TIDMHGT
HgCapital Trust plc
Private equity investment trust of the year
Investment Week Awards 2005, 2006, 2007, 2008 and 2009
The Directors present the Annual Financial Report of the Company for the year
ended 31 December 2009. The financial information set out below does not
constitute the Company's statutory accounts for the years ended 31 December
2009 or 2008. 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.
Annual report and accounts 31 December 2009
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 2009
+3.6% Positive net asset growth (assuming historic dividends are reinvested)
+30% Increase in share price compared with a 30% increase in the FTSE All-Share
Index
37% Net assets in liquid funds available for deployment
GBP30m Funds deployed during the year including GBP17.2m in two new buyouts and GBP
7.6m invested in renewable energy projects through Hg RPP
+18% Average annual EBITDA growth of our top 10 investments over the last 12
months
+14% Ten year total return per annum versus 2% per annum from the FTSE
All-Share Index
>3.8x Growth in value of shares over 10 years
Chairman's statement
This introductory statement forms part of the Directors' report which continues
later on in this document.
With a strong balance sheet and a solid portfolio that has good prospects for
growth the Company looks forward to acquiring more good businesses at
reasonable prices
The year in review
Following the previous year's dramatic events in financial markets, 2009 was a
quiet year in the private equity sector. A sharp fall in the availability of
bank borrowing, especially of underwritten loans for very large buyouts,
reduced the capacity of most private equity firms to complete acquisitions.
Unless under pressure to realise cash, owners of businesses preferred to defer
planned sales. Market conditions for the sale of private equity investments
were poor, especially for the onward sale of businesses to other private equity
buyers. Furthermore, some private equity houses were severely distracted by
poor performance in their underlying investments leading to the breach of bank
covenants.
Our Manager, HgCapital, had wisely pursued a policy of realising investments
not only to capture strong valuations, but also to be positioned with cash for
reinvestment. Between June 2005 and December 2008 the Company exited 30
investments, receiving proceeds totalling GBP295 million and representing 2.7x
original cost. The last in this round of disposals, the sale of Orbiscom to
MasterCard, was completed in December 2008, returning a multiple of 1.8x
original cost.
The Company made several new investments during the year. The acquisition of
Epyx, the leading private electronic marketplace serving the contract
automobile hire & leasing market was completed in June 2009; this investment
reflected the Manager's special expertise in business services and technology.
The Manager's specialist healthcare team was successful in its recommended
offer for Goldshield Group plc, the listed manufacturer of generic
pharmaceuticals, and completed the transaction in December 2009. In March the
Board was informed by HgCapital that it was taking action following the
discovery of possible under-reporting by Goldshield of past profits, but had no
reason to believe that any adjustment to the book value of this investment was
necessary. Further information is set out on the Goldshield section of the Review
of Principal Buyout Investments below.
The conditions for investment in the renewable energy sector were more
accommodating, with banks continuing to lend on acceptable terms for long-term
infrastructure projects generating stable cash flows; the Company participated
in the acquisition of five solar photovoltaic generating plants in Spain.
Both the Board and the Manager are committed to providing shareholders with the
fullest possible information about the Company and its portfolio. Further
information about all the Company's principal investments can be found in the
Manager's Report and at www.hgcapital.com.
Your Company ended the year with liquid funds of GBP87 million, representing 37%
of net assets, available for deployment. Of this, GBP6.3 million will be
disbursed in payment of the Company's dividend.
Performance record
Net assets Net Revenue
Year attributable to asset Ordinary available Earnings Dividends
ended ordinary value share for ordinary per per
31 shareholders per price Gross shareholders ordinary ordinary
December ordinary revenue share share
share
GBP'000 p p GBP'000 GBP'000 p p
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
2009 236,044 937.2 844.0 9,682*** 7,148 28.4 25.00*
*Interim dividend for the year ended 31 December 2009, declared on 17 February
2010, to be paid on 31 March 2010.
**Change in accounting standards relating to recognition of dividends.
***Gross revenue before General Partner attribution
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 following
the established IPEV guidelines; how the Company applies these guidelines is
described in the Notes to the Financial Statements and the guidelines can be found in full at www.privateequityvaluation.com.
Detailed valuations are prepared by the Manager, using multiples for a range of
selected comparator companies, adjusted to take account of their relevance; the
Board's Audit & Valuation Committee then scrutinises these valuations in
detail, raising questions or calling for further evidence if appropriate,
before the valuations are agreed and adopted by the Board and the Manager. The
Board believes that its valuation process is rigorous, consistently applied and
conforms fully to IPEV guidelines. In particular, historic earnings are used
for valuation purposes when earnings are increasing, while forecast earnings
are used if they are declining. The prudence of the Company's approach to
valuation is shown by its achievement of average proceeds of 1.9x book value on
a total of 30 exits since mid-2005.
I commented in my statement last year that against a background of economic
recession, the sharp fall in equity market ratings and the credit crisis,
valuing private businesses was challenging and valuations must be subject to
material uncertainty and the risk that they may change. The Board strongly
believes in the importance of recognising any fall in value quickly and at that
time sixteen investments were written down in value or written off completely.
As a result, in the valuation at 30 June 2009, only relatively modest
adjustments were needed.
In the valuation at December 2009 a number of buyout investments, led by the
Company's largest holdings Pulse and Visma, have been written up in value.
These revaluations have mostly been driven by improved earnings, reflecting
strong revenue growth despite the recession.
The analysis of movements in net asset value below sets out an analysis
attributing changes in value of the portfolio held at year-end. In aggregate,
in the first half of the year values were largely unchanged before the effects
of foreign exchange; in the second half the main driver of improving values was
growth in earnings, delivered through a combination of good sales growth and
early action taken across the portfolio to cut costs.
Performance
As a consequence, the total return (NAV plus dividend) over the whole year was
3.6%, with NAV at year-end of 937.2 pence per share. This compares with a rise
of 30% in the FTSE All-Share Index, reversing the Company's substantial
out-performance of listed equities in the previous year.
At 28 February 2010, after providing for the interim dividend and adjusting for
movements in foreign exchange, listed investments and the sale of Hoseasons,
the NAV was 926.6 pence per share. The sale of Hoseasons was completed in
February 2010, returning a multiple of 2.3x original cost and in excess of 2.0x
the book value as at 31 December 2009.
We have consistently said that we expected an investment in the Company's
shares to reward the long-term investor, and so it has proved. The Company's
portfolio has been managed by the same senior management team since November
1994. Over the 15 year period from 1994 to 31 December 2009 the Company has
delivered growth in Net Asset Value (with dividends reinvested) of 15.4% per
annum. These returns exceed the returns for the FTSE All-Share Index by 7.9%
per annum, compounded over that period. On the basis of the unaudited NAV as at
28 February 2010, GBP1 invested in the Company in December 1994 would now be
worth GBP8.45, compared with GBP2.96 if invested in the FTSE All-Share Index over
the same period.
The Company was chosen, for the fifth consecutive year, as Private Equity
Investment Trust of the Year in the 'Investment Week' awards. The citation for
the award referred to the Company's outstanding long-term performance and its
high standards of governance.
Revenue return was 28.4 pence per share, compared with 29.6 pence in the
previous year. Revenue comprises interest earned on the Company's liquid
assets, gilts and bank deposits, and from interest-bearing securities that make
up a large part of the Company's investment in many buy-outs. The revenue
available for distribution varies each year according to the Company's
liquidity and the structure of the buy-outs held at the time: the Board
recommends a dividend based on the revenue return each year, to maintain its
status as an investment trust. This year the Board has resolved to pay an
interim dividend of 25.0 pence per share (2008: 25.0 pence) and elected to take
advantage of HMRC's new framework by "streaming" income from interest-bearing
investments into dividends that will be taxed in the hands of shareholders as
interest income. This has permitted the Company's dividend to be deducted from
its taxable interest revenue, resulting in both a small increase in NAV at 31
December 2009 and payment of a higher dividend, while some shareholders may
also benefit directly from the interest receipt, depending on their tax status.
Prospects
The market correction of 2008 marked the end of a long and benign period for
investment. The Board and the Manager are united in believing that the
recession of 2009 will be seen as the starting point for a new phase of
investment at more attractive prices. 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, HgCapital 6. The Manager
is in the final stages of its fund-raising programme with aggregate commitments
(including the Company's) exceeding GBP1.88 billion, nearly twice the size of the
Manager's previous fund. The demand from sophisticated institutional investors
to participate in HgCapital 6 indicates confidence, similar to our own, that we
are entering an attractive period for investment in private equity.
Institutional investors are also aware that returns in private equity have
shown a wide dispersion, with many private equity managers delivering
unexciting returns; selection of the right manager is especially important in
private equity.
Whilst awaiting confirmation from the Manager of the final closing commitment,
the Company's commitment to invest alongside HgCapital 6 is in excess of GBP280
million. This is a substantial figure but necessary if the Company is to take
full advantage of the opportunities open to it now. However, I draw your
attention to the unique characteristic of this commitment, namely that in
circumstances where the Company will not have cash to invest it can opt-out of
any investment. This opt-out gives a high level of protection from the
potential effects of over-commitment that have seriously affected some other
private equity investment trusts. The terms of the Company's commitment were
set out in full in a circular to shareholders issued in December 2008.
The investment phase for HgCapital 6 began in 2009 and the Company has already
deployed GBP17 million in the buyouts of Epyx and Goldshield. Investment will
continue over three to four years, as the economy gradually recovers, which
should in turn lead to an improved market for realisations. In addition, the
Manager has advised the Board that it intends to raise a second renewable
energy fund, in which the Board is minded to invest. We believe that over the
long-term the returns from HgCapital's investments in renewables are similar,
on a risk-adjusted basis, to those achieved in its buyouts; and the return
characteristics, through cash distributions as well as capital receipts, suit
the Company as it has a pool of permanent capital. The Manager's second
renewable energy fund will invest over a similar period to HgCapital 6.
Between 2007 and 2009 discounts across all private equity investment trusts
increased substantially; during 2009 these discounts gradually reduced. Shares
in HgCapital Trust have traded at a consistently narrower discount than its
peers. We attribute this to a number of factors: the Manager's outstanding
long-term returns; the transparency of our reporting; a rigorous valuation
process; avoidance of borrowing at company level and of unfunded commitments;
and the Manager's success in realising a substantial part of the portfolio
before the recession set in. These policies have resulted in the Company being
well positioned to take full advantage of the investment opportunities that
this stage in the economic cycle will reveal. Reflecting these opportunities
the Board announced in February that it was considering raising further funds
by way of a placing and offer of new ordinary shares with subscription shares
attached, combined with a bonus issue of subscription shares to existing
shareholders: a further announcement will be made if the Board decides to
proceed.
Roger Mountford
Chairman
4 March 2010
Ten Year Record
Historical total return* performance
One year Three years Five years Seven years Ten years
% p.a. % p.a. % p.a. % p.a. % p.a.
Share price 30.2 7.7 15.8 24.4 14.4
Net asset value 3.6 10.6 16.5 18.2 12.8
FTSE All-Share Index 30.1 (1.3) 6.5 9.3 1.6
FTSE Small Cap Index 54.3 (8.2) 2.7 8.9 1.5
Based on the Company's share price at 31 December 2009 and allowing for
dividends to be reinvested, an investment of GBP1,000 ten years ago would now be
worth GBP3,842
An equivalent FTSE All-Share Index return would be worth GBP1,177
*Total return assumes all dividends have been reinvested.
Investment activity
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Invested 25 20 20 15 22 35 45 50 26 30
Realised (including income) 18 26 27 31 47 52 62 106 92 8
Investing in private equity
Private Equity
Private equity is the term given to the provision of equity and equity type
risk capital to unlisted companies.
It is normally used to finance beneficial change in businesses. The changes
that require equity finance are manifold and ever present. They include a
change in the scale of a business (through fast growth or acquisitions), a
change in ownership, often in conjunction with management (the management
buyout), a change in the strategic direction of a company, a significant change
in the structure and operations of a business or financing the
commercialisation of new technologies.
Healthy economies require constant change in their corporate sector, otherwise
they stultify. Private equity is probably the best form of finance to pay for
this change as it is patient, welcomes considered risk taking, and participates
directly in outcomes.
In return for their investment, private equity investors receive a share of the
equity in the businesses they finance and do so with the objective of making a
significant capital gain over holding periods from three to seven years.
Private equity investors like HgCapital aim to deliver their clients higher
returns than may be obtained from a portfolio of public equity investments over
any rolling period of five to ten years. Attractive returns can be garnered if
the private equity manager exploits the inherent advantages private equity
investors have over investors in public markets.
Investment profile
Private equity investments are less liquid than public equities. To compensate
for this, they offer greater control and more attractive returns.
Individual private equity investments have a risk profile 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 the manager's ability to manage its portfolio
further mitigates risk. Manager selection is a key determinant of returns.
Advantages of the private equity model
Compared with investment in the public markets, a private equity investor has
significant advantages:
* Better governance model
Theory and experience tells us that businesses run by their owners tend to
perform better than those run by salaried agents. In a private equity backed
business almost everybody around the board table and often a high percentage of
managers and staff own shares in the companies they run. In addition, the
private equity managers also own equity in the portfolio companies through
their co-investment obligations and via their carried interest. Accordingly,
interests of all parties are closely aligned and focused on creating value and
realising a substantial capital gain. This is achieved by selecting ambitious
medium to long-term goals and allowing managers to pursue them, free from
short-term distractions that often beset the managers of listed companies.
* Better control
The private equity manager has more control over the method and timing of the
sale of the business than a manager of listed equities. This superior control
also extends to the appointment of management.
* Able to attract the best management talent
Working in a private equity backed business is highly attractive to the best
and most ambitious managers. They will be exposed to capital returns that the
listed companies rarely, if ever, match and are given the challenge and
satisfaction of running their own business.
* Larger universe of opportunities to choose from
The universe of privately owned businesses is much larger than the
publicly-traded one so the investor has greater choice. The choice available to
private equity also includes listed companies which are frequently de-listed
and refinanced with private equity capital.
