TIDMHGT
HgCapital Trust plc
Annual report and accounts
31 December 2010
Private equity investment trust of the year
Investment Week Awards 2005, 2006, 2007, 2008, 2009 and 2010
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
2010 or 2009. Statutory accounts for 2009 have been delivered to the registrar
of companies, and those for 2010 will be delivered in due course. The auditors
have reported on those accounts; their report was (i) unqualified, (ii) did not
include a reference to any matters to which the auditors drew attention by way
of emphasis without qualifying their report; and (iii) did not contain a
statement under Section 498 (2) or (3) of the Companies Act 2006. 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.
The objective of the Trust is to provide shareholders with long-term capital
appreciation in excess of the FTSE All-Share Index by investing in unquoted
companies.
The Trust provides investors with exposure to a diversified portfolio of
private equity investments primarily in the
UK and Continental Europe.
References in this announcement to HgCapital Trust plc have been abbreviated to
"HgCapital Trust" or "the Trust". HgCapital refers to the trading name of
HgPooled Management Limited and HgCapital LLP, who act as "the Manager".
2010 PERFORMANCE
Market Capitalisation GBP313 million
The ordinary share price rose from GBP8.44 to GBP10.06 over the year. An increase
(on a total return basis) of: +23%
Net Asset Value GBP348 million
The net asset value (basic) per ordinary share rose from GBP9.37 to GBP11.18 over
the year. An increase (on a total return basis) of: +23%
Cash deployed GBP111 million
The amount of capital deployed in 2010, a record year for deployment. HgCapital
invested in seven, primarily fast growing companies.
Cash realised GBP82 million
Significant cash realised in 2010, primarily from the sale of Pulse Staffing
and the partial sale of Visma, at an average uplift on book value of 64%.
LONG-TERM PERFORMANCE - 10 YEAR TOTAL RETURNS
COMPOUND ANNUAL GROWTH RATE
14% p.a. - The compound annual growth rate of the HgCapital Trust plc share
price over the last 10 years.
10 YEAR RETURN ON GBP1,000
GBP3,721 - How much an investment of GBP1,000 in HgCapital Trust plc ten years ago,
would now be worth*. An equivalent investment in the FTSE All-Share Index would
be worth GBP1,432.
*Assuming reinvestment of all dividends.
BALANCE SHEET ANALYSIS
GBP348 million
The net assets of HgCapital Trust plc as at 31 December 2010.
GBP90 million
The net assets in liquid funds available for deployment as at 31 December 2010
representing 26% of NAV.
GBP212 million**
The amount of outstanding commitments as at 31 December 2010 representing 61%
of NAV.
**This includes an outstanding commitment to HgCapital 6 of GBP156 million, where
the Trust has an investment opt-out without penalty if it has insufficient cash
resources to fund a new investment (see note 21).
THE PORTFOLIO
HgCapital Trust plc gives investors access to a private equity portfolio of
currently 31 companies, run by an experienced and well-resourced Manager that
makes investments in private companies across Northern Europe in the
Healthcare, Industrials, Services and TMT sectors.
Investment in HgCapital Trust plc provides exposure to a portfolio of primarily
fast growing companies*. The top 20 buyout investments currently account for
92% of the portfolio value. These companies have aggregate revenues of GBP1.9
billion and profits of GBP470 million.
In addition, the Trust has diversified into the renewable energy sector and
currently holds investments in two renewable energy funds.
+13% p.a. revenue growth
The average growth in revenues of the top 20 buyout investments over the last
year.
+16% p.a. profit growth
The average growth in profits of the top 20 buyout investments over the last
year.
9.7x EV/EBITDA multiple
The average valuation multiple used to value the top 20 buyout investments at
31 December 2010.
3.6x Net debt/EBITDA
The average net debt/EBITDA multiple of the top 20 buyout investments at 31
December 2010.
*References in this announcement to the "portfolio", "investments", "companies"
or "businesses", refer to a number of buyout investments, held indirectly by
the Trust through its direct investments in fund limited partnerships (HGT LP
and HGT6 LP) of which the Trust is the sole limited partner, and direct
investments in renewable energy fund limited partnerships (HgRenewable Power
Partners LP ("RPP1") and HgCapital Renewable Power Partners 2 C LP ("RPP2")),
of which the Trust is a limited partner.
Chairman's statement
With a portfolio of businesses that is trading well, the Trust has again
created value for shareholders. The Trust's strong balance sheet combined with
the Manager's clear focus offer prospects for continuing good long-term
returns.
The year in review
In 2010 HgCapital Trust plc made further strong progress towards several of our
goals.
A highlight of the year was the successful placing and open offer of new
ordinary shares, raising GBP50 million before expenses, that completed in April.
The offer was over-subscribed by both existing shareholders and new investors,
thus growing and diversifying the Trust's share register so as to provide
greater liquidity in the market to the benefit of all shareholders. At the same
time, the Trust made a bonus issue of new subscription shares on the basis of
one for every five ordinary shares. These subscription shares have traded well,
ending the year with a market value of GBP1.05 per share, providing further value
to shareholders.
Each subscription share entitles the holder to subscribe to one new ordinary
share, beginning in May 2011 with the final exercise date being 31 May 2013. If
exercised in 2011 or 2012 the subscription price will be GBP9.50 per share; if
exercised in 2013 the price will be GBP10.25. If all the subscription shares are
exercised it will raise new funds of between GBP59 million and GBP64 million for
the Trust to deploy and will further enhance the liquidity of the market in the
Trust's shares.
Performance
The total return (net asset value plus dividend) was 22.8%, compared with a
total return on the Trust's benchmark, the FTSE All Share Index, of 14.5%. The
basic net asset value per ordinary share increased over the year to a record GBP
11.19 (GBP10.91 diluted).
Total return in terms of share price, plus dividend, was 22.8%. As a result,
the ten-year total return to shareholders was more than 10% p.a. in excess of
the benchmark. An investment of GBP1,000 made ten years earlier, with dividends
reinvested, would now have a value of GBP3,721, compared with GBP1,432 if invested
in the FTSE All Share Index.
The total return, over the eight months following the share issue, to
shareholders who held or subscribed new ordinary shares at the issue price of GBP
8.45, with subscription shares attached, and who retained both, represented a
return of 21.5% over the eight month period which is equivalent to an
annualised return of 34.0%.
Return per ordinary share was 34.0 pence, compared with 28.4 pence in 2009, and
the Board has recommended a dividend of 28.0 pence (2009: 25.0 pence).
Since the year-end, the Trust's interest in SiTel has been sold, delivering
proceeds of GBP9.5 million and an uplift over NAV at 31 December 2010 of 13.1
pence per share (basic) and 10.9 pence per share (diluted). As a result, and
taking account of movements in foreign exchange, NAV at 28 February 2011 was
1,131.4 pence per share (basic) and 1,101.2 pence per share (diluted).
Portfolio
It was a busy year for new buyout investments, with seven new investments made,
totalling GBP100 million for the Trust. A further GBP5 million was invested in
existing buyouts and GBP6 million in renewable power projects.
Following a quiet year for realisations in 2009, the total value of
realisations to the Trust in 2010 was over GBP82 million, marking a return to the
levels achieved on average over the period 2006-8. In aggregate, these
realisations delivered GBP32 million in excess of their valuation at December
2009, an uplift of 64%, adding substantially to net asset value.
Shareholder value was further created by the unrealised revaluation of
portfolio investments by a net total of GBP36 million. The Manager's attribution
analysis indicates that by far the largest contributor to this growth in value
was the growth in profits of the businesses in the Trust's buyout portfolio.
Strong cash flows from trading enabled reductions to be achieved in the net
debt of portfolio companies. Strong equity markets in the latter part of 2010
led to some further upward revaluation as the market multiples of comparable
companies improved. The effect of changes in the value of sterling against the
currencies in which some investments are held was broadly neutral.
It is particularly pleasing to note that at year-end almost all the companies
making up the top 20 buyout investments continued to trade strongly. All but
two of the Trust's top 20 buyouts at year-end achieved growth in both sales and
EBITDA during the year. The Manager monitors trading on a monthly basis and
reports in detail on the latest trading figures to the Board of the Trust at
every meeting.
A disappointment affecting a small part of the Trust's investment portfolio
came with the decision of the Spanish government to impose, unilaterally,
adverse changes in the terms on which the solar energy projects in Spain had
contracted to sell their power. The Manager kept the Board well informed about
this issue and the Manager's renewables team led the industry's efforts to
lobby the Spanish government. Late in the year the government replaced its
original proposals with new terms that reduce short-term returns to investors
while compensating for this by extending the life of the power sales contract.
The net effects remain adverse for the distribution of cash to investors in the
early years, and this has been taken into account in the portfolio valuation at
year-end.
Reporting
Over several years we have endeavoured each year to improve the transparency
and the clarity of our reporting to shareholders.
This report contains for the first time not only a statement of our investment
objective, but also a clear statement of the rationale for investing in private
equity and a description of the business model that the Board is pursuing. In
one straightforward statement this covers the asset class, the benchmark, the
Board's priorities for the Trust as a listed investment vehicle, investment
policy, the Board's approach to cash, borrowing, hedging, valuation and
dividends.
This year the Board and the Manager have also provided further information
about the portfolio and analysis of how value for shareholders has been created
across the portfolio. We believe that shareholders also value transparency
through to the principal underlying assets in a way that is not practical in a
fund-of-funds investment vehicle. Nearly all of our private equity investments
are held across several annual reports and, accordingly, they are likely to be
revalued several times between first investment and final realisation. In
between, trading performance may vary from year to year; bolt-on acquisitions
and disposal of non-core activities may add further complexity. To give a
longer term view we have this year added as a case study a description of the
investment made in Visma, the case for doing so and the strategy adopted, the
work that HgCapital's executives did with Visma's management team to build the
business, and the sale of a majority interest to KKR in late 2010. Further case
studies will be provided to shareholders in future and will be available on the
Manager's website, www.hgcapital.com.
Later this year we plan to redesign the Trust's website,
www.hgcapitaltrust.com, in order to make it more useful for shareholders and
prospective investors.
In line with this policy of transparency, the Manager also publishes a
pre-close statement on the website just prior to the half-year and year-end.
Prospects
The Trust began the year with a compact portfolio, diversified by geography and
business across the sectors that the Manager has used its expertise to select.
Almost all of the principal buyout businesses are trading strongly in markets
that show clear growth characteristics. Accordingly, we believe that the
prospects for continuing progress are good, but remain subject, of course, to
continuing stability in European economies and a return to economic growth.
Private equity investment at its best brings together long-term capital and
talent in identifying good businesses and helping them to create value. We have
consistently said that we expected an investment in the Trust's shares to
reward the committed and patient investor. Large institutional investors
recognise the value of making an allocation of their funds to private equity,
as HgCapital's other clients do in joining as limited partners into its funds.
The Trust provides individual investors and small institutions with the
opportunity to invest alongside those large institutions, on the same terms,
and in a vehicle whose shares are traded on the London Stock Exchange.
To reinforce the valuable role that the Trust can play in a portfolio I am
pleased to report that, in the Investment Week awards, it was again chosen, for
the sixth consecutive year, as Private Equity Investment Trust of the Year. The
citation for the award referred to the Trust's outstanding long-term
performance and its high standards of governance.
Roger Mountford
Chairman
17 March 2011
Long-Term Performance Record
Performance record
Net
Net asset
asset value
value per
Net assets per ordinary Revenue Earnings Dividends
attributable to ordinary share Ordinary Subscription available for per per
ordinary share (diluted share share ordinary ordinary ordinary
Year shareholders (basic) (1)) price price shareholders share(2) share(3)
ended
31 December GBP'000 p p p p GBP'000 p p
2001 95,795 380.3 n/a 294.0 n/a 2,420 9.6 8.00
2002 83,837 332.9 n/a 219.5 n/a 2,148 8.5 8.00
2003 99,987 397.0 n/a 289.5 n/a 3,969 15.8 12.00
2004 122,040 484.5 n/a 451.5 n/a 2,649 10.5 8.00
2005 156,487 621.3 n/a 583.5 n/a 2,965 11.8 10.00
2006 187,135 743.0 n/a 731.0 n/a 4,519 17.9 14.00
2007 238,817 948.2 n/a 782.5 n/a 7,446 29.6 25.00
2008 234,094 929.4 n/a 668.5 n/a 7,445 29.6 25.00
2009 236,044 937.2 n/a 844.0 n/a 7,148 28.4 25.00
2010 347,993 1,118.8 1,090.7 1,006.0 105.0 10,053 34.0 28.00(4)
1. Diluted net asset value per share assumes that all outstanding subscription
shares were converted into ordinary shares at the year-end at the minimum price
of GBP9.50 a share.
2. Based on weighted number of shares in issue during the year.
3. Dividend proposed in respect of reported financial year; declared and paid
post relevant year-end.
4. Proposed final dividend for the year ended 31 December 2010 to be paid on 13
May 2011, subject to shareholder approval.
HgCapital Trust plc's share price has consistently delivered significant
outperformance against its benchmark across one, three, five, seven and
ten-year periods.
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* 22.8 12.0 14.3 22.5 14.0
Net asset value (basic) 22.6 8.5 15.0 18.6 12.8
Net asset value (diluted) 19.5 7.6 14.5 18.2 12.5
FTSE All-Share Index 14.5 1.4 5.1 8.5 3.7
*Total return assumes all dividends have been reinvested.
Investment activity
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Invested 20 20 15 22 35 45 51 26 30 111
Realised (including income) 26 27 31 47 52 62 106 92 8 82
THE BOARD OF DIRECTORS
The Board of HgCapital Trust plc consists of six non-executive Directors with a
wide range of business experience, all of whom the Board of the Trust deems to
be independent of the Trust's Manager.
Roger Mountford (Chairman of the Board)
Aged 62, 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.
Piers Brooke
Aged 70, 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 Investment Management.
Richard Brooman
Aged 55, 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, a non-executive
Director of the Camden & Islington NHS Foundation Trust, where he chairs the
Audit & Risk Committee, and was appointed as a non-executive director of SVM UK
Active Fund Plc on 1 March 2011. 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 & Valuation
Committee of the Trust.
Peter Gale
Aged 55, Peter Gale was appointed to the Board in 1991 and is Senior
Independent Director and Deputy Chairman of the Trust. 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. Following the merger of
Gartmore's private equity business with that of Hermes Fund Managers in 2010 Mr
Gale became Chief Investment Officer of Hermes GPE. He is a non-executive
director of Lothbury Investment Management and advisor to the West Midlands
Metropolitan Authorities Pension Fund as well as several other large pension
and investment funds.
Andrew Murison
Aged 62, 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.
Mark Powell
Aged 65, Mark Powell was appointed to the Board in 2010. He has been involved
in investment management for private investors and charities throughout his
career. From 1968 to 1989 he worked in what became C L Alexanders Laing &
Cruickshank Holdings of which he became Chief Executive. In 1989 he joined
Laurence Keen which was acquired in 1995 by Rathbone Brothers Plc of which he
became Managing Director. He was appointed Chairman of Rathbones in 2003 and
will retire from their board in May 2011. He is Chairman of SVM UK Active Fund
Plc and was previously Chairman of the Association of Private Client Investment
Managers & Stockbrokers and a member of the Takeover Panel.
All Directors are members of the Audit & Valuation, Nomination, Remuneration
and Management Engagement Committees.
All Directors are non-executive.
INVESTMENT OBJECTIVE
The Investment Objective of the Trust is to provide shareholders with long-term
capital appreciation in excess of the FTSE All-Share Index by investing in
unquoted companies. If the Board proposes to amend the Trust's Investment
Objective, it will seek the approval of shareholders in a general meeting.
INVESTMENT POLICY
The principal policy of the Trust is to invest in a portfolio of unlisted
companies that are expected to grow organically or by acquisition. Any material
change to the Trust's Investment Policy will be made only with the approval of
shareholders in a general meeting.
The Trust'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 Trust may invest in assets other than
companies, so long as the Manager believes that its expertise in private equity
investment can be profitably applied. The Trust 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 Trust 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. The Trust may invest its liquid
funds in government or corporate securities, or in bank deposits, in each case
with an investment grade rating, or in managed funds that hold investments of a
similar quality.
Range and diversification
The Trust invests primarily in companies whose operations are headquartered or
substantially based in or which serve markets in Europe. The Trust invests in
companies operating in a range of countries, but there is no policy of making
allocations to specific countries or markets. The Trust 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 Trust
may over-commit to invest in underlying assets in order to maintain the
proportion of gross assets that are invested at any time. The Trust has the
power to borrow and to charge its assets as security.
The Articles currently restrict the Trust's ability to borrow no more than,
broadly, twice the aggregate of the Trust's paid up share capital and reserves
(without shareholder approval).
Hedging
The Trust may use derivatives to hedge its exposure to interest rates,
currencies, equity markets or specific investments for the purposes of
efficient portfolio management.
RATIONALE AND BUSINESS MODEL
The Board has a clear view of the rationale for investing in private equity
through an investment trust and this informs its decisions on the operation of
the Trust and the evolution of the Board's Business Model.
RATIONALE
The Board believes that there is a convincing rationale for investing in
well-researched private businesses with potential for growth, especially where
the Investment Manager and the management of the business can work together to
implement strategic change or operational efficiency. These can result in
higher rates of growth in sales and enhanced profits, offering investors
capital gains on realisation. Many large institutional investors allocate a
proportion of their assets to this asset class, but it is difficult for private
investors and small institutions to invest in private equity due to the large
commitments required over long periods of time. The Trust provides an
opportunity for investors to hold shares listed on the London Stock Exchange
through which they can invest in private equity transactions not otherwise
accessible.
BUSINESS MODEL
Working within the constraints of the Trust's Investment Policy, the Board and
the Manager have together developed a Business Model, which is kept under
regular review. The Business Model evolves as market conditions change and new
opportunities appear.
Asset class
The Trust invests directly into unquoted businesses in the UK and Continental
Europe alongside other institutional clients of HgCapital, an experienced
private equity manager whose principal business is to invest in, and manage,
leveraged buyouts. Private equity investments are normally held through
partnerships that provide legal and taxation advantages. Most of the Trust's
investments are held through partnerships of which it is the sole limited
partner and which invest alongside pooled funds managed by HgCapital (currently
its Hg6 fund) on the same terms as institutional investors. The Trust normally
acquires a 15% interest in each business in which Hg6 invests. The Manager is
organised in investment teams that focus on well researched business sectors,
but it does not make top-down allocations to these sectors or to particular
countries; the balance may change as investment opportunities appear and
portfolio companies are sold. The Trust is not a fund of funds and does not
invest in other managers' funds. The Trust's strategy of making direct
investments into businesses provides greater transparency for the Board and
shareholders in the Trust and avoids the double fees inherent in a fund of
funds.
The Board of the Trust decides, after consultation with the Manager, on the
timing, amount and terms of each commitment it makes to invest in or alongside
any of the Manager's funds. Such commitments are normally drawn down over five
years as investment opportunities arise. The Board agrees each commitment at a
level it believes the Trust will be able to fund from its own resources or from
temporary borrowing. However, to protect the Trust from the risk of being
unable to fund any drawdown under its commitment the Board has negotiated a
right to "opt-out", without penalty, of any HGT 6 LP investment where certain
conditions exist (see note 21 to the financial statements).
In addition, the Trust has invested in renewable power generating projects, an
area where the Manager has developed its skills and built a specialist team.
This sector provides the Trust with an element of diversification, as it has
fundamentally different drivers of risk and return, but is expected to deliver
comparable long-term returns. In this sector it is advantageous to the Trust to
participate with other institutional clients of HgCapital as limited partners
in HgCapital's two renewable energy funds.
