%
Sporting Index Group Ltd UK 136,751 13.4%
Further information on those investments which, in the opinion of the
Directors, have a significant effect on the Company's financial statements, is
contained in the Review of principal investments.
10. Gains on investments and government securities
2008 2007
GBP'000 GBP'000
Realised gains on sales 47,266 53,017
Change in unrealised (depreciation)/appreciation (43,824) 2,697
- investments and government securities
- financial derivative instruments (2,801) -
641 55,714
11. Debtors
2008 2007
GBP'000 GBP'000
Taxation recoverable 453 -
Prepayments and other accrued income 1,609 1,264
Accrued income on fixed assets 14,196 12,637
Other debtors - 5
16,258 13,906
12. Government securities
2008 2007
GBP'000 GBP'000
Investments held at fair value through
profit and loss
Opening valuation 79,723 34,284
Purchases at cost 185,679 181,486
Sales and redemptions (141,624) (134,731)
Movement in unrealised capital gains 799 239
Realised capital losses (563) (1,555)
Closing valuation 124,014 79,723
13. Movement in net funds
(a) Reconciliation of net cash flow to movement in net funds
2008 2007
GBP'000 GBP'000
Change in net funds 5,724 (2,151)
Net funds at 1 January 117 2,268
Net funds at 31 December 5,841 117
(b) Analysis of changes in net funds At 1 Jan Cash At 31 Dec
2008 flows 2008
GBP'000 GBP'000 GBP'000
Cash 117 5,724 5,841
14. Creditors - amounts falling due within one year
2008 2007
GBP'000 GBP'000
Carried interest 5,132 6,189
Corporation taxation payable - 2,564
Sundry creditors 1,619 543
6,751 9,296
15. Risk
The following disclosures relating to the risks faced by the Company are
provided in accordance with Financial Reporting Standard 29, "Financial
instruments: disclosures". The reference to investments in this note is in
relation to the Company's direct investments and the underlying investments in
HGT LP as detailed in Note 1.
Financial instruments and risk profile
As a private equity investment trust, the Company's primary investment
objective is to achieve long-term capital appreciation by investing in
unquoted companies, mostly in the UK and Europe. Additionally, the Company
holds Government gilts and cash and items such as debtors and creditors
arising directly from its operations. In pursuing its investment objective,
the Company is exposed to a variety of risks that could result in either a
reduction of the Company's net assets or a reduction in the profits available
for distribution by way of dividends. These risks, valuation risk, market risk
(comprising currency risk and interest rate risk) and liquidity risk and the
Directors' approach to the management of them, are set out below.
The Board and the Manager coordinate the Company's risk management. The
objectives, policies and processes for managing the risks, and the methods
used to manage the risks, that are set out below, have not changed from the
previous accounting period.
Valuation risk
The Company's exposure to valuation risk comprises mainly movements in the
value of its underlying investments, the majority of which are unquoted. A
breakdown of the Company's portfolio is given above. In accordance with the
Company's accounting policies, all underlying unquoted investments are valued
by the Directors following the IPEVC. The Company does not hedge against
movements in the value of these investments, apart from foreign exchange
movements as explained below. The Company has exposure to interest rate
movements, through cash and gilt holdings.
In the opinion of the Directors, the diversified nature of the Company's
portfolio significantly reduces the risks of investing in unquoted companies.
Market risk
The fair value of future cash flows of a financial instrument held by the
Company may fluctuate due to changes in market prices. This market risk
comprises: currency risk ,interest rate risk and equity price risk (see
below). The Board of Directors reviews and agrees policies for managing these
risks. The Manager assesses the exposure to market risk when making each
investment decision, and monitors the overall level of market risk on the
whole of the investment portfolio on an ongoing basis.
Currency risk and sensitivity
The Company is exposed to currency risk as a result of investing in funds and
companies in foreign currencies. The sterling value, being the Company's
functional currency, of these assets can be significantly influenced by
movements in foreign exchange rates. The Company is partially hedged against
Euro currency movements affecting the value of its investments, as explained
below. The Manager monitors the Company's exposure to foreign currencies and
reports to the board on a regular basis. The following table illustrates the
sensitivity of the Revenue and Capital return for the year in relation to the
Company's year-end financial exposure to movements in foreign exchange rates
against the Company's functional currency. The rates represent the high and
low positions during the year for the currencies listed.
Revenue return Capital return
NAV per NAV per
ordinary ordinary
share share
GBP'000 (pence) GBP'000 (pence)
Low
Swiss Franc (1.5120) - - 17 -
Euro (1.0195) 38 0.1 528 2.1
Euro forward contract (1.0195) - - (530) (2.1)
Euro option contract (1.0195) - - (41) (0.2)
Norwegian Kroner (9.8175) 45 0.2 322 1.3
US Dollar (1.4377) - - - -
83 0.3 296 1.1
High
Swiss Franc (2.2624) - - (462) (1.8)
Euro (1.3659) (634) (2.5) (8,830) (35.1)
Euro forward contract (1.3659) - - 5,105 20.3
Euro option contract (1.3659) - - 709 2.8
Norwegian Kroner (11.6204) (234) (0.9) (1,689) (6.7)
US Dollar (2.0397) (508) (2.0) (1,030) (4.1)
(1,376) (5.4) (6,197) (24.6)
In the opinion of the Directors, the above sensitivity analysis is not
representative of the year as a whole, since the level of exposure changes as
the portfolio changes through the purchase and realisation of investments to
meet the Company's objectives.
Portfolio hedging
The Company uses derivative financial instruments such as forward foreign
currency contracts and option contracts to manage the currency risks
associated with its underlying investment activities. The contracts entered
into by the Company are denominated in the foreign currency of the geographic
areas in which the Company has significant exposure against its reporting
currency. The contracts are designated as a hedge and the fair value thereof
is recorded in the balance sheet as investments held at fair value. Unrealised
gains and losses are taken to capital reserves. At the balance sheet date, the
notional amount and value of outstanding forward foreign exchange contracts
and option contracts are as follows:
2008 2007
Currency No. `000 GBP'000 No. `000 GBP'000
Forward foreign currency Euro 25,040 (3,186) - -
contracts
Currency option Euro 12,520 385 - -
The Company does not trade in derivatives, as they are held for hedge specific
exposures and have maturities designed to match the exposures they are
hedging. It is the intention to hold both the financial investments giving
rise to the exposure and the derivatives hedging them until maturity and
therefore no net gain or loss is expected to be realised.
The derivatives are held at fair value which represents the replacement cost
of the instruments at the balance sheet date. Movements in the fair value of
derivatives are included in the income statement.
Interest rate risk and sensitivity
The Company has exposure to interest rate movements as this may affect the
fair value of funds awaiting investment, interest receivable on liquid assets
and short-dated government securities and interest payable on borrowings. The
Company has little immediate direct exposure to interest rates on its fixed
assets as the majority of these are fixed rate assets and equity shares that
do not pay interest. Therefore, and given that the Company has no borrowings
and maintains low cash levels, the Company's revenue return is not materially
affected by changes in interest rates.
