TIDMJZCP TIDMJZCC TIDMJZCN
JZ CAPITAL PARTNERS LIMITED (the "Company" or "JZCP")
(a closed-end investment company incorporated with limited liability under the
laws of Guernsey with registered number 48761)
ANNUAL RESULTS FOR THE TWELVE-MONTH PERIODED
29 FEBRUARY 2020
LEI: 549300TZCK08Q16HHU44
(Classified Regulated Information, under DTR 6 Annex 1 section 1.1)
18 June 2020
JZ Capital Partners, the London listed fund that invests in US and European
micro-cap companies and US real estate, announces its preliminary results for
the year ended 29 February 2020.
Results and Portfolio Highlights
· NAV per share of $6.14 (FYE 28/02/19: $10.04)
· NAV of $475.7 million (FYE 28/02/19: $810.2 million)
· Total realisations of $148.2 million, including: the sale of JZCP's 80%
stake in Avante & Orizon, the sale of Waterline Renewal; and the sale of
Priority Express.
· As of 29 February 2020, the portfolio comprised:
o US micro-cap: 23 businesses, which includes four 'verticals' and 15
co-investments, across nine industries.
o European micro-cap: 13 companies across six countries.
o US real estate: major assemblages in New York and South Florida
Covid-19 (post-period)
· At this time, it is difficult to accurately gauge the potential impact of
the Covid-19 pandemic on the Company. However, in particular the outbreak is
currently having a negative impact on several of the Company's real estate
assets, although the exact nature, extent and duration of the impact on our
entire portfolio is not yet known and cannot be accurately assessed with
certainty.
· The Investment Adviser is working closely with JZCP's portfolio companies
and their management teams to ensure they navigate the headwinds caused by the
crisis.
Real Estate Portfolio
· Following the release of the Company's interim results in November 2019,
the Board appointed a new independent third-party appraiser to reappraise the
real estate portfolio; it is these year-end valuations, with a value date of 31
December 2019, that have given rise to the recent write-downs in value.
· The Board do not consider that there were any material changes to the
portfolio valuations in the two months ended 29 February 2020.
· However, the Board and Investment Adviser believe the effects of the
Covid-19 crisis on the values of the real estate investments are expected to be
significant and adverse, although their quantum cannot yet be estimated.
Further appraisals will be commissioned to establish the value of the real
estate portfolio as at 31 August 2020.
Strategic Initiatives
· On 22 April 2020, the Board announced it was seeking shareholder approval
for the adoption of a revised investment policy, whereby the Company intends to
realise the maximum value of its investments and, after repayment of all debt,
to return capital to shareholders.
· In light of the difficulties that the Company has endured, the Board has
had discussions with its Investment Adviser, JZAI, about the Company's future.
The Board believes it is in the Company's best interests that JZAI manages the
continued realisation of the Company's assets over an appropriate time period
that will maximise their value.
· The Company had already announced a stabilisation plan to realise assets,
including the execution of the secondary sale of certain US micro-cap assets,
in order to generate enough liquidity to cover its debt obligations at a
corporate level. Unfortunately, the Covid-19 crisis has delayed these plans,
but the Investment Adviser has already identified other potentially realisable
assets, which would satisfy the aims of the plan in full.
· The maturity dates on the Company's debt obligations and the Company's
existing cash resources mean that there is no near-term liquidity pressure.
David Macfarlane, Chairman of JZCP, said: "The global impact of Covid-19 has
been unprecedented, and one of the most significant macro-economic shocks the
world has experienced in the past century. At this time, it is difficult to
accurately gauge the potential impact of the Covid-19 outbreak on the Company's
portfolio, but the Investment Adviser is working more closely with our
portfolio companies than ever before to ensure they navigate the headwinds
caused by the crisis. We are also in negotiation with our lenders across the
real estate portfolio to provide us with more flexibility in the short to
medium-term.
We are deeply disappointed with the significant losses in the value of the
Company's real estate portfolio and poor performance reported during the
period. While the US and European micro-cap assets continue to perform well,
the Board recognises that there has to be a change in investment policy.