Cash and borrowing
The Board and the Manager agree that prudent use of borrowing to fund
acquisitions can increase diversification within the portfolio and yield rates
of return superior to the market in listed shares. Businesses in the underlying
portfolio are acquired with the benefit of bank borrowing at levels that can be
serviced from the cash flows generated within that business. The Board does not
currently see any advantage in using a further level of structural borrowing by
the Trust as this would add risk without any certainty of enhancing returns.
From time to time the Board arranges a small bank facility on which it can draw
to meet short-term needs between making an investment and receiving the
proceeds from a realisation.
At certain points in the investment cycle the Trust may hold substantial cash
awaiting investment, which it holds in bank deposits or invests in short-dated
government bonds. If there appears to be surplus capital and conditions for new
investment appear to be unfavourable the Board will consider returning capital
to shareholders, probably through the market purchase of shares.
Hedging
The Trust offers exposure to a range of businesses operating in the UK, the
eurozone and the Nordic region. The Trust does not strategically hedge
investments back into sterling. From time to time the Manager may use
derivatives approved by the Board to hedge tactically with the object of
protecting the anticipated sterling value of proceeds from realising
investments in other currencies.
Benchmark
For most shareholders their investment in the Trust represents a small
allocation of funds that would otherwise be invested in UK equities. The
Trust's benchmark is therefore the FTSE All-Share Index.
Relative data on performance, volatility etc can be found in the Trust's fact
sheet at www.hgcapitaltrust.com and www.lpeq.com. To assess the Manager's
performance relative to other private equity managers the Board regularly
compares the NAV and share price performance against a basket of peers listed
on the London Stock Exchange and against the UK and pan- European indices of
listed private equity companies published by LPX.
Priorities as a listed investment company
As the rationale for the Trust is to provide investors with a way to invest in
an illiquid asset class, through a liquid listed vehicle, the Board has a
number of priorities including: retaining the status of an investment trust;
maintaining a liquid market in its shares; providing shareholders with
transparent reports on the underlying portfolio; adopting prudent valuations;
and avoiding adding risk at the Trust level.
Valuation
The Board values each investment in the portfolio after considering analytical
data and draft valuations prepared by its Manager. Valuations are carried out
in accordance with the International Private Equity and Venture Capital
('IPEVC') Valuation Guidelines, September 2009 edition. Further information can
be found at www.privateequityvaluation.com.
Net asset value and trading in the Trust's shares
The Board values the portfolio and publishes the Trust's NAV as at 30 June and
31 December. Each month following these valuations the NAV figure is published
after adjustment for realisations and movements in foreign exchange and the
market prices of any listed securities. The Trust's shares trade on the London
Stock Exchange at prices that are independent of the Trust's NAV but reflect
the NAV and expectations of future changes in it. The shares have traded at a
discount to the NAV and at times at a premium to it. The Board has not
attempted to manage any discount through repurchase of shares, which it
believes usually has only temporary effect. The Board believes that discounts
to NAV are minimised through consistent long-term returns, transparent
reporting, rigorous valuation and avoidance of risk at Trust level.
Dividends
The Board does not structure the Trust's balance sheet or underlying
investments in order to deliver any target level of dividend. To maintain the
Trust's status an investment trust, annual net revenue return retained, after
dividend distributions in respect of that financial year, may not exceed 15% of
the annual total income earned from investments. The level of the net revenue
return varies from year to year according to the level of the Trust's liquid
funds and the structure of the buy-outs held at the time. Accordingly,
dividends may vary from year to year. The Trust has elected to "stream" its
income from interest-bearing investments as dividends that will be taxed in the
hands of shareholders as interest income; this minimises the tax charge payable
by the Trust.
THE MANAGER
HgCapital is a private equity investor focused on the European middle market.
Its business model combines sector-specific thematic investing with dedicated
portfolio management support. HgCapital invests in growth companies in
expanding sectors via leveraged buyouts and in renewable energy generating
projects across Western Europe.
HgCapital's vision is to be the most sought after private equity manager in
Europe, being a partner of choice for management teams and renewable power
developers producing consistent top quartile returns for our clients and
providing a rewarding environment for our staff.
INTRODUCTION TO THE MANAGER
HgCapital began life as Mercury Private Equity (MPE), the private equity arm of
Mercury Asset Management plc, a long established listed UK-based asset
management firm. Mercury was bought by Merrill Lynch in 1997 and, in December
2000, MPE negotiated its independence as HgCapital and became a fully
independent firm, owned by its partners.
HgCapital has progressively invested in and strengthened its business over the
years to establish a significant competitive advantage in making money for its
clients.
With over 70 employees in two investment offices in the UK and Germany,
HgCapital has assets under management of GBP3.3 billion serving a range of highly
regarded institutional investors, including private and public pension funds,
charitable endowments, insurance companies and banks.
HgCapital's largest client is HgCapital Trust plc. Established in 1989, the
Trust appointed HgCapital as its Investment Manager in 1994. It offers
investors a liquid investment vehicle through which they can obtain an exposure
to our diversified portfolio of private equity investments with minimal
administrative burdens, no long-term lock-up or minimum size of investment.
THEMATIC INVESTMENT
HgCapital's five sector teams combine the domain knowledge and expertise of a
trade buyer - giving them superior credibility and the ability to make quick
decisions - with the flexibility of a financial investor - leading to high
conversion rates on deals we like.
This deep sector focus is channelled through a rigorous research-based approach
and disciplined thematic investment processes, whereby the most attractive
segments of the European mid-market can be systematically identified and then
repeatedly invested in, optimising deal flow and improving returns.
Following each investment HgCapital's specialist portfolio management team,
which is separate from the sector teams, works to protect and enhance value,
ensuring clear strategies for growth and a realisation that adds further value.
With substantial expert resources, and a structure that focuses on delivering
value, HgCapital has the tools and ability to succeed consistently.
THE MANAGER'S STRATEGY AND TACTICS
Middle-market focus
HgCapital focuses on middle market buyouts with enterprise values of between GBP
50 million and GBP500 million and renewable power generating projects using
proven technologies. 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 primarily focuses its buyout investments in the UK, Germany and the
Nordic Region, as well as Switzerland, Italy and Benelux.
Our renewable energy investments are currently focused on the British Isles,
the Nordic region and Spain. All investments are managed by specialist sector
and portfolio management teams located in London and Munich who work with a
common purpose and culture, applying consistent processes.
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.
For buyouts, 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.
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 chosen geographies.
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.
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 22 active buyout investments.
Investing in businesses, many of which have a global footprint and which are
located across Europe, requires time and, of course, a deep 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 in private equity management.
PRINCIPAL LOCATION OF INVESTMENTS BY NUMBER:
Buyout Investments
Nordic Region: 2
UK: 10
Germany: 5
Benelux: 1
Switzerland: 1
Italy: 1
Renewable Energy Investments
Swedish Onshore Wind: 3
Uk Onshore Wind: 6
French Onshore Wind: 1
Spanish Solar: 7
SECTOR SPECIALISATION
Healthcare
The Healthcare sector across Europe is large and displays non-cyclical growth
ahead of nominal GDP driven by ageing populations and expensive but beneficial
technological change. It is also characterised by high levels of regulation and
differing payer models from country to country.
We focus on niche growth segments where businesses may clearly differentiate
their offerings. We currently invest in high acuity long-term care, either
residential or domestic, where surplus cash flow can be invested in rolling out
the business or in making bolt-on acquisitions. In addition, we invest in
generic and low cost pharmaceutical suppliers who operate with high margins and
cash conversion which allow them to grow by acquisition. We continue to examine
other niches for future investment including instruments and devices.
Our core geographic focus is in the UK, Germany and the Nordic region but we
continue to monitor opportunities in Benelux, France and Spain and other
regions with significant growth potential.
The Healthcare team is currently made up of six dedicated investment
professionals and, over the last ten years, has invested GBP384 million across
seven investments.
Industrials
Based in Germany, the HgCapital Industrials team's objective is to take
advantage of the country's deserved reputation in the production of high
quality, cutting edge manufactured goods which are in particularly strong
demand amongst the BRIC economies as well as across Europe and North America.
Typically, German technology and expertise are applied to products made in low
cost locations.
It is well known that the German market is characterised by the large number of
small, family-owned Mittelstand companies. These companies and their owners are
difficult to access and yet we have been particularly successful in dealing
with them as we have patiently built our business in Germany and acquired a
good reputation for our approach to investing and working with them.
Our team has identified three sectors which demonstrate the most attractive
growth, profitability and valuation characteristics for us as well as offering
significant opportunities for investment. These sectors are: mechanical
engineering, industrial electronics and specialist suppliers to the automotive
industry.
The Industrials team is currently made up of five dedicated investment
professionals and, over the last ten years, has invested GBP497 million across
eleven investments.
Services
The services sector is a very broad market with many segments. We have
developed an investment strategy that focuses on specific vertical markets
where the growth drivers are likely, in our opinion, to be present for many
years to come. They have diverse customer bases, long-term, stable customer
relationships and often provide business critical services.
These markets are the provision of compliance/screening services, specialist
outsourcing and the provision of corporate trust services. We like to invest in
entities that are natural acquirers/industry leaders or those that will make
excellent acquisitions for others. We like companies who display a strong
ability and a very a systematic approach to growth - either organic or through
incremental acquisitions.
Investments to date have been largely UK-based although some trade globally. We
continue to monitor and explore opportunities throughout Europe and, during the
year, committed to acquire a Netherlands-based provider of company tax,
secretarial and trust services.
Our current portfolio provides services that range across health and safety
compliance, HR and laundry facilities management.
Since deciding to establish a Services sector focus in 2005, a team of five
dedicated investment professionals has been built and GBP208 million has been
invested across three investments.
TMT
Within the TMT market we continue to invest in three core sub-sectors: vertical
market application software; private electronic marketplaces; and telecoms/
datacentre operators.
Within these sub-sectors we invest in high quality, growing companies which
have strong and defensible market positions, diverse customer bases, and which
feature subscription-based business models generating predictable revenues and
cashflows. We regularly conduct top-down thematic research within the wider TMT
sector, seeking further repeatable investment models where we can develop
expertise.
We have an eight-strong team dedicated to TMT, meaning we are well resourced to
identify, assess and complete investments quickly and thoroughly. The team
benefits from a cumulative 60 years of TMT private equity experience, and is
complemented by an extensive network of industry experts and advisers.
Over the last ten years, the TMT team has invested GBP939 million across 18
investments.
Renewable Energy
The renewable energy market is the fastest growing power generation segment in
Europe. The fundamental drivers of return and risk in the renewable energy
market are very different from those of the traditional buyout market. As such,
renewable energy offers valuable diversification benefits.
Increasing consensus on climate change, the need for reduction of greenhouse
gas emissions and the need for security of energy supply have increased
pressure to diversify and upgrade power generation assets. Renewables are
playing a key role in meeting these targets.
Given this anticipated growth and global political pressure, the renewables
market is a highly attractive investment proposition, estimated to require
around EUR160 billion in capital investment over the medium term.
Technological advances and industry scaling have increased price competition,
while favourable regulatory regimes offer predictable pricing and strong
revenue visibility, providing superior, risk-adjusted returns, favourable
inflation linkage and a hedge against fossil fuel costs.
Our team has financed projects primarily across three platforms, UK onshore
wind, Swedish onshore wind and solar projects in Spain. The market offers
significant opportunities to acquire attractive assets, given its fragmented
nature and the numerous independent developers, sponsors and large utilities
players.
The team's investment strategy focuses on high quality assets, a disciplined
approach to structuring and risk management, operational performance
improvements and working with tier one developers, contractors and equipment
manufacturers. This has earned us a strong reputation for prudently geared,
well structured deals, and positioned us as one of the leading European
renewables teams.
The Renewable Energy team is currently made up of seven dedicated investment
professionals with over 55 years of industry experience and, since its
foundation in 2006, has invested EUR261 million.
CASE STUDY - VISMA
Website: www.visma.com
Sector: TMT
Location: Nordic region
Business description
Based in Oslo, Visma is the leading provider of accounting, resource planning,
book-keeping and payroll software and services to 220,000 SME businesses in the
Nordic region.
Thematic investing
Regulatory-driven software for SMEs is a long-term, recession resistant growth
area with an attractive business model:
* A fast growing marketplace with increasing penetration of business critical
software.
* High barriers to entry and sticky customer relationships due to the
complexity of regulation across the SME marketplace.
* Supporting a subscription payment model so SME software businesses tend to
have high levels of recurring revenue and high profit margins.
The opportunity
HgCapital had already made two successful platform investments applying this
theme in IRIS Software and Addison Software, both of which grew organically and
by acquisition and which delivered strong investment returns. So, when we
identified Visma in 2003, we had knowledge, experience and confidence in our
ability to evaluate the business and the investment opportunity.
We first met the CEO in 2004 and developed a good relationship with Visma's
management team, gaining a better understanding of the business.
Our sub-sector knowledge enabled us to combine the support of a trade partner
with the flexibility of a financial buyer. As a result, we made a successful
public to private offer in 2006 beating a competitive public offer from Sage
plc.
The investment case
Notwithstanding Visma's position as a market leader in the Nordic region, with
growing revenues, profits and consistent innovation, its profit margins were
well below those of most of its competitors.
We understood that Visma's low margins did not reflect the full benefits of
integrating a series of acquisitions it had made. Moreover we could see that
Visma was investing heavily for rapid growth. So as new business lines matured
and integration work was completed we believed that margins would improve
significantly, matching similar results from Iris and Addison.
In addition, Visma's management team were very successful in finding and making
bolt-on acquisitions, which gave us comfort that there was potential for
significant growth.
How HgCapital supported Visma
Working closely with management to grow the business both organically and
through acquisition:
* We helped to deliver more than 25 bolt-on acquisitions, particularly
Accountview in 2007.
* We worked to help develop a 'lean process' strategy and a move to fixed
pricing for some customers, improving customer satisfaction, revenue visibility
and margins.
* We assisted in re-positioning Visma as a higher growth, web-based software as
a service and business process outsourcing services company.
Performance improvement
Visma's performance proved resilient through the recession, supporting our
original hypothesis.
At the end of 2009, Visma was more than one year ahead of our original plan. We
feel that under HgCapital's ownership Visma has become a stronger company
during our four years of ownership, benefiting employees, customers and owners:
* EBITDA increased by over 265%.
* Revenues rose by an average of 16% p.a.
* Margins improved from 14% to 20%.
* Investment in R&D and new product launches doubled.
* Jobs increased from 2,512 to 4,200.
* Market share increased in every part of the business every year.
It is now one of the top three software and services companies in the Nordic
region and one of the top ten across Western Europe.
Partial exit
Visma continues to enjoy growing revenues with scope for further margin
improvement and enhanced cross-selling so we decided to continue to hold a
stake in Visma on behalf of our clients.
Our initial intention was to float the business but, instead, a process with a
small number of potential PE suitors began in the summer of 2010. We aimed to
select a new shareholder who would offer the best value to existing
shareholders as well as help drive the future growth of the business.
In September 2010, KKR agreed to purchase 63.5% of our stake in Visma
(HgCapital clients retained 36.5%). KKR's global reach and understanding of the
technology and services sectors will make them an excellent partner for Visma.
Our aim is at least to double the value of this reinvested stake over the next
3-4 years as Visma continues to grow.
Investment return multiple of cost: 3.7x
Impact of sale on NAV*: +62.0p
*As at 30 November 2010
Time line
2003: Identified Visma as a target
2004: Met Visma CEO and began to build relationship
2006: Public to private buyout of Visma (EBITDA of NOK304.9 million)
2007: Established a strong base in the Netherlands by acquiring Accountview
2008: Build presence in Finland by acquiring Teemuaho
2010: Acquired Sirius, creating the project and consulting division
2010: Partial sale to KKR. (EBITDA of NOK684.2 million - an increase of over
265% in the four years of ownership)
MANAGER'S REVIEW OF THE YEAR
References in this announcement to the "portfolio", "investments", "companies"
or "businesses", refer to a number of buyout investments, held indirectly by
the Trust through its direct investments in fund limited partnerships (HGT LP
and HGT6 LP) of which the Trust is the sole limited partner, and direct
investments in renewable energy fund limited partnerships (HgRenewable Power
Partners LP ("RPP1") and HgCapital Renewable Power Partners 2 C LP ("RPP2")),
of which the Trust is a limited partner.
Summary
We produced a solid set of results and put a record amount of capital to work
in seven new buyout companies. Three sales were completed during the year, the
last two to larger PE firms as the shallow buyer's market of 2009-10 turned
into a healthy two-way market with balanced buyer and seller interest. A GBP50
million share issue was also completed, expanding the share register, improving
liquidity and rewarding investors who participated. As in every other year, we
continued to invest in and to develop the capabilities of our firm so that we
may compete effectively in the future.
We will probably invest less in 2011 than in 2010, because we believe that
value will be harder to find. In addition, we will bed down recent acquisitions
and spend time making bolt-on acquisitions where possible. There may be further
realisations, taking advantage of increasing interest amongst trade buyers and
from larger PE houses wanting to invest their pools of committed capital.
Taking a longer view, it remains our belief that the combination of a patient,
committed approach we offer companies plus equity capital will be attractive to
the market because:
* The need for change in business will be greater.
* The challenge of making radical change, either as a listed company, a state
owned enterprise or a family company, will become more intense.
* Debt finance will be scarcer and more expensive.
Performance
We prefer to be measured over periods of 3, 5 and 10 years because this
frequency is consistent with the long-term nature of private equity investment
and our patient investment strategy. Over three years, the Trust has
out-performed the FTSE All-Share index by 10.6% p.a., over five years by 9.2%
p.a., and 10 years by 10.3% p.a. net of all costs. GBP1,000 invested in December
2000 would be worth GBP1,432 in December 2010 if invested in the FTSE All-Share
Index and GBP3,721 if invested in the Trust. As for 2010, the total return to
shareholders was 22.8%, including a dividend of 25 pence per share, paid in
April 2010, which compared with 14.5% for the FTSE All-Share Index.
The growth in Net Asset Value per share is a driver of share price performance
over the long run. During the year it rose by 22.6% (basic) which may be
attributed to realised proceeds in excess of the 31 December 2009 book value
adding 11% to the NAV and unrealised appreciation contributing 17% to NAV
before the reduction from expenditure and payments to the Manager. This
unrealised appreciation is mostly due to rising earnings, debt reduction and
higher ratings -see below.
TOTAL RETURN OUTPERFORMANCE AGAINST THE FTSE ALL SHARE INDEX
FTSE All-Share index HgCapital
Current value Current value
of GBP1,000 of GBP1,000
% total invested at the % total invested at the
return beginning return beginning
per year of the period* per year of the period*
3 years 1.4 GBP1,044 12.0 GBP1,406
5 years 5.1 GBP1,284 14.3 GBP1,947
10 years 3.7 GBP1,432 14.0 GBP3,721
*With reinvestment of dividends
Trading performance
2010 offered an improving backdrop for the businesses in the Trust's portfolio,
partly because over the past 5 years we have largely avoided making investments
in highly cyclical industries. So the portfolio measured by number, by cost or
by value is exposed, in the main, to secular growth stories or non-cyclical
value plays.
Across the top twenty buyout investments, revenue growth averaged 13% and
EBITDA growth averaged 16%, comparing favourably with nominal GDP across
Europe. This growth trend fell slightly from 2009 because we added two
non-cyclical value plays to the portfolio: in pharmaceuticals (Goldshield); and
in telecoms a network operator (Manx Telecom).
The tables below show the revenues and earnings for the last twelve months to
31 December 2010 for the top 20 portfolio companies, expressed in growth bands.
71% of the portfolio by value has seen profits grow by more than 10%. Less than
10% of portfolio companies by value and number have seen profits fall
marginally.