However, funds awaiting investment are invested in Government securities and
as stated above, the valuation is affected by movements in interest rates. The
sensitivity of the capital return of the Company to movements on interest
rates has been based on the UK base rate. With all other variables constant, a
0.5% decrease in the above should increase the capital return in a full year
by GBP617,000, with a corresponding decrease if the UK base rate were to
increase by 0.5%. In the opinion of the Directors, the above sensitivity
analyses are not representative of the year as a whole, since the level of
exposure changes as investments are made and repaid throughout the year.
Liquidity risk
Investments in unquoted companies, which form the majority of the Company's
investments, may not be as readily realisable as investments in quoted
companies, which might result in the Company having difficulty in meeting
obligations associated with financial liabilities. Liquidity risk is currently
not significant as more than 55% of the Company's net assets at the year-end
are invested in liquid funds. The Board gives guidance to the Manager as to
the maximum amount of the Company's resources that should be invested in any
one company. For details refer to the Investment Policy section below.
Equity price risk
Equity price risk is the risk that the fair values of equities (including
loans) decrease as a result of changes in the values of underlying businesses.
The Board manages the risks inherent in the investment portfolio by ensuring
full and timely access to relevant information from the Manager.
The Board meets regularly and at each meeting reviews investment performance.
The Board monitors the Manager's compliance with the Company's objectives, and
is responsible for investment strategy. The Manager's best estimate of the
effect on the net assets and total return due to a reasonably possible change
in the value of unquoted securities, with all other variables held constant,
is as follows:
% NAV per
ordinary
change GBP'000 share (pence)
Unquoted 10% 9,473 37.6
Financial assets of the Company
2008 2007
Fixed Floating Non Fixed Floating Non
interest- interest-
rate rate bearing Total rate rate bearing Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Sterling 164,415 5,841 10,672 180,928 134,673 117 21,223 156,013
Euro 31,348 - 7,708 39,056 40,136 - 20,734 60,870
Euro hedge - - (2,801) (2,801) - - - -
Norwegian 7,838 - 6,553 14,391 8,887 - 7,553 16,440
kroner
Swiss franc 1,428 - - 1,428 - - - -
US dollar 5,211 - 2,137 7,348 6,635 - 8,145 14,780
Total 210,240 5,841 24,269 240,350 190,331 117 57,655 248,103
The fixed rate assets comprise gilts and fixed rate lendings to investee
companies. Fixed rate lendings relating to fixed assets investments have a
weighted average interest rate of 11.4% per annum (2007: 10.9%) and a weighted
average life to maturity of 6.0 years (2007: 7.9 years). Fixed rate lendings
relating to gilts have an interest rate of 4.0% per annum and matures on 7
March 2009. At the time of maturity, it is the intention to re-invest the
proceeds in a gilt with a similar short dated liquidity profile. The floating
rate assets consist of cash.
The non interest-bearing assets represent the equity content of the investment
portfolio and the financial derivative instruments.
The Company did not have any outstanding borrowings at the year end (2007:
GBPnil). The numerical disclosures above, exclude short-term debtors and
creditors.
Currency exposure
The currency denomination of the Company's financial assets is shown above.
Short-term debtors and creditors, which are excluded, are predominantly
denominated in sterling, the functional currency of the Company.
Capital management policies and procedures
The Company's capital management objectives are to ensure that it will be able
to finance its business as a going concern and to maximise the revenue and
capital return to its equity shareholders, through an appropriate balance of
equity capital and debt.
The Company's capital at 31 December comprises:
2008 2007
GBP'000 GBP'000
Equity
Equity share capital 6,296 6,296
Share premium 14,123 14,123
Capital redemption reserve 1,248 1,248
Retained earnings and other reserves 212,427 217,150
Total capital 234,094 238,817
As stated above, the Company did not have any outstanding borrowings at the
year-end. The Board with the assistance of the Manager monitors and reviews
the broad structure of the Company's capital on an ongoing basis. This review
covers:
- the planned level of gearing, which takes into account the Manager's
projections of cash flow;
- the desirability of buying back equity shares, either for cancellation or to
hold in treasury, balancing the effect (if any) this may have on the discount
at which shares in the Company are trading against the advantages of retaining
cash for investment;
- the need to raise funds by an issue of equity shares, including issues from
treasury; and
- the extent to which revenue in excess of that which is required to be
distributed should be retained, whilst maintaining its Section 842 status.
The Company's objectives, policies and processes for managing capital are
unchanged from the preceding accounting period.
16. Share capital
2008 2007
Nominal Nominal
No.'000 GBP'000 No.'000 GBP'000
Authorised:
40,000,000 ordinary shares of 25p each 40,000 10,000 40,000 10,000
Allotted, called up and fully paid:
Ordinary shares
At 1 January & 31 December 25,187 6,296 25,187 6,296
17. Share premium account and reserves
Share Capital Capital Capital
redemption
premium reserve reserve reserve Revenue
account GBP'000 realised unrealised reserve
GBP'000 GBP'000 GBP'000 GBP'000
As at 1 January 2008 14,123 1,248 197,852 5,682 13,616
Transfer on disposal of - - 11,511 (11,511) -
investments
Losses on sale of - - (563) - -
government securities
Net gain on sale of - - 36,318 - -
investments
Net movement in unrealised - - - (35,114) -
depreciation of investments
Dividends paid - - - - (6,297)
Net revenue for the year - - - - 7,445
after tax
Carried interest - - (5,132) - -
Management fee charged to - - (1,380) - -
capital, after taxation
As at 31 December 2008 14,123 1,248 238,606 (40,943) 14,764
18. Contingent liabilities
As at 31 December 2008, investment purchases of GBP14,760,000 (31 December 2007:
GBP11,900,000) had been authorised and contractually committed, including the
uncalled commitment to Hg Renewable Power Partners LP. In addition, the
Company's derivative financial instruments held through HGT LP expire on 29
August 2012. In order to meet any potential liability arising on this date, an
amount of GBP6,260,000 million, has been reserved for this purpose. This amount
is therefore callable from the Company at this or any earlier date.
19. VAT recoverable
On 28 June 2007, the European Court of Justice announced that it had found in
favour of the Association of Investment Companies and JPMorgan Claverhouse
Trust plc in declaring that management expenses of investment trusts should be
exempt from VAT. Her Majesty's Revenue and Customs ("HMRC") has since
announced that it has accepted that fund management services are exempt from
VAT and it has withdrawn from the appeal in the JPMorgan Claverhouse Trust
case. The Company will therefore no longer be charged VAT on management
expenses and it is able to recover some or all of the VAT previously charged
on management fees. In September 2008, the Company, through its Manager,
recovered GBP1,167,000 of VAT (see Note 3(a)) on management expenses charged by
the current Manager during the period May 2003 to September 2007. Between
February 2001 and April 2003, the Company paid approximately GBP590,000 of VAT
on its management expenses to a previous Manager. No recovery of VAT has been
recognised in these financial statements in respect of this GBP590,000, as
negotiations with the previous Manager are not sufficiently advanced. Recovery
of VATâEUR^suffered prior to February 2001 remains uncertain and has similarly
not been recognised in these Financial Statements.