* Better access presenting the possibility for better assessment
Prior to investing, private equity managers have better access to information,
including detailed market, financial, legal and management due diligence.
Listed Private Equity
Listed Private Equity ('LPEQ') refers to public companies 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 provide the stockholder with an exposure to a
differentiated portfolio of private companies, either directly or via funds.
By buying shares in LPEQ companies, the investor benefits from liquidity while
participating in the potentially superior returns of a private equity
portfolio. In addition, LPEQ companies 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.
For the most comprehensive single source of information on listed private
equity go to www.lpeq.com.
London Stock Exchange-listed private equity investment trusts are supervised by
boards of directors, the majority of whom are independent, in order to
re-enforce the manager's accountability to the shareholders. Provided they meet
certain criteria, investment trusts pay no corporation tax on capital gains but
must distribute most of their net income as dividends in each financial year.
The objective of listed private equity is usually to provide shareholders with
long-term capital appreciation, rather than income.
Each listed company, like each private equity firm, has its own investment
strategy relating to geography, size and type of investment, etc. Listed
private equity companies vary considerably in the number of their own holdings,
ranging from specialist direct investment trusts, with a handful of portfolio
companies in one country, to a fund-of-funds manager with holdings in over 300
private equity funds worldwide.
Listed private equity companies continually invest and reinvest; they have no
fixed lifespan like a limited partnership. Proceeds from the sale of assets are
generally retained for reinvestment, rather than being distributed to
investors, which would trigger taxable gains. This, together with the long-term
horizon of private equity, means that listed private equity is best suited to
long-term holding, rather than frequent trading.
In Europe, there are about 80 investable listed private equity companies, with
market capitalisation of GBP22 billion (EUR25 billion) of which GBP11 billion are
London-listed companies (source: LPX as at end 2009). These listed private
equity companies should not be confused with Venture Capital Trusts (VCTs),
which offer targeted tax advantages to investors, but must follow stringent
regulations as to the size and nature of the companies in which VCTs can
invest. Such companies are generally embryonic businesses.
Advantages of listed private equity
Compared with an investment in a limited partnership with a ten year life, the
normal route to obtaining a diversified exposure to private equity, listed
private equity offers significant advantages:
* Listed private equity offers the opportunity for retail investors as well as
institutions to participate in a diversified portfolio of mainly unlisted
companies for the price of one share, rather than a typical minimum commitment
of over GBP5 million;
* By buying shares in a listed private equity company, the investor has
liquidity in the shares and does not have to make a ten year commitment to a
fund. Accordingly they can trade without requiring the manager's consent and
the need to run private auctions for their interest;
* Listed vehicles handle the cash management and administration, which are
complex for a limited partnership interest. All listed private equity investors
need do is monitor the value of their shareholdings in the quoted vehicle
itself; and
* Capital gains retained within London-listed trusts are not taxed.
The listed sector is diverse, offering a wide range of private equity
investment vehicles adopting different investment strategies and criteria.
The Company
The Company is an investment vehicle with an independent board of directors,
listed on the London Stock Exchange, whose objective is to provide shareholders
with long-term capital appreciation, by investing in all investments managed by
HgCapital alongside HgCapital's institutional funds, on the same economic terms
and on a pro rata basis. This approach provides investors with exposure to a
diverse portfolio of fast growth private companies across Western Europe run by
a well resourced and experienced manager. More recently, the Company and the
Manager have agreed a no cost opt-out which enables it to decline an investment
in HgCapital's latest fund, HgCapital 6, if cash resources are not available.
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.
Manager's strategy
HgCapital provides investors with an exposure to a diversified portfolio of
growing private companies, located in the UK and Continental Europe.
Middle-market focus
* HgCapital focuses on middle-market buyouts with enterprise
values of between GBP50 million and GBP500 million and renewable energy
investments.
* The middle-market offers a high volume of companies with proven
financial performance and defensible market positions.
* These companies are small enough to provide opportunities for
operational improvement, yet large enough to attract quality management and
offer multiple exit options across market cycles.
European focus
* HgCapital focuses its buyout investments in the UK, Germany, Switzerland,
Austria, the Nordic Region and Benelux.
* Our renewable energy investments are focused on proven technologies in the
British Isles and Continental Europe.
* Our activity is directed by specialist sector teams located in London and
Munich who work within a common culture and apply consistent processes.
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. Our objective is to complete the
most attractive investments rather than being limited by a top-down asset
allocation.
* 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, sound operational skills and the allocation of
significant time and resource to every investment.
Sector specialisation - Buyouts
* 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 and associated thematic investment origination and
selection practices aim to optimise relevant deal flow, investment selection
and hence improve returns.
* Dedicated buyout teams cover the healthcare, industrials, business services
and TMT sectors.
Sector specialisation - Renewable power generation
Over the past five years HgCapital has built a specialist team to assemble a
portfolio of electrical power generating assets, located in Western Europe,
using proven renewable energy technologies such as wind and solar. These assets
deliver returns which are uncorrelated with general economic activity and oil
prices.
Active portfolio management
* Our sole objective is to ensure that all businesses in which we invest
maximise their long-term potential and reward all of their stakeholders.
* As a result, HgCapital typically invests as the lead, majority shareholder
and appoints HgCapital executives to the companies' boards to ensure that each
firm applies active, results-oriented corporate governance and that the
interests of the owners and managers are closely aligned.
* Experienced HgCapital professionals work with the management of our portfolio
companies to develop, execute and monitor value enhancement strategies for each
business.
* Accordingly, HgCapital is in a position to review the performance of all of
its investments, quickly identify any issues that demand attention and see that
appropriate action is taken.
Deep resources
* Our practice of employing specialisation - both in investment selection and
management - places significant demands on our time. Accordingly we have built
a deeply resourced business employing over 45 investment professionals
currently managing approximately 22 active buyout investments.
* Investing in businesses, many of which have a global footprint and which are
located across Europe, requires an understanding of local cultures.
Accordingly, our people come from around the globe including ten Western
European countries.
* Our investment professionals have on average 16 years' experience of private
equity.
Manager's review - the market
Buyout volumes fell as vendor and buyer confidence came under strain.
2009 was a year of recession across Europe and North America. The deleveraging
of the financial sector continued apace, with governments resorting to extreme
measures to avoid a depression. Against this background, it is unsurprising
that the profitability of many companies fell, valuation multiples compressed
and M&A activity receded. Accordingly, our investment stance was cautious
during the year and we spent most of our time driving efficiency in our
existing investments and preparing for a gradual up-turn in new deal activity
over the next three to four years by identifying those businesses we wish to
buy.
Economic activity was hit hard in the first half of the year as companies
halted capital expenditure, ran down inventories and cut employment while
consumers increased their savings. Governments injected liquidity and ran
unprecedented deficits to boost activity. This recession has had the greatest
adverse consequences for manufacturers of capital goods, consumer durables and/
or construction-related products. In contrast, those businesses which satisfy
non-discretionary demand continued to grow.
By the fourth quarter it was possible to see revenues stabilise and, in some
cases, increase as customers rebuilt inventories and Asian export markets
picked up. We start 2010 with more evidence that the modest pick up in the
economy is continuing but we need to flag our concern that another downturn,
either triggered by action to prevent the Chinese economy from over heating and
/or by a sovereign debt crisis, could yet happen. Moreover, the huge amount of
debt many countries have incurred has to be serviced and repaid, dampening
growth over the next decade.
For the full year, the value of European buyouts totalled EUR9 billion, down 87%
from EUR69 billion in 2008. In our target segment of deals with a value from GBP
50-500 million, deal volumes fell from EUR35 billion to EUR13 billion. The first
half of the year was particularly quiet but towards the end of the year it
became apparent that distressed vendors were finally taking action to raise
cash by selling non-core assets. Private equity owners have started to test the
market with disposals as a necessary precursor to raising new funds. Some
private vendors were also tempted to sell. Even after public markets rebounded
in the summer some public-to-private activity took place as small cap investors
wanted to raise cash to either redeploy or meet redemptions.
We expect this trend towards higher activity levels in the buyout market to
continue for several reasons. First, it is clear that the pressures on
distressed vendors are mounting. Banks are tightening credit availability
meaning, yet again, that cash is king. Better placed businesses who wish to
restructure their portfolios and sell non-core activities become more confident
that they can secure acceptable valuations often as the market turns so they
will start selling. The banks who are taking control of over-leveraged buyouts
will inevitably look to unload them to free up scarce capital in their already
overstretched balance sheets. Private equity owners have to liquidate their
portfolios at some stage and will sell into any upswing. Finally, we may see a
revival of the privatisation of state-owned assets across Europe as fiscal
imbalances have to be addressed to maintain the confidence of the international
bond markets.
Many people comment on the depressed state of debt markets and the appetite of
banks to lend to our sector. It is true that banks largely withdrew from the
buyout market as the old 'originate and distribute' model stopped working. This
left just a small number of banks serving the middle market. Their appetite to
lend was subdued and the spreads they could charge doubled over pre-crunch
levels. We have maintained good relations with a number of banks, who have had
good experiences in HgCapital sponsored buyouts. As a result we were able to
secure, on acceptable terms, the debt we have needed to complete the two
buyouts financed since January 2009. It is worth noting that, over the past ten
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.
Manager's review - performance & portfolio
Despite a challenging economic environment, trading in the unrealised portfolio
has remained robust.
Buyout investments are held through limited partnerships of which the Company
is the sole limited partner.
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 rose by GBP1.9 million (0.8%) over the year moving
up to GBP236.0 million after a dividend of GBP6.3 million (25p per share) and all
fees and expenses. The unrealised portfolio appreciated in value by GBP5.8
million (2008: GBP35.1 million decline) and realised gains over book value were GBP
0.5 million (2008: GBP35.8 million). Gross revenue was GBP9.7 million (2008: GBP12.1
million). Six investments and the Euro hedge contributed to an unrealised
appreciation (including accrued interest) of GBP33.5 million and eight saw a
depreciation in holding value of GBP19.7 million.
The movement in unrealised holdings is analysed in the table below between
changes in trading results, changes in ratings, movements in net debt levels
for each underlying holding, foreign exchange movements and acquisitions and
disposals.
Analysis of movements in net asset value for the year ended 31 December 2009
GBP'000
Opening net asset value as at 1 January 2009 234,094
Gross revenue 9,682
Priority profit share to General Partners (6,401)
Other expenditure (1,078)
VAT recovery on prior year's management fees 833
Dividend paid (6,297)
Realised proceeds in excess of 31 December 2008 book value (excludes gross 493
revenue)
Net unrealised appreciation of investments 5,780
Carried interest (1,062)
Closing net asset value as at 31 December 2009 236,044
Realised and unrealised movements in investment portfolio (including accrued
interest)
for the year ended 31 December 2009
Net unrealised appreciation/ Realised proceeds in excess of 31
(depreciation) of investments December 2008 book value GBP'm (excludes
GBP'm gross revenue)
Pulse (2)* 14.9 2.6
Visma (1) 11.6 -
SLV (8) 3.1 -
Sporting 1.5 -
Index (6)
Euro Hedge 0.9 -
Americana 0.8 -
(9)
Mondo (5) 0.7 -
Other (0.3) 1.2
SHL (15) (0.9) -
Cornish (1.0) -
(18)
Weston
Presidio (1.1) -
(19)
KVT (1.7) -
Voyage (2.7) -
(13)
Fabory** (3.0) -
Atlas** (4.3) -
Casa Reha (5.0) -
(14)
*Investment name and ranking within top 20 investment portfolio at year-end
**These investments are currently written down to nil in the Company's balance
sheet
2009 was a year of modest gains, healthy dividend and investments made,
reducing liquid funds to nearly GBP88 million.
Net assets grew by GBP1.95 million after the payment of a dividend of GBP6.3
million (25 pence per share). Unrealised gains and accrued interest on loan
stock investments held in portfolio companies contributed GBP15.2 million to the
growth in net assets, realised gains added GBP0.5 million and total expenses,
including carried interest, amounted to GBP7.5 million or 3% of net assets.
As the table above shows, the portfolio's book value rose by GBP38.9 million
during the year. New and follow-on investments, net of the carrying value of
disposals of GBP4.4 million, came to GBP25.4 million. This left unrealised
investments increasing in value by GBP13.5 million (12.4% of opening book value).
The increase in the book value of the investment portfolio was attributed to an
increase in trading profits delivering GBP16.2 million of value, repayment of
debt contributing GBP10.3 million offset by a reduction in ratings or trading
multiples used in our valuations causing a GBP10.5 million reduction in value and
adverse foreign exchange movements costing GBP2.4 million. In short, positive
trading in the portfolio of underlying companies was partially offset by an
adverse movement in ratings and foreign exchange movements.
Clearly economic conditions in 2009 presented problems for many businesses. The
companies that sit in HgCapital's portfolio were no exception. Those businesses
which service markets where demand is largely discretionary suffered most,
experiencing a very sharp and deep decline in sales and even greater pressure
on earnings. Their valuations have accordingly been written down heavily, in
some cases to zero. These businesses are leaders in their market segments and
have strong teams who have taken swift action to restructure costs. We will
continue to work with them with the objective of rebuilding value in the
equity.
In other cases, notably Voyage and Casa Reha, comparable ratings have been
compressed sharply and their enterprise valuations have been reduced, with
gearing amplifying the extent of this decline on the equity valuation and hence
our book values.
However the ten largest buyout investments, which represent 78% of the
portfolio valuation and 49% of year-end net assets, delivered continued growth
in sales (averaging 7%) and even stronger profit growth (18%). These growth
rates will probably compare favourably with the average for all European
companies.
Of course it is true that even for the better performing companies, growth
rates have declined during the year. However, management action to improve
operations across the top ten companies has delivered a respectable increase in
net margins from 18% to 20%.
At the end of 2009, the Company had 37% of its assets in cash and fixed
interest securities while 63% was in unquoted and quoted investments. We remain
liquid and capable of exploiting the attractive opportunities which we believe
will arise over the next 3-4 years. Our concentration on buyouts remains but
our exposure to renewable power generating assets, which we believe offer
attractive returns uncorrelated to overall equity markets, is building steadily
and according to plan.