Our portfolio companies are exposed to comfortable levels of gearing (see
below). The average gearing in the top twenty is 3.6x EBITDA. We have taken
advantage of the highly predictable earnings and free cash flows generated by
some businesses (Team System, JLA, Voyage and Manx Telecom) to use cheap debt
to gear our returns. In others, such as Achilles, Epyx, SHL, Mondo and
Goldshield, the balance sheets are under-geared and the companies have the
financial flexibility to make acquisitions, expand more aggressively or to
refinance and return capital.
TOP 20 LAST TWELVE MONTHS ('LTM') SALES GROWTH
Exposure to GBP1.9bn of sales that have grown on average at 13% over the last 12
months to December 2010
Sales LTM Number of % of top 20 portfolio by
growth Sales investments within value within associated
bands GBP' million associated band band
(5%)-0% pa 98 1 5%
0%-5% pa 154 3 14%
5%-10%pa 416 4 18%
10%-20% pa 631 6 33%
>20% pa 607 6 30%
TOP 20 LTM PROFIT GROWTH
Exposure to GBP470 million of EBITDA that have grown on average at 16% over the
last 12 months to December 2010
EBITDA LTM Number of % of top 20 portfolio by
growth EBITDA investments within value within associated
bands GBP' million associated band band
(5%)-0% pa 54 2 10%
0%-10%pa 83 3 19%
10%-15% pa 85 3 12%
15%-25% pa 155 5 29%
>25% pa 94 7 30%
Valuation and Concentration Analysis
The portfolio is valued consistently from year to year, applying the IPEVC
Valuation Guidelines. Our valuation of each company has produced an average
EBITDA multiple for the top 20 buyout investments (92% of book value) of 9.7x
earnings with these companies achieving a 16% average growth rate in EBITDA.
Where we have invested in companies operating in cyclical industries adversely
affected by the recession, we wrote down their values heavily and early so they
represent a minimal share of NAV.
Our preference is to concentrate on a compact portfolio of businesses that we
know and understand fully. The top ten buyout investments accounted for 66% of
the book value of investments and 46% of NAV, the next ten represented 31% of
the book value (22% of NAV); accordingly, over the medium-term, it will be
these that are most likely to drive future valuation changes. We continue to
pay close attention to each investment and dedicate significant resources to
growing their value.
Valuation Basis|
39% Cost
39% Earnings
9% Third party transaction
7% Written down
6% Net assets
|Percentages are based on fixed assets (excluding hedges) and accrued interest
and are shown by value
Our largest investment by value, TeamSystem, is 10% of the value of the
portfolio and 7% of NAV. It is the fourth accounting software business we have
owned, having invested in and having successfully exited or partially exited
Iris, Addison and Visma, each delivering substantial and attractive returns.
TOP 20 DEBT TO EBITDA RATIO
Average debt ratio of the top 20 buyout investments of 3.6x
Debt to (Cash)/Net Number of % of top 20 portfolio by
EBITDA debt investments within value within associated
bands GBP'million associated band band
(1.0)-0x (12) 3 15%
0-2.0x 117 3 12%
2.0-3.0x 196 5 23%
3.0-4.0x 291 4 18%
4.0-5.0x 559 3 19%
5.0-5.5x 221 1 11%
5.5x to 7.0x 241 1 2%
Top 20 EV to EBITDA VALUATION MULTIPLE
Average ratings multiple of 9.7x
EV Portfolio Number of % of top 20 portfolio by
EBITDA value investments within value within associated
bands GBP'million associated band band
< 6x 17.3 2 7%
6x to 7.5x 39.4 5 17%
7.5x to 10x 58.7 5 25%
10x to 12.5x 67.4 5 28%
12.5x to 15x 23.1 1 10%
> 15x 31.9 2 13%
Balance Sheet
The net assets of the Trust increased by GBP112.0 million (47%) from GBP236.0
million to GBP348.0 million at the year-end. A dividend of 25.0 pence per share
was declared in February 2010, decreasing the NAV by GBP6.3 million, following
which the NAV increased after the successful share issue that completed during
April 2010, raising GBP50 million (GBP48.9 million after costs) at a price of GBP8.45
per share. The remaining increase was largely due to performance, with realised
gains producing GBP28.8 million, unrealised gains amounting to GBP35.9 million and
GBP15.0 million of income received or accrued. Total expenditure and other
charges, including the Manager's remuneration, resulted in a GBP10.3 million
decrease in the NAV. In summary, the NAV per share rose by 22.6% on a total
return basis.
The Trust was also able to put the proceeds of the share issue to work, so that
investments amounted to GBP258.8 million or 74% of net assets. Cash and
government securities totalled GBP90.0 million, which compares with outstanding
but undrawn commitments of GBP212.0 million on HgCapital 5, HgCapital 6, RPP1 and
RPP2. This represents an improvement with commitments, less cash and government
securities, representing 35% of NAV compared with 73% at 31 December 2009.
The Trust has a unique opt-out for capital calls on HgCapital 6, without
incurring the normal penalties that apply to most limited partnerships. As we
enter 2011, the balance sheet has sufficient free capital to continue to
exploit any good opportunities we might uncover, both by financing bolt-on
acquisitions from existing portfolio companies and through financing new
transactions. It remains our belief that 'available capital' is a critical
factor in the long-term investor's armoury.
Analysis of movements in net asset value for the year ended
31 December 2009 GBP'000
Opening net asset value as at 1 January 2010 236,044
Dividend paid (6,297)
Net proceeds from fundraising 48,863
Gross revenue 15,026
Realised proceeds in excess of 31 December 2009 book value
(excludes gross revenue) 28,769
Net unrealised appreciation of investments 35,896
Expenditure and taxation (2,112)
Priority profit share (7,060)
Carried interest (1,136)
Closing net asset value as at 31 December 2010 347,993
Realised and unrealised movements in investment portfolio
(excluding accrued interest) for the year ended 31 December 2010
Investment name and Net unrealised Realised proceeds in excess of /
ranking within top 20 appreciation/ (deficit to) 31 December 2009
investment portfolio at (depreciation) of book value (excludes gross
year end investments revenue)
Visma (2) 8.8 23.4
SHL (6) 8.5 -
Achilles (7) 6.2 -
SLV (5) 6.2 -
Pulse (sold) - 5.2
Goldshield (9) 2.4 -
Elite (18) 2.2 -
Atlas (20) 1.9 -
Epyx (14) 1.8 -
Fx on new investments 1.4 -
Hoseasons (sold) - 1.0
Euro Hedge 0.6 -
Other 0.5 (0.8)
Voyage (19 ) (2.1) -
RPP1 and RPP2 (2.5) -
ANALYSIS OF NET ASSET VALUE (NAV) MOVEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010
Over the course of the year, the NAV of the Trust increased by 47% from GBP236
million to GBP348 million. There were three main drivers of this movement.
Firstly, there was the raising of GBP49 million (net of fees) in an April 2010
share issue intended to fund new investment opportunities. Secondly, it can be
attributed to the revaluation of the unquoted portfolio - itself driven by
strong trading performance. Lastly, NAV increased by just under GBP29 million as
a result of realisations in excess of book value.
ATTRIBUTION ANALYSIS OF UNREALISED MOVEMENTS IN THE INVESTMENT PORTFOLIO
(INCLUDING ACCRUED INTEREST MOVEMENT OF GBP6.4 MILLION) FOR THE YEAR ENDED
31 DECEMBER 2010
During 2010, the value of the unrealised portfolio increased by just under GBP111
million. This change can be attributed to a number of things: the net increase
of GBP54 million (GBP64 million in the first half of the year, minus GBP10 million in
the second half) from acquisitions and disposals, a growth driven by strong
trading performance in both halves of the year, the reduction of debt from
cashflow generated by the portfolio, and a modest pick-up in ratings in the
second half of the year.
Portfolio of Investments
The Trust's strategy is to invest in five sectors, four of them by way of
buyouts of businesses (representing 94% of the portfolio by value at year-end).
Investment in the fifth sector, renewable power generation (6%), is made into
projects through RPP1 and RPP2.
Buyout portfolio
The majority of the portfolio companies grew steadily in 2010, generating
surplus cash which was either returned to shareholders in the case of SiTel and
Pulse or used to repay debt and finance bolt-on acquisitions.
As at 31 December 2010, the Trust's buyout portfolio comprised 21 investments
with value and a small number of residual interests in companies we had sold,
which were mostly valued at, or close, to zero. In addition, the Trust held
investments which had performed poorly and been written down to zero in
previous periods. This report covers only those companies with value.
TMT represented 42% of the total investment portfolio. Over 95% of this value
was represented by companies that are all users of technology, rather than
developers of technology with the associated frequent challenges of new product
development. They included three accounting software companies, a fixed and
mobile incumbent telecom network operator, two private electronic market places
and a vendor of strategic HR software, sold as a service ('SaaS'). The common
themes that run through each one are highly visible revenues, strong market
positions and strong cash conversion that permits debt repayment whilst the
businesses expand and grow. Achilles and Epyx both grew very strongly as did
the new investment in Stepstone. Visma and a new investment, TeamSystem, also
continued to grow solidly and Manx Telecom started to implement its buyout
strategy which involves investment in new service lines.
Industrials represented 18% of the total investment portfolio. Here, the common
theme is that we are backing companies that own and develop high quality
technology/design mostly in Germany but manufacture in low cost locations.
2010 saw a resumption of strong growth in our lighting equipment business, SLV,
and a cyclical rebound in our industrial minerals business, Mondo, amplified by
excellent cost reduction, better pricing policies and improved sales mix.
Healthcare represented 14% of the total investment portfolio. We currently like
two areas: long-term care where the payer risk is low, with a preference for
specialist care of people with acute disabilities; and low cost
pharmaceuticals.
Performance in the year was mixed. Solid profit growth was negated by a
reduction in market ratings for long-term care businesses which reduced the
equity value of Voyage and Casa Reha. Conversely, Frösunda, an addition in the
year which operates in Sweden, both increased earnings strongly and saw no
adverse impact on ratings because the payer risk is low. Strong cash generation
and higher core earnings increased the value of our pharmaceutical business,
Goldshield.
Services investments represented 11% of the total investment portfolio. Two
companies, SHL and Atlas, both engaged in HR and compliance services grew
strongly at double-digit rates of revenue and profit growth. SHL benefited from
the successful completion of an ambitious restructuring exercise which cut
costs, increased productivity and accelerated innovation and sales growth. Our
third investment made in 2010 is JLA, a provider of equipment, finance and
maintenance to laundries. JLA improved cash generation and started management
succession changes as part of our plans to professionalise and improve this
solid market-leading business.
Finally, our legacy Consumer and Leisure portfolio represented 9% of the
investment portfolio. Americana designs and sells branded clothing; Schleich
designs and markets toy figurines and Sporting Index is a sports spread betting
firm. All have performed solidly and continue to pay down debt. We believe that
they offer further value appreciation potential before we exit them at the most
opportune time.
Sector by value|
42% TMT
18% Industrials
14% Healthcare
11% Services
9% Consumer & Leisure
6% Renewable Energy
Asset class||
74% Unquoted
26% Cash & other assets
|Percentages are based on fixed assets (excluding hedges) and accrued interest
and are shown by value
||Percentages are based on net assets
Renewable Power
The Trust invests in renewable energy through RPP1 and RPP2, separate UK funds
managed by our dedicated team of seven specialists. The underlying portfolios
are divided primarily into three platforms: UK onshore wind, Swedish onshore
wind and Spanish solar. The assets are split into onshore wind at 73% of value
and solar at 27% of value. All employ proven, commercially viable technologies
within the framework of current power price regimes across Europe. We eschew
off-shore power generation, as we believe it to be operationally unproven.
Each of the platforms' operating performance was in line with our investment
cases since inception, notwithstanding a period of exceptionally low winds by
historic standards. Against this robust financial performance we face a
decision by the Spanish government to unilaterally change the terms of 25-year
contracts with power generators. These changes reduce the income our assets
will receive over the next three years.
Accordingly, our valuations of these Spanish assets are based on our updated
estimates of reduced net cash flow to equity and on an increased discount rate
to reflect the peculiar factors the market now attaches to Spanish sovereign
risk and our own addition to reflect Spanish regulatory risk.
The investment case for power generation remains positive as Western Europe
faces both a huge need to re-equip its creaking power infrastructure and to
reduce its CO2 emissions.
Geography, Vintage Analysis
At the balance sheet date the geographical weighting of the portfolio had moved
away from the UK, (down from 50% in December 2009 to 45%) towards the Nordic
region, Germany and Italy. We are certainly exposed to developments in each of
these economies but also exposed to growth sectors and to the global economy
too as many companies are exporters. We have retained a weather eye on the
periphery of the eurozone economy, which is set for uncertain times ahead,
whereas the core saver economies of the Nordic region and Germany are both
performing strongly at present.
The distribution of the portfolio across the years shows that our exposure to
the vintages of 2007 and 2008, which may be poor years in retrospect, is quite
low at 21%.
Geographic spread by value|
45% UK
20% Nordic Region
18% Germany
10% Italy
5% Rest of Europe
2% Benelux
Vintage by value|
41% 2010
8% 2009
6% 2008
15% 2007
25% 2006
5% Pre 2006
Deal type by value|
94% Buyout
6% Renewable Energy
|Percentages are based on fixed assets (excluding hedges) and accrued interest
and are shown by value
Investment portfolio|
THE TOP 20 BUYOUT INVESTMENTS ACCOUNT FOR 92% OF THE PORTFOLIO BY VALUE
Buyout
investments Residual Total Portfolio Cum.
(in order Year of Cost valuation value Value
of value) Sector Location investment GBP'000 GBP'000 % %
TeamSystem
1 Luxco SARL TMT Italy 2010 24,432 25,136 9.7% 9.7%
Visma Norway Nordic
2 Holdco TMT Region 2006 701 23,116 8.9% 18.6%
Stepstone
Solutions
3 SARL TMT UK 2010 19,316 19,085 7.4% 26.0%
Frösunda Nordic
4 Luxco SARL Healthcare Region 2010 14,296 15,418 6.0% 32.0%
SLV
Electronik
5 SARL Industrials Germany 2007 5,999 14,532 5.6% 37.6%
SHL Group
Holdings 1
6 Limited Services UK 2006 7,984 14,224 5.5% 43.1%
Achilles
Group
Holdings
7 Limited TMT UK 2008 5,226 12,788 4.9% 48.0%
Mondo
Minerals Nordic
8 Co-op Industrials Region 2007 6,987 12,676 4.9% 52.9%
Midas
EquityCo SARL
(t/a
9 Goldshield) Healthcare UK 2009 8,545 11,962 4.6% 57.5%
JLA Equityco
10 Limited Services UK 2010 11,476 11,476 4.4% 61.9%
Manx Telecom
11 Limited TMT UK 2010 11,033 11,033 4.3% 66.2%
SimonsVoss
12 Luxco SARL Industrials Germany 2010 10,065 10,360 4.0% 70.2%
Teufel Holdco
13 SARL Industrials Germany 2010 9,418 9,605 3.7% 73.9%
Epyx
Investments
14 Limited TMT UK 2009 6,388 9,414 3.6% 77.5%
Schleich Consumer &
15 Luxembourg SA Leisure Germany 2006 4,634 8,305 3.2% 80.7%
Americana
International
Holdings Consumer &
16 Limited Leisure UK 2007 4,625 7,947 3.1% 83.8%
Sporting
Index Group Consumer &
17 Limited Leisure UK 2005 7,207 6,444 2.5% 86.3%
Elite Holding
SA (t/a
18 Sitel) TMT Benelux 2005 3,540 5,367 2.1% 88.4%
Voyage
Holdings
19 Limited Healthcare UK 2006 13,136 4,926 1.9% 90.3%
Atlas Energy
20 Group Limited Services UK 2007 9,597 4,034 1.6% 91.9%
Casa Reha
21 SARL Healthcare Germany 2008 8,262 3,023 1.2% 93.1%
Software
(Cayman), LP
- re Blue
22 Minerva TMT UK 2006 530 2,224 0.9% 94.0%
Software
(Cayman), LP
- re
23 Guildford TMT UK 2007 253 1,030 0.4% 94.4%
Weston
Presidio
Capital III, North
24 LP Fund America 1998 2,104 639 0.2% 94.6%
Tiger Capital
25 Limited TMT UK 2008 632 316 0.1% 94.7%
26 Doc M SARL Healthcare Germany 2004 - 177 0.1% 94.8%
ACT Venture
Capital
27 Limited Fund Ireland 1994 26 28 - 94.8%
BMFCO UA (t/a
28 Fabory) Services Benelux 2007 7,473 - - 94.8%
Cornish
Bakehouse
Investments Consumer &
29 Limited Leisure UK 2007 4,200 - - 94.8%
KVT Coinvest
30 SARL Industrials Switzerland 2008 5,827 - - 94.8%
W.E.T Holding
31 Luxembourg SA Industrials Germany 2003 7,774 - - 94.8%
NOK / GBP
Hedge n/a n/a n/a 849 543 0.2% 95.0%
Hg5 Euro
Hedge n/a n/a n/a - (1,289) (0.5%) 94.5%
Total buyout
investments 222,535 244,539 94.5%
Renewable
energy
investments
Renewable
1 RPP1 Fund energy Europe 2006 14,815 12,425 4.8% 4.8%
Renewable
2 RPP2 Fund energy Europe 2010 2,314 1,826 0.7% 5.5%
Total
renewable
energy
investments 17,129 14,251 5.5%
Total all
investments
(33) 239,664 258,790* 100.0% 100.0%
*Including investment valuation of GBP232,184,000 and accrued interest of GBP
26,606,000 - see notes 12 and 14 to the financial statements
The above buyout investments are held through the Trust's investment in HGT LP
and HGT 6 LP. See note 1 to the financial statements.
Investments
A record year, investing GBP111 million in a shallow buyer's market
Seven new buyout investments were made with a total enterprise value of GBP1.3
billion, using GBP667 million of equity from our clients, with the Trust's share
being GBP100 million. In each case we have applied the knowledge acquired in our
research into various investment themes. These are: compliance and mission
critical services and software; telecoms infrastructure; long-term acute care;
low cost pharmaceuticals; and German designed products made in China. Details
of these new investments may be found below.
In the renewable power business, three new investments with total project
values of GBP254.9 million required GBP37.6 million of equity from RPP1 and RPP2.
The Trust's share of these new investments, other further investments and their
share of fees payable by the projects was GBP5.9 million. Three new investments
were made in the year in the UK and Sweden. Each one built on earlier work and
grew existing core platforms in Sweden and the UK. We are now co-owners of the
largest on-shore wind farms in the UK and Sweden and are the 5th largest
operator of solar parks in Spain.
Post-period end, an investment was made into ATC Group, a leading independent
provider of corporate secretarial, tax and trust services to multinational
corporations and financial institutions. HgCapital Trust plc contributed
approximately GBP9.9 million to the investment.
Investments made in 2010*
Deal Cost*
Company Sector Geography Activity type GBP'000
TeamSystem TMT Italy Software and services business Buyout 24,432
Global provider of strategic HR
Stepstone TMT UK software Buyout 19,316
Nordic Swedish provider of specialist
Frösunda Healthcare region disability care Buyout 14,296
Provision of on-premise laundry
services and commercial machine
JLA Services UK sales Buyout 11,476
Telecommunications and internet
Manx Telecom TMT UK provider Buyout 11,033
Provider of digital radio-based
locking and access control
SimonsVoss Industrials Germany systems Buyout 10,065
Designer and online retailer of
Teufel Industrials Germany loudspeaker systems Buyout 9,418
Renewable
RPP2 Fund Energy Europe Renewable energy fund Fund 2,314
New investments 102,350
Voyage Healthcare UK Care home operator Buyout 4,380
Renewable
RPP1 Fund Energy Europe Renewable energy fund Fund 3,603
Nordic
Visma TMT region Business application software Buyout 1,712
E-learning products for the oil
Atlas Services UK and gas industry Buyout 1,444
Electronic marketplace for
Epyx TMT UK services to private car fleets Buyout 446
Markets pharmaceuticals and
Goldshield Healthcare UK nutraceuticals Buyout (2,730)+
Other
investments 213
Further
investments 9,068
Total
investment by
the Trust 111,418
*The numbers in the table relate to the Trust's share of transactions
+Partial return of initial investment
Realisations
GBP82 million realised at 2.2x original cost and 64% uplift over book value in
December 2009
We entered 2010 believing that the next 12 months would be a buyer's market and
realisation activity would be unattractive and hence subdued. The opportunity
to buy for value was in fact shallow and competitive buyer interest grew
through the year giving us the opportunity to secure good value from realising
a number of investments.