20. HgCapital Trust commitment to invest alongside the HgCapital 6 Fund
The Company has committed to invest GBP250 million alongside the Manager's
latest buyout fund, HgCapital 6, increasing to a maximum of GBP300 million if
the size of the funds raised for HgCapital 6, including the Company's
commitment, reaches GBP2 billion. The Company has agreed to pay fees on its
commitment. The Company will be entitled, without penalty, to opt out of any
investment which could cause the Company to lose its status as an investment
trust, result in the Company not having the cash resources to meet any of its
projected liabilities or expenses, or result in it not being able to pay
dividends or undertake any intended share buy-back.
Top ten investments
% of
total
income
share
accrued capital
held by
Accounting Turnover PBIT* 2007 the % of % of
date Currency (millions) (millions) company total total
GBP'm 2008 2007
Achilles Group Apr-08 GBP 24.1 3.0 - 7.9 4.8 -
Holdings
Limited
Americana Jun-08 GBP 84.0 18.7 1.3 5.7 5.3 3.0
International
Holdings
Limited
Casa Reha SARL Dec-07 EUR 152.7 25* - 6.4 7.2 -
Elite Holding Dec-07 $ 147.1 21.5 1.7 15.6 4.8 4.0
SA Dec-07
Mondo Minerals Dec-07 EUR 136.5 26.4* 1.3 11.4 9.0 4.8
Co-op
Pulse Staffing Dec-07 GBP 96.7 1.0 - 41.8 11.8 0.1
Limited
Schleich GmbH Dec-07 EUR 81.6 21.7 1.3 9.5 8.0 3.3
Sporting Index May-08 GBP 25.8 9.5* 2.2 13.4 6.1 4.7
Visma Holdings Dec-07 NOK 2,723.2 457.7 1.8 8.5 13.2 8.9
Voyage Group Mar-08 GBP 116.3 19.2 2.3 7.9 5.9 5.7
Ltd
* Profit Before Interest and Taxation and, where applicable, before amortisation of
goodwill and depreciation
This table does not form part of the financial statements.
Analysis of registered shareholders
as at 31 December 2008
By type of holder Number of % of total Number of % of total
shares holders
31 Dec 31 Dec 31 Dec 31 Dec
2008 2007 2008 2007
Nominee companies 22,997,660 91.3 90.8 351 55.1 55.0
Direct private 1,154,740 4.6 4.4 235 36.9 37.0
investors
Others 1,034,355 4.1 4.8 51 8.0 8.0
Total 25,186,755 100.0 100.0 637 100.0 100.0
By size of holding Number of % of total Number of % of total
shares holders
31 Dec 31 Dec 31 Dec 31 Dec
2008 2007 2008 2007
1 - 5,000 583,774 2.3 2.7 434 68.1 68.5
5,001 - 50,000 2,224,052 8.8 9.7 132 20.7 20.2
50,001 - 100,000 2,004,072 8.0 8.3 27 4.3 4.3
Over 100,000 20,374,857 80.9 79.3 44 6.9 7.0
Total 25,186,755 100.0 100.0 637 100.0 100.0
This table does not form part of the financial statements.
Board of Directors
Roger Mountford (Chairman)
Aged 60, Roger Mountford was appointed to the Board in 2004 and became
Chairman in April 2005. He spent 30 years as a merchant banker in the City of
London and in the Far East, latterly as Managing Director in the Corporate
Finance Department of SG Hambros, leading the Bank's practice in the private
equity market. He now serves on several boards, including the Civil Aviation
Authority, where he is chairman of the CAA Pension Scheme, and the Port of
Dover. He is Chairman of The Housing Finance Corporation and of Enterprise LSE
Limited, the commercial subsidiary of the London School of Economics.
Timothy Amies
Aged 70, Timothy Amies was appointed to the Board in 1991. He is a chartered
accountant with over 30 years' experience of working in the City. He was a
partner at Laurie Milbank & Co, stockbrokers for 16 years prior to its
acquisition by Chase Manhattan Bank. He then became a director of Chase
Investment Bank involved in mergers and acquisitions.
Piers Brooke
Aged 68, Piers Brooke was appointed to the Board in 2001. He worked for 38
years in both commercial and merchant banking, holding a variety of general
management positions in the UK, Continental Europe, the Far East and North
America. Most recently he was Director of Financial Strategy at National
Westminster Bank. He has been a director of a number of companies. He is
currently a non-executive director of Lothbury Property Trust plc.
Richard Brooman
Aged 53, Richard Brooman was appointed to the Board in 2007. He is a chartered
accountant and is Deputy Chairman and Chairman of the Audit Committee of
Invesco Perpetual UK Smaller Companies Investment Trust plc, and a
non-executive Director of the Camden & Islington NHS Foundation Trust. He was
formerly Chief Financial Officer of Sherwood International plc and Group
Finance Director of VCI plc. Prior to this, he served as CFO of the global
Consumer Healthcare business of SmithKline Beecham and held senior financial
and operational positions at Mars after qualifying with Price Waterhouse. He
is Chairman of the Audit and Valuation Committee of the Company.
Peter Gale
Aged 53, Peter Gale was appointed to the Board in 1991 and is Deputy Chairman
of the Company. He has worked in many divisions of National Westminster Bank,
specialising in investment management. In 1990 he became responsible for the
investment management of National Westminster Bank Group Pension Funds, which
subsequently became RBS Pension Trustee Ltd. Upon the purchase of Gartmore
Investment Management plc in 1996, he became a principal of the enlarged fund
management company and in 2003 became Managing Director of Gartmore Private
Equity. He is a non-executive director of Lothbury Property Trust plc.
Andrew Murison
Aged 60, Andrew Murison was appointed to the Board in 2004. He was Senior
Bursar of Peterhouse, Cambridge for nine years and spent the previous twelve
years as a principal in private equity partnerships in the USA. Prior to that
he was a fund manager, financial journalist and investment banker in the City
of London. He now serves on the boards of Aberdeen Growth Opportunities
Venture Capital Trust plc, Brandeaux Student Accommodation Fund Limited and
Brandeaux US Dollar Fund Limited and is Chairman of JPMorgan European
Investment Trust plc.
All Directors are members of the Audit and Valuation, Nomination, Directors'
Remuneration and Management Engagement Committees.
All Directors are non-executive.
Directors' report
The Chairman's Statement on pages 4-6 forms part of this Directors' Report
The Directors present the annual report and financial statements of the
Company for the year ended 31 December 2008.
BUSINESS REVIEW
Background
The purpose of the Business Review is to provide an overview of the business
of the Company by:
- Analysing development and performance using appropriate key performance
indicators (`KPIs')
- Outlining the principal risks and uncertainties affecting the Company
- Describing how the Company manages these risks
- Explaining the future business plans of the Company
- Setting out the Company's environmental, social and ethical policy
- Providing information about persons with whom the Company has contractual or
other arrangements which are essential to the business of the Company
- Outlining the main trends and factors likely to affect the future
development, performance and position of the Company's business.
Principal activity and business review
The principal activity of the Company is to operate as an investment trust
providing access to a diversified portfolio of private equity investments. A
review of the business for the year is given in the Chairman's Statement
above, which forms part of this Directors' report, and in the Manager's report
(also above).