Accordingly, and as previously announced, the Company is seeking shareholder
approval for a new investment policy, whereby it will make no further
investments outside of its existing obligations or to the extent that
investment is required to support selected existing investments. The Company's
plan and focus is on realising assets, repaying debt and then returning capital
to shareholders. The Covid-19 crisis has delayed the timetable for achieving
this, but the Board believe that substantial progress can be made when the
crisis lifts."
__________________________________________________________________________________
The information contained within this announcement is considered by the Company
to constitute inside information as stipulated under the Market Abuse
Regulations (EU) No. 596/2014. Upon the publication of this announcement, this
inside information is now considered to be in the public domain. The person
responsible for arranging the release of this announcement on behalf of the
Company is David Macfarlane, Chairman.
For further information:
Ed Berry / Kit Dunford
+44 (0)20 3727 1143
FTI Consulting
David Zalaznick
+1 212 485
9410
Jordan/Zalaznick Advisers, Inc.
Sam Walden
+44 (0) 1481
745385
Northern Trust International Fund
Administration Services (Guernsey) Limited
About JZ Capital Partners
JZ Capital Partners ("JZCP") is one of the oldest closed-end investment
companies listed on the London Stock Exchange. It seeks to provide shareholders
with a return by investing selectively in US and European microcap companies
and US real estate. JZCP receives investment advice from Jordan/Zalaznick
Advisers, Inc. ("JZAI") which is led by David Zalaznick and Jay Jordan. They
have worked together for more than 35 years and are supported by teams of
investment professionals in New York, Chicago, London and Madrid. JZAI's
experts work with the existing management of micro-cap companies to help build
better businesses, create value and deliver strong returns for investors. For
more information please visit www.jzcp.com.
Chairman's Statement
It is regrettable that the financial results of the Company for the year ended
29 February 2020 reflect significant losses in value to the Company. The
Company's NAV during the period reported on has fallen from $10.04 to $6.14 per
share. This 38.8% reduction is attributable in the most part to write-downs in
the value of certain real estate investments, which was foreshadowed prior to
the release of the interim results in late October 2019 and announced
thereafter. The other areas of the Company's business, investment in US and
European micro-cap assets, have, apart from one significant loss on a European
debt investment, performed well, as generally speaking, they always have.
As a result of the significant losses in value to the Company's real estate
portfolio and ensuing poor performance, the Board has recognised the need for a
change in investment policy. Accordingly, as announced on 22 April 2020, the
Board has proposed a new investment policy whereby the Company will make no
further investments outside of its existing obligations or to the extent that
investment may be made to support selected existing portfolio investments. The
intention is to realise the maximum value of the Company's investments and,
after repayment of all debt, to return capital to shareholders. A separate
letter to shareholders will be issued on or before the posting of the printed
version of these results convening an Extraordinary General Meeting at which to
propose a resolution formally to adopt this new policy.
Soon after the period end, the full extent of the COVID-19 crisis started to
take effect globally and the Investment Adviser moved swiftly to ensure the
safety of its employees and their families adapting to remote working and
appropriate social distancing measures. Whilst the full impact of the pandemic
on the portfolio is yet to be determined, the Investment Adviser is working
closer with our portfolio companies than ever before to ensure they navigate
the headwinds caused by the crisis.
Real Estate Portfolio
During the autumn of 2019, initial indications of potential impairment to the
real estate portfolio emerged in the ordinary course of business between the
Company's Investment Adviser and third-party real estate brokers. These initial
indications suggested that certain investments might not be realisable at the
values at which the Company was holding them, which were based upon the
valuations of the Company's independent third-party appraiser at that time. In
light of this, the Board requested that the third-party appraiser urgently
review its appraisals and bring them up to date. The appraisals were updated in
time for the Company to publish its interim results; however, the appraiser's
review revealed minimal differences from its previously prepared valuations.
Nevertheless the Investment Adviser continued to have substantial reservations
about these appraisals as indicated in those results.
Following the release of the Company's interim results, the Board appointed a
new independent third-party appraiser to reappraise the real estate portfolio;
it is these year-end valuations that have given rise to the recent write-downs
in value. The downward valuations of certain properties have been less severe
than others, but only one property has maintained its previous carrying value.
In the case of two substantial investments, Fulton Mall and Design District,
the markdowns at the property level were sufficient to extinguish the Company's
entire equity in these properties.