Analysis of the portfolio by sector shows the importance of
TMT and healthcare investments, which have been chosen for their growth
characteristics and the lower correlation of their profitability to GDP changes
than other sectors. Industrial companies represent a lower percentage of the
portfolio value than was the case 24 months ago, having been the sector most
exposed to the downturn. Our portfolio of business services companies is small
but we expect it will build over the next three years while our legacy
investments in consumer-facing businesses will be reduced as we realise our
holdings.
Geographic distribution by value is roughly equal between the UK and
Continental Europe. We expect the exposure to Continental European companies to
increase over time because we see better value there and have a proven
capability of making good money from investments in Germany, the Nordic Region
and Benelux. It is perhaps worth noting that for many businesses the location
is set by the location of headquarters and that these companies serve global
markets, allowing us to gain an exposure to faster growing economies.
Our distribution of value by year of investment or vintage shows a small 6%
exposure to the over-priced year of 2008. Our investment rate in that year was
low and we have quickly and heavily written down the investments we made in
that year.
Asset class+
Unquoted and quoted 63%
Cash & other assets 37%*
Deal type by value++
Buyout 90%
Renewable energy 8%
Expansion 1%
Fund 1%
Valuation++
Earnings 64%
Cost 15%
Written down 12%
Net assets 9%
Geographic spread by value++
UK 50%
Nordic region 26%
Germany 12%
Europe 8%
Benelux 3%
North America 1%
Sector by value++
TMT 31%
Healthcare 29%
Consumer & Leisure 17%
Industrials 12%
Renewable energy 8%
Services 2%
Funds 1%
Vintage by value++
2009 12%
2008 6%
2007 17%
2006 36%
2005 9%
Pre 2005 20%*
*17% relates to Pulse Staffing Limited
+Percentages are based on net assets
++Percentages are based on fixed assets (excluding hedges) and accrued interest
and are shown by value
The top ten companies within the portfolio have out-performed the UK GDP by
over 4x in 2008, and although the recession slowed down sales growth in 2009,
it did not stop the companies from growing revenues.
The chart below shows the quarterly EBITDA growth of the top ten companies
within the portfolio as well as EBITDA margin over the last two years. This
demonstrates that EBITDA has grown at approximately 1.5-2x revenue growth.
Action taken to restructure businesses during 2009 has positioned the portfolio
well to take full advantage of the improving economic climate.
At 31 December 2009 the average EV/EBITDA multiple used to value the top ten
investments was 7.7x, compared with a FTSE All-Share equivalent of 14.3x.
The weighted average debt/EBITDA multiple for the top ten investments was 3.1x
as at 31 December 2009.
Investments
We were a net buyer in 2009, increasing new investment in companies that can
perform through the downturn.
Buyout investments are held through limited partnerships of which the Company
is the sole limited partner.
Our investment stance has been influenced by our concern that there will be a
second leg to the recession. Accordingly we have little interest in cyclical
stories but are very focused on buying growth companies at valuations below the
long run averages for similar companies. This attitude flows through to the
provision of further capital to our existing portfolio. We have reserved
capital to support them where they wish to expand organically or by acquisition
or, in the right circumstances, where they need to repair balance sheets to
reduce capital gearing.
Acquisition financing remains relatively easy to obtain if the price is right,
the targets are on strategy and management has proven its capability to acquire
and integrate other businesses. Fortunately, the portfolio has many companies
that meet these three criteria and which are buying businesses at good values.
Repairing balance sheets is more challenging and our approach, based on our
experience of every recession since 1978, is to take each case strictly on its
merits as an investment, to recognise the need for companies to make
significant changes to how they operate, to evaluate the capital needs very
carefully and lastly, to price any new capital correctly.
During 2009 HgCapital invested GBP157.9 million on behalf of its clients in
buyout investments, including GBP22.3 million for the Company. HgCapital has been
a net seller of investments over the eight years ending December 2008. In 2009
we increased deployment modestly, investing conservatively in businesses which
are anticipated to perform strongly across economic cycles. During 2009,
HgCapital invested GBP56.2 million in renewable energy investments through the Hg
RPP fund in which the Company's participation was GBP7.6 million.
Deal Cost
Company Sector Activity Type
GBP'000
Goldshield Healthcare Markets pharmaceuticals and Buyout 11,275*
nutraceuticals in the UK
Epyx TMT Electronic marketplace for services Buyout 5,942**
to private car fleets
New investments 17,217
Hg RPP LP Renewable Renewable energy fund Fund 7,578
energy
NOK / GBP Hedge n/a Financial derivative instrument n/a 1,699
SHL Services Psychometric testing and assessment Buyout 1,503
Visma TMT Business application software Buyout 1,341
KVT Industrials Leading distributors of special Buyout 293
fasteners and expanders
Other investments 232
Further investments 12,646
Total investment by 29,863
the Company
*GBP3.3 million has been repaid in January 2010
**GBP4.9 million reduction since June 2009 due to the admission of subsequent
investors to HgCapital 6, resulting in a reduction of the Company's pro-rata shareholding
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 - Buyouts
Goldshield
In December 2009 HgCapital completed the GBP179 million public to private buyout
of Goldshield Group plc in partnership with management. HgCapital's clients
have a 53% stake in the business.
Goldshield is a niche pharmaceutical and consumer health company which is
structured into two main divisions: a pharmaceutical division and a consumer
health division. HgCapital's principal interest is the pharmaceutical division
which engages in the distribution of niche branded original and non-branded
generic medicines, mainly in the UK and Continental Europe.
In the course of the normal review by the Manager of any new investment's
financial reporting systems, evidence was discovered suggesting that Goldshield
may have understated its reported profits over a number of years, whilst it was
a listed company, and prior to the Manager's acquisition.
Current trading is ahead of prior year and at least in line with the Manager's
investment plan. In accordance with our normal and consistent application of
the IPEV guidelines, the Board currently has no reason to believe that any
adjustment to the book value of this investment is necessary.
Epyx
In June 2009, HgCapital completed the GBP96 million buyout of Epyx Limited in
partnership with its management. HgCapital's clients have a 49% stake in this
business but HgCapital has effective control rights over and above its economic
holding. Epyx provides a private electronic marketplace serving the contract
car hire and leasing market. The Epyx electronic trading platform allows both
customers and suppliers to reduce costs and increase efficiency across multiple
business processes such as servicing and disposals. Epyx operates over 50 buyer
schemes, hosts 11,000+ registered suppliers and is the de-facto electronic
market place in the UK for the corporate car fleet users and their suppliers.
Management plan to create value by increasing their share of purse from scheme
members by selling more services and establishing a profitable business in at
least one other European market.
FURTHER INVESTMENTS
SHL
In November 2006 HgCapital completed the GBP100 million buyout of SHL. It
performed well and repaid GBP9 million of our investment ahead of plan. However,
in the second quarter of 2008, revenues fell as customers used up inventory and
cut re-order levels. Management embarked on a significant cost reduction
exercise, taking out annual costs of GBP14 million. This required the investment
of a further GBP12 million in SHL, to pay for one-off costs and give the business
adequate working capital.
By the end of 2009, the restructuring was complete, profits have rebounded and
customer demand has stabilised. The new CEO is modifying SHL's culture,
focusing more on the significant value it delivers to its growing customer
base.
Visma
HgCapital led the GBP382 million public-to-private buyout of Visma in May 2006.
Visma is the Nordic market leader in the provision of accounting software and
related services to over 250,000 SME accounts.
In February 2009, HgCapital invested a further GBP8.3 million in Visma in order
to fund the acquisition of the Finnish accounting services business, Teemuaho.
Visma also continues to make incremental value-enhancing acquisitions, funded
out of cash flow.
Visma continues to pay down debt while growing revenues and EBITDA.
KVT
HgCapital completed the CHF530 million buyout of KVT in 2008. The company
provides specialist expanders and fasteners to manufacturers of machinery.
These products deliver significant cost saving benefits to users and
accordingly KVT takes market share and earns high margins. However our purchase
was poorly timed and in common with other industrial product vendors, KVT's
revenues and profits fell precipitously in 2009. Accordingly we have written
down the investment to nil.
In October 2009 following a covenant breach, HgCapital invested a further GBP2.3
million in KVT in order to secure a lengthy covenant free period and a holiday
on capital repayments. Management was also strengthened by the appointment of a
new CEO and CFO.
NOK / GBP hedge
To create a partial hedge against currency risk in the portfolio, in December
2009 HgCapital acquired two NOK options at a premium of GBP10.5 million, both
with a strike price of NOK10.50 to sterling. These options expire in December
2011 and December 2013.
NEW INVESTMENTS - Renewable Power
Hg Renewable Power Partners
At the beginning of 2009, HgCapital invested EUR36.4 million in Mercurio Solar, a
portfolio of four operational solar photovoltaic projects in Spain with a total
capacity of 35.0MW.
A further EUR7.5 million was invested in Wind Direct Solutia, a 5.0MW two turbine
wind project in Newport, South Wales.
In the second quarter, HgCapital invested EUR12.4 million to acquire the 5.0MW
Bargas Solar PV project to grow our platform in Spain and this was joined in
December by Tinajeros, a 12.0MW operating project in Castilla La Mancha and
Fuente Alamo, an 8.0MW construction project in Murcia, both completing in
January 2010.
In addition, December also saw the acquisition of a 50% interest in Scout Moor,
a 65.0MW wind farm in Lancashire, that also completed in January 2010.
Realisations
Good buying conditions are consistent with bad selling conditions.
During 2009, HgCapital realised total proceeds of GBP37.8 million on behalf of
its clients, including GBP8.3 million for the Company. Realisation activity was
limited to repayments of loan stock, dividend distributions and the release of
escrow accounts from earlier sales.
Cost Proceeds* Cumulative Current
year
Company Sector Exit Route gain/ gain/
GBP'000 GBP'000 (loss)** (loss)***
GBP'000 GBP'000
Loan stock
Pulse Healthcare redemption, interest - 5,757 5,757 2,616
& dividend
Hirschmann Industrials Release of escrow - 1,251 1,251 432
Other 866 1,313 447 824
Partial 866 8,321 7,455 3,872
realisations
Total 866 8,321 7,455 3,872
realisations
*Includes gross revenue received during the year
**Realised proceeds including gross revenue received, in excess of historic
cost
***Realised proceeds including gross revenue received, in excess of 31 December
2008 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
Pulse
Pulse is one of the UK's leading providers of labour management, recruitment
and temporary labour in the healthcare sector. Its revival continued in 2009
and cash generating was strong. Proceeds of GBP6.1 million were realised for
HgCapital clients from a redemption of loan stock and interest in July 2009 and
a dividend of GBP4 million was received in December 2009.
Hirschmann
Hirschmann is a supplier of electronics equipment, components and related
accessories. The initial investment in the business by HgCapital was made in
March 2004 and the business was successfully exited in March 2007 returning
over 5.0x the original investment. Remaining funds held in escrow were released
in May 2009, returning a further GBP7.4 million to HgCapital clients, of which
the Company's share was GBP1.3 million.
Other realisations
Final proceeds of GBP1.4 million were received by HgCapital clients following the
sale of Schenck Process SA in August 2007 and further small realisations were
received relating to Newchurch which was sold to Tribal plc, in exchange for
cash proceeds of GBP0.2 million and shares in Tribal plc, currently valued at GBP
0.1 million.
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 other related
services to small and medium-sized enterprises in the Nordic region.
* The company provides solutions for financial, procurement, HR and other back
office processes to a customer base of over 200,000 companies.
Why did we invest?
* 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.
How do we intend to create value?
* Grow through acquisition and integration of smaller competitors across the
Nordics and Benelux.
* Grow organically by selling new services /products.
* Improve EBITDA margins to industry standard levels through process change.
What has been achieved?
Initiatives: Supported management in making and integrating 16 bolt-on
acquisitions to date. Implemented operational improvements driving margin
expansion from 14% to 20% since our investment.
How is it performing?
Current trading: Performance in the year remained strong, with significant
growth in both sales and EBITDA.
How will we crystalise value?
An IPO is planned for 2011.
Company's Investment - VISMA
Year of Residual Unrealised Accrued Total Valuation
Sector Location investment cost GBP value GBP'000 interest GBP value GBP methodology
'000 '000 '000
TMT Nordic 2006 14,609 25,069 2,660 27,729 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 a market leader in the placement of doctors, allied health
professionals and nurses into flexible and permanent roles in the UK and
abroad. The company also has a growing presence in the scientific, social care
and qualified social work markets.
Why did we invest?
* Pulse is one of the top two players in the UK healthcare staffing sector. It
benefits from a diversified revenue base covering all disciplines to both NHS
Trusts and to the private sector.
* We believe that growth is possible through the further penetration of
Pulse's target sectors.
* Industry-leading management team, with a proven track record of value
creation.
* A low entry price and these strong features encouraged us to accept the
risks posed by the policy choices of central government, an ever present
feature of serving the NHS.
How do we intend to create value?
Management's plan is simply to use surplus cash flow to return capital, pay
dividends and to grow organically by building private care revenues.
What has been achieved?
* NHS-derived profit stands at 50% compared to 65% at the beginning of 2007.
New service offerings, established in the past three years, now represent 37%
of revenues and 51% of profit.
* Management has been strengthened and morale improved. The firm was voted
'Staffing Agency of the Year' in 2009.
How is it performing?
Since HgCapital took over this investment, EBITDA has risen from GBP1 million to
GBP13.5 million on sales of GBP164 million (unaudited).
How will we crystalise value?
An IPO is being considered for 2010.
Company's Investment - Pulse
Year of Residual Unrealised Accrued Total Valuation
Sector Location investment cost value interest value methodology
GBP'000 GBP'000 GBP'000 GBP'000
Healthcare UK 1999 6,131 24,597 - 24,597 Earnings-based
3 Goldshield www.goldshield-pharmaceuticals.com
Date Invested: December 2009
Original Enterprise Value: GBP179 million
Total HgCapital Clients' Equity: 53%
Business description
- Goldshield is a profitable niche pharmaceutical company with a small
consumer health division.