Status of the Company
HMRC has accepted the Company as an investment trust for the purposes of
section 842 of the Income and Corporation Taxes Act 1988 (ICTA) for the year
ended 31 December 2007. In the opinion of the Directors, the Company has
conducted its affairs so as to enable it to continue to maintain acceptance as
an investment trust since that date. It is the Company's intention to continue
to seek authorisation under section 842 of ICTA.
The Company is not a close company within the meaning of the provisions of
ICTA.
The Company is an investment company within the meaning of section 833 of the
Companies Act 2006.
The Company's shares are eligible investments within the stocks and shares
component of an Individual Savings Account (ISA).
Going concern
The Company's business activities, together with the factors likely to affect
its future development, performance and position are described in the
Chairman's Statement (above) and in the Manager's report. The financial
position of the Company, its cash flows, liquidity position and borrowing
facilities are described in the Directors' report below. In addition note 15
to the financial statements includes the group's objectives, policies and
processes for managing its capital; its financial risk management objectives;
details of its financial instruments and hedging activities; and its exposures
to credit risk and liquidity risk. The Company has considerable financial
resources and as a consequence, the Directors believe that the group is well
placed to manage its business risks successfully despite the current uncertain
economic outlook. After making enquiries, the Directors have a reasonable
expectation that the Company will have adequate resources to continue in
operational existence for the foreseeable future. Accordingly, they continue
to adopt the going concern basis in preparing the annual report and accounts.
Business and strategy
The objective of the Company is to provide shareholders with long-term capital
appreciation in excess of the FTSE All-Share Index by investing in unquoted
companies. The strategy of the Manager is to maximise returns from mid-market
private equity investments through sector specialisation and proactive work
with portfolio companies. It concentrates on buyouts in Europe with enterprise
values between GBP50 million and GBP500 million.
No material change will be made to the investment policy without shareholder
approval.
Investment Policy
Investments
- The principal policy of the Company is to invest in a portfolio of unlisted
companies that are expected to grow organically or by acquisition.
- The Company's maximum exposure to unlisted investments is therefore 100% of
gross assets. At the time of acquisition no single investment will exceed a
maximum of 15% of gross assets.
- The Company may invest in assets other than companies where the Manager
believes that its expertise in private equity investment can be profitably
applied.
- The Company may invest in unlisted funds, whether managed by the Company's
Manager or not, up to a maximum at the time of acquisition of 15% of gross
assets.
- The Company may invest in other listed investment companies, including
investment trusts, up to a maximum at the time of acquisition of 15% of gross
assets.
- The Company invests its liquid funds in government or corporate securities,
or in bank deposits, in each case with an investment grade rating, or in
managed funds with a similar investment policy.
Range and diversification
- The Company invests primarily in companies whose operations are
headquartered or substantially based in or which serve markets in Europe.
- The Company invests in companies operating in a range of countries, but
there is no policy of making allocations to specific countries or markets.
- The Company invests across a range of sectors, but there is no policy of
making allocations to sectors.
Gearing
- Underlying investments or funds are typically leveraged to enhance value
creation, but it is impractical to set a maximum for such gearing.
- The Company may over-commit to invest in underlying assets in order to
maintain the proportion of gross assets that are invested at any time.
- The Company may borrow against its portfolio.
Hedging
- The Company may use derivatives to hedge its exposure to interest rates,
currencies, equity markets or specific investments.
Borrowing facility
The Company had no borrowing facility at the end of the year. The Board
regularly reviews cash flow and the use of gearing.
Performance
In the year to 31 December 2008, the Company's net asset value per share
(including dividends re-invested) increased by 0.5%. This compares with a
decrease in the FTSE All-Share Index (total return) of 29.9%. The Company's
ordinary share price decreased by 12.0% on a total return basis.
Results and dividend
The total return for the Company is set out in the Income Statement above. The
total return for the year, after taxation, was GBP1,574,000 (2007: GBP55,208,000)
of which GBP7,445,000 is revenue return (2007: GBP7,446,000).
The Directors recommend the payment of a final dividend of 25.0p per ordinary
share for the year ended 31 December 2008 (2007: 25.0p). Subject to approval
of this dividend at the forthcoming Annual General Meeting (AGM), it will be
paid on 11 May 2009 to shareholders on the register of members at the close of
business on 3 April 2009.
Key performance indicators
Each Board meeting conducts a detailed review of the portfolio and reviews a
number of indices and ratios to understand the impact on the Company's
performance of the individual portfolio holdings. The KPIs used to measure the
progress and performance of the Company over time and which are comparable to
those reported by other investment trusts include net asset value per share,
share price, earnings per share, average monthly trading volumes and cash
flow. The Directors recognise that it is in the long-term interest of
shareholders that shares do not trade at a significant discount to the
prevailing NAV and they also monitor the Company's discount or premium
regularly.
Principal risks
The key risks faced by the Company are set out below. The Board regularly
reviews and agrees policies for managing each risk, as summarised below.
Performance risk
The Board is responsible for deciding the investment strategy to fulfil the
Company's objectives and for monitoring the performance of the Manager. An
inappropriate strategy may lead to poor performance. To manage this risk the
Manager provides an explanation of all investment decisions and the rationale
for the composition of the investment portfolio. The Manager monitors and
maintains an adequate spread of investments, based on the diversification
requirements inherent in the Company's investment policy, in order to minimise
the risks associated with particular countries or factors specific to
particular sectors.
Income/dividend risk
The amount of dividends and future dividend levels will depend on the income
received and receivable from the Company's underlying portfolio.
Regulatory risk
The Company operates as an investment trust in accordance with section 842 of
ICTA. As such, the Company is exempt from corporation tax on any capital gains
realised from the sale of its investments. The Manager monitors investment
movements, the level and type of forecast income and expenditure, and the
amount of retained income (if any) to ensure that the provisions of section
842 are not breached. The results are reported to the Board at each meeting.
Operational risk
In common with most other investment trust companies, the Company has no
employees. The Company therefore relies upon the services provided by third
parties and is dependent upon the control systems of the Manager and the
Company's other service providers. The security, for example, of the Company's
assets, dealing procedures, accounting records and maintenance of regulatory
and legal requirements, depend on the effective operation of these systems.
These are regularly tested and monitored and an internal control report, which
includes an assessment of risks together with procedures to mitigate such
risks, is prepared by the Manager and reviewed by the Audit and Valuation
Committee twice a year.
Financial risks
The Company's investment activities expose it to a variety of financial risks
that include valuation risk, liquidity risk, market price risk, foreign
exchange risk and interest rate risk. Further details are disclosed in Note 15
to the Financial Statements, together with a summary of the policies for
managing these risks.
Liquidity risk
The Company, by the very nature of its investment objective, invests in
unquoted companies, and liquidity in their securities can be constrained,
potentially making the investments difficult to realise at, or near, the
Directors' published valuation at any one point in time. The Manager has
regard to the liquidity of the portfolio when making investment decisions, and
the Company manages its liquid resources to ensure sufficient cash is
available to meet its contractual commitments.
Social, environmental and ethical policy
HgCapital Trust seeks to invest in companies that are well managed, with high
standards of corporate governance. The Directors believe this creates the
proper conditions to enhance long-term shareholder value. In aiming to achieve
a high level of corporate performance, the Company adopts a positive approach
to corporate governance and engagement with companies.