Two investments, Hoseasons, a holiday business, and Pulse, a healthcare
staffing agency, were long-held investments, both of which had been very
heavily written down in earlier periods. Both were revived under new
management; both grew to record profits; and both were sold to industry
consolidators at attractive prices. Together they returned GBP84.0 million of
capital for our clients, the Trust's share being GBP36.2 million at an average
multiple of cost of 2.0x and a combined uplift over book value of 53% (GBP29.0
million).
Visma was the third and most significant realisation. It was sold for NOK 11
billion (GBP1.2 billion) to KKR delivering a 3.7x return on cost, with the
Trust's share being GBP61.5 million representing a 50% uplift over the June 2010
book value. We chose to take 63.5% of this in cash (GBP39.4 million for the
Trust) rolling over the remaining 36.5%, totalling GBP136.7 million (GBP22.1
million for the Trust) because, even at the premium price paid, we believe the
long-term prospects for Visma remain attractive.
GBP11.3 million of capital was distributed from the RPP portfolios, which are now
generating cash consistently, of which the Trust's share was GBP0.7 million.
Power investments offer long-term high yields which are a partial hedge against
the impact of rising energy prices on corporate profits.
Since the period end, we completed the sale of Elite Holdings, trading as SiTel
Semiconductor, a producer of microchips targeted primarily at the home wireless
voice and data applications market. Proceeds to the Trust amounted to GBP9.5
million and the uplift over the December 2010 valuation was equal to 13.0 pence
per share.
REALISATIONS MADE IN 2010*
Cumulative Current
Cost Proceeds gain/ year
Cost (1) (loss)(2) Gain(3)
Company Sector Exit Route GBP'000 GBP'000 GBP'000 GBP'000
Visma TMT Secondary sale 16,470 39,365 22,895 21,757+
Pulse Healthcare Trade sale 6,131 31,186 25,055 6,589
Consumer &
Hoseasons Leisure Trade sale 2,197 5,065 2,868 2,591
FTSA Industrials Liquidation 6,813 - (6,813) -
Full
realisations 31,611 75,616 44,005 30,937
Elite TMT Refinancing 2,209 4,127 1,918 -
Renewable Capital
RPP1 Fund energy Distribution 758 748 (10) -
Other 2,504 1,452 (1,052) 1,106
Partial
realisations 5,471 6,327 856 1,106
Total
realisations 37,082 81,943 44,861 32,043
*The numbers in the table relate to the Trust's share of transactions
1. Includes gross revenue received during the year
2. Realised proceeds including gross revenue received, in excess of historic
cost
3. Realised proceeds including gross revenue received, in excess of 31 December
2009 book value and accrued interest
+Minority stake retained, valued at GBP23.1 million
Developments in HgCapital
2010 was little different from any other year in terms of investment and change
at HgCapital. Some of the significant developments in the year worth noting
were:
* Increasing our funds under management by GBP0.3 billion, including the GBP50
million raised in the Trust's share issue.
* The promotion of the next generation of investment managers to lead each of
our four buyout investment teams.
* Recruiting new talent into the business at all levels including at partner
and director level.
* Commencing research on smaller mid-market buyouts in TMT.
We have ample capacity to manage the capital entrusted to us by our clients and
to identify new areas of endeavour which will be beneficial for our clients,
including the Trust.
Prospects
Having the capital to support our portfolio, a well equipped investment team
and a portfolio of companies growing revenues and profits, led by a strong
cadre of managers, give us grounds for optimism for the future. Yet we continue
to recognise the risks posed by a reverse in the global economy caused by an
inadequate policy response to global imbalances, which currently manifest
themselves in an over-heating Chinese economy, excess debt in Anglo-Saxon
economies and sovereign credit risk in the peripheral economies of the
eurozone. So we will work to improve the strategic and operational positions of
each of our holdings, look at selling for value where appropriate, and reducing
our investment rate in a year where we believe demand for new deals will be
more intense than it has been since early 2008.
As the economy recovers, attention will shift again to the longer term problems
of the costs of a rapidly ageing population and pricing-in the true economic
cost of CO2 emissions. This will happen during a period where the excesses of
the last decade have to be worked off via deleveraging and probably through
higher inflation than we have been used to over the past 20 years. Companies
will need to change their strategies, their portfolios and their operations to
succeed. Business will need the patient risk capital and informed and committed
approach that HgCapital brings.
If we continue to be alert to risks and opportunities, avoid complacency and
continue to find the best managers to back, we remain confident that we can
continue to deliver performance and value for shareholders.
TOP 20 BUYOUT INVESTMENTS
Buyout investments are held through limited partnerships of which HgCapital
Trust plc (the 'Company') is the sole limited partner. 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.
1 TeamSystem
Website: www.teamsystem.com
Original enterprise value: EUR570 million
HgCapital clients' total equity: 50%
Business description
TeamSystem is a leading market provider of business-critical, daily-use SME
software products in Italy. Headquartered in Pesaro, the company has a diverse
base of over 80,000 customers. It has 27 offices in Italy and employs
approximately 800 people.
Why did we invest?
TeamSystem is HgCapital's seventh investment into business-critical back office
software. The company has a track record of strong performance and delivered
organic revenue growth of 6% p.a. between 2007 and 2009, trading resiliently
through the downturn. Its stable nature (with more than 50% of revenues by way
of annual subscriptions), strong cash generation and room for growth in both
the business and its market, all supported our decision.
How do we intend to create value?
Alongside organic growth, management intends to cross-sell products to
TeamSystem's existing client base through the use of add-on modules such as
reporting, analytics and payroll.
The potential to complete a number of add-on acquisitions of complementary
software businesses in Italy has also been identified.
What has been achieved?
At this early stage of the investment's life we are focused on an in-depth
review to identify key growth areas for the business and to confirm the
investment case.
How is it performing?
TeamSystem has already traded ahead of prior year with good growth in both
sales and EBITDA. Some anticipated growth has been delayed until 2011 as
changes in tax legislation that will require customers to upgrade their
software were postponed.
How will we crystallise value?
We see a diverse range of exit options for TeamSystem, with interest from trade
and financial buyers expected and an IPO on the Italian stock market also a
possibility.
To support an attractive exit rating for the business we will look to drive
organic growth both by leveraging the existing customer base and by continuing
to grow customer numbers.
Trust's Investment - TeamSystem
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
TMT Italy Aug 2010 24,432 25,136 - 25,136 Cost
The difference between cost and valuation is due to foreign exchange rate
movements
2 Visma
Website: www.visma.com
Original enterprise value: NOK4.3 billion
HgCapital clients' total equity: 16%
Business description
VISMA is the number one provider of business software and related services to
small and medium-sized enterprises in the Nordic region.
The company provides accounting, resource planning and payroll software,
outsourced book-keeping, payroll services and transaction process outsourcing.
Why did we invest?
Visma is an early example of HgCapital's focus on business critical 'software
as a service' firms operating within a fast growing marketplace. The company
enjoys high barriers to entry due to complex regulation and high levels of
predictable recurring revenue resulting from a subscription payment model.
Room for improvement was identified in profit margins that were below those of
most of its competitors. This was due to significant investment in the business
and a delay in the benefits expected from a number of recent acquisitions.
How do we intend to create value?
In September 2010, a 64% stake in the business was sold to KKR. This valued the
business at GBP1.2 billion, of which our clients' stake was worth GBP380.0 million
(an investment multiple of 3.7x). HgCapital continues to hold a stake and hopes
to benefit from further potential in the next few years.
What has been achieved?
During the course of the investment, the company has made several bolt-on
acquisitions including Accountview, Sirius IT and Teemuaho. These deals
bolstered organic growth from innovation in new services and products while
margins were improved through rethinking Visma's internal processes.
How is it performing?
There was continued strong growth in 2010 with growth in both sales and EBITDA
up on prior year.
How will we crystallise value?
There is plenty of potential for further value to be generated through an IPO
in the next few years.
Trust's Investment - Visma
Residual unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
Nordic Third party
TMT region May 2006 701 23,116 - 23,116 transaction
3 StepStone Solutions
Website: www.stepstonesolutions.com
Original enterprise value: EUR110 million
HgCapital clients' total equity: 79%
Business description
StepStone Solutions is a leading provider of strategic HR software (recruiting
and talent management) to medium and large enterprises in Europe, operating in
16 countries with 430 full-time employees.
The business operates a subscription-based model (more than 60% of total
revenue) with a strong recurring consulting element. Customer retention rates
are high at around 95%.
Why did we invest?
StepStone lies within the sub-sector focus on 'software as a service' (e.g.
Visma, Achilles, Epyx) where companies experience high levels of recurring
revenue from long-term customers which leads to stability and high margins.
The company has achieved strong organic growth, with scope for further margin
improvement, and has been gaining share since 2003 in a market growing at
15%-20% p.a. There is also the opportunity to consolidate the market by
acquiring local players.
How do we intend to create value?
StepStone's management intends to drive subscription revenue growth by
capitalising on their leading technology, improving cross- and up-selling into
the existing customer base and investigating partnerships with HgCapital
portfolio companies.
There is also an increased focus on costs to improve margins and the
strengthening of the company's international presence both organically and
through bolt-on acquisitions.
What has been achieved?
A first bolt-on acquisition, Mr. Ted, has been made and their globally-sold
Talentlink product has been added to the StepStone range of services. An
initial cost saving programme has been successfully completed.
How is it performing?
Sales and EBITDA have grown well in 2010, partly driven by an increased demand
for consulting services.
How will we crystallise value?
Multiple options are available as there is high demand for vertical technology
companies. StepStone has received strong interest from trade buyers but we may
also contemplate an IPO or a sale to another private equity buyer.
Trust's Investment - StepStone Solutions
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
TMT UK Aug 2010 19,316 19,085 - 19,085 Cost
The difference between cost and valuation is due to foreign exchange rate
movements
4 Frösunda
Website: www.frosunda.se
Original enterprise value: SEK1.5 billion
HgCapital clients' total equity: 88%
Business description
Frösunda provides specialist care and personal assistance for people with
physical or mental disabilities. It also has an emerging psychiatric and
schools business.
Headquartered in Solna, Sweden, Frösunda employs around 3,700 and cares for
over 1,600 people.
Why did we invest?
Frösunda represents HgCapital's fourth investment into healthcare services. It
is one of the leaders, with considerable market share, in a sub-segment of the
healthcare market growing at over 10% p.a. and protected by intensifying
regulation and high patient care requirements.
The business benefits from visible recurring revenue and low customer churn.
There are clear opportunities to improve margins through economies of scale.
There is also potential to expand into adjacent market segments which the
company has already shown through recent M&A.
How do we intend to create value?
HgCapital will work with management to develop Frösunda as an independent
business and as the leading provider of specialist care in Sweden.
We intend to grow the business organically while broadening into adjacent
markets where the company can apply its expertise. Expansion through
acquisition will be key to our growth plans and a first bolt-on investment,
Norlandia, has already been made. There is considerable room for margin
improvement by focusing on operational excellence.
What has been achieved?
The senior team at Frösunda is in the midst of executing the 100 day plan
developed alongside HgCapital. This will see improvements in sales force
effectiveness, productivity and product range while also looking at potential
bolt-on acquisitions.
How is it performing?
In 2010, Frösunda experienced good growth in both sales and EBITDA.
How will we crystallise value?
We expect Frösunda to appeal to one of the large Swedish healthcare
conglomerates, another financial buyer, or to the public through an IPO.
Trust's Investment - Frösunda
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
Nordic
Healthcare region Jun 2010 14,296 15,418 - 15,418 Cost
The difference between cost and valuation is due to foreign exchange rate
movements
5 SLV
Website: www.slv.com
Original enterprise value: EUR280 million
HgCapital clients' total equity: 66%
Business description
SLV is a fast growing and highly profitable German provider of lighting systems
and decorative lighting solutions with a B2B focus. Products are only sold
through catalogues.
SLV has a competitive advantage in the areas of product development and design,
production, warehousing and logistics, and distribution.
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,
improve cooperation with business partners, enter new markets and reduce
leverage quickly.
What has been achieved?
The management team has been strengthened while strategies and plans to enter
the US market are bearing fruit. Relationships with business partners have been
redefined and new partners added in Europe to support growth.
How is it performing?
Despite the uncertain environment, SLV managed to significantly grow sales and
EBITDA in 2010 following flat performance in 2009. Promisingly, new markets are
showing particularly strong growth prospects.
How will we crystallise value?
SLV should be an attractive target for both private equity and trade buyers.
Trust's Investment - SLV
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
Industrials Germany Aug 2007 5,999 11,556 2,976 14,532 Earnings
6 SHL
Website: www.shl.com
Original enterprise value: GBP102 million
HgCapital clients' total equity: 75%
Business description
SHL is the UK market leader in objective psychometric testing and has a global
presence.
The business consists of the development and sale of 300 different types of
psychometric tests to corporate clients and the provision of psychologists for
the administration and interpretation of tests.
Why did we invest?
SHL's position at the head of a growth market with a blue chip customer base
provided an opportunity to invest aggressively to increase SHL's share of
customer spend and access high growth geographies through focusing on new
technology and products.
How do we intend to create value?
Our plan was to invest in new sales resources, to focus the business on higher
margin web sales and to invest in new technology to increase product
performance.
What has been achieved?
Following a tough year in 2009 the business has rebounded strongly, with
profits and revenues on the increase. A merger with US-based Previsor was
completed post-period end in January 2011.
The deal was executed on an all equity basis, with a universal rollover of
existing management ownership into the combined business, and no additional
funding requirement from clients. HgCapital will retain a 50.5% stake of the
enlarged group, with Veronis Suhler Stevenson, the private equity investor in
PreVisor, retaining a minority position.
The merged company will be able to provide a broad range of assessment
solutions across a variety of roles to support both recruitment and development
decisions. Its offering will be available in more languages and countries than
any other talent management provider.
How is it performing?
Sales in the year to date have been strong and costs have been effectively kept
under control leading to very strong recovery in growth in EBITDA after a
difficult 2009.
How will we crystallise value?
Following the merger we will focus on achieving the target cost and revenue
synergies of the combined businesses. The business will be one of the largest
and most profitable in the human capital market and should be an attractive
acquisition target as well as potential IPO candidate.
Trust's Investment - SHL
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
Services UK Oct 2006 7,984 10,473 3,751 14,224 Earnings
7 Achilles
Website: www.achilles.com
Original enterprise value: GBP75 million
HgCapital clients' total equity: 63%
Business description
Achilles operates schemes whereby buyers in a certain industry require their
suppliers to subscribe and to provide information to the Achilles online
database; for suppliers it is mandatory to join the scheme if they wish to
supply to the buyer group and both buyers and suppliers pay annual subscription
fees.
Achilles currently operates more than 30 schemes across 22 countries.
Why did we invest?
Achilles is a prime example of HgCapital's subscription-based 'software as a
service' thematic investment strategy. It is a market leader in a fast growing
industry, with significant recurring revenue streams and high barriers to
entry.
How do we intend to create value?
With high levels of contracted revenue, Achilles' position as global market
leader with high barriers to entry and a scalable business model reveals
considerable potential in revenue and margin growth.
What has been achieved?
Achilles' senior management team has been strengthened with significant new
hires, while internal process projects on pricing, back-office management and
sales practices are beginning to bear fruit.
There has also been considerable investment in a new common IT system, used
across all areas of the business.
How is it performing?
Performance has been significantly up on the prior year with good growth in
both sales and EBITDA.
In March 2011, Achilles was named as The Times Buyout Track 100, Best Buyout
Deal of the Year and was also ranked at number 13 in The Times 2011 Buyout
Track List, designed to highlight private equity-backed companies with the
fastest growing profits in the UK.
How will we crystallise value?
There has been strong interest from the Private Equity community and Achilles'
protected revenue base will maintain this interest throughout the economic
cycle. A trade sale or IPO are also attractive outcomes.
Trust's Investment - Achilles
Residual unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
TMT UK Jul 2008 5,226 11,458 1,330 12,788 Earnings
8 Mondo Minerals
Website: www.mondominerals.com
Original enterprise value: EUR230 million
HgCapital clients' total equity: 89%
Business description
Mondo is the European number two in talc mining and processing. Its core
markets are the paper and paint industries. It supplies the majority of talc
for paper producers in Finland, the rest of the Nordic region and Northern
Europe.
Why did we invest?
Mondo's core customer base offers long-term demand. The product is a critical
but low cost technical component in its customers' manufacturing processes.
Due to the specific characteristics of talc, an opportunity exists to push into
other high margin applications and increase the size of the non-paper business.
There is also opportunity for margin improvement through process change.
How do we intend to create value?
The strategy is to grow sales in higher margin applications, reduce costs
through better procurement and process and enter new expanding BRIC markets
through acquisition and joint ventures.
What has been achieved?
Sales in non-paper applications have increased, processes improved, milling
operations have switched from oil to electricity, and Mondo has expanded
alongside its customers to serve their global needs.
How is it performing?
Mondo has been trading very well over the year with a steady increase in
shipped volumes, sales and EBITDA.
How will we crystallise value?
We believe that Mondo will be an attractive target for industrial minerals
companies to enter into or reinforce their position in the talc industry. Mondo
already has world-class margins and cash generation. These characteristics,
together with the build up of a strong management team should also make Mondo
attractive to secondary buyout investors.
Trust's Investment - Mondo Minerals
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
Nordic
Industrials region Oct 2007 6,987 9,159 3,517 12,676 Earnings
9 Goldshield
Website: www.goldshield-pharmaceuticals.com
Original enterprise value: GBP179 million
HgCapital clients' total equity: 53%
Business description
Goldshield is a profitable niche pharmaceutical and consumer health products
company focused on the UK.
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.
Goldshield also has a small consumer health division which sells a range of
weight management and consumer health products.
Why did we invest?
The business operates in a protected niche of the pharmaceuticals market and
can act as a platform for acquisition-based growth.
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 licensing deals that will extend the
product portfolio and deliver continued growth.
How do we intend to create value?
The business can be simplified by withdrawing from unprofitable activities and
grown by acquiring/licensing more products in the pharmaceutical business.
What has been achieved?
A new management team has been recruited including a Chairman, CEO and Heads of
Operations and Business Development. A streamlining process has begun with the
disposal of some Consumer Health and other non-core assets. The new executives
are driving improvements in their respective areas particularly Quality
Assurance, Product Development/Acquisition and Operations.
How is it performing?
Pharmaceutical sales are flat with underlying market growth offset by a new
competitor in a core product area. Consumer Health sales are declining and this
division is being exited. EBITDA is strongly ahead of the prior year and
expectations, with significant cash on the balance sheet.
How will we crystallise value?
The most likely exit route is a trade sale to a larger pharmaceutical company.
Trust's Investment - Goldshield
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
Healthcare UK Dec 2009 8,545 10,924 1,038 11,962 Earnings
10 JLA
Website: www.jla.com
Original enterprise value: GBP150 million
HgCapital clients' total equity: 75%
Business description
JLA is the number one service provider to the on-premises laundry market in the
UK, providing distribution, rental and servicing of commercial laundry machines
to more than 18,000 UK SMEs.
The company is also the leading provider of coin-operated, commercial machines
into accommodation units (e.g. universities, worker accommodation units etc.)
which it services via its Circuit brand.