- The pharmaceutical division sells mature branded products and niche
generics, typically re-formulating them to extend their lives. It is primarily
focused on serving the UK, where demand for its products benefits from attempts
to reduce prescription costs.
- The consumer health division sells a range of weight management and consumer
health products.
Why did we invest?
- The niche pharma business has a good record of organic growth and prospects
are sound.
- It benefits from having a lean operating model which delivers attractive
margins and strong cash conversion. We believe that surplus cash can be used to
acquire new products and to finance in-licensing deals that will extend the
product portfolio and deliver continued growth
How do we intend to create value?
- Simplify activities by withdrawing from unprofitable activities.
- Acquire / in-licence more products in the pharmaceutical business.
What has been achieved?
The post-acquisition plan focused on Goldshield's financial reporting and on
continuing to streamline the business and its supply chain. In the course of
this review, HgCapital discovered evidence suggesting that Goldshield may have
understated its reported profits over a number of years, prior to the
acquisition by HgCapital. As explained in the Investments section above,
HgCapital believe no adjustment to the book value of this investment is
necessary.
How is it performing?
Current trading: Goldshield has met all financial targets to date.
How will we crystalise value?
The most likely exit route is a trade sale to a larger pharmaceutical company.
Post-December repayments
Following a return of cash in January, the current cost and valuation of this
investment is GBP7.9 million, representing 3.4% of the Company's net assets as at
31 December 2009.
Company's Investment - Goldshield
Year of Residual Unrealised Accrued Total Valuation
Sector Location investment cost value interest value methodology
GBP'000 GBP'000 GBP'000 GBP'000
Healthcare UK 2009 11,275 11,275 24 11,299 Cost
4 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.
- Mondo is a longstanding and trusted supplier of talc for paper producers in
the Nordic region and Northwestern Europe. Mondo's high quality products also
hold a strong market position in the paint, plastic, food, cosmetics and
ceramics industries where Mondo's quality, reliability of supply and technical
support are pivotal to its success.
Why did we invest?
- Mondo's core customer base offers long-term demand.
The product is a critical but relatively low cost technical component of its
customers' manufacturing processes.
- Due to the specific chemical characteristics of talc, there exists an
opportunity to push into other high margin applications and increase the size
of the non-paper business.
- Opportunity for margin improvement through changes in processes.
How do we intend to create value?
Grow sales in higher margin applications, reduce costs through better
procurement and process and enter new expanding BRIC geographies through
acquisition and joint ventures.
What has been achieved?
Increasing sales in higher margin, non-paper applications, the significant
process improvements, switching of milling operations from oil to electricity,
and expanding alongside our customers to serve their global needs.
How is it performing?
Strong performance through the recession with margins holding up due to strict
cost control and operational improvements.
How will we crystalise value?
Mondo's business and financial characteristics make it an attractive target for
both private equity and trade buyers.
Company's Investment - Mondo
Year of Residual Unrealised Accrued Total Valuation
Sector Location investment cost value interest value methodology
GBP'000 GBP'000 GBP'000 GBP'000
Industrials Nordic 2007 7,004 8,091 2,343 10,434 Earnings-based
region
5 Sporting Index www.sportingindex.com
Date Invested: November 2005
Original Enterprise Value: GBP73 million
Total HgCapital Clients' Equity: 70%
Business description
Sporting Index ('SPIN') is the largest sports spread betting firm in the world.
It offers more markets, in larger size than its competitors, serving a niche
market, which is currently largely limited to the UK. It also uses its
unrivalled pricing ability to offer other betting firms "in running" prices on
a range of sports, thereby helping them serve their fastest growing market
segment.
Why did we invest?
The core business is robust, cash generative and provides a base from which to
expand the group by launching new products and services and attacking new
geographies.
How do we intend to create value?
- Develop new distribution channels for SPIN's spread betting product through
the sale of pricing to fixed-odds bookmakers, lottery operators and online
casinos.
- Expand SPIN's proprietary trading capability via betting exchanges.
- Develop its online marketing abilities and customer database to increase
retention and usage.
What has been achieved?
- Four accounts for SPIN's pricing service have been won and a strong pipeline
built.
- A new IT platform under development will deliver significant productivity
improvements.
How is it performing?
In spite of the downturn that has adversely affected SPIN's customer base;
sales and profit are level with last year as it wins share from smaller
competitors.
How will we crystalise value?
The company will be positioned for a sale to an international gaming firm or
system provider.
Company's Investment - Sporting Index
Year of Residual Unrealised Accrued Total Valuation
Sector Location investment cost value interest value methodology
GBP'000 GBP'000 GBP'000 GBP'000
Consumer
& UK 2005 7,186 4,405 3,616 8,021 Earnings-based
Leisure
6 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 low price classic toy figurines, such as
farm and wildlife animals, historical characters and The Smurfs.
- It has international distribution in over 30 countries with market leading
positions in Germany, the UK, France and a growing presence in the USA.
Why did we invest?
- Schleich's figurines are attractive to retailers, given their low
seasonality, high sales and attractive margins.
- The company benefits from relatively high barriers to entry given its wide
product range, brand, established retailer network and a high quality, low cost
supply base.
- Revenue growth is supported by continual innovation in the product range.
How do we intend to create value?
- Plan: Drive sales growth organically in existing markets and through
international expansion. Penetrate large key accounts. Capture margin
improvement through increased scale.
- Initiatives: Revised in-store displays and pricing structure; positioned
manufacturing and logistics for future growth.
What has been achieved?
Schleich has rolled out 8,000 metres of new shelf space, introduced a new
pricing policy and acquired major key accounts, including ELC, Edeka and Toys
'R' Us.
How is it performing?
Current trading: Continued growth in both revenues and EBITDA during the year
despite the impact of the financial crisis. North America sales grew at 8% on a
constant currency basis as per December 2009.
How will we crystalise value?
Several multi-national toy makers represent natural trade buyers; stable
profits and risk profile could also support an IPO or a secondary buyout.
Company's Investment - Schleich
Year of Residual Unrealised Accrued Total Valuation
Sector Location investment cost value interest value methodology
GBP'000 GBP'000 GBP'000 GBP'000
Consumer
& Germany 2006 4,634 6,413 1,581 7,994 Earnings-based
Leisure
7 SLV www.slv.com
Date Invested: August 2007
Original Enterprise Value: EUR280 million
Total HgCapital Clients' Equity: 65%
Business description
- SLV is a fast growing German designer and supplier of decorative and
technical lighting products and systems.
- The company has established a competitive business model focused on the B2B
market with sales made via catalogues, backed by a well-invested global
logistics function, best-in-class service levels and a highly competitive
pricing strategy.
Why did we invest?
SLV's fast, profitable growth, strong cash flow and competitive business model
give it the clear potential to increase market share in Germany, to grow
strongly in other European countries and to enter other markets.
How do we intend to create value?
Our plan is to grow sales and gain market share in existing European markets,
professionalise co-operation with partners, enter new markets and reduce
leverage quickly.
What has been achieved?
- Strengthened management team.
- Developed US market entry strategy and implementation plan.
- Redefined relationship with partners and added new partners in Europe to
support growth.
How is it performing?
Current trading: In spite of a declining market, SLV managed to grow sales and
profits in 2009 and thereby gained significant market share. EBITDA has
improved significantly since we acquired the business and cash flow generation
has been ahead of plan.
How will we crystalise value?
SLV has the size, growth and potential to make a viable IPO candidate. It is
also an attractive target for both private equity and trade buyers.
Company's Investment - SLV
Year of Residual Unrealised Accrued Total Valuation
Sector Location investment cost value interest value methodology
GBP'000 GBP'000 GBP'000 GBP'000
Industrials Germany 2007 5,962 5,307 1,639 6,946 Earnings-based
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, designing and marketing the Bench
casual clothing brand targeted at the youth market.
- The company achieves UK-wide distribution through multiple UK retailers as
well as its own small UK retail presence. It has entered the German market
successfully, employing a wholesale distribution strategy.
Why did we invest?
- Bench is a strong brand that can be developed internationally.
- A high margin, cash generative business underpinned by a strong supply chain
based in China.
How do we intend to create value?
- Management's plan is to build Bench's brand equity and value by growing
revenues internationally, both in Germany and in less established territories,
whilst at the same time refreshing its credentials in the mature UK market.
- Success in both areas will increase profits as well as improve the rating we
can attain on exit.
What has been achieved?
- Substantially strengthened the management team; improved management
reporting and business planning.
- Entered Germany and built a small but highly profitable and growing
business.
How is it performing?
The UK market has been tough but this has been compensated for by German
performance. Higher investment in brand building being covered by increased
sales leaving profits broadly flat year-on-year.
How will we crystalise value?
Interest is anticipated from trade buyers or private equity.
Company's Investment - Americana
Year of Residual Unrealised Accrued Total Valuation
Sector Location investment cost value interest value methodology
GBP'000 GBP'000 GBP'000 GBP'000
Consumer
& UK 2007 4,625 4,483 2,068 6,551 Earnings-based
Leisure
9 Epyx www.epyx.co.uk
Date Invested: June 2009
Original Enterprise Value: GBP96 million
Total HgCapital Clients' Equity: 49%
Business description
- Epyx provides a private electronic marketplace serving the vehicle contract
hire and leasing market. The Epyx service enables both customers and suppliers
to reduce costs and increase efficiency across multiple business processes.
- The Epyx marketplace connects over 60 of the UK's largest vehicle fleet
operators and 9,000+ suppliers of critical services to these fleets. The
company is very well established in the UK and is now investing in European
growth.
Why did we invest?
- We like companies which possess resilient growth characteristics and high
levels of revenue visibility, which operate in business-critical niche markets,
and which have the potential to generate high cashflow margins. Epyx fits this
model perfectly.
- The company's applications are embedded in its customers' business
processes, offering a low-cost and highly reliable method of administering the
servicing, relicensing, hire and disposal of fleet vehicles.
- The company uses its high level of cash generation to continually invest in
growth. Epyx provides its customers with a stream of innovative products, and
is further investing in development and sales to win new business in Europe.
How do we intend to create value?
Value is being created by selling more services to the existing customer base
and by expanding internationally.
What has been achieved?
A strategic business review has been implemented to decide on core focus areas
in a highly selective manner. We are working to identify and approach potential
acquisition targets.
How is it performing?
The company completed 2009 on plan. Sales grew at 15% and EBITDA grew at 25% on
an organic basis. The outlook for 2010 remains sound.
How will we crystalise value?
Epyx will make a viable IPO candidate but it will also attract significant
trade interest.
Company's Investment - Epyx
Year of Residual Unrealised Accrued Total Valuation
Sector Location investment cost value interest value methodology
GBP'000 GBP'000 GBP'000 GBP'000
TMT UK 2009 5,942 5,942 - 5,942 Cost
10 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 40,000 customers,
with focus on industries with "high cost of supplier failure" (e.g. oil & gas,
construction).
Why did we invest?
- 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.
How do we intend to create value?
Plan: Extract more value from existing schemes through product additions, roll
out existing schemes in new geographies and industries and drive margin
expansion.
What has been achieved?
- Implementation of best practice review across business and rolled out across
geographies.
- Strengthened management team
How is it performing?
Current trading: Performance in the first eight months of the year-ending April
2010 was strong with significant growth on prior year in both sales and EBITDA.
The business is forecasting to end the financial year ahead of their original
plan.
How will we crystalise value?
Another attractive IPO candidate or target for a business process outsourcer or
business-to-business exchange.
Company's Investment - Achilles
Year of Residual Unrealised Accrued Total Valuation
Sector Location investment cost value interest value methodology
GBP'000 GBP'000 GBP'000 GBP'000
TMT UK 2008 5,226 5,226 - 5,226 Cost
Renewable energy
Hg Renewable Power Partners LP
In June 2006, the Company made a commitment of EUR21 million to Hg Renewable
Power Partners LP ('RPP 1'), a fund dedicated to investments in renewable power
generation assets in Western Europe.
The Fund's investment strategy is to invest primarily in controlling stakes of
European renewable energy projects using proven technologies, seeking out
superior resource and technologies. HgCapital also invests in project
developers on a selected basis.
At EUR303 million RPP1 is one of the largest funds of its kind in Europe and
today the management team has seven investment professionals with over 55 years
of renewable and conventional energy investment experience between them.
The attractions of the renewable energy market arise from its predictable -
non-GDP-linked - cash flows. Investors enjoy both current income from operating
projects and long-term capital appreciation while demand is expected to grow as
carbon reduction and the security of the primary methods of power supply become
increasingly pressing issues.
As of 31 December 2009, RPP 1 has invested in a total of 19 power plants: eight
wind projects in construction or operation totalling 262.0MW; four biogas
projects in operation totalling 1.4MW, and seven solar photovoltaic plants
totalling 61.0MW.
Overall the Hg Renewable Power Partners' portfolio is performing according to
plan, with construction projects to date completed on time and on budget,
operating assets performing within the expected range and one realisation
completed ahead of original plan. As of 31 December 2009, the fund was 81%
committed.
The bulk of the fund's investments have been in three main platforms: UK
onshore wind, Swedish onshore wind and Spanish photovoltaic. Other investments
have been made in France, Italy and Germany.
Platform: UK Onshore Wind
Tir Mostyn
A 21.3MW wind farm in North Wales that has been in operation for over four
years.
Sorne Wind
A 32.0MW operating wind farm in Donegal, Ireland. On 5 March 2009 the Fund sold
its interests for a gross price of EUR10 million, with net proceeds of EUR9.88
million to the fund. This represents a gross multiple of 2.3x the Fund's
investment and an IRR of 43%.
RidgeWind
A UK wind farm developer with more than 250.0MW of wind farms in development,
including two projects totalling 54.0MW that have secured planning permission
and the 16.0MW Bagmoor project in Lincolnshire, which entered full operation
one month early, on 31 July 2009.
Scout Moor
A 65.0MW operating wind farm in Lancashire.