Socially responsible investment
The Company has committed to invest in the Hg Renewable Power Partners fund,
which the Board believes offers a profitable route for the Company to
participate in efforts to combat climate change.
The Manager addresses other investment opportunities on a sector basis. The
sectors chosen do not generally raise ethical issues.
FUTURE PROSPECTS
The Board's main focus is on the achievement of capital growth and the future
of the Company is dependent upon the success of the investment strategy. The
outlook for the Company is discussed in the Chairman's statement and the
Manager's report at the beginning of this document.
DERIVATIVE TRANSACTIONS
On 27 August 2008, the Manager, on behalf of the Company entered into a EUR25
million forward foreign exchange contract and a EUR12.5 million option contract
with a duration of 4 years, in order to partially offset the effect of
sterling exchange rate movements on euro currency exposure. The contract
secures a sterling/euro exchange rate of EUR1.24 on the forward contact and a
strike price of EUR1.40 on the option contract compared with an average exchange
rate of EUR1.42 at which euro-denominated assets in HgCapital 5 were acquired.
The current write-down of GBP2.8 million is more than offset by unrealised
foreign exchange gains on the euro-denominated assets.
The contract requires no cash funding until expiry, by which time the Manager
expects to be in a position to cover any funding requirement from euro
proceeds from the sale of investments. Further details are provided in Note 15
of the financial statements.
DIRECTORS
The Directors in office during the year and at the date of this report are
listed in the Board of Directors section above.
The Board undertook a review of committee membership and the resultant
position is detailed in the Corporate Governance and Directors'
responsibilities report below.
The Board has noted the recommendation in the AIC Code of Corporate Governance
that non-executive directors serving longer than nine years since election
should be subject to annual re-election. Accordingly, Mr Amies and Mr Gale
will offer themselves for re-election at this year's Annual General Meeting.
The Board has considered the retiring Directors' performance as part of its
evaluation process and recommends that both be proposed for re-election, based
on the following assessment of their contribution to the operation of the
Board.
Mr Tim Amies
A chartered accountant, he has over thirty years' experience in financial
markets. The Board believes that Mr Amies will continue to be an effective
member of the Board and Audit & Valuation Committee, and his re-election is
recommended to shareholders.
Mr Peter Gale
Peter Gale is professionally responsible for the selection and monitoring of a
wide range of private equity managers on behalf of a major institutional
investor. His extensive knowledge of the private equity industry and of trends
in this market is of great value to the Board, especially when considering the
strategy of the Company and of the Manager. The Board recommends that Mr P
Gale be re-elected.
None of the Directors has a service contract with the Company.
Directors' interests
The interests of those persons who were Directors at the end of the year in
the ordinary shares of the Company were as follows (all holdings are
beneficial unless stated otherwise):
31 December 1 January 2008
2008
T J Amies 15,000 30,000
P L Brooke 2,000 2,000
R J Brooman 1,200 1,200
P Gale 9,996 9,996
R P Mountford 10,289 10,000
A H Murison 8,000 1,281
Substantial interests
The Company is aware that the following shareholders had an interest in 3% or
more of the voting rights of the Company on 18 March 2009, being the latest
practical date prior to publication of this report:
Ordinary % of voting
shares rights
Oxfordshire County Council 1,782,500 7.1
Hg Investment Managers Ltd* 1,725,803 6.9
East Riding Pension Fund 1,300,000 5.2
The Scottish Investment Trust plc 1,200,000 4.8
Hg Pooled Management Ltd** 1,019,619 4.0
Legal & General Investment Managers Ltd 1,003,177 4.0
* Held by HgCapital staff
** Managed on behalf of RW SPLP LP, where the beneficial owner is the BBC
Pension Trust Limited Fund RW
The Company is not aware that any other shareholder had an interest of 3% or
more in the Company's ordinary share capital as at 18 March 2009.
Investment management and administration
Throughout 2008, the Company's assets were managed by Hg Pooled Management Ltd
(HgCapital), under management arrangements implemented in May 2003. A
management fee of 1.5% per annum of NAV, excluding investments in other
collective investment funds, was payable to HgCapital.
The Company's shareholders agreed, at an Extraordinary General Meeting held on
14 January 2009, to amend these arrangements. Consequently, with effect from 1
January 2009, the Company will pay no management fees to HgCapital in respect
of its holdings of cash or liquid assets. The Company will continue to pay a
fee of 1.5% per annum on the current value of its existing private equity
portfolio, excluding investments in other collective investment funds.
The Company will also pay charges in respect of its commitment to invest
alongside HgCapital's new buyout fund, HgCapital 6. These charges will be the
same as those payable by all institutional investors in the new fund. A charge
of 1.75% per annum will be payable on the commitment during the investment
period of the fund, which is expected to last for between four and five years.
The charge will then reduce to 1.5% per annum calculated on the basis of the
original cost of the assets, less the original cost of any assets which have
been realised or written off.
The incentive scheme introduced in May 2003 will remain in place for the
Company's existing investments. Under this scheme, the Manager is entitled to
a carried interest, in which the executives of HgCapital participate, in order
to provide an incentive to deliver good performance. This arrangement allows
for a carried interest of 20% of the excess annual growth in average NAV over
an 8% preferred return, based on a three-year rolling average NAV, calculated
half-yearly and aggregated with any dividends declared by the Company in
respect of that financial year. In respect of the Company's investment
alongside HgCapital 6, this incentive scheme will be replaced by a carried
interest arrangement identical to that which applies to all other investors in
HgCapital 6. Under this arrangement, HgCapital will receive 20% of aggregate
profits after the repayment to the Company of its invested capital and the
payment of a preferred return thereon of 8% per annum.
HgCapital has been appointed as Secretary and administrator of the Company for
a fee equal to 0.1% of NAV. Hg Investment Managers Limited is the custodian of
the Company's assets and its fees and expenses are met by HgCapital.
VAT recovery
In common with other investment trusts, the Company has, through its Manager
pursued the recovery of VAT previously charged on investment management fees.
During the year the Company received GBP1,167,000; further recoveries are being
sought as described in Note 19 to the Financial Statements above.
Continued appointment of the Manager
The Board has concluded that it is in shareholders' interests that HgCapital
should continue as Manager of the Company on the existing terms. The Board
considers the arrangements for the provision of investment management and
other services to the Company on an ongoing basis and a formal review is
conducted annually.
As part of this review, the Board considered the quality and continuity of the
Manager's personnel, succession planning, sector and geographic coverage,
investment process and the results achieved to date. The Board also considered
the Manager's ongoing commitment to the promotion of the Company's shares.
The principal contents of the agreement with the Manager have been set out in
the previous section. Having considered the terms of this agreement and those
of other private equity investment trust companies, the Board considers that
the terms of the agreement represent an appropriate balance between cost and
incentivisation of the Manager.
Voting policy
The exercise of voting rights attached to the Company's portfolio has been
delegated to HgCapital, whose policy is to participate actively as a
shareholder, reviewing each case separately.
Donations
The Company made no political or charitable donations during the period.
Payment of suppliers
It is the policy of the Company to pay for the supply of goods and services
within the terms agreed with the supplier.