While no obvious major macro-economic trends would imply a change in value of
the magnitude of the write downs, several factors, including the general
decline of retail and, in New York, new regulations adversely affecting
residential properties, have led to a general softening of the Brooklyn and
South Florida real estate markets. In addition, there has been either an
inability or delay in executing strategic investment plans. High loan-to-value
ratios at the property level have also exacerbated the effect of falling
appraisals on the Company's equity value. Nonetheless, it would seem that many
of the Company's real estate investments have not been the advantageous
purchases they were considered to be, in terms of either price or timing.
It is important to note that the valuations at which the real estate
investments are held as at year-end are based upon the appraisals done by the
new independent third-party appraiser with a value date of 31 December 2019.
The Board do not consider that there were any material changes to portfolio
valuations in the two months ended 29 February 2020, However, needless to say
the effects of the COVID-19 crisis since then on values of the real estate
investments are expected to be significant and adverse although their quantum
cannot yet be estimated. Further appraisals will be commissioned to establish
the value of the real estate portfolio as at 31st August 2020, the Company's
half year end and the date to which the Interim Results for the Company's
financial year ending 28th February 2021 will be presented.
US and European Micro-cap Portfolios
In contrast the year under review has been a solid one for the Company's US and
European micro-cap investments. However, these results are stated before taking
into account the impact of the COVID-19 crisis, because its effect could not
then be known. Now the impact is known to affect adversely most businesses to
varying degrees of severity, although it is not known what the quantum is or
what will be the longer-term effect on values. Suffice to say that the main
factor will be the length of the lockdown and how quickly business can return
to normal. In the short term, the Company's Investment Adviser continues to
work assiduously with its portfolio companies and their management teams to
guide them safely through this crisis. We look forward to reporting further on
our US and European micro-cap portfolios at our interim results.
Stabilisation Plan
The Company had already announced a plan to realise assets as soon as possible
in order to generate sufficient liquidity to cover its debt obligations at the
corporate level: the Guggenheim loan of approximately $150 million (due 12 June
2021), Convertible Unsecured Loan Stock ("CULS") of approximately GBP38.9 million
(due 30 July 2021) and Zero Dividend Preference Shares ("ZDPs") of
approximately GBP57.6 million (due 1 October 2022). This plan was well underway,
featuring a largely agreed secondary sale of certain US micro-cap assets at a
substantial premium to NAV, which would have contributed half the liquidity
required for the entire stabilisation plan. Unfortunately, the Covid-19 crisis
intervened, deferring the ultimate execution of the secondary sale. In tandem,
the Company's Investment Adviser has identified several other potentially
realisable assets, which in aggregate would be sufficient to satisfy the aims
of the stabilisation plan in full. Again, this timetable, originally targeted
for this calendar year, will be extended due to the disruption and uncertainty
created by COVID-19. Fortunately, the maturity dates on the Company's debt
obligations and the Company's existing cash resources mean that there is no
near-term liquidity pressure. That said, in view of the uncertainties at least
temporarily as to value caused by Covid 19, at Guggenheim's invitation, the
Company and Guggenheim are discussing amendments to the loan agreement with the
purpose of ensuring that any risk of breach of covenant that might otherwise
occur will be avoided. Although in the light of the decline in value of the
Company's real estate portfolio and the enhanced uncertainty in light of the
Coronavirus crisis about the Company's ability to realise assets, the
assumption as to which is always key to its ability to continue as a going
concern, has in these results occasioned the material uncertainties that have
been disclosed in detail in the Directors Report.
Investment Adviser
In light of the difficulties that the Company has endured, the Board has had
discussions with its Investment Adviser, JZAI, and with Jay Jordan and David
Zalaznick about the Company's future. The Board believes it is in the Company's
best interests that JZAI manages the continued realisation of the Company's
assets over an appropriate time period that will maximise their value. The
Board appreciates the concessions that David and Jay have made in relation to
their waiver of capital incentive fees earned of $24.6 million. They have also
agreed to relieve the Company of some $8.6 million of of commitments and
obligations in relation to investment in the CERPI fund managed by Spruceview;
and in respect of the Orangewood Fund, where the Company's commitment was
originally $24 million, they have agreed to relieve the Company by each of them
assuming the obligation of $2 million, by arranging the transfer of a further
$5m to a third party and it is anticipated that the balance of $15 million will
also be transferred. In addition, it has been agreed that the Company's
intended co-commitment with David and Jay to JZ Fund IV originally of EUR64
million will not be made at all.