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 two sites in operation with the option
to acquire two further permitted projects.
Platform: Swedish Onshore Wind
Havsnäs
The 95.4MW project will be the largest on-shore wind farm in Sweden. Commercial
operation is expected to commence in April 2010.
Platform: Spanish Photovoltaic
Mercurio Platform
The Mercurio portfolio consists of seven operating Spanish solar photovoltaic
projects totalling 61.0MW. Fuente Alamo, an 8.0MW construction project in
Murcia, is expected to be commissioned in April 2010.
Other Investments
Picardy Wind
A portfolio of two wind farms in Northern France in operation with a total
capacity of 23.5MW. The fund has the right to acquire two further farms which
would double the capacity of this investment.
Rewind
An investment of EUR2.1 million was made in August 2006 to develop a 120.0MW
portfolio of wind farms in Italy. In October 2007 this agreement was terminated
on terms that give the fund the right to success fees or acquisition rights if
the projects achieve planning permission.
Bayern Energie
Four operating anaerobic digestion (biogas) plants with a combined capacity of
1.4MW in Germany. RPP's involvement in the development of further biogas
projects has been terminated with no further costs.
Cost and valuation of the Company's holding
Residual Valuation Valuation
Company Deal type cost
GBP'000 Methodology*
GBP'000
Hg Renewable Power Partners Renewable 11,987 11,620 Fund net
LP energy assets
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 for operating assets and cost for non-operational
assets.
Investment portfolio|
Principal Residual Total Year of Portfolio Cum.
Company Sector location cost valuation investment Value Value
GBP'000 GBP'000 % %
1 VISMA TMT Nordic 14,609 27,729 2006 18.8% 18.8%
Holdings + region
Pulse
2 Staffing Ltd Healthcare UK 6,131 24,597 1999 16.5% 35.3%
+
Hg Renewable Renewable
3 Power energy Europe 11,987 11,620 2006 7.9% 43.2%
Partners LP +
Goldshield
4 Group (Midas Healthcare UK 11,275 11,299 2009 7.7% 50.9%
Equityco) +
Mondo Nordic
5 Minerals Industrials region 7,004 10,434 2007 7.1% 58.0%
Co-op +
Sporting Consumer &
6 Index Group Leisure UK 7,186 8,021 2005 5.4% 63.4%
Ltd +
Schleich Consumer &
7 Luxembourg SA Leisure Germany 4,634 7,994 2006 5.4% 68.8%
+
SLV
8 Electronik Industrials Germany 5,962 6,946 2007 4.7% 73.5%
SARL +
Americana Consumer &
9 International Leisure UK 4,625 6,551 2007 4.4% 77.9%
Holdings Ltd
Epyx
10 Investments TMT UK 5,942 5,942 2009 4.0% 81.9%
Limited +
Achilles
11 Group TMT UK 5,226 5,226 2008 3.5% 85.4%
Holdings
Limited +
12 Elite Holding TMT Benelux 5,749 5,196 2005 3.5% 88.9%
SA +
Voyage Group
13 Ltd (formerly Healthcare UK 8,755 3,736 2006 2.5% 91.4%
Paragon) +
14 Casa Reha Healthcare Germany 8,151 2,872 2008 1.9% 93.3%
SARL +
SHL Group
15 Holdings 1 Services UK 7,991 2,587 2006 1.8% 95.1%
Ltd +
16 Hoseasons Consumer & UK 2,197 2,473 2003 1.7% 96.8%
Group Ltd + Leisure
Software
17 (Cayman), LP TMT UK 530 1,586 2006 1.1% 97.9%
- re Blue
Minerva
Cornish
18 Bakehouse Consumer & UK 4,200 1,221 2007 0.8% 98.7%
Investments Leisure
Ltd +
Weston
19 Presidio Fund North 2,320 1,041 1998 0.7% 99.4%
Capital III, America
LP
Software
20 (Cayman), LP TMT UK 253 735 2007 0.5% 99.9%
- re
Guildford
21 Tiger Capital TMT UK 632 254 2008 0.2% 100.1%
Ltd
22 Doc M SARL Healthcare Germany - 122 2004 0.1% 100.2%
Hirschmann
23 Electronics Industrials Germany - 112 2004 0.1% 100.3%
Holdings SA +
24 Tribal Group Healthcare UK 573 77 2009 0.1% 100.4%
plc
25 ACT Venture Fund Ireland 38 42 1994 - 100.4%
Capital Ltd
26 Atlas Energy Services UK 8,153 - 2007 - 100.4%
Group Ltd +
W.E.T Holding
27 Luxembourg SA Industrials Germany 7,709 - 2003 - 100.4%
+
28 BMFCO UA (t/a Services Benelux 7,474 - 2007 - 100.4%
Fabory) +
29 FTSA Holdings Industrials North 6,813 - 2006 - 100.4%
Ltd + America
King
30 Luxembourg Industrials Switzerland 5,827 - 2008 - 100.4%
Sarl (t/a
KVT)
SGI
31 (Holdings) Services UK 1,669 - 1999 - 100.4%
Ltd +
32 Crest Avenue Fund Ireland 9 - 1992 - 100.4%
Ltd
Wand / North
33 Yankelovich Fund America 5 - 1992 - 100.4%
LP
Addison
34 Luxembourg SA TMT Germany - - 2005 - 100.4%
+
35 Hofmann M.M. Industrials Germany - - 2005 - 100.4%
SA +
Lantor plc
36 (formerly Industrials Ireland - - 1992 - 100.4%
South Wharf
plc)
37 PBR Holding Healthcare Europe - - 2002 - 100.4%
SA +
NOK / GBP n/a n/a 1,699 1,322 2009 0.9% 101.3%
Hedge
Hg5 Euro n/a n/a - (1,917) 2008 (1.3%)100.0%
Hedge
Total All
investments 165,328 147,818* 100.0% 100.0%
(38)
+Through its management of the Company and other funds, HgCapital holds more
than 50% of the voting equity shares
*Comprising investment valuation of GBP127,204,000 and accrued interest of GBP
20,614,000. See notes 9 and 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 and HGT 6 LP. See note 1 of the
financial statements.
Income statement
for the year ended 31 December 2009
Revenue return Capital return Total return
Note 2009 2008 2009 2008 2009 2008
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Gains/(losses) on
investments and government 10 - - 5,211 (4,491) 5,211 (4,491)
securities
Loans to General Partner 3(b) - - ( 4,737) - (4,737) -
Net income 2 8,018 12,068 - - 8,018 12,068
Investment management fee 3(a) 208 (643) 625 (1,930) 833 (2,573)
rebate/(charge)
Other expenses 4(a) (1,078) (932) - - (1,078) (932)
Net return/(deficit) on
ordinary activities before 7,148 10,493 1,099 (6,421) 8,247 4,072
taxation
Taxation on ordinary 6(a) - (3,048) - 550 - (2,498)
activities
Transfer to/(from) reserves 7,148 7,445 1,099 (5,871) 8,247 1,574
Return/(deficit) per 7 28.38p 29.56p 4.36p (23.31p) 32.74p 6.25p
ordinary share
The total return column of this statement represents the Company's income
statement. The supplementary revenue and capital return columns are both
prepared under guidance published by the Association of Investment Companies
('AIC'). All recognised gains and losses are disclosed in the revenue and
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 notes below form part of these financial statements.
Balance sheet
as at 31 December 2009
2009 2008
Note
GBP'000 GBP'000
Fixed assets
Investments held at fair value
Quoted at market valuation 76 -
Unquoted at Directors' valuation 127,128 94,732
9 127,204 94,732
Current assets - amounts receivable after one year
Accrued income on fixed assets 11 20,614 14,196
Current assets - amounts receivable within one year
Debtors 11 4,623 2,062
Government securities 12 84,526 124,014
Cash 13(a) 2,873 5,841
Total current assets 112,636 146,113
Creditors - amounts falling due within one year 14 (3,796) (6,751)
Net current assets 108,840 139,362
Net assets 236,044 234,094
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 17 242,015 238,606
Capital reserve - unrealised 17 (43,253) (40,943)
Revenue reserve 17 15,615 14,764
Total equity shareholders' funds 236,044 234,094
Net asset value per ordinary share 7 937.2p 929.4p
The financial statements were approved and authorised for issue by the Board of
Directors on 4 March 2010 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 2009
2009 2008
Note
GBP'000 GBP'000
Net cash (outflow)/inflow from operating activities 4(b) (3,439) 1,550
Taxation paid (1,149) (5,514)
Capital expenditure and financial investment
Purchase of fixed asset investments (29,863) (25,987)
Proceeds from the sale of fixed asset investments 5,467 86,027
Net cash (outflow)/inflow from capital expenditure and (24,396) 60,040
financial investment
Equity dividends paid 8 (6,297) (6,297)
Net cash (outflow)/inflow before management of liquid (35,281) 49,779
resources
Management of liquid resources
Purchase of government securities 12 (242,339) (185,679)
Sale/redemption of government securities 12 274,652 141,624
Net cash inflow/(outflow) from management of liquid 32,313 (44,055)
resources
(Decrease)/increase in cash in the period 13 (2,968) 5,724
(a)
Reconciliation of movements in shareholders' funds
for the year ended 31 December 2009
Called Share Capital Capital Revenue Total
up share premium redemption reserves reserve
Note capital account reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 31 December 2008 6,296 14,123 1,248 197,663 14,764 234,094
Net return from ordinary - - - 1,099 7,148 8,247
activities
Dividends paid 8 - - - - (6,297) (6,297)
At 31 December 2009 16,17 6,296 14,123 1,248 198,762 15,615 236,044
At 31 December 2007 6,296 14,123 1,248 203,534 13,616 238,817
Net (deficit)/return - - - (5,871) 7,445 1,574
from ordinary activities
Dividends paid 8 - - - - (6,297) (6,297)
At 31 December 2008 16,17 6,296 14,123 1,248 197,663 14,764 234,094
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 Corporation 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
2009. 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 (subsequently revised in January 2009) and January 2009, the
Company entered into two separate partnership agreements with general and
founder partners, at which point investment holding limited partnerships were
established to carry on the business of an investor, with the Company being the
sole limited partner in these entities.
Under the partnership agreements, the Company made capital commitments to HGT
LP and HGT 6 LP ('funds'), with the result that the Company now holds direct
investments in the funds and an indirect investment in the fixed asset
investments that are held by the funds as it is the sole limited partner. The
fixed asset investments on the Balance Sheet (excluding the investment in Hg
Renewable Power Partners LP) and the Investment portfolio present the
underlying investments held by the funds.
The Company also entered into a partnership agreement and made a capital
commitment alongside other limited partners to Hg Renewable Power Partners LP
('HgRPP') and has direct investment in HgRPP, which is shown on the Balance
Sheet and the Investment portfolio.
Priority profit share and carried interest
Under the terms of the limited partnership agreements of funds, the general
partner is entitled to appropriate, as a first charge on the gross income of
the funds, an amount equivalent to its priority profit share ('PPS'). The
funds' income, after payment of the PPS, are distributed to the Company.
In years in which the funds have not yet earned sufficient net income to
satisfy the PPS, the entitlement is carried forward to the following years. The
PPS is payable quarterly in advance, even if insufficient net income has been
earned. Where the cash amount paid exceeds the net income, an interest free
loan is advanced to the general partner by the funds, which is funded via a
loan from the Company. This loan is only recoverable from the general partner
by an appropriation of net income; until net income is earned, no value is
attributed to this loan.
The founder partner is entitled to a carried interest distribution once certain
preferred returns are met. The agreements stipulate that the funds' income and
capital gains, after payment of the carried interest, are distributed to the
Company.
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, to then reflect the income and gains appropriated to the general
and founder partner in satisfaction of the PPS and carried interest, so as to
reflect the Company's proportion of net income and capital gains in the funds
that have been paid to the general and founder partner as its PPS and carried
interest.
The PPS paid from net income is charged to the revenue account in the income
statement, whereas the PPS paid as an interest-free loan, is charged as an
unrealised depreciation to the capital return on the income statement.
The carried interest paid from net income and capital gains are charged to the
revenue and capital account respectively on the income statement.
Investment income and interest receivable
As stated above, all income of HGT LP and HGT 6 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 and HGT 6 LP.
Income from listed 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 on non-equity shares and fixed
income securities are recognised on a time apportionment basis so as to reflect
the effective yield when it is probable that economic benefit will flow to the
Company. Premiums paid or discounts received with the acquisition of
government securities are amortised over the remaining period up to the
maturity date and is recognised in interest income on government securities.
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.
Dividends
Dividend distributions to shareholders are recognised as a liability in the
year that they are approved unconditionally.
Current and other non-current assets
Financial assets and financial liabilities are recognised in the Company's
balance sheet when the Company becomes a party to the contractual provisions of
the instrument. Trade receivables are stated at nominal value. Appropriate
allowances for estimated irrecoverable amounts are recognised in the revenue
return on the income statement.
Government securities are short term investments made in fixed rate government
gilts. Cash comprises current accounts with banks.
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, September 2009 edition. Where
relevant, the Company applies the policies stated below to the investments held
by HGT LP and HGT 6 LP, in order to determine fair value of its investments in
HGT LP and HGT 6 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 the price of recent investment
including fees and transaction costs, unless the prevailing market conditions
and/or trading prospects of the investment result in this price being an
inappropriate measure of fair value and (ii) or (iv) below 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 and an appropriate earnings multiple, 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.
Limited partnership funds: These are investments that are set up by a third
party where the Company does not hold a majority share and are at fair value,
based on the third party manager's valuation after any required adjustment by
the Directors.
Government securities: These are short term investments made in fixed rate
government gilts and are valued at the current fair value of the gilt.
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) attribution of gains to founder partner for carried interest;
(iii) losses on investments within the portfolio where there is little prospect
of realisation or recovering any value;
(iv) realised exchange differences of a capital nature; and
(v) 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;
(ii) increases and decreases in the valuation of the loan to general partner;
and
(iii) unrealised exchange differences of a capital nature.