The Company has no trade creditors.
Annual General Meeting
The AGM of the Company, which will include a presentation by the Manager, will
be held at the offices of HgCapital, 2 More London Riverside, London SE1 2AP
on Thursday 7 May 2009 at 12 noon. Light refreshments will be available at the
conclusion of the AGM. Notice of the Annual General Meeting is given in the
Annual Report and Accounts.
Authority to buy back shares
The Directors' authority to buy back shares was renewed at last year's AGM and
will expire on 24 October 2009. Although no shares were bought back during the
year, the Directors are proposing to renew the authority at the forthcoming
AGM, and are seeking authority to purchase up to 3,775,494 ordinary shares
(being 14.99% of the issued share capital) as set out in Resolution 8. This
authority, unless renewed, will expire on 6 November 2010. The Authority will
be used where the Directors consider it to be in the best interest of
shareholders.
Purchases of ordinary shares will only be made through the market for cash at
prices below the prevailing NAV per ordinary share. Under the Listing Rules of
the Financial Services Authority, the maximum price that can be paid is 5%
above the average of the market values of the ordinary shares for the five
business days before the purchase is made. The minimum price that may be paid
will be 25.0p per share (being the nominal value of a share). Any shares
purchased under this authority will be cancelled. In making purchases, the
Company will deal only with member firms of the London Stock Exchange.
Authority of Directors to allot shares
Resolutions 9 and 10 to be proposed at the AGM are similar to the authorities
given to the Directors at last year's AGM. By law, directors are not permitted
to allot new shares (or to grant rights over shares) unless authorised to do
so by shareholders.
Resolution 9 gives the Directors, for the period until the conclusion of the
AGM in 2010, the necessary authority to allot securities up to an aggregate
nominal amount of GBP314,825, which is equivalent to 1,259,300 ordinary shares
of 25.0p each, or approximately 5% of the issued ordinary share capital. There
are no shares held in treasury. The Authority will be used where the Directors
consider it to be in the best interest of shareholders.
Resolution 10 empowers the Directors until the conclusion of the AGM in 2010
or, if earlier, the expiry of fifteen months from the date on which the
resolution is passed, to allot securities for cash, otherwise than to existing
shareholders on a pro rata basis, up to an aggregate nominal amount of
GBP314,825, which is equivalent to 1,259,300 ordinary shares or approximately 5%
of the issued share capital. In no circumstances would the Directors use this
authority to dilute the interests of existing shareholders by issuing shares
at a price that is less than the NAV attributable to the shares at the time of
issue.
Auditor
Each of the persons who is a director at the date of approval of this report
confirms that:
- so far as the director is aware, there is no relevant audit information of
which the Company's auditors are unaware; and
- the director has taken all the steps that he ought to have taken as a
director in order to make himself aware of any relevant audit information and
to establish that the Company's auditors are aware of that information.
This confirmation is given and should be interpreted in accordance with the
provisions of s234ZA of the Companies Act 1985.
During the year Ernst & Young LLP resigned as auditor to the Company. On 2
December 2008, Deloitte LLP was appointed as independent auditor and has
indicated its willingness to continue in office. Resolutions proposing its
re-appointment and authorising the Directors to determine its remuneration
will be submitted at the AGM.
By order of the Board
Hg Pooled Management Ltd
Secretary
19 March 2009
Corporate governance and Directors' responsibilities
The Board of HgCapital Trust plc has considered the principles and
recommendations of the AIC Code of Corporate Governance ("AIC Code") by
reference to the AIC Corporate Governance Guide for Investment Companies ("AIC
Guide"). The AIC Code, as explained by the AIC Guide, addresses all the
principles set out in Section 1 of the Combined Code, as well as setting out
additional principles and recommendations on issues that are of specific
relevance to HgCapital Trust plc.
The Board considers that reporting against the principles and recommendations
of the AICâEUR^Code, and by any reference to the AIC Guide (which incorporates
the Combined Code), will provide better information to shareholders.
The Company has complied with the recommendations of the AIC Code and the
relevant provisions of Section 1 of the Combined Code, except as set out
below.
The Combined Code includes provisions relating to:
- the role of the chief executive
- executive directors' remuneration
- the need for an internal audit function.
For the reasons set out in the AIC Guide, and in the preamble to the Combined
Code, the Board considers these provisions are not relevant to the position of
HgCapital Trust plc, being an externally managed investment company. The
Company has therefore not reported further in respect of these provisions.
The Board
The Board consists of six non-executive Directors, all of whom the Company
deems to be independent of the Company's Manager.
In the Board's opinion Mr Amies continues to qualify as an independent
Director despite his length of service, as he is independent of the Manager
and free from any business or other relationships that could materially
interfere with the exercise of his judgment.
For the same reasons and having considered Mr Gale's position as a senior
employee of Gartmore, a shareholder of the Company, the Board considers him to
be independent. Both Mr Gale and Mr Brooke are non-executive directors of
Lothbury Property Trust plc. Their fellow Directors consider that each
demonstrates that they are independent in character and judgment and that this
common directorship of another company does not impede their independence.
The Directors' biographies above highlight their wide range of business
experience. The Board does not feel that it would be appropriate to adopt a
policy on tenure whereby Directors serve for a limited period, as, with a
private equity portfolio, historical knowledge is useful. The structure of the
Board is such that it is considered unnecessary to identify a senior
non-executive Director other than the Deputy Chairman.
The Board is supplied in a timely manner with information in a form and of a
quality appropriate to enable it to discharge its duties. Strategic issues and
all operational matters of a material nature are determined by the Board.
The Directors retire by rotation at every third Annual General Meeting (AGM),
except for Directors who have served for longer than nine years, who stand for
re-election annually. Any Directors appointed to the Board since the previous
AGM also retire and stand for election.
Messers Gale and Amies were both appointed on 1 May 1991. The AIC Code of
Corporate Governance recommends that any non-executive director serving for
longer than nine years be subject to annual re-election. Therefore Mr Gale and
Mr Amies will stand for annual re-election at this year's AGM. The Board's
recommendations that both should be re-elected are set out in the Directors
section of the Directors' Report above.
The Board meets at least five times a year and there is regular contact with
HgCapital between these meetings. The Directors also have access to the advice
and services of the Secretary, who is responsible to the Board for ensuring
that Board procedures are followed and that applicable rules and regulations
are complied with. Where necessary, in the furtherance of their duties, the
Directors may seek independent professional advice at the expense of the
Company.
The Board has responsibility for ensuring that the Company keeps proper
accounting records which disclose with reasonable accuracy at any time the
financial position of the Company and enable it to ensure that the financial
statements comply with UK Company Law. The Board is also responsible for
safeguarding the assets of the Company and for taking reasonable steps for the
prevention and detection of fraud and other irregularities. Finally, it is the
Board's responsibility to present a balanced and understandable assessment of
the Company's position in all public communications.
The Company has maintained appropriate directors' liability insurance cover
throughout the year.
Board and Audit and Valuation Committee
Directors' evaluation
The Board formally reviews its performance on a regular basis, together with
that of the Audit and Valuation Committee.