The Board
In my statement accompanying the Company's annual results for its financial
year ended 28 February 2019, I indicated that a substantial refreshment of the
board was planned to take place by 2021, including the appointment of a
replacement for myself as Chairman. To this end Tanja Tibaldi will retire from
the board at the forthcoming Annual General Meeting and an additional Guernsey
resident director is being recruited. The Board is greatly appreciative of
Tanja's contribution and thanks her for her service. The Board will keep under
review the need for further refreshment as time goes on and circumstances
require. However, in the light of the events of the last few months, my own
plans for retirement have been deferred and I now intend to remain in office to
oversee the realisation of the Company's assets, repayment of debt and return
of capital to shareholders. I am pleased to say that Jim Jordan has also agreed
to remain in office. In such circumstances though the Board is mindful of the
need to limit its cost to the Company and accordingly directors' base fees will
be reduced by $10,000 to $50,000 and my fees will be reduced by 25%. However,
the chairman of the audit committee will receive an additional fee this year in
recognition of the substantial additional work that she has had to undertake.
Prospects
The prospects of the Company depend to a great extent in the immediate term
upon the duration of the Covid-19 crisis and its outcome for the Company's
investments. As noted above and in the Investment Adviser's report there are
grounds for some optimism as regards the Company's microcap investments but the
outlook for the real estate portfolio is more uncertain. The Company's plan and
focus is on realising assets, repaying debt and then returning capital to
shareholders. The timetable for achieving this has been delayed by the COVID-19
crisis but the Board believes that substantial progress can be made when the
crisis lifts.
David Macfarlane
Chairman
17 June 2020
Investment Adviser's Report
Dear Fellow Shareholders,
As previously announced, we've spent the past six months focused on our stated
goal of realizing investments to generate cash to pay debt, support certain
investments in the existing portfolio and return capital to shareholders; this
is all in line with the new investment policy. We've made some progress on
realizations as detailed below. However, with the arrival of the COVID-19
crisis, our plans have been pushed back by six to twelve months, or longer.
Therefore, our efforts will be totally dedicated towards raising cash in order
to execute the aforementioned plan to pay debt as well as continue to
selectively support the existing portfolio so that we can maximize the value of
the Company's assets.
Our US and European micro-cap portfolios performed relatively well during the
first calendar quarter of 2020. To deal with the COVID-19 pandemic, we are
working daily with each portfolio company's leadership team to review
contingency plans and liquidity scenarios to weather the current downturn. Many
of our portfolio companies currently have strong liquidity positions;
regardless, we are in touch with lenders to amend loan terms to give our
companies as much headroom as necessary to get through COVID-19. While we are
hopeful that the economic downturn will be relatively short-term in nature, we
are executing on conservative plans to support our portfolio in case of a
longer duration impact.
We believe our micro-cap portfolios remain in good shape because (i) they are
not heavily invested in cyclical businesses; (ii) they are conservatively
leveraged; and (iii) our entry multiples are below market and offer significant
room for capital gains. Furthermore, we believe certain of our build-ups in the
US and Europe may end up being net beneficiaries of current market conditions
as add-on acquisition targets become available on more attractive terms.
With regards to our real estate portfolio, COVID-19 has been devastating to
commercial retail real estate and may likely result in further write downs in
the value of our real estate assets. Many of our retail tenants have not paid
rent in April or May. We are negotiating with our lenders across the portfolio
on numerous fronts to allow us to weather the current situation.
During the year ended 29 February 2020, JZCP realized more than $152 million in
gross proceeds, including: $65 million from the August 2019 sale of 80% of its
interest in portfolio companies Orizon and Avante; $23.3 million from the April
2019 sale of Waterline Renewal; $17.2 million from the October 2019 sale of
Priority Express; $14.5 million from the sale of Fund III portfolio company
Petrocorner and the refinancing of companies Collingwood and Fincontinuo; $14.0
million from the March 2019 refinancing of Felix Storch; and $4.6 million from
the sale of our Triangle real estate property.