Why did we invest?
JLA has significant market share and strong operating performance, including
sustained organic growth through the period 2007-2009.
The customer base is highly fragmented and considers laundry as a mission
critical part of their day-to-day business. With a high proportion of customers
in long-term contracts (representing over 70% of revenues and 85%+ of profits),
there are attractive recurring revenues.
How do we intend to create value?
HgCapital is working alongside management to increase the benefit of selling
new products and services through JLA's existing sales force and service
network.
In addition there are plans to drive add-on acquisitions while assisting the
company to secure the financing to enable it to grow.
What has been achieved?
A first small bolt-on acquisition has been made in CityNet, a producer of
temperature monitoring systems, bolstering JLA's product range.
How is it performing?
Performance for the year to date has been largely flat for both sales and
EBITDA with a poor first half being countered by improvements in the second.
How will we crystallise value?
The most likely exit route for JLA is either a secondary sale or a trade sale.
Ahead of exit, HgCapital will focus on repositioning JLA as a platform for
selling hard facility management services into SMEs, which could potentially
lead to a re-rating of the business.
Trust's Investment - JLA
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
Services UK Mar 2010 11,476 11,476 - 11,476 Cost
11 Manx Telecom
Website: www.manxtelecom.com
Original enterprise value: GBP159 million
HgCapital clients' total equity: 80%
Business description
Manx Telecom is the primary fixed and mobile telecom operator on the Isle of
Man. A former monopoly, it provides telecommunication and data services to
commercial and consumer customers.
In addition to its on-island activities, the company has developed a number of
niche off-island voice and data hosting businesses which are delivering further
growth.
Why did we invest?
Manx Telecom is the incumbent operator in a high growth economy where quality
telecoms are critical for many businesses and spending in the sector has
historically grown above real GDP.
The company enjoys a leading market position and a favourable regulatory
environment which encourages infrastructure investment.
How do we intend to create value?
HgCapital will continue to invest in the network to drive growth in the core
business while further investment in the Isle of Man's infrastructure through
the development of a new data hosting centre will support continued growth in
this high margin business area.
We will pursue margin improvement to levels in line with leading small island
telecoms operators and management will be supported in the continued growth of
new off-island opportunities. There is potential for bolt-on acquisitions to
further expand the business.
What has been achieved?
In the nine months since our investment the company has successfully completed
the spin out from previous owner Telefonica, and adjusted well to life as an
independent business. Best in class reporting and KPI monitoring processes have
been put in place and a strategic review carried out identifying key areas for
future growth, with planning for construction of a new data centre and roll out
of high speed broadband well underway. In 2011, Manx Telecom was listed in the
Sunday Times 100 Best Companies To Work For.
How is it performing?
The company experienced flat sales and a slight decrease in EBITDA compared to
the prior year due to exceptional one-off revenues in 2009 and the extra costs
incurred as a result of Manx Telecom becoming a stand-alone company.
How will we crystallise value?
The business in its current form is expected to be attractive to a number of
trade and financial buyers but successful growth in the scale of the business
through acquisitions will make the business attractive to larger private equity
players who have a successful track record in the telecoms space.
Trust's Investment - Manx Telecom
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
TMT UK Jun 2010 11,033 11,033 - 11,033 Cost
12 SimonsVoss
Website: www.simons-voss.com
Original enterprise value: EUR112 million
HgCapital clients' total equity: 69%
Business description
SimonsVoss is the European market leader in the development, manufacture and
marketing of electronic battery powered locking and access systems for public,
commercial and residential buildings. Revenues come primarily from Germany with
additional presence in France and Benelux.
Why did we invest?
Operating in a niche market segment with high barriers to entry (development
costs and certification in particular), the company's robust trading through
the recent recession saw them gain market share in a depressed market and the
business grew EBITDA by an average of 28% each year between 2005 and 2009.
The business is well placed to benefit from the low penetration of the overall
market for electronic locking systems (5% in Europe and 19% in Germany); there
is also an opportunity for further expansion into the US and Asia and into
attractive new product segments.
SimonsVoss has an established in-house R&D function and develops innovative new
products while minimising the cost of existing ones.
How do we intend to create value?
By building sales teams in all markets we can increase revenue, with the
strongest growth coming from European countries outside Germany. This can be
supported by additional products such as passive technology, digital escutcheon
and compact readers, all of which can help to open up new markets.
Margins can be partly improved by increasing volumes and achieving a variety of
operational efficiencies.
What has been achieved?
At such an early stage in the investment, the primary objective so far has been
to navigate an expanded product range to market, giving a newly bolstered sales
force something to use as it expands internationally.
How is it performing?
In spite of weakness in the industry, SimonsVoss saw slight increases on prior
year in both sales and EBITDA.
How will we crystallise value?
SimonsVoss offers a strong platform to enter the fast growing market for
electronic cylinders so an exit to a trade buyer seems most likely.
Trust's Investment - SimonsVoss
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
Industrials Germany Jun 2010 10,065 10,360 - 10,360 Cost
The difference between cost and valuation is due to foreign exchange rate
movements
13 Teufel
Website: www.teufel.de
Original enterprise value: EUR105 million
HgCapital clients' total equity: 84%
Business description
Teufel Speakers is a leading designer and online retailer of loudspeaker
systems in Germany. The company designs, markets and sells under its own brand
directly through its internet platform.
Based in Berlin with 72 employees, the business is focused on providing value
for money products to the mid-to-high-end segment of the market.
Why did we invest?
Teufel has a pure online sales model with high operating margins while still
being able to offer products at a 10%-20% lower price point than its
competitors. The market it serves has been growing thanks to the ongoing switch
to flatscreen TVs, surround sound and portable media devices in the household,
all requiring speakers. Teufel's revenue grew at a rate of 18% per annum
between 2007 and 2009.
Loudspeakers enjoy stable prices and margins and Teufel designs its own
products, eliminating the risk of disintermediation, a business model with
certain similarities to other successful HgCapital investments like SLV and
Schleich.
How do we intend to create value?
Initial expansion into the UK and Benelux has generated immediate sales success
and HgCapital intends to support management to continue to grow the core
business in Germany alongside these international efforts.
There is considerable room for improvement in margins, marketing, brand
recognition and especially in the product range where we look forward to the
continued launch of new, state-of-the-art products and technologies.
What has been achieved?
The additional acquisition of wireless audio company, Raumfeld, gives Teufel an
entry into a small but fast growing, high margin audio segment. At this early
stage, Teufel is primarily concerned with new product development.
How is it performing?
Teufel has seen significant increase in sales and EBITDA across 2010.
How will we crystallise value?
Several buyers could be interested in a trade sale if the business becomes
larger and more international. Financial investors looking for an asset light
business model with attractive growth and cash flow characteristics, industry
players interested in the trend towards listed eCommerce, and an IPO are all
possible outcomes.
Trust's Investment - Teufel
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
Industrials Germany Jul 2010 9,418 9,605 - 9,605 Cost
The difference between cost and valuation is due to foreign exchange rate
movements
14 Epyx
Website: www.epyx.co.uk
Original enterprise value: GBP90 million
HgCapital clients' total 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 cash flow 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?
Epyx has seen strong growth in sales and EBITDA in the year to date which is
expected to continue as new business lines are rolled out.
How will we crystallise value?
We believe the exit options for Epyx are attractive, with a trade sale or
secondary buyout being viable exit options.
Trust's Investment - Epyx
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
TMT UK Jun 2009 6,388 8,149 1,265 9,414 Earnings
15 Schleich
Website: www.schleich-s.com
Original enterprise value: GBP165 million
HgCapital clients' total 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.
Its products are sold in over 30 countries, including its home market of
Germany, the US, the UK and France.
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?
Drive sales growth organically in existing markets and through international
expansion. Penetrate large key accounts. Capture margin improvement through
increased scale.
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. The online business is under review and new management in the US is
performing well.
How is it performing?
Strong product demand in the year was hampered by availability issues which
were solved at the end of 2010 leaving Schleich with sales and EBITDA only
moderately up on prior year.
How will we crystallise value?
Several multi-national toy makers represent natural trade buyers; stable
profits and risk profile could also support a secondary buyout or an IPO. We
have watched the success of recent German IPOs (eg. Kabel Deutschland,
Brenntag, Tom Tailor) with interest.
Trust's Investment - Schleich
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
Consumer
& Leisure Germany Dec 2006 4,634 6,408 1,897 8,305 Earnings
16 Americana
Website: www.bench.co.uk
Original enterprise value: GBP180 million
HgCapital clients' total equity: 45%
Business description
Americana is a branded apparel business, primarily focused on designing and
marketing Bench brand products aimed at both men and women in the 16 to 25 age
group.
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?
Having substantially strengthened the management team and improved management
reporting and business planning, Americana entered Germany and built a small
but highly profitable and growing business. Brand ownership issues in other
territories have been resolved in preparation for further expansion while brand
perception on home soil is being built up.
How is it performing?
Performance in the year to 30 June 201 was good. Sales and EBITDA in the first
half of the financial year-ending 30 June 2011 continued to grow - particularly
in the German operation.
How will we crystallise value?
Interest is anticipated from both trade buyers and private equity.
Trust's Investment - Americana
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
Consumer
& Leisure UK Mar 2007 4,625 4,946 3,001 7,947 Earnings
17 Sporting Index
Website: www.sportingindex.com
Original enterprise value: GBP73 million
HgCapital clients' total equity: 69%
Business description
Sporting Index ('SPIN') is the largest sports spread betting firm in the world.
Well positioned in the UK, it aims to offer more markets, more 'fun bets', and
more choice than any other sports spread betting company.
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
geographic markets.
How do we intend to create value?
Three main improvements will lead to greater revenues and margins: the
development of new distribution channels for SPIN's spread betting product
through the sale of pricing to fixed-odds bookmakers, lottery operators and
online casinos; the expansion of SPIN's proprietary trading capability via
betting exchanges; and development of 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
for further accounts is in place.
A new IT platform under development will deliver significant productivity
improvements.
How is it performing?
Sales and EBITDA were flat in the year to May 2010 but have since rebounded,
and are both significantly up on the previous year. Contributing factors can be
identified as a profitable World Cup and a strengthening wholesale distribution
base.
How will we crystallise value?
The company will be positioned for a trade exit, most likely to an industry
consolidator.
Trust's Investment - Sporting Index
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
Consumer
& Leisure UK Nov 2005 7,207 3,077 3,367 6,444 Written-down
18 SiTel Semiconductor
Website: www.sitelsemi.com
Original enterprise value: GBP39 million
HgCapital clients' total equity: 80%
Business description
SiTel creates custom-made microchips targeted primarily at the home wireless
voice and data applications market. Its customers include the world's leading
manufacturers of cordless home telephone systems.
SiTel outsources all of its asset-intensive manufacturing to large blue-chip
foundries, allowing it to generate a high return on capital.
Why did we invest?
Our investment thesis was based on buying the asset at a low price, with the
intent of growing revenues and profits from both market share gains and winning
revenue in adjacent niche markets.
How do we intend to create value?
By working closely with management to establish a strong independent entity,
support increased R&D spend, and expand into areas such as 'Voice over Internet
Protocol' (VoIP) chips and gaming peripherals.
What has been achieved?
HgCapital helped the business establish a strong supplier base and build a
skilled non-executive team. Increased R&D investment resulted in market share
gains in core cordless telephony systems market and key design wins in new
growth markets.
How is it performing?
In 2010, both sales and EBITDA grew over the prior year.
How will we crystallise value?
On 10 February 2011, HgCapital announced the sale of SiTel Semiconductor to
Dialog Semiconductor plc for an enterprise value of $86.5 million, representing
a realisation at nearly 2.4x original cost.
HgCapital Trust realised cash proceeds of GBP9.6 million on the deal. Compared
with the valuation of SiTel - at GBP5.4 million - this is an uplift of 78%.
The Trust's net asset value as at February 2011 has taken account of the sale
of this business.
Trust's Investment - SiTel Semiconductor
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
TMT Benelux June 2005 3,540 2,883 2,484 5,367 Earnings
19 Voyage
Website: www.voyagecare.com
Original enterprise value: GBP322 million
HgCapital clients' total equity: 65%
Business description
Voyage provides care for people with learning disabilities and associated
physical disabilities, autistic spectrum disorders, complex needs and acquired
brain injury.
Voyage offers a range of care provision from help in your own home to intensive
physical and mental support in modified accommodation. Fees are paid by local
authorities and PCTs.
Why did we invest?
Significant shortage of supply for residential care at this level leaves
opportunity for growth.
Voyage enjoys a strong market position and a high quality estate of stable,
cash generative assets.
How do we intend to create value?
Historically, growth has been generated by organic roll-out of purpose-built
homes. Going forward, the strategy is to broaden the service offering to
include flexible home care options. In December 2010, Voyage acquired an acute
home care provider, Partners in Specialist Care.
What has been achieved?
Maintained a reputation for high quality care, continued successful roll out of
new homes, supported management in reviewing acquisition targets.
How is it performing?
Voyage experienced moderate growth in both sales and EBITDA compared to prior
year with high levels of occupancy offsetting pressure on fees.
How will we crystallise value?
An exit could be via an IPO, to a private equity fund or private equity-backed
trade buyer.
Trust's Investment - Voyage
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
Healthcare UK Apr 2006 13,136 4,357 569 4,926 Written-down
20 Atlas Interactive
Website: www.atlasinteractive.com
Original enterprise value: GBP25 million
HgCapital clients' total equity: 69%
Business description
Atlas Interactive is a provider of e-learning products, targeted to meet the
growing competency, health, safety and environmental training needs of the
global oil and gas ('O&G') sector.
Why did we invest?
The e-learning market is large and fast-growing due to the twin problems of
poor education standards and skills shortages across many countries and
sectors. The O&G sector in particular faces huge problems with recruitment and
safe operating standards. E-learning offers significant cost advantages over
classroom based training.
Atlas has amassed over 1,500 hours of standardised intellectual property -
protected e-learning content - which it resells to its customer base of
international and national O&G companies such as BP, Shell, Exxon Mobil,
Chevron and QatarGas on term contracts with a recurring subscription basis.
How do we intend to create value?
The plan is to increase the share of revenue from key accounts and to win
additional business in areas outside of the core North Sea market by expanding
the sales resource and by broadening the product range.
What has been achieved?
Sales have grown by 25% since we acquired the business and are on target to
double by September 2012. The management team has been strengthened. A more
sales-oriented strategy has seen significant business won with trade
associations including a project in which Atlas has been appointed the
exclusive provider of minimum safety standards assessment and training to all
40,000 + North Sea offshore workers.
How is it performing?
Atlas has performed very well in 2010 with sales and EBITDA significantly up on
prior year.
How will we crystallise value?
Atlas is attracting the attention of two sets of potential acquirers: existing
O&G services companies and other more generic e-learning vendors. There is
scope to perform one or two acquisitions before exit.
Trust's Investment - Atlas Interactive
Residual Unrealised Accrued Total
Date of cost value interest value Valuation
Sector Location investment GBP'000 GBP'000 GBP'000 GBP'000 methodology
Services UK Nov 2007 9,597 3,333 701 4,034 Written-down
Investments in renewable energy
Business description
HgCapital's Renewable Energy sector team uses private equity skills to identify
and acquire renewable energy projects, usually based on wind or solar energy,
in Western Europe. These projects run across two funds and are grouped into
platforms with the current portfolio comprising:
* UK Onshore Wind: one of the ten largest independently-owned onshore wind
portfolios in the UK with 112MW of capacity in operation;
* Swedish Onshore Wind: the largest owner of onshore wind farms in the Nordic
region with total capacity of 139MW in two projects, both developed and built
by Renewable Energy Systems Limited, one of the world's most experienced
developers of wind farms;
* Spanish Solar: the fourth largest operator of solar PV in Europe with
capacity of 61MW in seven projects in Spain; and
As at 31 December 2010, 187,096 homes benefit from the operational energy
plants in the portfolio.
Why did we invest?
Investment in renewable energy offers good, risk-adjusted returns, delivering
inflation-protected and non-GDP linked revenue streams from high quality
assets.
It is the fastest growing part of the European electric power sector, and is
expected to account for the majority of new European energy asset investment
over the next ten years. This growing demand is driven by renewable energy's
increasing cost competitiveness, legally binding carbon reduction targets set
by the EU, the need to replace ageing generation capacity, and to increase the
security of energy supplies in Europe.
The sector shares the attractive characteristics, including downside
protection, of core infrastructure projects with the potential for
significantly higher returns on equity.
How do we intend to create value?
Investment returns are anticipated through a combination of yield during
operation and capital gain at refinancing or exit, providing a return profile
that the Board believes will complement returns from its core investments in
leveraged buyouts.
By bringing individual investments together into platforms, we can enhance
value through economies of scale, shared expertise and aggregated generation
capacity.
How will we crystallise value?
HgCapital is developing groups of projects based on the three platforms
described below. These platforms can then be refinanced efficiently or sold as
portfolios of closely related projects to industry buyers or financial
investors.
DIVERSIFICATION BY VALUE
Geography
38% UK
31% Sweden
27% Spain
4% France
Resource
73% Onshore wind
27% Solar
Residual Total Portfolio
cost valuation value
PRINCIPAL INVESTMENTS BY PLATFORM GBP'000 GBP'000 %
UK Wind: RPP 1 5,213 5,372 2.1
Swedish Wind: RPP 1 2,721 2,666 1.0
Swedish Wind: RPP 2 1,579 1,621 0.6
Spanish Solar: RPP 1 5,069 3,734 1.4
FINANCIAL STATEMENTS
Income statement
for the year ended 31 December 2010
Revenue return Capital return Total return
2010 2009 2010 2009 2010 2009
Note GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Gains on investments and
government securities 13 - - 63,529 5,211 63,529 5,211
Losses on loans receivable
from General Partner 5(b) - - (4,199) (4,737) (4,199) (4,737)
Net income 4 12,165 8,018 - - 12,165 8,018
VAT recovered 5(a) - 208 - 625 - 833
Other expenses 6 (2,062) (1,078) - - (2,062) (1,078)
Net return on ordinary
activities before taxation 10,103 7,148 59,330 1,099 69,433 8,247
Taxation on ordinary
activities 9(a) (50) - - - (50) -
Transfer to reserves 10,053 7,148 59,330 1,099 69,383 8,247
Return per Ordinary share 10 (a) 34.02p 28.38p 200.77p 4.36p 234.79p 32.74p
The total return column of this statement represents the Trust'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 20 to the financial statements.
All revenue and capital items in the above statement derive from continuing
operations.
No operations were acquired or discontinued during the year.
The following notes form part of these financial statements.
Balance sheet
as at 31 December 2010
2010 2009
Note GBP'000 GBP'000
Fixed assets
Investments held at fair value
Quoted at market valuation - 76
Unquoted at Directors' valuation 232,184 127,128
Total fixed assets 12 232,184 127,204
Current assets - amounts receivable after
one year
Accrued income on fixed assets 14 26,606 20,614
Current assets - amounts receivable within
one year
Debtors 14 1,826 4,623
Government securities 15 86,498 84,526
Cash 16 3,473 2,873
Total current assets 118,403 112,636
Creditors - amounts falling due within one
year 17 (2,594) (3,796)
Net current assets 115,809 108,840
Net assets 347,993 236,044
Capital and reserves
Called up share capital 19 7,838 6,296
Share premium account 20 61,444 14,123
Capital redemption reserve 20 1,248 1,248
Capital reserve - realised 20 274,913 242,015
Capital reserve - unrealised 20 (16,821) (43,253)
Revenue reserve 20 19,371 15,615
Total equity shareholders' funds 347,993 236,044
Net asset value per Ordinary share 10(b) 1,118.8p 937.2p
Diluted net asset value per Ordinary share 10(b) 1,090.7p n/a
The financial statements below were approved and authorised for
issue by the Board of Directors on 17 March 2011 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 2010
2010 2009
Note GBP'000 GBP'000
Net cash inflow/(outflow) from operating
activities 7 4,311 (3,439)
Taxation paid (10) (1,149)
Capital expenditure and financial
investment
Purchase of fixed asset investments 12 (111,418) (29,863)
Proceeds from the sale of fixed asset
investments 12 72,600 5,467
Net cash outflow from capital expenditure
and financial investment (38,818) (24,396)
Financing activities
Proceeds from issue of share capital 50,000 -
Fees paid on issue of share capital (1,137) -
Equity dividends paid 11 (6,297) (6,297)
Net cash inflow/(outflow) from financing
activities 42,566 (6,297)
Net cash inflow/(outflow) before
management of liquid resources 8,049 (35,281)
Management of liquid resources
Purchase of government securities 15 (205,535) (242,339)
Sale/redemption of government securities 15 198,086 274,652
Net cash (outflow)/inflow from management
of liquid resources (7,449) 32,313
Increase/(decrease) in cash in the year 16 600 (2,968)
Cash and cash equivalents at 1 January 2,873 5,841
Cash and cash equivalents at 31 December 16 3,473 2,873
The following notes form part of these financial statements.