An appraisal system has been agreed by the Board for evaluation on a regular
basis of the Board, the Audit and Valuation Committee, the Chairman and the
individual Directors. The evaluation for the year ended 31 December 2008 has
been carried out. This took the form of a detailed questionnaire followed by
discussions to identify how the effectiveness of the Board's activities,
including its committees, policies or processes might be improved. The results
of the evaluation process were presented to and discussed by the Board and it
was agreed that the current composition of the Board and its committees
reflects a suitable mix of skills and experience and that the Board was
functioning effectively. The Board is satisfied that collectively the members
of the Audit and Valuation Committee have a sufficient level of recent and
relevant financial experience.
Delegation of responsibilities
The Board has delegated a number of areas of responsibility, outlined below.
Management and administration
The management of the investment portfolio has been delegated to HgCapital.
HgCapital has also been appointed as Secretary and administrator to the
Company: certain of its corporate secretarial duties have been delegated to
Capita Company Secretarial Services Limited (CCSS) and certain of its fund
administration duties have been delegated to Capita Financial Group Limited
(CFG) who have teams specialising in providing secretarial and accounting
services to investment trusts. Custody and settlement services are undertaken
by Hg Investment Managers Limited (authorised and regulated by the Financial
Services Authority), which in turn has appointed The Bank of New York Europe
Limited (BNYE), a subsidiary of The Bank of New York Mellon, as sub-custodian.
The Board has delegated the exercise of voting rights attaching to the
securities held in the portfolio to HgCapital. HgCapital does not operate a
fixed policy when voting but reviews each case separately.
All other matters are reserved for the approval of the Board.
Board committees
All the Directors of the Company are non-executive and serve on the Nomination
Committee, which meets when necessary to select and propose suitable
candidates for appointment. When looking for a new Director, the Board
assesses the skills of the Board as a whole, to identify any areas that need
strengthening. External search consultants are also used.
Separate Audit & Valuation and Management Engagement Committees have been
established. These committees consist of all six Directors, each of whom has
no previous or current connection with the investment management of the
Company other than in their capacity as a Director of the Company.
The Audit and Valuation Committee, which has written terms of reference
detailing its scope and duties and which meets at least four times per year,
examines the effectiveness of the control systems. All the Directors of the
Company, including the Chairman, are members of this committee to enable them
to be kept fully informed of any issues that may arise and to participate
fully in discussions on portfolio valuation. The committee reviews the
half-yearly and annual reports and also receives information from the relevant
corporate audit and compliance departments. The committee reviews the scope,
results, cost effectiveness, independence and objectivity of the external
auditor. Semi-annually, at each balance sheet date, the committee reviews in
detail the valuation of the unquoted investments within the portfolio.
Non-audit fees of GBP5,000 were paid to Ernst & Young LLP for reviewing the
half-yearly financial statements. During their appointment, Ernst & Young LLP
provided details of any other relationship with the Manager and confirmed to
the Board that in its opinion it was independent of the Manager. Non-audit
fees of GBP4,000 were paid to Deloitte LLP for a review of the new HgCapital 6
commitment terms. Deloitte LLP has provided details of any other relationship
with the Manager and confirmed to the Board that in its opinion it is
independent of the Manager. Based on the review of non-audit services provided
by Ernst & Young LLP and Deloitte LLP, the Board has concluded that both firms
are independent of the Company.
The Board has considered the independence and objectivity of the Auditors and
has conducted a review of non-audit services which the Auditors have provided.
It is satisfied in these respects that Deloitte LLP has fulfilled its
obligations to the Company and its Shareholders.
The external auditor is invited to attend the Audit and Valuation Committee
meeting at which the annual accounts are considered and has the opportunity to
meet with the committee without representatives of the Manager being present.
The Management Engagement Committee, which also has written terms of reference
detailing its scope and duties, regularly reviews the terms of the investment
management and administration contracts.
The Directors' Remuneration Committee, which is made up of all the Directors,
meets when necessary to consider any change to the Directors' remuneration.
The remuneration of the Chairman and Directors is reviewed against the fees
paid to directors of other specialist investment trusts and investment trusts
of a comparable size, as well as taking account of published data.
The terms of reference of all the committees are available on request and will
also be available at each Annual General Meeting.
Membership of the Board Committees
Mr Mountford is Chairman of the Directors' Remuneration Committee, the
Management Engagement Committee and the Nomination Committee. Mr Brooman is
the Chairman of the Audit & Valuation Committee.
The composition of the Board's standing committees was considered at the
year-end and it was felt appropriate that every non-executive Director should
be a member of all committees.
With a relatively small Board, it was deemed both proportionate and practical
to involve all the independent Directors in each committee.
Attendance record
The following table summarises the Directors' attendance at meetings of the
Board and Audit and Valuation Committee, held in the year to 31 December 2008,
compared with the number they were eligible to attend.
Director Number of meetings
attended/eligible to attend
Board A&VC
Tim Amies 6/6 5/5
Piers Brooke 6/6 4/5
Richard Brooman 6/6 5/5
Peter Gale 5/6 4/5
Roger Mountford 6/6 5/5
Andrew Murison 6/6 5/5
The Management Engagement Committee and Remuneration Committee met on at least
one occasion during the year.
Internal controls
The Board is responsible for the internal controls of the Company and for
reviewing their effectiveness, for ensuring that financial information
published or used within the business is reliable, and for regularly
monitoring compliance with regulations governing the operation of investment
trusts. The Board continually reviews the effectiveness of the internal
control system. The processes indicated below have been put in place to ensure
that the Company fully complied with the AIC Code of Corporate Governance for
the year ended 31 December 2008 and up to the date of this report, and will
continue to do so for the year ending 31 December 2009.
As part of the Board's responsibility for the internal control system, an
ongoing process has been established in conjunction with HgCapital, CCSS and
CFG for identifying, evaluating and managing the Company's significant risks.
Controls relating to the risks identified, covering financial, operational,
compliance and risk management, are embedded in the operations of HgCapital,
CCSS, CFG, BNYE and other outsourced service providers. There is a monitoring
and reporting process to review controls put in place to track risks identified,
carried out by the compliance function within HgCapital and the
auditors of the other organisations.This accords with the guidance in the
Turnbull Report. HgCapital, CCSS and CFG report to the Company on their review
of internal controls (which for HgCapital includes checks on the
sub-custodian) formally on a semi-annual basis and orally at each Board and
Audit and Valuation Committee meeting.
The Board has taken actions to remedy any significant failings or weaknesses
identified.
The Board reviews the `whistle blowing' procedures of HgCapital, CCSS and CFG
to ensure that the concerns of their staff may be raised in a confidential
manner.
The Company does not have its own internal audit function, as all the
administration is delegated to the Manager. This matter is kept under annual
review.
HgCapital prepares cash flow forecasts and management accounts, which allow
the Board to assess the Company's activities and to review its performance.
The Board and HgCapital have agreed clearly-defined investment criteria,
specified levels of authority and exposure limits. Reports on these issues,
including performance statistics and investment valuations, are submitted to
the Board at each meeting. HgCapital's evaluation procedure and financial
analysis of the companies within the portfolio include detailed research and
appraisal, and also take into account environmental policies and other
business issues. The Board recognises that these control systems can only be
designed to manage, rather than eliminate the risk of failure to achieve
business objectives and to provide reasonable, but not absolute, assurance
against material misstatement or loss. It relies on the operating controls
established by HgCapital, CCSS, CFG and BNYE.