As of 29 February 2020, our US micro-cap portfolio consisted of 23 businesses,
which includes four 'verticals' and 15 co-investments, across nine industries;
this portfolio was valued at 8.3x EBITDA, after applying an average 18%
marketability discount to public comparables. The average underlying leverage
senior to JZCP's position in our US micro-cap portfolio is 4.6x EBITDA.
Consistent with our value-oriented investment strategy, we have acquired our
current US micro-cap portfolio at an average 5.9x EBITDA. Our European
micro-cap portfolio consisted of 18 companies across six industries and seven
countries. The European micro-cap portfolio has low leverage senior to JZCP's
position, of under 2.0x EBITDA.
As discussed in the Chairman's Statement and several press releases in JZCP's
third and fourth quarters of this fiscal year, our real estate portfolio has
suffered a large reduction in value during the year. Our US real estate
portfolio consists primarily of 'assemblages' located in the Williamsburg,
Greenpoint and Downtown Brooklyn neighbourhoods of Brooklyn, New York, as well
as the cities of Miami and West Palm Beach in South Florida.
Net Asset Value ("NAV")
JZCP's NAV per share decreased by $3.90, or 38.8%, during the year.
NAV bridge
NAV per Ordinary share as of 1 March 2019 $10.04
Change in NAV due to capital gains and accrued
income
+ US Micro-cap 0.59
- European Micro-cap (0.25)
- Real Estate (4.27)
+ Other Investments 0.02
Other increases/(decreases) in NAV
+ Change in CULS market price 0.03
- Finance costs (0.25)
+ Reversal of Incentive fee 0.45
accrual
- Expenses and taxation (0.24)
+ Appreciation from share buy 0.02
backs
NAV per Ordinary share as of 29 February $6.14
2020
The US micro-cap portfolio performed respectably during the period, delivering
a net increase of 59 cents per share. This was primarily due to net accrued
income of 18 cents, increased earnings at co-investments Peaceable Street
Capital (11 cents), New Vitality (7 cents) and K2 Towers II (3 cents) as well
as writing up our Orizon, Avante and Logistics investments upon their
realizations in 2019 (18, 7 and 6 cents, respectively). We also received 6
cents of escrow payments during the year. Offsetting these increases were
decreases at co- investments Sloan (1 cent), Igloo (6 cents) and Deflecto (10
cents).
Our JZI Fund III, L.P. ("Fund III") portfolio performed well during the period,
posting a net increase of 8 cents, primarily due to write-ups at Fund III
portfolio companies S.A.C, Eliantus, Factor Energia, BlueSites, Luxida and
Karium. Gains at our Fund III portfolio companies were offset by a write-down
on our direct loan to Ombuds (33 cents).
The real estate portfolio experienced a net decrease of $4.27, largely due to
the write-offs of the Design District and Fulton Mall investments.
Returns
The chart below summarizes cumulative total shareholder returns and total NAV
returns for the most recent six-month, one-year, three-year and five-year
periods.
29.2.2020 31.8.2019 28.2.2019 28.2.2017 28.2.2015
Share price (in GBP) GBP2.58 GBP4.82 GBP4.35 GBP5.38 GBP4.09
NAV per share (in USD) $6.14 $9.66 $10.04 $10.12 $10.85
NAV to market price discount 46.3% 39.2% 42.4% 33.8% 41.7%
6 month 1 year 3 year 5 year
return return return return
Dividends paid (in USD) $0.00 $0.00 $0.00 $0.64
Total Shareholders' return (GBP)1 -41.9% -40.7% -52.0% -30.2%
Total NAV return per share (USD)1 -37.5% -38.8% -39.3% -39.7%
Adjusted NAV return per share(USD) -37.5% -39.0% -40.4% -34.8%
1,2
1Total returns are cumulative and assume that dividends were reinvested.
2Adjusted NAV returns reflect the return per share before (i) the dilution
resulting from the issue of 18,888,909 ordinary shares at a discount to NAV on
30 September 2015 and (ii) subsequent appreciation from the buyback of ordinary
shares at a discount.