2. Income
2009 2008
GBP'000 GBP'000
Income from investments held by HGT LP and HGT 6 LP
UK unquoted investment income 2,218 4,387
Foreign unquoted investment income 4,776 2,728
UK dividends 2,278 11
Gilt interest 322 4,704
Priority profit share attribution (1,664) -
7,930 11,830
Other income
Deposit interest 46 119
Other interest income 42 119
88 238
Total net income 8,018 12,068
Total income comprises:
Dividends 2,278 11
Interest 5,740 12,057
8,018 12,068
3. Fees, priority profit share and carried interest paid to Manager
Revenue return Capital return Total return
(a) Investment management fee 2009 2008 2009 2008 2009 2008
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investment management fee - 935 - 2,805 - 3,740
VAT recovered (208) (292) (625) (875) (833) (1,167)
(208) 643 (625) 1,930 (833) 2,573
From 1 January 2009, no further investment management fee is payable as the
Manager is receiving a priority profit share from that date. Details of the
investment management, custodian and administration contracts are disclosed in
the Directors' report.
The investment management fee was levied quarterly in arrears and was charged
75% to capital and 25% to revenue.
For details regarding the VAT recovery, see note 19.
(b) Priority profit share
2009 2008
Priority profit share to General Partners funded by via:
GBP'000 GBP'000
Investment income attribution 1,664 -
Loan to General Partner 4,737 -
Total priority profit share charge 6,401 -
The priority profit share payable on HGT LP and HGT 6 LP rank as a first
appropriation of gross income from investments held in HGT LP and HGT 6 LP
respectively and is deducted prior to such income being attributed to the
Company in its capacity as a Limited Partner. The net income of HGT LP and HGT
6 LP earned during the year, after the deduction of the priority profit share,
is shown on the Income Statement. Details of the contract are disclosed in the
Directors' report below.
4. Other expenses
2009 2008
(a) Operating expenses
GBP'000 GBP'000
Custodian and administration fees 268 260
Directors' remuneration (note 5) 179 170
Current Auditors' remuneration - audit services 58 32
- taxation, 41 6
interim review and other services
Previous Auditors' remuneration - audit services - -
- taxation and - 5
interim review
Legal and other administration costs 532 459
1,078 932
The Company's total expense ratio ('TER'), calculated as total
expenses including the priority profit share but before any recovery 3.18% 1.98%
of VAT on management fees, as a percentage of average net assets was:
(b) Reconciliation of net revenue return before taxation to net cash flow from
operating activities
2009 2008
GBP'000 GBP'000
Net return before taxation 8,247 4,072
Gains on investments held at fair value (1,536) (641)
Priority profit share advanced (4,737) -
Movement on carried interest (4,070) (1,057)
Amortisation of premium on government securities 5,372 -
Increase in prepayments and accrued income (5,101) (1,904)
(Increase)/decrease in debtors (2,708) 5
Increase in creditors 1,115 1,076
Tax on investment income included within gross income (21) (1)
Net cash (outflow)/inflow from operating activities (3,439) 1,550
5. Directors' remuneration
The aggregate remuneration of the Directors for the year to 31 December 2009
was GBP179,000 (2008: GBP170,000). Further information on the Directors'
remuneration is disclosed in the Directors' remuneration report.
6. Taxation on ordinary activities
Revenue return Capital Total return
return
(a) Analysis of charge in the year
2009 2008 2009 2008 2009 2008
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Current tax:
UK corporation tax 1,997 2,988 - (550) 1,997 2,438
Income streaming relief (see note 6 (1,997) - - - (1,997) -
(b))
Prior year adjustment - 60 - - - 60
Total current tax (note 6b) - 3,048 - (550) - 2,498
(b) Factors affecting current tax charge for the year
The tax assessed for the year is lower than the standard rate of corporation
tax in the UK for a large company (28%; 2008: 28.5%).
The differences are explained below:
2009 2008
GBP'000 GBP'000
Net revenue return on ordinary activities before taxation 7,148 10,493
UK corporation tax at 28% thereon (2008: 28.5%) 2,001 2,991
Effects of:
Non taxable UK dividends (179) (3)
Tax relief from interest distribution (1,997) -
Taxable rebate/(deductible expenses) in capital 175 (550)
Tax credit to the capital account - 550
Tax in relation to the prior year - 60
(2,001) 57
Current revenue tax charge for the year (note 6a) - 3,048
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. The Company has elected to designate all of
the interim dividend declared on 17 February 2010 (see note 8) as an interest
distribution to its shareholders. This distribution is treated as a tax
deduction against taxable income and resulting in no corporation tax payable by
the Company at 31 December 2009.
7. Return and net asset value per ordinary share
2009 2008
Revenue and capital returns per share are shown below and
have been calculated using the following:
Net revenue attributable to equity shareholders after GBP7,148,000 GBP7,445,000
taxation
Net capital gains/(deficit) for the year GBP1,099,000 (GBP5,871,000)
Total return GBP8,247,000 GBP1,574,000
Number of shares in issue 25,186,755 25,186,755
Revenue return Capital return Total return
2009 2008 2009 2008 2009 2008
Return/(defecit) per ordinary share 28.38p 29.56p 4.36p (23.31p) 32.74p 6.25p
The net asset value per share of 937.2p (2008: 924.4p) was calculated by
dividing equity shareholders' funds of GBP236,044,000 (2008: GBP234,094,000) by the
number of shares in issue at the year-end of 25,186,755 (2008: 25,186,755).
8. Dividends on ordinary shares
Register Payment 2009 2008
Company date date
GBP'000 GBP'000
Final dividend of 25.0p for the year ended 31 27 March 11 May - 6,297
December 2007 2008 2008
Final dividend of 25.0p for the year ended 31 2 April 11 May 6,297 -
December 2008 2009 2009
6,297 6,297
An interim dividend for the year ended 31 December 2009 of 25.0p per ordinary
share was declared by the Board of Directors on 17 February 2010.
This will be paid on 31 March 2010 to shareholders on the register of members
at the close of business on 26 February 2010. The dividend has not been
included as a liability in these financial statements. A final dividend for the
year ended 31 December 2009 has not been proposed.
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:
2009
GBP'000
Revenue available for distribution by way of dividend for the year 7,148
Proposed interim dividend of 25.0p for the year ended 31 December 2009
(6,297)
(based on 25,186,755 ordinary shares in issue at 31 December 2009)
Undistributed revenue for section 842 purposes * 851
*Undistributed revenue comprises 10.6% of income from qualifying investments of
GBP8,001,000 (including tax credit on UK dividend income) (see note 2).
9. Fixed assets investments
2009 2008
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 Exchanges 76 -
Unquoted investments 98,291 90,413
Investments held by HGT 6 LP
Unquoted investments 17,217 -
Other investments held by the Company
Unquoted investments 11,620 4,319
127,204 94,732
Equity shares 30,774 19,501
Non-equity shares 34,211 7,569
Fixed income securities 62,814 70,463
Derivative instruments (595) (2,801)
127,204 94,732
Quoted Unquoted Total
GBP'000 GBP'000 GBP'000
Opening valuation as at 1 January 2009 - 94,732 94,732
Opening unrealised depreciation - investments - 38,798 38,798
- - 2,801 2,801
financial derivative instruments
Opening book cost as at 1 January 2009 - 136,331
Movements in the year:
Additions at cost - 29,863
Transfer from Unquoted to Quoted 573 (573) -
Disposals - proceeds (34) (5,433)
- realised gains on sales 34 4,567
Closing book cost of investments 573 164,755 165,328
Closing unrealised depreciation - investments (497) (35,333) (35,830)
- - (2,294) (2,294)
financial derivative instruments
Closing valuation of investments as at 31 December 2009 76 127,128 127,204
The investments included in the above, excluding the investment in Hg Renewable
Power Partners LP, are indirectly held by the Company through its investment in
HGT LP and HGT 6 LP, as set out in note 1.
10. Gains/(losses) on investments and government securities
2009 2008
GBP'000 GBP'000
Realised gains on sales 3,846 47,266
Carried interest attribution (1,062) (5,132)
Change in unrealised appreciation/(depreciation) - investments and government 1,920
securities (43,824)
507 (2,801)
- financial derivative instruments
5,211 (4,491)
11. Debtors
2009 2008
GBP'000 GBP'000
Amounts receivable after one year
Accrued income on fixed assets 20,614 14,196
Amounts receivable within one year
Taxation recoverable 1,623 453
Prepayments and other accrued income 292 1,609
Other debtors 2,708 -
4,623 2,062
Total debtors 25,237 16,258
12. Government securities
2009 2008
GBP'000 GBP'000
Investments held at fair value through profit and loss
Opening valuation 124,014 79,723
Purchases at cost 242,339 185,679
Sales and redemptions (274,652) (141,624)
Movement in unrealised capital (losses)/gains (1,048) 799
Amortisation of premium on acquisition (5,372) -
Realised capital losses (755) (563)
Closing valuation 84,526 124,014
13. Movement in net funds
2009 2008
(a) Reconciliation of net cash flow to movement in net funds
GBP'000 GBP'000
Change in net funds (2,968)5,724
Net funds at 1 January 5,841 117
Net funds at 31 December 2,873 5,841
At 1 Jan Cash At 31 Dec
(b) Analysis of changes in net funds 2009 flows 2009
GBP'000 GBP'000 GBP'000
Cash 5,841 (2,968) 2,873
14. Creditors - amounts falling due within one year
2009 2008
GBP'000 GBP'000
Carried interest 1,062 5,132
Premium payable on financial derivative instruments 1,699 -
Sundry creditors 1,035 1,619
3,796 6,751
15. Financial 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 in HgRPP and the underlying
investments in HGT LP and HGT 6 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 indirectly 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 being 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 the investments held through fund partnerships, the majority of which
are unquoted. A breakdown of the Company's portfolio is given in the investment
portfolio table above. In accordance with the Company's accounting policies,
the investments in fund limited partnerships are valued by reference to all
underlying unquoted investments which are valued by the Directors following the
IPEV guidelines. 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.
The Company adopted the amendment to FRS 29, effective 1 January 2009. This
requires the Company to classify fair value measurements using a fair value
hierarchy that reflects the significance of the inputs used in making the
measurements. The fair value hierarchy has the following levels:
- Quoted prices (unadjusted) in active markets for identical assets or
liabilities (level 1).
- Inputs other than quoted prices included within level 1 that are observable
for the asset or liability, either directly (that is, as prices) or indirectly
(that is, derived from prices) (level 2).
- Inputs for the asset or liability that are not based on observable market
data (that is, unobservable inputs) (level 3).
The level in the fair value hierarchy within which the fair value measurement
is categorised in its entirety is determined on the basis of the lowest level
input that is significant to the fair value measurement in its entirety. For
this purpose, the significance of an input is assessed against the fair value
measurement in its entirety. If a fair value measurement uses observable inputs
that require significant adjustment based on unobservable inputs, that
measurement is a level 3 measurement. Assessing the significance of a
particular input to the fair value measurement in its entirety requires
judgement, considering factors specific to the asset or liability.
The determination of what constitutes 'observable' requires significant
judgement by the Company. The Company considers observable data to investments
actively traded in organised financial markets, fair value is generally
determined by reference to Stock Exchange quoted market bid prices at the close
of business on the Balance sheet date, without adjustment for transaction costs
necessary to realise the asset.
The following table analyses, within the fair value hierarchy, the Fund's
financial assets and liabilities (by class) measured at fair value at 31
December 2009
Level Level Level Total
Financial assets 1 2 3
GBP'000 GBP'000 GBP'000 GBP'000
Investments held at fair value through profit and loss
Unquoted Investments - Investment in HGT LP - - 98,367 98,367
- Investment in - - 17,217 17,217
HGT6 LP
- Investment in - - 11,620 11,620
Hg RPP LP
- Government 84,526 - - 84,526
securities
Other assets
Accrued income 260 - 20,614 20,874
Cash 2,873 - - 2,873
87,659 - 147,818 235,477
Investments whose values are based on quoted market prices in active markets,
and therefore classified within level 1, include active listed equities. The
Fund does not adjust the quoted price for these instruments.
Financial instruments that trade in markets that are not considered to be
active but are valued based on quoted market prices, dealer quotations or
alternative pricing sources supported by observable inputs are classified
within level 2. As level 2 investments include positions that are not traded in
active markets and/or are subject to transfer restrictions, valuations may be
adjusted to reflect illiquidity and/or non-transferability, which are generally
based on available market information.
Investments classified within level 3 have significant unobservable inputs.
Level 3 instruments include private equity and corporate debt securities. As
observable prices are not available for these securities, the Fund has used
valuation techniques to derive the fair value. In respect of unquoted
instruments, or where the market for a financial instrument is not active, fair
value is established by using recognised valuation methodologies, in accordance
with International Private Equity and Venture Capital ('IPEV') Valuation
Guidelines. Fair value is the amount for which an asset could be exchanged
between knowledgeable, willing parties in an arm's length transaction.
There were no transfers of assets from level 1 to level 2 or 3, level 2 to
level 1 or 3 and level 3 to level 1 or 2.
The following table presents the movement in level 3 investments for the period
ended 31 December 2009 by class of financial instrument.