Reconciliation of movements in shareholders' funds
for the year ended 31 December 2010
Called
up Share Capital
share premium redemption Capital Revenue
capital account reserve reserves reserve Total
Note GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 31 December 2009 6,296 14,123 1,248 198,762 15,615 236,044
Issue of Ordinary shares 19 1,480 48,520 - - - 50,000
Issue of Subscription
shares 19 62 (62) - - - -
Cost of share issue 19 - (1,137) - - - (1,137)
Net return from ordinary
activities - - - 59,330 10,053 69,383
Dividends paid 11 - - - - (6,297) (6,297)
At 31 December 2010 19,20 7,838 61,444 1,248 258,092 19,371 347,993
At 31 December 2008 6,296 14,123 1,248 197,663 14,764 234,094
Net return from ordinary
activities - - - 1,099 7,148 8,247
Dividends paid 11 - - - - (6,297) (6,297)
At 31 December 2009 19,20 6,296 14,123 1,248 198,762 15,615 236,044
The following notes form part of these financial statements.
Notes to the financial statements
1. Principal activity
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 Sections 1158 and 1159
of the Corporation Tax Act 2010 ('CTA 2010').
2. Basis of preparation
The accounts have been prepared under the historical cost convention, except
for the revaluation of financial instruments at fair value as permitted by the
Companies Act 2006, and in accordance with applicable UK law and UK Accounting
Standards ('UK GAAP') and with the Statement of Recommended Practice 'Financial
Statements of Investment Trust Companies' ('SORP'), dated January 2009. All of
the Trust's operations are of a continuing nature.
The Trust has considerable financial resources and as a consequence, the
Directors believe that the Trust 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 Trust 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.
The same accounting policies, presentation and methods of computation are
followed in these financial statements as applied in the Trust's previous
annual audited financial statements.
3. Organisational structure and Manager arrangements Partnerships
In May 2003 (subsequently revised in January 2009) and January 2009, the Trust
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 Trust being the
sole limited partner in these entities.
The purpose of these partnerships, HGT LP and HGT 6 LP (together the 'buyout
funds') is to hold all the Trust's investments in buyouts and other
investments, other than liquid funds and renewable energy projects (see below).
Under the partnership agreements, the Trust made capital commitments into the
buyout funds with the result that the Trust now holds direct investments in the
buyout funds and an indirect investment in the fixed asset investments that are
held by these funds, as it is the sole limited partner. The fixed asset
investments on the balance sheet and the Investment portfolio above comprise
the underlying investments held by these buyout funds.
The Trust also entered into partnership agreements with the purpose of
investing in renewable energy projects by making capital commitments alongside
other limited partners in Hg Renewable Power Partners LP and HgCapital
Renewable Power Partners 2 C LP (together the 'renewable funds'). These are
direct investments in the renewable funds, as shown on the balance sheet and
the Investment portfolio.
Priority profit share and carried interest per the buyout limited partnership
agreements
Under the terms of the buyout fund limited partnership agreements ('LPAs'), the
general partner is entitled to appropriate, as a first charge on the net income
of the funds, an amount equivalent to its priority profit share ('PPS'). The
Trust is entitled to net income from the funds, after payment of the PPS.
In years in which these 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 these funds, which is funded via a
loan from the Trust. Such 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.
Furthermore, under the buyout funds' LPAs, the founder partner is entitled to a
carried interest distribution once certain preferred returns are met. The LPAs
stipulate that the buyout funds' capital gains (or net income), after payment
of the carried interest, are distributed to the Trust.
Accordingly, the Trust's entitlement to net income and net capital gains are
shown in the appropriate lines of the income statement. Notes 4, 5 and 7 to
the financial statements and the cash flow statement disclose the gross income
and gross capital gains of the buyout funds (including the associated cash
flows) and also reflect the proportion of net income and capital gains in the
buyout funds that have been paid to the general partner and founder partner as
its PPS and carried interest, where applicable.
The PPS paid from net income is charged to the revenue account in the income
statement, whereas PPS paid as an interest-free loan, if any, is charged as an
unrealised depreciation to the capital return on the income statement.
The carried interest payments made 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 Trust
and this income is recognised and shown as income in the financial statements
of the Trust. 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 Trust 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
Trust. Premiums paid or discounts received with the acquisition of government
securities are amortised over the remaining period up to the maturity date and
are 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 Trust's right to receive
payment is established.
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 Trust's
balance sheet when the Trust 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 pounds
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 Trust'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 Financial Instruments: Recognition Measurement
('FRS26') and the International Private Equity and Venture Capital ('IPEVC')
Valuation Guidelines, September 2009 edition. Where relevant, the Trust 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.
Purchases of investments are recognised on a trade date basis. The sales of
investments are recognised at the trade date of the disposal. Proceeds are
measured at fair value, which is regarded as the proceeds of sale less any
transaction costs.
Quoted: Quoted investments are designated as held at fair value, which is
deemed to be bid 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 Trust 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 market 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 fixed asset
investments, financial assets and liabilities, and derivative financial
instruments, 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 the founder partners 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 loans to general partners;
and
(iii) unrealised exchange differences of a capital nature.
4. Income
2010 2009
GBP'000 GBP'000
Income from investments held by HGT LP and HGT
6 LP
UK unquoted investment income 7,672 2,218
Foreign unquoted investment income 6,267 4,776
UK dividends 1,396 2,278
Gilt interest less amortisation of premium (472) 322
14,863 9,594
Other income
Deposit interest 27 46
Other interest income 136 42
163 88
Total income 15,026 9,682
Priority profit share attribution (2,861) (1,664)
Total net income 12,165 8,018
Total income comprises:
Dividends 1,396 2,278
Interest 10,769 5,740
Total net income 12,165 8,018
5. Fees, priority profit share and carried interest paid to Manager
Revenue Capital Total
return return return
2010 2009 2010 2009 2010 2009
(a) VAT recovered on Investment
management fee GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
VAT recovered - (208) - (625) - (833)
Total VAT recovered - (208) - (625) - (833)
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.
(b) Priority profit share
2010 2009
Priority profit share to General
Partners funded by via: GBP'000 GBP'000
Share of investment income 2,861 1,664
Loan to General Partner 4,199 4,737
Total priority profit share charge 7,060 6,401
The priority profit share payable on HGT LP and HGT 6 LP rank as a first
appropriation of net income from investments held in HGT LP and HGT 6 LP
respectively and is deducted prior to such income being attributed to the Trust
in its capacity as a Limited Partner. The net income of HGT LP and HGT 6 LP
earned during the year, after the deduction, is shown on the income statement.
Details of the contract are disclosed in the Directors' report.
(c) Carried interest
2010 2009
GBP'000 GBP'000
Carried interest payable to Founder Partner
funded by:
Share of gains on investments 1,136 1,062
Total carried interest charge 1,136 1,062
The carried interest payable ranks as a first distribution of capital gains on
the investments held in HGT LP and HGT 6 LP, a limited partnership established
solely to hold the Trust's investments, and is deducted prior to such gains
being paid to the Trust in its capacity as a Limited Partner. The net amount of
capital gains of HGT LP and HGT 6 LP during the year, after the deduction of
carried interest, is shown on the income statement. Details of the carried
interest contract are disclosed in the Directors' report.
6. Other expenses
2010 2009
Operating expenses GBP'000 GBP'000
Custodian and administration fees 324 268
Directors' remuneration (note 8) 178 179
Auditor's remuneration - audit services 45 43
- taxation,
interim review and other services 12 63
Legal and other administration costs 1,503 525
Total other expenses 2,062 1,078
The Company's total expense ratio ('TER'), calculated as
total expenses including the priority profit share, but
before any recovery of VATon management fees, as a
percentage of average net assets was: 3.12% 3.18%
Auditor's remuneration excludes an amount of GBP41,000 (including VAT) which was
included in the cost of the share issue (see note 20).
7. Cash flow from operating activities
Reconciliation of net return before taxation to net cash flow
from operating activities
2010 2009
GBP'000 GBP'000
Net return before taxation 69,433 8,247
Gains on investments held at fair value (60,466) (1,536)
Priority profit share advanced (4,199) (4,737)
Movement on carried interest 74 (4,070)
Amortisation of premium on government
securities 3,980 5,372
Increase in prepayments and accrued income (5,919) (5,101)
Decrease/(increase) in debtors 2,691 (2,708)
(Decrease)/increase in creditors (1,276) 1,115
Tax on investment income included within gross
income (7) (21)
Net cash inflow/(outflow) from operating
activities 4,311 (3,439)
8. Directors' remuneration
The aggregate remuneration of the Directors for the year to 31 December 2010
was GBP178,000 (2009: GBP179,000).
Further information on the Directors' remuneration is disclosed in the
Directors' remuneration report.
9. Taxation on ordinary activities
(a) Analysis of charge in the year
2010 2009
GBP'000 GBP'000
Current tax:
UK corporation tax 2,438 1,997
Income streaming relief (see note 9b) (2,438) (1,997)
Prior year adjustment 50 -
Total current tax (note 9b) 50 -
(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%; 2009:
28%).
The differences are explained below:
2010 2009
GBP'000 GBP'000
Net revenue return on ordinary activities
before taxation 10,103 7,148
UK corporation tax at 28% thereon (2009: 28%) 2,829 2,001
Effects of:
Non taxable UK dividends (391) (179)
Tax relief from interest distribution (2,438) (1,997)
Taxable rebate in capital - 175
Tax in relation to the prior year 50 -
(2,779) (2,001)
Current revenue tax charge for the year
(note 9a) 50 -
In the opinion of the Directors, the Trust has complied with the requirements
of Sections 1158 and 1159 of the CTA 2010 and will therefore be exempt from
corporation tax on any capital gains made in the year. The Trust will elect to
designate all of the proposed final dividend (see note 11) as an interest
distribution to its shareholders. This distribution is treated as a tax
deduction against taxable income and results in no corporation tax being
payable by the Trust at 31 December 2010.
10. Return and net asset value per ordinary share
(a) Return per ordinary share Revenue return Capital return
Year Year Year Year
ended ended ended ended
31.12.10 31.12.09 31.12.10 31.12.09
Earnings (GBP'000):
Return on ordinary activities
after taxation 10,053 7,148 59,330 1,099
Number of shares ('000)
Weighted average number of
shares in issue 29,552 25,187 29,552 25,187
Return per Ordinary share
(pence) 34.02 28.38 200.77 4.36
The Trust has in issue 6,220,783 Subscription shares, issued on 7 April 2010,
which are convertible into Ordinary shares on 31 May 2011, and thereafter on 31
October and 31 May in each year to 2012, with the final exercise date on 31 May
2013. As at 31 December 2010, there was no dilution of the return per Ordinary
share in respect of the conversion rights attaching to the Subscription shares
(see note 19).
(b) Net asset value per share
Year Year
ended ended
31.12.10 31.12.09
Net asset value (GBP'000)
Net assets 347,993 236,044
Assuming exercise of all subscription shares
(at minimum price) 59,097 -
Fully diluted net asset value 407,090 236,044
Number of shares ('000)
Number of shares in issue 31,104 25,187
Potential issue of subscription shares 6,221 -
Shares in issue following exercise of
subscription shares 37,325 25,187
Basic net asset value per share (pence) 1,118.8 937.2
Diluted net asset value per share (pence) 1,090.7 n/a
11. Dividends on Ordinary shares
Register Payment 2010 2009
date date GBP'000 GBP'000
Final dividend of 25.0p for the year ended 2 April 11 May
31 December 2008 2009 2009 - 6,297
Interim dividend of 25.0p for the year ended 26 February 31 March
31 December 2009 2010 2010 6,297 -
6,297 6,297
The proposed final dividend of 28.0 pence per Ordinary share for the year-ended
31 December 2010 is subject to approval by the shareholders at the annual
general meeting and has not been included as a liability in these financial
statements.
The total dividends payable in respect of the financial year, which form the
basis of the retention test as set out in Section 1159 of the CTA 2010, are set
out below:
2010
GBP'000
Revenue available for distribution by way of dividend
for the year 10,053
Proposed final dividend of 28.0p for the year ended
31 December 2010
(based on 31,103,915 Ordinary shares in issue at
31 December 2010) (8,709)
Undistributed revenue for Section 1159 purposes* 1,344
*Undistributed revenue comprises 11.1% of income from
qualifying investments of GBP12,157,000 (including tax credit on
UK dividend income) (see note 4).
12. Fixed assets investments
2010 2009
GBP'000 GBP'000
Investments held at fair value through
profit and loss
Investments held in HGT LP
Investments quoted on the London or Dublin
Stock Exchanges - 76
Unquoted investments 96,746 98,291
Investments held in HGT 6 LP
Unquoted investments 121,186 17,217
Other investments held by the Trust
Unquoted investments 14,252 11,620
Total fixed asset investments 232,184 127,204
Total fixed asset investments consisting
of:
Equity shares 15,205 30,774
Non-equity shares 13,280 34,211
Fixed income securities 204,445 62,814
Derivative instruments (746) (595)
Total fixed asset investments 232,184 127,204
Quoted Unquoted Total
GBP'000 GBP'000 GBP'000
Opening valuation as at 1 January 2010 76 127,128 127,204
Add back: Opening unrealised depreciation -
investments 497 35,333 35,830
- financial derivative instruments - 2,294 2,294
Opening book cost as at 1 January 2010 573 164,755 165,328
Movements in the year:
Additions at cost - 111,418 111,418
Disposals - proceeds (79) (72,521) (72,600)
- realised (losses)/gains on sales (494) 36,012 35,518
Closing book cost of investments - 239,664 239,664
Less: Closing unrealised depreciation - investments - (5,885) (5,885)
- financial derivative
instruments - (1,595) (1,595)
Closing valuation of investments as at 31 December
2010 - 232,184 232,184
The above investments include investments that are indirectly held by the Trust
through its investment in HGT LP and HGT 6 LP, as set out in note 1, and
investments in Hg Renewable Power Partners LP and HgCapital Renewable Power
Partners 2 C LP.
2010 2009
13. Gains on investments and government securities GBP'000 GBP'000
Realised gains on sales 34,034 3,846
Carried interest attribution (1,136) (1,062)
Change in unrealised appreciation - investments and
government securities 29,932 1,920
-
financial derivative instruments 699 507
Total gains 63,529 5,211
14. Debtors
2010 2009
GBP'000 GBP'000
Amounts receivable after one year
Accrued income on fixed assets 26,606 20,614
Amounts receivable within one year
Taxation recoverable 1,590 1,623
Prepayments and other accrued income 219 292
Other debtors 17 2,708
1,826 4,623
Total debtors 28,432 25,237
The Directors consider that the carrying amount of debtors approximate their
fair value.
15. Government securities
2010 2009
GBP'000 GBP'000
Investments held at fair value
through profit and loss
Opening valuation 84,526 124,014
Purchases at cost 205,535 242,339
Sales and redemptions (198,086) (274,652)
Movement in unrealised capital
losses (13) (1,048)
Amortisation of premium on
acquisition (3,980) (5,372)
Realised capital losses (1,484) (755)
Closing valuation 86,498 84,526
16. Movement in net funds
2010 2009
Analysis and reconciliation of net funds GBP'000 GBP'000
Change in cash and cash equivalents 600 (2,968)
Net funds at 1 January 2,873 5,841
Net funds at 31 December 3,473 2,873
Net funds comprise:
Cash and cash equivalents 3,473 2,873
17. Creditors - amounts falling due within one year
2010 2009
GBP'000 GBP'000
Carried interest 1,136 1,062
Premium payable on financial derivative
instruments - 1,699
Sundry creditors 1,458 1,035
2,594 3,796
18. Financial risk
The following disclosures relating to the risks faced by the Trust are provided
in accordance with Financial Reporting Standard 29, 'Financial instruments:
disclosures'. The reference to investments in this note is in relation to the
Trust's direct investments in RPP1 and RPP2 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 Trust's primary investment objective
is to achieve long-term capital appreciation by indirectly investing in
unquoted companies through its investments in fund partnerships, mostly in the
UK and Europe. Additionally, the Trust holds government gilts and cash and
items such as debtors and creditors arising directly from its operations. In
pursuing its investment objective, the Trust is exposed to a variety of risks
that could result in either a reduction of the Trust's net assets or a
reduction in the profits available for distribution by way of dividends.
Valuation risk, market risk (comprising currency risk and interest rate risk)
and liquidity risk, and the Directors' approach to the management of them, are
described below. The Board and the Manager coordinate the Trust'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.
Credit risk
Credit risk is the risk of financial loss in the event that any of the Trust's
market counterparties fail to fulfil their contractual obligations to the
Trust. The Trust's financial assets (excluding fixed asset investments)
subject to credit risk, are not impaired or overdue. The Trust's cash balances
are held with the Bank of New York Mellon and any significant balances are
invested in government securities. Government securities are held with the
United Kingdom government. Foreign exchange forward contracts and options are
held with counterparties which have credit ratings that the Board considers to
be adequate. The board regularly monitors the credit quality and financial
position of these market counterparties. The credit quality of the above
mentioned financial assets was deemed satisfactory.
Valuation risk
The Trust's exposure to valuation risk arises mainly from movements in the
value of the underlying investments (held through fund partnerships), the
majority of which are unquoted. A breakdown of the Trust's portfolio is given
above. In accordance with the Trust'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 IPEVC guidelines.
The Trust does not hedge against movements in the value of these investments,
apart from foreign exchange movements as explained below. The Trust has
exposure to interest rate movements, through cash and gilt holdings.
In the opinion of the Directors, the diversified nature of the Trust's
portfolio significantly reduces the risks of investing in unquoted companies.
The Trust adopted the amendment to FRS 29, effective 1 January 2009. This
requires the Trust 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 an 'observable' input requires
significant judgement by the Board. The Board considers observable data
relating to investments actively traded in organised financial markets, in
which case 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.