Portfolio Summary
Below is a summary of JZCP's assets and liabilities at 29 February 2020 as
compared to 28 February 2019. An explanation of the changes in the portfolio
follows:
29.2.2020 28.2.2019
US$'000 US$'000
US micro-cap portfolio 404,880 478,970
European micro-cap portfolio 102,591 128,698
Real estate portfolio 158,712 443,044
Other investments 22,603 18,302
Total Private Investments 688,786 1,069,014
Treasury bills 3,386 3,314
Cash and cash equivalents 52,912 50,994
Total Listed Investments and Cash 56,298 54,308
Other assets 119 1,286
Total Assets 745,203 1,124,608
Zero Dividend Preferred shares 64,510 63,838
Convertible Unsecured Loan Stock 49,886 54,274
Loans payable 150,362 149,227
Other liabilities 4,711 47,007
Total Liabilities 269,469 314,346
Total Net Assets 475,734 810,262
JZCP's loan facility with Guggenheim Partners may be repaid, in whole or in
part, at any time, without any prepayment penalties.
US Micro-Cap Portfolio
As you know from previous reports, our US portfolio is grouped into industry
'verticals' and co-investments. Our 'verticals' strategy focuses on
consolidating businesses under industry executives who can add value via
organic growth and cross company synergies. Our co-investments strategy allows
for greater diversification of our portfolio by investing in larger companies
alongside well-known private equity groups.
The US micro-cap portfolio performed respectably during the period, delivering
a net increase of 59 cents per share. This was primarily due to net accrued
income of 18 cents, increased earnings at co-investments Peaceable Street
Capital (11 cents), New Vitality (7 cents) and K2 Towers II (3 cents) as well
as writing up our Orizon, Avante and Logistics investments upon their
realizations in 2019 (18, 7 and 6 cents, respectively). We also received 6
cents of escrow payments during the year. Offsetting these increases were
decreases at co-investments Sloan (1 cent), Igloo (6 cents) and Deflecto (10
cents).
European Micro-Cap Portfolio
Our Fund III portfolio performed well during the year, posting a net increase
of 8 cents, primarily due to write-ups at Fund III portfolio companies S.A.C,
Eliantus, Factor Energia, BlueSites, Luxida and Karium. Gains at our Fund III
portfolio companies were offset by a write-down on our direct loan to Ombuds
(33 cents).
JZCP invests in the European micro-cap sector through its approximately 18.8%
ownership of Fund III. As of 29 February 2020, Fund III held 13 investments:
five in Spain, two in Scandinavia, two in Italy, two in the UK and one each in
Portugal and Luxembourg. JZCP held direct loans to a further four companies in
Spain: Ombuds, Docout, Xacom and Toro Finance.
JZAI has offices in London and Madrid and an outstanding team with over fifteen
years of experience investing together in European micro-cap deals.
During the year, JZCP received distributions totaling approximately EUR12.8
million (approximately $14.5 million) from its investments in: (i) Petrocorner,
a network of petrol stations throughout Spain; (ii) Collingwood, a niche auto
insurance business in the UK; and (iii) Fincontinuo, a niche consumer lender in
Italy. Post-period (April 2020), JZCP received a distribution of EUR2.7 million
from the refinancing of Eliantus.
The proceeds included above from Petrocorner represent the first tranche of
proceeds from the sale of Petrocorner by Fund III to British Petroleum.
Headquartered in Madrid, Petrocorner is a strategic build-up in the Spanish
retail petrol station market, comprised of 65 petrol stations located across
Spain with annualized sales volume of approximately 250 million litres of
petrol. JZCP expects to receive cumulative gross proceeds of EUR12.1 million from
the sale (including interim proceeds and escrows), which represents a gross
multiple of invested capital ("MOIC") of approximately 2.0x and a gross
internal rate of return ("IRR") of approximately 22.0%.
Real estate Portfolio
As discussed in the Chairman's Statement and several press releases in JZCP's
third and fourth quarters of this fiscal year, our real estate portfolio has
suffered a large reduction in value during the year. COVID-19 has further
damaged the portfolio and may likely result in further write downs in the value
of our real estate assets. Many of our retail tenants have not paid rent in
April or May. We are negotiating with our lenders across the portfolio on
numerous fronts to allow us to weather the current situation.
As of 29 February 2020, JZCP had approximately $419 million invested in a
portfolio of retail, office and residential properties in Brooklyn, New York,
and South Florida, which is valued at $159 million as of that date.