Accrued Investments in
income on Limited
Unquoted investments investments Partnerships Total
2009 2009 2009
GBP'000 GBP'000 GBP'000
Opening balance 14,196 94,732 108,928
Purchases - 29,863 29,863
Realisations at 31 December 2008 valuation (230) (4,219) (4,449)
Total gains for the year included in the 6,648 6,828 13,476
income statement
Closing valuation of Level 3 investments 20,614 127,204 147,818
Total gains for the year included in the
income statement for investments held at 6,994 6,828 13,822
the end of the year
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. 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 fund
partnerships that invest in 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
(pence) (pence)
GBP'000 GBP'000
Low
Swiss Franc (1.5303) - - - -
Euro (1.0343) 531 2.1 4,534 18.0
Euro forward contract (1.0343) - - (1,558) (6.2)
Euro option contract (1.0343) - - (109) (0.4)
Norwegian Kroner (8.8758) 136 0.5 1,415 5.6
Norwegian Kroner option contract ( - - (351) (1.4)
8.8758)
US Dollar (1.3669) 379 1.5 1,131 4.5
1,046 4.1 5,062 20.1
High
Swiss Franc (1.8032) - - - -
Euro (1.1834) (295) (1.2) (2,516) (10.0)
Euro forward contract (1.1834) - - 903 3.6
Euro option contract (1.1834) - - 93 0.4
Norwegian Kroner (10.7197) (345) (1.4) (3,598) (14.3)
Norwegian Kroner option contract - - 1,240 4.9
(10.7197)
US Dollar (1.6965) (101) (0.4) (300) (1.2)
(741) (3.0) (4,178) (16.6)
In the opinion of the Directors, the above sensitivity analysis may not be
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:
2009 2008
Currency No. '000 GBP'000 No. '000 GBP'000
Forward foreign currency contracts Euro 25,040 (2,121) 25,040 (3,186)
Currency option NOK 251,448 1,322 - -
Forward foreign currency contracts Euro 25,040 (2,121) 25,040 (3,186)
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. The Company does not include
hedge accounting in the financial statements.
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 in 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 GBP
415,000, 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 may not
be 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 37% 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.
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
share
change GBP'000 (pence)
Unquoted 10% 12,720 50.5
Financial assets of the Company
2009 2008
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 121,711 2,873 26,105 150,689 164,415 5,841 10,672 180,928
Euro 38,238 - 13,179 51,417 31,348 - 7,708 39,056
Euro - - (1,917) (1,917) - - (2,801) (2,801)
hedge
Norwegian - - 27,729 27,729 7,838 - 6,553 14,391
Kroner
Norwegian
Kroner - - 1,322 1,322 - - - -
hedge
Swiss - - - - 1,428 - - 1,428
Franc
US Follar 5,196 - 1,041 6,237 5,211 - 2,137 7,348
Total 165,145 2,873 67,459 235,477 210,240 5,841 24,269 240,350
The fixed rate assets comprise gilts and fixed rate lendings to investee
companies. Fixed rate lendings relating to fixed asset investments have a
weighted average interest rate of 11.1% per annum (2008: 10.9%) and a weighted
average life to maturity of 7.5 years (2008: 7.9 years). Fixed rate assets
comprise a gilt with an interest rate of 4.75% per annum and which matures on 7
June 2010. It is the intention to re-invest the proceeds at maturity in a gilt
with a similar short dated 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 (2008: GBP
nil). The numerical disclosures above exclude short-term debtors and creditors.
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:
2009 2008
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 214,377 212,427
Total capital 236,044 234,094
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
2009 2008
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
premium redemption reserve reserve Revenue
account reserve realised unrealised reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
As at 1 January 2009 14,123 1,248 238,606 (40,943) 14,764
Transfer on disposal of - - 3,353 (3,353) -
investments
Losses on government securities - - (755) (1,048) -
Net gain on sale of fixed asset - - 1,248 - -
investments
Net movement in unrealised
appreciation of fixed asset - - - 6,828 -
investments
Dividends paid - - - - (6,297)
Net revenue for the year after - - - - 7,148
tax
Priority profit share loan to - - - (4,737) -
General Partner
Carried interest to Founder - - (1,062) - -
Partner
Management fee charged to - - 625 - -
capital, after taxation
As at 31 December 2009 14,123 1,248 242,015 (43,253) 15,615
18. Commitment in fund partnerships and contingent liabilities
The Company has committed through HGT 6 LP 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's commitment at the
Manager's current fund size is over GBP280 million. The Company has agreed to pay
fees on its commitment, whereas management fees were previously based on its
NAV. 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. At 31 December 2009, GBP
21,970,000 of this commitment was called.
The Company has also committed through HGT LP to invest GBP120 million alongside
the Manager's previous buyout fund, HgCapital 5. At 31 December 2009, GBP
26,160,000 of this commitment was uncalled.
As at 31 December 2009, investment purchases of GBP5,557,000 (31 December 2008: GBP
14,760,000) had been authorised and contractually committed, including the
uncalled commitment to Hg Renewable Power Partners LP but excluding any
uncalled commitment in HGT LP and HGT 6 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 GBP
6,260,000 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 2008, 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
was able to recover some or all of the VAT previously charged on management
fees. During the current year, the Company, through its previous Manager,
recovered a further GBP833,000 of VAT (see note 3) on management expenses charged
by the previous Manager during the period February 2001 and April 2003 in
addition to the GBP1,167,000 of VAT recovered in the prior year in relation to
VAT charged by the current Manager during the period May 2003 to September
2008. Any further potential recovery relating to these or any earlier periods
is deemed to be immaterial and therefore no recovery of VAT has been recognised
in these financial statements.
20. Post balance sheet event
The Company announced on 17 February 2010 that it is considering raising
additional equity capital by means of a placing and offer of new ordinary
shares, with subscription shares attached. If the Company decides to proceed
with the fundraising, it proposes that there will also be a bonus issue of
subscription shares to existing shareholders.
The proposed fundraising, which will be conditional on shareholder approval, is
subject to prevailing market conditions. If the Company decides to proceed with
the fundraising, it is expected that the issue price for the new ordinary
shares will be at or around the current market price. A further announcement
will be made if the Board decides to proceed.
21. Related party disclosure
HgCapital and its subsidiaries, acting as Manager of the Company through a
management agreement and participating through limited partnership agreements
as General and Founder partners of the fund partnerships that the Company
invests in, are considered to be related parties by virtue of the above
agreements.
During the year, management fees and priority profit shares allocated to
HgCapital were GBP6,401,000 (31 December 2008: GBP3,740,000) and a carried interest
profit attribution of GBP1,062,000 (2008: GBP5,132,000) was made to HgCapital
during the year.
HgCapital also acts as secretary and administrator of the Company. Total fees
for the year amounted to GBP232,000 (2008: GBP249,000).
At 31 December 2009, the amount due to HgCapital relating to above, disclosed
under creditors, was GBP1,942,000 (31 December 2008: GBP6,178,000). Where
applicable, amounts are inclusive of VAT.
Top ten investments
% of
total
share
capital
income held by
accrued the % of
Accounting Turnover PBIT* 2009 company total
date Currency (millions) (millions) GBP'm 2009 2008
Achilles
Group Apr 2009 GBP 31.1 7.3 - 7.9 3.5 4.8
Holdings
Limited
Americana
International Jun 2009 GBP 109.3 20.6 2.1 5.7 4.4 5.3
Holdings
Limited
Epyx Dec 2008 GBP 15.3 6.9 - 6.8 4.0 -
Investments
Goldshield Mar 2009 GBP 96.2 24.2 - 7.4 7.7 -
Group
Mondo
Minerals Dec 2008 EUR 132.1 31.3 2.3 11.4 7.1 9.0
Co-op
Pulse
Staffing Dec 2008 GBP 137.8 6.6 - 41.8 16.5 11.8
Limited
Schleich GmbH Dec 2008 EUR 90.0 26.2 1.6 9.5 5.4 8.0
SLV
Electronik Dec 2008 EUR 104.0 38.9 1.6 8.1 4.7 3.5
SARL
Sporting May 2009 GBP 25.3 8.8 3.6 13.4 5.4 6.1
Index
Visma Dec 2008 NOK 3,045.6 555.4 2.7 8.5 18.8 13.2
Holdings
* Profit Before Interest, Taxation, Depreciation and Amortisation of goodwill
This table does not form part of the financial statements.
Significant equity holdings of indirect investments
The Company had indirect equity holdings of 10% or more of the equity shares in
the companies listed below:
Company Country of Number of equity Effective
incorporation shares equity %
Atlas Energy Group Ltd UK 4,706,450 47.1%
Cornish Bakehouse UK 382,170 38.2%
Investments Ltd
Elite Holding SA (t/a The Netherlands 4,884 15.6%
SiTel)
FTSA Holdings Ltd UK 1,129,812 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.
This table does not form part of the financial statements.
Analysis of registered shareholders
as at 31 December 2009
Number of % of total Number of % of total
By type of holder shares holders
31 Dec 31 Dec 31 Dec 31 Dec
2009 2008 2009 2008
Nominee companies 23,693,682 94.07 91.32 380 58.28 55.10
Direct private 992,180 3.94 4.58 234 35.89 36.89
investors
others 500,893 1.99 4.10 38 5.83 8.01
Total 25,186,755 100.00 100.00 652 100.00 100.00
By size of Number of % of total Number of % of total
holding shares holders
31 Dec 31 Dec 31 Dec 31 Dec
2009 2008 2009 2008
1 - 5,000 597,738 2.37 2.32 445 68.25 68.13
5,001 - 50,000 2,086,558 8.28 8.83 129 19.79 20.72
50,001 - 2,387,224 9.48 7.96 33 5.06 4.24
100,000
over 100,000 20,115,235 79.87 80.89 45 6.90 6.91
Total 25,186,755 100.00 100.00 652 100.00 100.00
This table does not form part of the financial statements.
Governance and other information
Board of Directors
Roger Mountford (Chairman of the Board)
Aged 61, 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. He is Chairman of
The Housing Finance Corporation, the Dover Harbour Board and LSE Enterprise
Limited, the commercial subsidiary of the London School of Economics.
Timothy Amies
Aged 71, 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 69, 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 54, 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, where he
chairs the Audit & Risk Committee. 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 54, 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 and
advisor to the West Midlands Metropolitan Authorities Pension Fund as well as
several other large Pension and Investment Funds.
Andrew Murison
Aged 61, 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 Maven Income and Growth VCT 3 plc
(formerly Aberdeen Growth Opportunities Venture Capital Trust), 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 forms part of this Directors' Report
The Directors present the annual report and financial statements of HgCapital
Trust plc (Reg. No. 1525583) for the year ended 31 December 2009.
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 development and performance of the business for the year ended 31
December 2009 is given in the Chairman's statement, which forms part of this
Directors' report, and in the Manager's report.
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 2008. 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 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. In addition note 15 to the financial
statements includes the Company'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 Company 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 and renewable energy projects
through RPP1.
No material change will be made to the investment policy without shareholder
approval.
The Companys Investment Policy
The principal policy of the Company is to invest in a portfolio of unlisted companies that are expected to grow organically or by acquisition. Any material change to the Company's investment policy will be made only with the approval of Shareholders.
The Company's maximum exposure to unlisted investments is 100 per cent. of gross assets. At the time of acquisition no single investment will exceed a maximum of 15 per cent. 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 HgCapital or not, up to a maximum at the time of acquisition of 15 per cent. 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 per cent. of gross assets, although it has no current intention to do so. 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 has the power to borrow against its portfolio, although it has no current intention of doing so (save in respect of temporary borrowing to cover its short term cash flow needs). The Articles currently restrict the Company's ability to borrow no more than, broadly, twice the aggregate of the Company's paid up share capital and reserves (without shareholder approval).
Hedging
The Company may use derivatives to hedge its exposure to interest rates, currencies, equity markets or specific investments for the purposes of efficient portfolio management.
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 2009, the Company's net asset value per share
(including dividends re-invested) increased by 3.6%. This compares with an
increase in the FTSE All-Share Index (total return) of 30.1%. The Company's
ordinary share price increased by 30.2% on a total return basis.
Results and dividend
The total return for the Company is set out in the Income statement. The total
return for the year, after taxation, was GBP8,247,000 (2008: GBP1,574,000) of which
GBP7,148,000 is revenue return (2008: GBP7,445,000).
The Directors declared an interim dividend of 25.0p per ordinary share for the
year ended 31 December 2009 on 17 February 2010. The interim dividend will be
paid on 31 March 2010 to shareholders on the register of members at the close
of business on 26 February 2010. The interim dividend is an interest
distribution as defined by regulation 5(2) of the Investment Trusts (Dividends)
(Optional Treatment as Interest Distributions) Regulations 2009. No final
dividend is proposed.
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 and in note 15 to the
financial statements. 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/distribution risk
The amount of distributions (including dividends) and future distribution
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,
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 committed to invest in the first Hg Renewable Power Partners fund,
which the Board believes offers a profitable route for the Company to
participate in efforts to combat climate change and is minded to invest in the
Manager's second renewable energy fund.
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.
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 GBP1.9 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 18 of the financial statements.
In December 2009, the Manager, on behalf of the Company, entered into two
option contracts of NOK126 million each expiring in two and four years
respectively which are exercisable at a strike price of NOK10.50 to
sterling. Total premiums of GBP1.7 million were paid. The current write-down of GBP
0.4 million reflects currency changes and other market factors impacting on the
value of the options since the acquisition date.
DIRECTORS
The Directors in office during the year and at the date of this report are
listed above.
Membership of the Board's committees is detailed in the Corporate Governance
Statement, beginning 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 Gale will offer
himself for re-election at this year's Annual General Meeting. Mr Amies will
retire at this year's Annual General Meeting but will not seek re-election. The
Board wishes to convey its gratitude for Mr Amies' considerable contribution to
the Board and the Company.
In accordance with the Articles of Association, Mr Mountford, having most
recently been re-elected in 2007, will retire by rotation at the Company's AGM
and, being eligible, offer himself for re-election. The Board has considered
the retiring Directors' performance as part of its evaluation process and
recommends that both Mr Mountford and Mr Gale be proposed for re-election,
based on the following assessment of their contribution to the operation of the
Board.
Mr Roger Mountford
Mr Mountford has proven business and leadership skills, which he has exercised
over a long career in merchant banking both in the UK and Far East. In
addition, he has excellent knowledge of financial markets and corporate
governance. Through his role as Chairman, Mr Mountford uses this experience and
skill to ensure that the Board discharges its duties in an effective manner at
all times.
Mr Peter Gale
Mr 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.