Level Level Level
1 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
Investments held at fair value through profit and loss
Unquoted Investments - Investment in HGT LP - - 96,746 96,746
- Investment in
HGT 6 LP - - 121,186 121,186
- Investment in
Hg RPP LP - - 12,426 12,426
- Investment in
Hg RPP2 C LP - - 1,826 1,826
- Government
securities 86,498 - - 86,498
Other assets
Accrued income 181 - 26,606 26,787
As at 31 December 2010 86,679 - 258,790 345,469
Level Level Level
1 2 3 Total
Financial assets 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
HGT 6 LP - - 17,217 17,217
- Investment in
Hg RPP LP - - 11,620 11,620
- Government
securities 84,526 - - 84,526
Other assets
Accrued income 260 - 20,614 20,874
As at 31 December 2009 84,786 - 147,818 232,604
Investments whose values are based on quoted market prices in active markets,
and therefore classified within level 1, include government securities and
actively traded listed equities. The Trust does not adjust the quoted bid price
of 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 Board has used
valuation techniques to derive the fair value. In respect of unquoted
instruments, or where the market for a financial instrument is not active, fair
value is established by using recognised valuation methodologies, in accordance
with International Private Equity and Venture Capital ('IPEVC') Valuation
Guidelines. 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
investments partnerships Total
2010 2010 2010
Unquoted investments GBP'000 GBP'000 GBP'000
Opening balance 20,614 127,204 147,818
Purchases - 111,418 111,418
Realisations at 31 December 2009 valuation (4,193) (42,347) (46,540)
Total gains for the year included in the
income statement 10,185 35,909 46,094
Closing valuation of level 3 investments 26,606 232,184 258,790
Total gains for the year included in the
income statement for investments held at
the end of the year 12,295 35,909 48,204
Market risk
The fair value of future cash flows of a financial instrument held by the Trust
may fluctuate due to changes in market prices of comparable businesses. This
market risk may comprise: currency risk (see below), interest rate risk and/or
equity price risk (see below). The Board of Directors reviews and agrees
policies for managing these risks. The Manager assesses the exposure to market
risk when making each investment decision, and monitors the overall level of
market risk on the whole of the investment portfolio on an ongoing basis.
Currency risk and sensitivity
The Trust is exposed to currency risk as a result of investing in fund
partnerships that invest in companies in foreign currencies. The value of these
assets in pounds sterling, being the Trust's functional currency, can be
significantly influenced by movements in foreign exchange rates. The Trust is
partially hedged against movements in the value of the Euro and Norwegian
Kroner against pounds sterling affecting the value of its investments, as
explained below. The Manager monitors the Trust'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 Trust's year-end financial exposure to movements in foreign
exchange rates against the Trust's functional currency. The rates represent the
high and low positions during the year for the currencies listed.
In the opinion of the Directors, the sensitivity analysis below 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 Trust's objectives.
Revenue return Capital return
NAV per NAV per
Ordinary Ordinary
share share
GBP'000 (pence) GBP'000 (pence)
Low
Euro (1.0956) 592 1.9 8,088 26.0
Euro forward contract
(1.0956) - - (52) (0.2)
Euro option contract
(1.0956) - - (1,338) (4.3)
Norwegian Kroner (8.7816) - - 839 2.7
Norwegian Kroner option
contract ( 8.7816) - - 2,197 7.1
Swedish Kroner (10.3487) - - 264 0.8
Swiss Franc (1.4418) - - - -
US Dollar (1.4304) 235 0.8 568 1.8
827 2.7 10,566 33.9
High
Euro (1.2364) (510) (1.6) (6,967) (22.4)
Euro forward contract
(1.2364) - - 85 0.3
Euro option contract
(1.2364) - - 1,188 3.8
Norwegian Kroner (9.8219) - - (1,698) (5.5)
Norwegian Kroner option
contract (9.8219) - - 4,741 15.2
Swedish Kroner (11.8446) - - (1,717) (5.5)
Swiss Franc (1.7005) - - - -
US Dollar (1.6372) (109) (0.4) (262) (0.8)
(619) (2.0) (4,630) (14.9)
Portfolio hedging
The Trust 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
Trust are denominated in the foreign currency of the geographic areas in which
the Trust has significant exposure against its reporting currency. The
contracts are designated as a hedge and the fair values thereof are 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:
2010 2009
Currency No. '000 GBP'000 No. '000 GBP'000
Forward foreign currency contracts Euro 25,040 (1,384) 25,040 (2,121)
Currency option Euro 12,520 95 12,520 204
Currency option NOK 125,724 543 251,448 1,322
The Trust does not trade in derivatives but holds them to 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 Trust does not adopt
hedge accounting in the financial statements.
Interest rate risk and sensitivity
The Trust 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 Trust
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 Trust 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 Trust to movements in interest rates
has been based on the UK base rate. With all other variables constant, a 0.5%
decrease in the UK base rate should increase the capital return in a full year
by GBP432,000, 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 realised throughout the year.
Liquidity risk
Investments in unquoted companies, which form the majority of the Trust's
investments, may not be as readily realisable as investments in quoted
companies, which might result in the Trust having difficulty in meeting its
obligations. Liquidity risk is currently not significant as about 26% of the
Trust'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 Trust'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) held by the Trust decrease as a result of changes in the values of
underlying businesses. The Board revalues each investment twice each year. 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. If there appears
to the Board to be an impairment in value between regular valuations, it can
revalue the investment. The Board also monitors the Manager's compliance with
the Trust's Investment Objective and Policy. The Manager's best estimate of the
effect on the net assets and total return due to a reasonably possible change
in the value of unquoted securities, with all other variables held constant, is
as follows:
NAV per ordinary
% change GBP'000 share (pence)
Unquoted 10% 25,879 83.2
Currency exposure
The currency denomination of the Trust's financial assets is shown below.
Short-term debtors and creditors, which are excluded, are mostly denominated in
pounds sterling, the functional currency of the Trust.
Financial assets of the Company
2010 2009
Non Non
Fixed Floating interest- Fixed Floating 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
Pounds
sterling 159,841 5,897 16,191 181,929 121,711 2,873 26,105 150,689
Euro 96,871 2,948 23,401 123,220 38,238 - 13,179 51,417
Euro
hedge - - (1,289) (1,289) - - (1,917) (1,917)
Norwegian
Kroner - - 23,116 23,116 - - 27,729 27,729
Norwegian
Kroner
hedge - - 543 543 - - 1,322 1,322
Swedish
Kroner 11,323 - 4,095 15,418 - - - -
US dollar 5,367 - 638 6,005 5,196 - 1,041 6,237
Total 273,402 8,845 66,695 348,942 165,145 2,873 67,459 235,477
The fixed rate assets comprise gilts and fixed rate loans to investee
companies. Fixed rate loans to investee companies had a weighted average
interest rate of 11.3% per annum (2009: 11.1%) and a weighted average life to
maturity of 12.1 years (2009: 7.5 years). Otherwise, fixed rate assets
comprised one gilt with an interest rate of 3.25% per annum and which matures
on 7 December 2011. It is the intention to re-invest the proceeds at maturity
in another short dated gilt. The floating rate assets consisted of cash.
The non interest-bearing assets represented the equity content of the
investment portfolio and the financial derivative instruments.
The Trust did not have any outstanding borrowings at the year-end (2009: GBPnil).
The numerical disclosures above exclude short-term debtors and creditors.
Capital management policies and procedures
The Trust'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 Trust's capital at 31 December comprised:
2010 2009
GBP'000 GBP'000
Equity:
Equity share capital 7,838 6,296
Share premium 61,444 14,123
Capital redemption reserve 1,248 1,248
Retained earnings and other reserves 277,463 214,377
Total capital 347,993 236,044
As stated above, the Trust did not have any outstanding borrowings at the
year-end. With the assistance of the Manager, the Board monitors and reviews
the broad structure of the Trust'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 Trust 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 status under Section
1158 of the CTA 2010.
The Trust's objectives, policies and processes for managing capital are
unchanged from the preceding accounting period.
19. Share capital
2010 2009
Nominal Nominal
No.'000 GBP'000 No.'000 GBP'000
Ordinary shares of 25p each
Allotted, called-up and fully
paid:
At 1 January 25,187 6,296 25,187 6,296
Issued as part of placing and open
offer 5,917 1,480 - -
Ordinary shares at 31 December 31,104 7,776 25,187 6,296
Subscription shares of 1p each
Allotted, called-up and fully
paid:
At 1 January - - - -
Issued as part of placing and open
offer and bonus 6,221 62 - -
Subscription shares at 31 December 6,221 62 - -
Total share capital 37,325 7,838 25,187 6,296
The Trust's issued share capital at the beginning of the year consisted of
25,186,755 Ordinary shares. On 7 April 2010, 5,917,160 new Ordinary shares were
issued as part of the placing and open offer at a price of GBP8.45, resulting in
proceeds of GBP50 million being received (GBP48.9 million net after fees).
At the same time a total of 6,220,783 Subscription shares of 1p each were
issued: 5,037,351 Subscription shares were issued as part of the qualifying
bonus issue, representing one Subscription share for every five existing
Ordinary shares held; and 1,183,432 Subscription shares were attached to the
Ordinary shares issued under the placing and open offer, representing one
Subscription share for every five new Ordinary shares issued. The Share premium
account was reduced for the purpose of issuing and paying up in full the
Subscription shares at their par value of 1.0 pence per share.
Each Subscription share entitles the holder to subscribe for one Ordinary share
upon exercise of the subscription right and payment of the subscription price.
The first opportunity to exercise such right will be on 31 May 2011, and
thereafter on 31 October and 31 May in each year to 2012, at a price of GBP9.50
per Ordinary share. The final exercise date is on 31 May 2013 at a subscription
price of GBP10.25 per Ordinary share.
The Companies Act 2006 abolished the requirement for a company to have an
authorised share capital and at the Trust's last annual general meeting; the
Trust's articles of association were amended to reflect this. Whilst the Trust
no longer has authorised share capital, the Directors will still be limited as
to the number of shares they can at any time allot as the Companies Act 2006
requires that Directors seek authority from the shareholders for the allotment
of new shares.
20. 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 2010 14,123 1,248 242,015 (43,253) 15,615
Share issue 48,520 - - - -
Issue of Subscription shares (62) - - - -
Cost of share issue (1,137) - - - -
Transfer on disposal of
investments - - 5,265 (5,265) -
Losses on Government securities - - (1,484) (13) -
Net gain on sale of fixed asset
investments - - 30,253 - -
Net movement in unrealised
appreciation of fixed asset
investments - - - 35,909 -
Dividends paid - - - - (6,297)
Net return for the year after
taxation - - - - 10,053
Priority profit share loan to
General Partner - - - (4,199) -
Carried interest to Founder
Partner - - (1,136) - -
As at 31 December 2010 61,444 1,248 274,913 (16,821) 19,371
21. Commitment in fund partnerships and contingent liabilities
The Trust has committed through HGT 6 LP to invest GBP258 million alongside the
Manager's latest buyout fund, HgCapital 6.
The Trust has agreed to pay fees on its commitment, whereas management fees
were previously based on its NAV. The Trust will be entitled, without penalty,
to opt out of any investment which could cause the Trust to lose its status as
an investment trust, result in the Trust 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 2010,
GBP155,884,000 (2009: GBP228,030,000) of this commitment was uncalled.
The Trust has also committed through HGT LP to invest GBP120 million alongside
the Manager's previous buyout fund, HgCapital 5. At 31 December 2010,
GBP22,350,000 (2009: GBP26,160,000) of this commitment was uncalled.
During the current year, the Trust has committed to invest EUR40 million in the
Manager's latest renewable energy fund, HgCapital Renewable Power Partners 2
CLP. During 2006, the Trust committed EUR21.6 million in the Manager's previous
renewable energy fund, Hg Renewable Power Partners LP. As at 31 December 2010,
EUR37,302,000 (GBP31,964,000) and EUR2,127,000 (GBP1,823,000) (2009: EUR6,254,000
(GBP5,557,000)) of these respective commitments were uncalled.
In addition, the Trust's derivative financial instruments held through HGT LP
expire on 29 August 2012. In order to meet any potential liability arising on
this date, an amount of GBP6,260,000 million has been reserved for this purpose.
This amount is therefore callable from the Trust at this or any earlier date.
22. Related party disclosure
HgCapital and its subsidiaries, acting as Manager of the Trust through a
management agreement and participating through limited partnership agreements
as General and Founder partners of the fund partnerships that the Trust 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 GBP7,060,000 (31 December 2009: GBP6,401,000) and a carried interest
profit attribution of GBP1,136,000 (2009: GBP1,062,000) was made to HgCapital
during the year.
HgCapital also acts as secretary and administrator of the Trust. Total fees for
the year amounted to GBP250,000 (2009: GBP232,000).
At 31 December 2010, the amount due to HgCapital relating to the above,
disclosed under creditors, was GBP1,731,000 (31 December 2009: GBP1,942,000). Where
applicable, amounts are inclusive of VAT.
GOVERNANCE
INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF HGCAPITAL TRUST PLC
The Company's Financial Statements for the year ended 31 December 2010 have
been audited by of Deloitte LLP. The text of the Auditor's report can be found
in the Company's Annual Report and Accounts atwww.hgcapitaltrust.com/
results.htm
Directors' report
The Chairman's statement, the description of the Trust's investment objective,
investment policy, rationale & business model, and corporate governance
statement form part of this Directors' report.
The Directors present the annual report and financial statements of HgCapital
Trust plc (the "Trust") (Reg. No. 1525583) for the year ended 31 December 2010.
BUSINESS REVIEW
Background
The purpose of the business review is to provide an overview of the business of
the Trust by:
* Analysing development and performance using appropriate key performance
indicators ('KPIs')
* Outlining the principal risks and uncertainties affecting the Trust.
* Describing how the Trust manages these risks.
* Explaining the future business plans of the Trust.
* Setting out the Trust's environmental, social and ethical policy.
* Providing information about persons with whom the Trust has contractual or
other arrangements which are essential to the business of the Trust.
* Outlining the main trends and factors likely to affect the future
development, performance and position of the Trust's business.
Principal activity and business review
The principal activity of the Trust 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 2010 is given in the Chairman's statement, which forms part of this
Directors' report, and in the Manager's review.
Status of the Trust
HMRC accepted the Trust as an investment trust for the purposes of Section 1158
of the Corporation Tax Act 2010 ('CTA 2010') for the year ended 31 December
2009. Following the modernisation of the investment trust tax rules through the
CTA 2010, with effect from the year ended 31 December 2010 and for subsequent
financial years, it is the intention of the Trust to seek approval for
classification as an investment trust under Sections 1158 and 1159 of the CTA
2010. In the opinion of the Directors the Trust continues to conduct its
affairs as an investment trust within the definition prescribed by the CTA 2010
and is not a close company as defined by relevant tax legislation and
provisions.
Capital Structure
As at 16 March 2011, the Trust had 31,103,915 Ordinary shares of 25 pence each
and 6,220,783 Subscription shares of 1 pence each in issue. Each Ordinary share
has one voting right attached to it and the Subscription shares carry no voting
rights. Consequently, the total number of voting rights in the Trust at this
date was 31,103,915. Further information on the share capital of the Trust can
be found in note 19 to the financial statements.
Going concern
The Trust'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 review. The financial position of the Trust, its
cash flows, liquidity position and borrowing facilities are described in the
Directors' report. In addition, note 18 to the financial statements includes
the Trust'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
Trust has considerable financial resources and as a consequence, the Directors
believe that the Trust is well placed to manage its business risks successfully
despite the current uncertain economic outlook. The Directors have a reasonable
expectation that the Trust 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.
Borrowing facility
The Trust 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 2010, the Trust's net asset value per share
(including dividends re-invested) increased by 22.6%. This compares with an
increase in the FTSE All-Share Index (total return) of 14.5%. The Trust's
Ordinary share price increased by 22.8% on a total return basis.
Results and dividend
The total return for the Trust is set out in the income statement. The total
return for the year, after taxation, was GBP69,383,000 (2009: GBP8,247,000) of
which GBP10,053,000 is revenue return (2009: GBP7,148,000).
The Directors recommend the payment of a final dividend of 28.0p per Ordinary
share for the year ended 31 December 2010 (2009 interim: 25.0p). Subject to
approval of this dividend at the forthcoming annual general meeting ('AGM'), it
will be paid on 13 May 2011 to shareholders on the register of members at the
close of business on 8 April 2011.
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 Trust's
performance of the individual portfolio holdings. The KPIs used to measure the
progress and performance of the Trust over time and which are comparable to
those reported by other investment trusts include net asset value per share,
share price, return per share, average monthly trading volumes and cash flow.
Further information on KPIs and the Trust's progress against these can be found
in the Chairman's statement and Manager's review. 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 monitor the Trust's
discount or premium regularly.
Principal risks
The key risks faced by the Trust are set out below and in note 18 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
Trust'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 Trust's investment policy, in order to minimise
the risks associated with particular countries or factors specific to
particular sectors.
Regulatory risk
The Trust operates as an investment trust in accordance with Sections 1158 and
1159 of CTA 2010. As such, the Trust is exempt from corporation tax on any
capital gains realised from the sale of its investments, so the loss of
investment trust status would represent a significant risk to the Trust. 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 Sections 1158 and 1159 of CTA 2010 are not breached. The results
are reported to the Board at each meeting.
General changes in legislation, regulation or government policy could
significantly influence the decisions of investors or impact upon the markets
in which the Trust invests.
Operational risk
In common with most other investment trust companies, the Trust has no
employees. The Trust therefore relies upon the services provided by third
parties and is dependent upon the internal control systems of the Manager and
the Trust's other service providers. For example, the security of the Trust'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 & Valuation
Committee twice a year.
The Trust has considered an Assurance Report on Internal Controls (AAF 01/06)
as prepared by the Manager, and independently reviewed by Deloitte LLP, and
confirm that no material issues were raised in the report.
Financial risks
The Trust's investment activities expose it to a variety of financial risks
that include valuation risk, liquidity risk, market price risk, credit risk,
foreign exchange risk and interest rate risk. Further details are disclosed in
note 18 to the financial statements, together with a summary of the policies
for managing these risks.
Liquidity risk
The Trust, 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 Trust
manages its liquid resources to ensure sufficient cash is available to meet its
contractual commitments.
In the event that the Directors have any particular concerns regarding the
liquidity of the Trust and its cash resources, the Trust may exercise an
opt-out in respect of new buyout investments alongside HgCapital 6 in order to
manage the risk of over-commitment.
Social, environmental & ethical policy
In 2004 and again in 2010, the Trust committed to invest in the Hg Renewable
Power Partners funds, which the Board believes offer a profitable route for the
Trust to participate in efforts to combat climate change.
The Manager addresses other investment opportunities on a sector basis. The
sectors chosen do not generally raise ethical issues.
The Trust has no employees and has limited direct impact on the environment.
The Trust aims to conduct itself responsibly, ethically and fairly and has
sought to ensure that HgCapital's management of the portfolio of investments
takes account of social, environmental and ethical factors where appropriate.
Stewardship
HgCapital and the Trust seek 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 Trust adopts a positive approach to
corporate governance and engagement with companies.
The exercise of voting rights attached to the Trust's portfolio has been
delegated to HgCapital. As acknowledged by the Walker Review, the distance
between owner and manager within the private equity model is relatively short
and the link between the two is an important ingredient in investment
performance. HgCapital has a policy of active portfolio management and ensures
that significant time and resource is dedicated to every investment, with
HgCapital executives typically being appointed to investee company boards in
order to ensure the application of active, results-orientated corporate
governance. Further information regarding the stewardship of investee companies
by HgCapital can be found in the Manager's review.
FUTURE PROSPECTS
The Board's main focus is on the achievement of capital growth and the future
of the Trust is dependent upon the success of the investment strategy. The
outlook for the Trust is discussed in the Chairman's statement and the
Manager's review.
DERIVATIVE TRANSACTIONS
On 27 August 2008, the Manager, on behalf of the Trust, 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 contract 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 GBP1,289,000 on these derivatives 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 21 of the
financial statements.
In December 2009, the Manager, on behalf of the Trust, entered into an option
contract of NOK126 million expiring in December 2013 which is exercisable at a
strike price of NOK10.50 to pounds sterling. A premium of GBP0.8 million was
paid. The current write-down of GBP0.3 million to the current value of GBP0.5
million reflects currency changes and other market factors impacting on the
value of the options since the acquisition date.
DIRECTORS
The Directors in office at the date of this report are listed above under 'The
Board of Directors'. Mr Powell was appointed as a Director on 27 July 2010 and
Mr Amies retired as a Director on 10 May 2010.
Membership of the Board's committees is detailed in the corporate governance
statement.