Financial statements
The Board is required to ensure that the financial statements give a true and
fair view of the affairs of the Company as at the end of each financial year
and of the profit of the Company for that period.
The Board considers that in preparing the financial statements the Company has
used appropriate accounting policies, consistently applied (except where
disclosed) and supported by reasonable and prudent judgments and estimates and
that all accounting standards that it considers to be applicable have been
followed.
Relations with shareholders
All shareholders have the opportunity to attend and vote at the AGM. The
notice of the AGM which is sent out at least twenty working days in advance
sets out the business of the meeting and any item not of an entirely routine
nature is explained in the Directors' report above. Separate resolutions are
proposed for substantive issues.
Both the Chairman of the Board and the Chairman of the Audit and Valuation
Committee, together with representatives of HgCapital, are available to answer
shareholders' questions at the AGM. Proxy voting figures are announced to
shareholders at the AGM.
HgCapital holds regular discussions with major shareholders, the feedback from
which is greatly valued by the Board. In addition, the Chairman and Directors
are available to enter into dialogue and correspondence with shareholders
regarding the progress and performance of the Company. A section of the Annual
Report and Accounts entitled "Shareholder Information" provides information
useful to shareholders.
Report of the independent auditor to the members of HgCapital Trust plc
We have audited the financial statements of HgCapital Trust plc for the year
ended 31 December 2008 which comprise the Income statement, the Balance sheet,
the Cash flow statement, the Reconciliation of movements in shareholders'
funds and the related notes 1 to 20. These financial statements have been
prepared under the accounting policies set out therein. We have also audited
the information in the Directors' remuneration report that is described as
having been audited.
This report is made solely to the Company's members, as a body, in accordance
with Section 235 of the Companies Act 1985. Our audit work has been undertaken
so that we might state to the Company's members those matters we are required
to state to them in an auditors' report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company's members as a body, for our
audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and auditors
The Directors' responsibilities for preparing the annual report, the
Directors' remuneration report and the financial statements in accordance with
applicable United Kingdom law and Accounting Standards (United Kingdom
Generally Accepted Accounting Practice) are set out in the Statement of
Directors' responsibilities.
Our responsibility is to audit the financial statements and the part of the
Directors' remuneration report to be audited in accordance with relevant legal
and regulatory requirements and International Standards on Auditing (UK and
Ireland).
We report to you our opinion as to whether the financial statements give a
true and fair view and whether the financial statements and the part of the
Directors' remuneration report to be audited have been properly prepared in
accordance with the Companies Act 1985. We also report to you whether in our
opinion the information given in the Directors' report is consistent with the
financial statements.
In addition we report to you if, in our opinion, the Company has not kept
proper accounting records, if we have not received all the information and
explanations we require for our audit, or if information specified by law
regarding directors' remuneration and other transactions is not disclosed.
We review whether the Corporate governance statement reflects the Company's
compliance with the nine provisions of the 2006 Combined Code specified for
our review by the Listing Rules of the Financial Services Authority, and we
report if it does not. We are not required to consider whether the Board's
statements on internal control cover all risks and controls, or form an
opinion on the effectiveness of the Company's corporate governance procedures
or its risk and control procedures.
We read other information contained in the annual report and consider whether
it is consistent with the audited financial statements. The other information
comprises only the Investment objective, Financial highlights, Chairman's
statement, Ten year track record, Investing in private equity, Manager's
strategy, Manager's tactics, Manager's review, Investments, Realisations,
Review of principal investments, Renewable energy, Investment portfolio, Top
ten investment listing, Analysis of registered shareholders, Board of
Directors, Directors' report and business review, Statement of Directors'
responsibilities, the unaudited part of the Directors' remuneration report,
Corporate governance and Directors' responsibilities, Shareholder information,
Glossary, Notice of Annual General Meeting and Management and administration.
We consider the implications for our report if we become aware of any apparent
misstatements or material inconsistencies with the financial statements. Our
responsibilities do not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing
(UK and Ireland) issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the amounts and
disclosures in the financial statements and the part of the Directors'
remuneration report to be audited. It also includes an assessment of the
significant estimates and judgments made by the Directors in the preparation
of the financial statements, and of whether the accounting policies are
appropriate to the Company's circumstances, consistently applied and
adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
and the part of the Directors' remuneration report to be audited are free from
material misstatement, whether caused by fraud or other irregularity or error.
In forming our opinion we also evaluated the overall adequacy of the
presentation of information in the financial statements and the part of the
Directors' remuneration report to be audited.
Opinion
In our opinion:
- the financial statements give a true and fair view, in accordance with
United Kingdom Generally Accepted Accounting Practice, of the state of the
Company's affairs as at 31 December 2008 and of its profit for the year then
ended;
- the financial statements and the part of the Directors' Remuneration Report
to be audited have been properly prepared in accordance with the Companies Act
1985; and
- the information given in the Directors' report is consistent with the
financial statements.
Deloitte LLP
Chartered Accountant and Registered Auditors
London
19 March 2009
Management and administration
HgCapital Trust plc
2 More London Riverside
London
SE1 2AP
www.hgcapitaltrust.com
Registered office
(Registered in England
No. 1525583)
2 More London Riverside
London
SE1 2AP
Manager
HgCapital*|
2 More London Riverside
London
SE1 2AP
Telephone: 020 7089 7888
www.hgcapital.com
Secretary and administrator
HgCapital*|
2 More London Riverside
London
SE1 2AP
Telephone: 020 7089 7888
www.hgcapital.com
Stockbroker
Winterflood Securities*
The Atrium Building
Cannon Bridge
25 Dowgate Hill
London EC4R 2EA
Telephone: 020 7621 0004
www.winsresearch.co.uk
Custodian
Hg Investment Managers Limited*
2 More London Riverside
London
SE1 2AP
Registrar
Computershare Investor Services plc*
The Pavilions
Bridgwater Road
Bristol BS99 6ZY
Telephone: 0870 702 0131
www-uk.computershare.com/investor
Independent auditor
Deloitte LLP
2 New Street Square
London EC4A 3BZ
AIC
Association of Investment Companies
www.theaic.co.uk
LPEQ
Listed Private Equity
www.lpeq.com
HgCapital Trust is a founder member of LPEQ (formerly iPEIT). LPEQ is a group
of private equity investment trusts and similar vehicles listed on the London
Stock Exchange and other major European stock markets, formed to raise
awareness and increase understanding of what listed private equity is and how
it enables all investors - not just institutions - to invest in private
equity.
LPEQ provides information on private equity in general, and the listed sector
in particular, undertaking and publishing research and working to improve
levels of knowledge about the asset class among investors and their advisers.
*Authorised and regulated by the Financial Services Authority.
|HgCapital is the trading name of Hg Pooled Management Limited
In accordance with LR 9.6.3, copies of the above document have today been sent
to the Document Viewing Facility, The Financial Services Authority, 25 The
North Colonnade, London E14 5HS.
END
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