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 2009 1 January 2009
T J Amies 15,000 15,000
P L Brooke 2,000 2,000
R J Brooman 1,200 1,200
P Gale 9,996 9,996
R P Mountford 10,607 10,289
A H Murison 8,000 8,000
Substantial interests
The Company is aware that the following persons had an interest in 3% or more
of the voting rights of the Company on 2 March 2010, being the latest practical
date prior to publication of this report:
Ordinary shares % of voting rights
Rowan Nominees Ltd*| 3,130,395 12.4
Oxfordshire County Council 1,782,500 7.1
The Co-operative Asset Management 1,290,200 5.1
Legal & General Group Plc 1,009,318 4.0
* Of the shares held by Rowan Nominees Limited 2,110,776 shares (representing
8.4% of the voting rights) are managed by Hg Investment Managers Ltd on behalf
of HgCapital staff, including 1,359,301 shares (representing 5.4% of the voting
rights) managed on behalf of Mr Ian Armitage.
| Of the shares held by Rowan Nominees Limited 1,019,619 shares (representing
4% of the voting rights) are managed by Hg Pooled Management Ltd 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 person had an interest of 3% or more in
the Company's ordinary share capital as at 2 March 2010.
Investment management and administration
Throughout 2009, the Company's assets were managed by Hg Pooled Management Ltd
and HgCapital LLP, both trading as HgCapital, under management arrangements
implemented in January 2009.
Under these arrangements, the Company no longer pays management fees to
HgCapital in respect of its portfolio holdings or cash and liquid assets. The
Company pays a priority profit share of 1.5% per annum on the current value of
its pre-HgCapital 6 private equity portfolio, excluding investments in other
collective investment funds and investments made alongside HgCapital 6 as
described below.
The Company pays a priority profit share in respect of its commitment to invest
alongside HgCapital's new buyout fund, HgCapital 6. This share is the same as
those payable by all institutional investors in the new fund. An amount of
1.75% per annum is payable on the commitment during the investment period of
the fund, which is expected to last for between four and five years. The amount
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 remains in place for the Company's
investments other than those made alongside HgCapital 6. 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. For the Company's investment
alongside HgCapital 6, this incentive scheme has been replaced by a carried
interest arrangement identical to that which applies to all other investors in
HgCapital 6. Under this arrangement, HgCapital receives 20% of aggregate
profits after the repayment to the Company of its invested capital payable once
investors have received a preferred return thereon of 8% per annum.
No priority profit share or carried interest will apply to any investment
alongside HgCapital 6 in excess of the Company's pro-rata commitment.
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 GBP833,000 (2008: GBP1,167,000).
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
Monday 10 May 2010 at 12 noon. Light refreshments will be available at the
conclusion of the AGM. Notice of the AGM is given below.
Authority to buy back shares
The Directors' authority to buy back shares was renewed at last year's AGM and
will expire on 6 November 2010.
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 7. This authority, unless
renewed, will expire at the conclusion of the AGM of 2011. 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 the
higher of: (a) 105% of the average of the middle market quotations of the
Ordinary Shares in the Company for the five business days prior to the date of
the market purchase; and (b) the higher of the price of the last independent
trade and the highest current independent bid (as stipulated by Article 5(1) of
Commission Regulation (EC) No.2233/2003). 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
The authority to allot new shares (or to grant rights over shares) was given to
the Directors at the Company's annual general meeting in 2009. The authority
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. If the Directors
determine it to be appropriate, they have been authorised to allot those
securities, for cash, otherwise than to existing shareholders on a pro rata
basis.
Resolution 8 will, if passed, essentially renew the Directors' general
authority to allot Shares that was given at the Company's AGM in 2009. This
authority to allot is on broadly the same terms as last year's resolution but
the resolution has been updated to reflect that authority is being given under
section 551 of the Companies Act 2006 (rather than section 80 of the Companies
Act 1985) and to reflect a change in the language used in the Companies Act
2006.
In December 2008, the ABI revised its guidelines on directors' authority to
allot shares (in line with the recommendations of the report issued in November
2008 by the Rights Issue Review Group). The guidelines state that ABI members
will permit, and treat as routine, resolutions seeking authority to allot
shares representing up to one-third of a company's issued share capital. In
addition they will treat as routine a request for authority to allot shares
representing an additional one-third of a company's issued share capital
provided that it is only used to allot shares pursuant to a fully pre-emptive
rights issue.
In light of these guidelines, the Board considers it appropriate that the
Directors should be granted ongoing authority to allot shares in the capital of
the Company up to a maximum nominal amount of GBP4,197,792 representing the
guideline limit of approximately 66 per cent of the Company's Ordinary Share
Capital. Of this amount 8,395,585 Ordinary Shares (representing approximately
33 per cent. of the Company's Ordinary Share Capital), can only be allotted
pursuant to a fully pre-emptive rights issue. The power will last until the
conclusion of the AGM in 2011 or, if earlier, 1 July 2011.
Resolution 9 will give the Directors authority to allot shares in the capital
of the Company pursuant to the authority granted under Resolution 8 for cash
without complying with the pre-emption rights in the Companies Act 2006 in
certain circumstances.
In the light of the ABI guidelines referred to above, the authority referred to
above will permit the Directors to allot:
(a) Shares up to a nominal amount of GBP4,197,792 (representing two-thirds of the
Company's Existing Ordinary Share Capital) on an offer to Shareholders on a
pre-emptive basis. However unless the Shares are allotted pursuant to a rights
issue (rather than an open offer), the Directors may only allot shares up to a
nominal amount of GBP2,098,896 (representing one-third of the Company's Existing
Ordinary Share Capital) (in each case subject to any adjustments, such as for
fractional entitlements and Overseas Shareholders, as the Directors see fit);
and
(b) otherwise than in connection with an offer to existing Shareholders, Shares
up to a maximum nominal value of GBP629,668, representing approximately 10 per
cent. of the Existing Ordinary Share Capital, at a price not less than the Net
Asset Value per Ordinary Share as at the most recent practicable date chosen
for such purposes by the Directors.
The terms of Resolution 9 are broadly the same as the Board's existing
authority, save that the amount of Shares that the Directors may issue on a
non-pre-emptive basis has been increased from 5 per cent. of the issued share
capital to 10 per cent. of the Company's Enlarged Issued Ordinary Share Capital
or Existing Ordinary Share Capital. The Directors consider that the additional
flexibility that this affords the Company is appropriate and intend to seek
similar authorities at the Company's future annual general meetings on Ordinary
Share Capital.
Notice Period for General Meetings
The provisions in the Companies Act 2006 permitting companies, subject to the
terms of their articles of association, to call general meetings other than
annual general meetings on a minimum notice period of 14 days were amended with
effect from 3 August 2009 by the Shareholders' Rights Regulations. One of the
amendments increased the minimum notice period for listed company general
meetings to 21 clear days, but with an ability for companies to reduce this
period back to 14 days (other than for annual general meetings) provided that
two conditions are met:
(i) that the Company offers facilities for shareholders to vote by
electronic means; and
(ii) that there is an annual resolution of shareholders approving the
reduction in the minimum notice period from 21 clear days to 14 clear days.
The Board is therefore proposing Resolution 10 as a special resolution to
approve 14 clear days as the minimum period of notice for all general meetings
of the Company other than annual general meetings. The approval will be
effective until the Company's next Annual General Meeting, when it is intended
that renewal will be sought.
Section 992 Companies Act 2006
The following information is disclosed in accordance with Section 992 of the
Companies Act
- As at 31 December 2009 the Company had an issued share capital of GBP
6,296,689, comprising 25,186,755 ordinary shares of 25p each, carrying one vote
each.
- Details of the substantial shareholders in the Company are listed above.
- The rules concerning the appointment and replacement of Directors are
contained in the Company's Articles of Association and are discussed below.
- The giving of powers to issue or buy back the Company's shares requires a
special resolution to be passed by shareholders. The Board's current powers to
buy back shares are set out above.
- There are: no restrictions concerning the transfer of securities in the
Company; no special rights with regard to control attached to securities; no
restrictions on voting rights; no agreements between holders of securities
regarding their transfer known to the Company; and no agreements which the
Company is party to that might affect its control following a successful
takeover bid.
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 Section 418 of the Companies Act 2006.
Deloitte LLP has indicated its willingness to continue in office as Auditor and
a resolution proposing its re-appointment and authorising the Directors to
determine its remuneration will be proposed at the AGM.
By order of the Board
Hg Pooled Management Ltd
Secretary
4 March 2010
Statement of Directors' responsibilities
in respect of the annual report and the financial statements
The directors are responsible for preparing the Annual Report and the financial
statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have elected to prepare the
financial statements in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards and applicable law).
Under company law the directors must not approve the accounts unless they are
satisfied that they give a true and fair view of the state of affairs of the
company and of the profit or loss of the company for that period. In preparing
these financial statements, the directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgments and accounting estimates that are reasonable and prudent;
- state whether applicable UK Accounting Standards have been followed; and
- prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the company will continue in business.
The directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the company's transactions and disclose with
reasonable accuracy at any time the financial position of the company and
enable them to ensure that the financial statements comply with the Companies
Act 2006. They are also responsible for safeguarding the assets of the company
and hence for taking reasonable steps for the prevention and detection of fraud
and other irregularities.
The directors are responsible for the maintenance and integrity of the
corporate and financial information included on the company's website.
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with UK Accounting Standards
give a true and fair view of the assets, liabilities, financial position and
profit or loss of the company; and
- the directors' report, includes a fair review of the development and
performance of the business and the position of the company, together with a
description of the principal risks and uncertainties that it faces.
By order of the Board
Roger Mountford, Chairman
4 March 2010
Corporate governance statement
This Corporate Governance Statement forms part of the Directors' Report.
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 AIC 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.
A copy of the AIC Code and the AIC Guide can be obtained via the AIC's website,
www.theaic.co.uk. A copy of the Combined Code on Corporate Governance can be
obtained at www.frc.org.uk.
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 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, a long-term perspective is valuable. 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. Accordingly, Mr Mountford is being
proposed for re-election at this year's AGM.
Messrs Gale and Amies were both appointed on 1 May 1991. The AIC Code
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 retire
and Mr Gale will stand for annual re-election at this year's AGM. It is
intended to appoint an additional member of the Board, following Mr Aimies
retirement. The Board's recommendations that Mr Mountford and Mr Gale should be
re-elected are set out 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. The Company's Articles of Association take advantage of
statutory provisions to indemnify the Directors against certain liabilities
owed to third parties even where such liability arises from conduct amounting
to negligence or breach of duty or breach of trust. In addition, under the
terms of appointment of each Director, the Company has agreed, subject to the
restrictions and limitations imposed by statute and by the Company's Articles
of Association, to indemnify each Director against all costs, expenses, losses
and liabilities incurred in execution of his office as director or otherwise in
relation to such office. Save for such indemnity provisions in the Company's
Articles of Association and in the Directors' terms of appointment, there are
no qualifying third party indemnity provisions in force.
Conflicts of interest
On 1 October 2008 it became a statutory requirement that a Director must avoid
a situation in which he has, or can have, a direct or indirect interest that
conflicts, or possibly may conflict, with the Company's interests (a
'situational conflict'). The Company's Articles of Association were amended at
the 2008 Annual General Meeting to give the Directors authority to approve such
situations, where appropriate.
It is the responsibility of each individual Director to avoid an unauthorised
conflict situation arising. He must request authorisation from the Board as
soon as he becomes aware of the possibility of a situational conflict arising.
The Board is responsible for considering Directors' requests for authorisation
of situational conflicts and for deciding whether or not the situational
conflict should be authorised. The factors to be considered will include
whether the situational conflict could prevent the Director from properly
performing his duties, whether it has, or could have, any impact on the Company
and whether it could be regarded as likely to affect the judgment and/or
actions of the Director in question. When the Board is deciding whether to
authorise a conflict or potential conflict, only Directors who have no interest
in the matter being considered are able to take the relevant decision, and in
taking the decision the Directors must act in a way they consider, in good
faith, will be most likely to promote the Company's success. The Directors are
able to impose limits or conditions when giving authorisation if they think
this is appropriate in the circumstances.
A register of conflicts is maintained by the Company Secretary and is reviewed
at Board meetings, to ensure that any authorised conflicts remain appropriate.
Directors are required to confirm at these meetings whether there has been any
change to their position.
The Directors must also comply with the statutory rules requiring company
directors to declare any interest in an actual or proposed transaction or
arrangement with the Company.
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 2009 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
provided 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 participatefully 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 GBP37,000 were paid to Deloitte LLP for reviewing the
half-yearly financial statements and as consultancy fees relating to the new
management arrangements. 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 Deloitte LLP, the Board has concluded that they 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 all Audit and Valuation Committee
meetings 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 2009,
compared with the number they were eligible to attend.
Number of meetings attended/eligible to attend
Director
Board A&VC
Tim Amies 8/8 6/6
Piers Brooke 8/8 6/6
Richard Brooman 8/8 6/6
Peter Gale 7/8 5/6
Roger Mountford 8/8 5/6
Andrew Murison 8/8 6/6
The Management Engagement Committee, Remuneration Committee and Nomination
Committee each met on one occasion during the year and all of the Directors
were present at those meetings.
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 2009 and up to the date of this report, and will continue to do so for
the year ending 31 December 2010.
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 of the
Financial Reporting Council: "Internal Control: Revised Guidance for Directors
on the Combined Code". 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. 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. The section of this
report, entitled "Shareholder Information", provides information useful to
shareholders.
Report of the independent auditors to the members of HgCapital Trust plc
A copy of the unqualified report of the independent auditors to the members of
HgCapital Trust plc is included in the Company's Annual Report & Accounts for
the year-ended 31 December 2009 which can be found at www.hgcapitaltrust.com.
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
Hg Pooled Management Limited*
2 More London Riverside
London
SE1 2AP
Telephone: 020 7089 7888
www.hgcapital.com
Stockbroker
RBS Hoare Govett Limited*
250 Bishopsgate
London
EC2M 4AA
Telephone: 020 7678 8000www.rbs.com/hoaregovett
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 and HgCapital LLP
END
Hg Capital (LSE:HGT)
Historical Stock Chart
From Oct 2024 to Nov 2024
Hg Capital (LSE:HGT)
Historical Stock Chart
From Nov 2023 to Nov 2024