The Board has noted the recommendation in the AIC Code of Corporate Governance
that non-executive directors serving longer than nine years should be subject
to annual re-election. Accordingly, Mr Gale and Mr Brooke will offer themselves
for re-election at this year's annual general meeting.
In accordance with the articles of association, Mr Brooman and Mr Murison,
having most recently been re-elected in 2008, will retire by rotation at the
Trust's AGM and, being eligible, offer themselves for re-election. Mr Powell
will be standing for election at this year's AGM having been appointed to the
Board in July 2010.
The Board has considered the retiring Directors' performance and recommends
that each Director be proposed for election or re-election (as applicable).
This opinion is based on the following assessment of their contribution to the
operation of the Board:
Mr Brooman
Mr Brooman is a chartered accountant with significant experience in senior
financial roles, including previous appointments as Finance Director for large
publicly listed businesses. He also holds the positions of Deputy Chairman and
Chairman of the Audit Committee of another UK investment trust. His knowledge
and experience are of great value to the Board, particularly his contribution
to, and leadership of, the Audit & Valuation Committee.
Mr Murison
Mr Murison has experience both as a director and manager of companies funded by
private equity and as a portfolio investor in unlisted equity. He is chairman
of another investment trust and sits on the board of a venture capital trust.
His informed opinions and relevant, broad-ranging experience contribute greatly
to Board discussions.
Mr 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 trends in
the market are of great value to the Board and his contributions towards the
consideration of the Trust's strategy and the Board's assessment of the
Manager's performance are particularly notable.
Mr Brooke
Mr Brooke has long-running and extensive experience in financial markets and
significant exposure to board level decision-making within publicly listed
companies. He brings particular expertise in corporate governance,
business strategy and financial management to Board discussions and decision-making.
Mr Powell
Mr Powell has had significant experience in the investment management arena
throughout his career and has been responsible for the management of private
client investment portfolios at the highest level. He makes significant
contributions to the Board through the application of his expert knowledge and
significant industry experience.
Directors' interests
At the year-end the Directors of the Trust had the following interests in the
Ordinary shares and Subscription shares of the Trust. All holdings are
beneficial unless stated otherwise. Subscription shares were first issued on
7 April 2010.
Ordinary Ordinary Subscription
shares shares shares
31.12.10 31.12.09 31.12.10
P L Brooke 2,500 2,000 500
R J Brooman 1,534 1,200 307
P Gale 10,695 9,996 2,139
R P
Mountford 11,893 10,607 2,329
A H Murison 10,000 8,000 2,000
G M Powell 3,000 n/a nil
There have been no changes to the interests held by the Directors, in the
Ordinary or Subscription shares of the Trust, between 31 December 2010 and the
date of this report.
Substantial interests
As at 3 March 2011, being the latest practicable date prior to the publication
of this report, the Trust had received notice that the following persons had
interests in 3% or more of the total voting rights of the Trust:
Ordinary % of voting
shares rights
Rowan Nominees Limited 2,781,905* 8.9
whose shares are held on behalf
of:
- Ian Armitage 1,567,368 5.0
- HgCapital staff 950,458 2.8
- BBC Pension Trust
Limited 346,619 1.1
Cazenove Capital Management
Limited 1,864,383 6.0
Oxfordshire County Council 1,782,500 5.7
The Co-Operative Asset
Management 1,290,200 4.1
Legal & General Group plc 1,131,392** 3.6
Where notifications were received prior to the placing and open
offer, percentages have been updated to reflect the increased
number of shares in issue and may therefore differ from the
percentages notified at the relevant time.
* The shares notified by Rowan Nominees Limited include shares
held on behalf of Mr Ian Armitage; HgCapital staff; and
BBC Pension Trust Limited as indicated opposite. All
shares held by Rowan Nominees Limited are managed by Hg
Investment Managers Ltd or Hg Pooled management Ltd.
**Additional interests in 226,341 Subscription shares were
notified by Legal & General plc.
Analysis of registered Ordinary shareholders as at 31 December 2010
% of total % of total
Number of 31 Dec 31 Dec Number of 31 Dec 31 Dec
By type of holder shares 2010 2009 holders 2010 2009
Nominee companies 29,696,180 95.47 94.07 411 59.57 58.28
Direct private
investors 807,651 2.60 3.94 233 33.77 35.89
Others 600,084 1.93 1.99 46 6.66 5.83
Total 31,103,915 100.00 100.00 690 100.00 100.00
% of total % of total
By size of Number of 31 Dec 31 Dec Number of 31 Dec 31 Dec
holding shares 2010 2009 holders 2010 2009
1 - 5,000 550,176 1.77 2.37 446 64.64 68.25
5,001 - 50,000 2,678,491 8.61 8.28 160 23.18 19.79
50,001-
100,000 3,162,079 10.17 9.48 42 6.09 5.06
over 100,000 24,713,169 79.45 79.87 42 6.09 6.9
Total 31,103,915 100.00 100.00 690 100.00 100.00
This table does not form part of the financial statements.
Investment management and administration
Throughout 2010, the Trust'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 Trust 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 Trust 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 Trust'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
Trust in respect of that financial year.
For the Trust'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 Trust 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 Trust's pro-rata commitment.
HgCapital has been appointed as Secretary and administrator of the Trust for a
fee equal to 0.1% of NAV. Hg Investment Managers Limited is the custodian of
the Trust's assets and its fees and expenses are met by HgCapital.
Continued appointment of the Manager
The Board has concluded that it is in shareholders' interests that HgCapital
should continue as Manager of the Trust on the existing terms. The Board
considers the arrangements for the provision of investment management and other
services to the Trust 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 Trust'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.
Donations
The Trust made no political or charitable donations during the period.
Payment of suppliers
It is the policy of the Trust to pay for the supply of goods and services
within the terms agreed with the supplier. The Trust has no trade creditors.
Annual General Meeting ('AGM')
The AGM of the Trust, which will include a presentation by the Manager, will be
held at the offices of HgCapital, 2 More London Riverside, London SE1 2AP on
Tuesday 10 May 2011 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 10 November 2011.
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 4,662,477 Ordinary shares (being 14.99% of the
issued share capital) as set out in Resolution 10. This authority, unless
renewed, will expire at the conclusion of the AGM in 2012. 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 for each
Ordinary share is the higher of: (a) 105% of the average of the middle market
quotations of the Ordinary shares in the Trust for the five business days prior
to the date on which such share is contracted to be purchased; 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 Trust will deal only with member
firms of the London Stock Exchange.
Authority of Directors to allot shares
A general authority to allot new shares (or to grant rights over shares) was
given to the Directors at the Trust's AGM in 2010. The authority gives the
Directors, for the period until the conclusion of the AGM in 2011, the
necessary authority to allot securities up to a maximum nominal amount of GBP
4,197,792, or what was at 31 December 2009 approximately 66% of the issued
ordinary share capital of the Trust. Of this amount GBP2,098,896, or what was
approximately 33% of the issued ordinary share capital, may only be allotted in
the event of a fully pre-emptive rights issue.
On 6 April 2010 the Directors were also given authority to allot Ordinary and
Subscription shares in respect of the open offer, the bonus issue and the
exercise of subscription rights attaching to Subscription shares. This
authority will expire on 6 April 2015.
The Directors are proposing to renew the general authority to allot shares at
the 2011 AGM. The authority to allot will be on broadly the same terms the
resolution passed at the 2010 AGM and takes account of ABI guidelines.
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 Trust up to a maximum nominal amount of GBP5,132,146 (or 20,528,584 Ordinary
shares of 25p each) representing the guideline limit of approximately 66 per
cent of the Trust's ordinary share capital. Of this amount GBP2,566,073 (or
10,264,292 Ordinary shares of 25p each), representing approximately 33 per cent
of the Trust'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 2012 or, if earlier, 10 August 2012.
Disapplication of pre-emption rights
A general power to disapply the pre-emption rights set out in section 561 of
the Companies Act 2006 was granted to the Directors at the AGM in 2010. On 6
April 2010 an authority to disapply pre-emption rights was granted to the
Directors in respect of the bonus issue and the exercise of subscription rights
attaching to Subscription shares.
The Directors are proposing a resolution to renew the general power to allot
shares 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, this authority will
permit the Directors to allot:
(a) shares up to a nominal amount of GBP5,132,146 (or 20,528,584 Ordinary shares
of 25 pence each) representing two-thirds of the Trust'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 GBP
2,566,073 (or 10,264,292 Ordinary shares of 25 pence each) representing
one-third of the Trust'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 GBP777,598, 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 power shall be valid until expiry of
the general authority to allot shares described above.
Notice period for general meetings
The Board believes that it is in the best interests of shareholders of the
Trust to have the ability to call meetings on 14 days' clear notice should a
matter require urgency. The Board will therefore, as last year, propose a
resolution at the AGM to approve the reduction in the minimum notice period
from 21 clear days to 14 clear days for all general meetings other than annual
general meetings. The Directors do not intend to use fewer than 21 clear days'
notice unless immediate action is required.
Transfer of shares and voting rights
There are no restrictions concerning the transfer of securities in the Trust;
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 Trust; and no agreements to which the
Trust is a party that might affect its control following a successful takeover
bid.
Disclosure of information to Auditors
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 Trust'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 Trust'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
17 March 2011
Corporate governance statement
This corporate governance statement forms part of the Directors' report.
Governance codes
The UK Listing Authority's Disclosure and TransparencyRules (the 'Disclosure
Rules') require listed companies to disclose how they have applied the
principles and complied with the provisions of the Combined Code on Corporate
Governance (the 'Combined Code'), as issued by the Financial Reporting Council
(the 'FRC'). The provisions of the Combined Code issued by the FRC in June 2008
were applicable in the year under review. The Combined Code can be viewed at
www.frc.org.uk.
In addition, the Board of Hg Capital Trust plc has considered the principles
and recommendations of the AIC Code of Corporate Governance ("AIC Code"),
published in October 2010, 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 the UK Corporate Governance
Code, published in May 2010,as well as setting out additional principles and
recommendations on issues that are of specific relevance to Hg Capital Trust
plc. The Board considers that reporting against the principles and
recommendations of the AIC Code, and by reference to the AIC Guide (which
incorporates the UK Corporate Governance Code), will provide better information
to shareholders.
Throughout the year, the Trust has complied with the recommendations of the
AIC Code and the relevant provisions of the UK Corporate Governance Code,
except as set out below. The UK Corporate Governance 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 as explained in the UK Corporate
Governance Code, the Board considers these provisions are not relevant to the
position of the Trust, being an externally managed investment company. The
Trust has not therefore reported against 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 UK Corporate Governance Code can be obtained at
www.frc.org.uk.
The Board's composition
The Board consists of six non-executive Directors, all of whom the Trust deems
to be independent of the Manager.
In the Board's opinion Mr Brooke and Mr Gale continue to qualify as independent
Directors despite their length of service as they are independent of the
Manager and free from any business or other relationships that could materially
interfere with the exercise of their judgment. Mr Gale and Mr Brooke are
non-executive directors of Lothbury Investment Management, and Mr Brooman and
Mr Powell are non-executive directors of SVM UK Active Fund Plc. Their fellow
Directors consider that each demonstrates that they are independent in
character and judgement and that these common directorships do not impede their
independence.
The Directors' biographies highlight their wide range of business experience.
The Board has proactively addressed the matter of director tenure in their
deliberations. It believes that adopting a policy whereby Directors may serve
only for a limited period is not appropriate for a listed private equity fund,
such as the Trust, where maintaining a long-term perspective is of particular
importance. The continuity and experience brought to the Board by Directors
with longer periods of service is considered desirable. The Board further
considers that implementation of a fixed tenure policy could bring with it the
inherent risks of short-termism and abuse of position, particularly in the
application of such a policy to the position of Chairman.
Mr Gale serves as Deputy Chairman of the Trust and, in practice if not in
title, has assumed those responsibilities highlighted in the AIC Code as being
the remit of the Senior Independent Director ('SID'). During the year the Board
determined that it would be appropriate for Mr Gale to be formally appointed as
the SID, in particular to highlight his role to investors as an alternative
channel for shareholder communications.
Proceedings of the Board
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 Board meets formally at least five times a year and met eight times in
2010. There is regular contact among the Directors and 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 Trust.
The Board has responsibility for ensuring that the Trust keeps proper
accounting records which disclose with reasonable accuracy at any time the
financial position of the Trust 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 Trust and for taking reasonable steps for the
prevention and detection of fraud and other irregularities. Further, it is the
Board's responsibility to present a balanced and understandable assessment of
the Trust's position in all public communications.
The Trust has maintained appropriate directors' liability insurance cover
throughout the year. The Trust'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 Trust has agreed, subject to the
restrictions and limitations imposed by statute and by the Trust'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 Trust's
articles of association and in the Directors' terms of appointment, there are
no qualifying third party indemnity provisions in force.
Conflicts of interest
The Directors have declared any conflict or potential conflict of interest to
the Board, which has the authority to approve such situations. A Register of
the situations approved is maintained and reviewed quarterly by the Board and
when changes are notified. The Directors advise the Board as soon as they
become aware of any conflicts of interest. In the event that a Director had a
relevant conflict of interest he would not be party to discussions or decisions
on the matter on which he is conflicted. The Board can however confirm that it
has not been necessary to exclude any Director from the consideration of Board
or Committee matters on such a basis at any time during the period.
The Board's evaluation
An appraisal system has been agreed by the Board for evaluation on an annual
basis of the Board, the Audit & Valuation Committee, the Chairman and the
individual Directors. The evaluation takes 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 & Valuation Committee have a sufficient level of recent
and relevant financial experience.
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 Trust:
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 the provision of 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 any voting rights attaching to
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 and its
committees.
Board committees
The Board has delegated a number of areas of responsibility to its committees.
All the Directors of the Trust are non-executive and serve on each committee of
the Board. Each Director is considered independent of the Manager, having had
no previous or current connection with the investment management of the Trust
other than in their capacity as a Director of the Trust, and are further
considered to be independent in mind and judgement.
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.
Mr Brooman is the Chairman of the Audit & Valuation Committee. Mr Mountford is
Chairman of the Remuneration Committee, the Management Engagement Committee and
the Nomination Committee.
The terms of reference of all the committees are available on request and will
also be available at each AGM.
Audit & Valuation Committee
The Audit & 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 Directors are members of this
committee to enable them to be kept fully informed of any issues that may arise
and to participate fully in discussions on portfolio valuation. The committee
reviews the half-yearly and annual reports and also receives information from
the relevant corporate audit and compliance departments. The committee reviews
the scope, results, cost effectiveness, independence and objectivity of the
external auditor. Semi-annually, at each relevant balance sheet date, the
committee reviews in detail the valuation of the unquoted investments within
the portfolio.
Non-audit fees of GBP53,000 (including VAT) were paid to Deloitte LLP for tax
compliance work and as consultancy fees relating to the share issue. The Board
monitors the Trust's relationship with its external auditor with a view to
ensuring that the external auditor does not provide non-audit services that
have the potential to impair or appear to impair the independence of their
audit role. The Board has agreed that, from time to time it may be appropriate
and cost effective for the external auditor to provide certain non-audit
services where alternative providers do not exist or where it is cost effective
or in the Trust's interest for the external auditor to provide such services.
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. The Board has considered the independence and objectivity of the
auditor and has conducted a review of non-audit services which the auditor has
provided. It is satisfied in these respects that Deloitte LLP is independent of
the Trust and has fulfilled its obligations to the Trust and its shareholders.
Having regard to these and all other relevant factors, the Audit & Valuation
Committee made a recommendation to the Board that, subject to shareholder
approval at the 2011 AGM, Deloitte LLP be reappointed as the independent
auditor of the Trust for the forthcoming year.
The external auditor is invited to attend all Audit & Valuation Committee
meetings and has the opportunity to meet with the committee without
representatives of the Manager being present.
Management Engagement Committee
The Management Engagement Committee is formally responsible for conducting an
appraisal of the Manager's performance and considering and recommending, as
appropriate, the Manager's continued appointment. It also regularly reviews the
terms of the investment management and administration contracts. The Directors
acknowledge that the role of the Management Engagement Committee in a listed
private equity company such as the Trust will be different to the role of such
committees in the majority of investment trusts. As such, the primary focus of
the committee is to ensure that the Manager's business remains robust and is
suitably resourced to enable efficient and effective operations to continue for
the foreseeable future; the committee considers matters such as the Manager's
governance framework and succession planning in this regard.
Remuneration Committee
The 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 recommendations of the AIC Code under Principle 5 state that the Chairman
may be a member of, but not chair, the Remuneration Committee. The Board,
having considered the recommendations, nevertheless believe that Mr Mountford
remains the most suitable Director to chair the committee. Of particular
relevance to the Board's deliberations on this matter were factors including
the size of the Board and the remit of the committee, which extends only to the
consideration of non-executive remuneration. The remuneration of the Chairman
is considered by the committee in his absence and under the leadership of the
Deputy Chairman.
Nomination Committee
The Nomination Committee 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.
Following the retirement of Mr Amies in May 2010 the Nomination Committee was
responsible for the new Director selection process and for recommending the
preferred candidate for appointment to the Board. Mr Powell was recommended for
appointment by the committee following an active search conducted by external
recruitment consultants.
Attendance record
The following table summarises the Directors' attendance at meetings of the
Board and its committees, held in the year to 31 December 2010, compared with
the number they were eligible to attend.
Number of meetings attended/eligible to attend
Audit & Management
Director Board Valuation Remuneration Engagement Nomination
Tim Amies 4/4 3/3 1/1 1/1 n/a
Piers Brooke 6/8 4/6 1/1 2/2 1/1
Richard Brooman 8/8 6/6 1/1 2/2 1/1
Peter Gale 6/8 4/6 1/1 1/2 1/1
Roger Mountford 7/8 5/6 1/1 2/2 1/1
Andrew Murison 8/8 6/6 0/1 1/2 1/1
Mark Powell 4/4 3/3 n/a 0/1 n/a
Internal controls
The Board is responsible for the internal controls of the Trust 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 Trust fully
complied with the AIC Code of Corporate Governance throughout the year ended 31
December 2010 and up to the date of this report, and will continue to do so in
the year ending 31 December 2011.
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 Trust'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's 'Internal Control: Revised Guidance for Directors
on the Combined Code'. HgCapital, CCSS and CFG report to the Trust 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 & Valuation Committee meeting.
During the year the Board has not identified any significant failings or
weaknesses in the internal control systems.
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 Trust 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 Trust'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 Trust as at the end of each financial year and
of the profit of the Trust for that period.
The Board considers that in preparing the financial statements the Trust 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 & 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, the Senior
Independent Director and Directors are available to enter into dialogue and
correspondence with shareholders regarding the progress and performance of the
Trust. The section of this report, entitled 'Shareholder Information', provides
information useful to shareholders.
The Annual Report contains the following statement regarding the directors'
responsibility for preparing the annual report and financial statements.
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
Trust and of the profit or loss of the Trust for that period. In preparing
these financial statements, the Directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgements 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 Trust will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Trusts's transactions and disclose with
reasonable accuracy at any time the financial position of the Trust 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 Trust 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 Trust'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 Trust; and
* the Directors' report, includes a fair review of the development and
performance of the business and the position of the Trust, together with a
description of the principal risks and uncertainties that it faces.
By order of the Board
Roger Mountford, Chairman
17 March 2011
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,
the 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 stock-holder 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
reinforce 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 to a limited partnership;
* By buying shares in a listed private equity company, investors have liquidity
in the shares and do 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 a private auction of 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.
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 8000
www.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 plc 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
National Storage Mechanism
A copy of the annual report and financial statements will be submitted shortly
to the National Storage Mechanism ("NSM") and will be available for inspection
at the NSM, which is situated at: www.hemscott.com/nsm.do.
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on this announcement (or any other website) is
incorporated into, or forms part of, this announcement.
END
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