Other investments
Our asset management business in the US, Spruceview Capital Partners, has
continued to make encouraging progress since our last report to you. Spruceview
addresses the growing demand from corporate pensions, endowments, family
offices and foundations for fiduciary management services through an Outsourced
Chief Investment Officer ("OCIO") model as well as customized products/
solutions per asset class.
During the period, Spruceview received commitments totaling $700 million for a
portfolio of alternative private equity investments for a Mexican trust (or
"CERPI"). Spruceview has successfully deployed most of those commitments and
continues working to deploy the remaining amounts. Additionally, Spruceview is
anticipating the potential commitment of an additional $700 million to the
CERPI, subject to regulatory approval.
During the period, Spruceview also maintained a pipeline of potential client
opportunities and continued to provide investment management oversight to the
pension funds of the Mexican and Canadian subsidiaries of an international
packaged foods company, as well as portfolios for family office clients, a
European private credit fund- of-funds, and a US middle market private equity
fund-of-funds.
As previously reported, Richard Sabo, former Chief Investment Officer of Global
Pension and Retirement Plans at JPMorgan and a member of that firm's executive
committee, is leading a team of 15 investment, business and product
development, legal and operations professionals.
Realisations
Investment Portfolio Proceeds
$ millions
Avante - Sale of 80% of JZCP's U.S micro-cap 37.5
stake
Orizon - Sale of 80% of JZCP's U.S micro-cap 28.0
stake
Waterline Renewal - Sale U.S micro-cap 23.3
Priority Express - Sale U.S micro-cap 17.2
Fund III - Proceeds from Sale of Petrocorner / Euro 14.8
Refinancing of Collingwood & Fincontinuo micro-cap
Felix Storch - Refinancing U.S micro-cap 14.0
Triangle - Sale Real Estate 4.6
Other U.S micro-cap 3.2
Receipt of Escrow Balances U.S micro-cap 5.6
Total 148.2
Avante & Orizon
In August 2019, JZCP sold 80% of its stake in US micro-cap investments Avante
and Orizon to Edgewater Growth Capital Partners for $65.5 million in gross
proceeds, a 23% uplift to July 2019 NAV of those assets.
Avante is a single source provider of medical, surgical, diagnostic imaging and
radiation oncology equipment, including sales, service, repair, parts,
refurbishing and installation in over 150 countries. Orizon is a manufacturer
of integral aerospace assemblies for original equipment manufacturers and tier
one suppliers to original equipment manufacturers.
Waterline Renewal
In April 2019, Waterline Renewal was acquired by Behrman Capital, a private
equity investment firm based in New York and San Francisco.
Waterline Renewal is a leading provider of engineered products used in the
trenchless rehabilitation of wastewater infrastructure for municipal,
commercial, industrial, and residential applications. The company's patented
line of products and technologies allows its customers to deliver long-lasting
solutions that repair sewer systems and wastewater lines without the need for
excavation or property damage, and prevent overflow created by excess inflow
and infiltration of ground water into the wastewater system.
JZCP expects to realise approximately $24.6 million in gross proceeds
(including escrows) from the sale.
Felix Storch
In March 2019, JZCP refinanced Felix Storch, its manufacturer of small and
custom refrigeration appliances. This refinancing resulted in gross proceeds to
JZCP of approximately $14.0 million, which returned JZCP's entire March 2017
investment in Felix Storch of $12.0 million. Felix Storch has continued to
exhibit strong growth and we expect it to return more capital in the future.
Priority Express
In October 2019, Priority Express was acquired by Capstone Logistics, a leading
North American supply chain solutions partner.
Priority Express was founded in 2005 and provides over 500 customers in the
healthcare and e-commerce end markets with expedited freight and distribution
services, scheduled routed delivery services and on-demand delivery services.
JZCP expects to realise approximately $18.8 million in gross proceeds
(including escrows and a potential earn-out) from the sale, a 60% uplift to
July 2019 NAV.
Triangle
In January 2020, JZCP sold its investment in the Triangle property, receiving
$4.6 million in sale proceeds.
Eliantus
In April 2020 (post period), JZCP received EUR2.7 million in proceeds from the
refinancing of Fund III portfolio company, Eliantus, which issued its second
project bond backed by solar power plants in Spain.
Outlook
As we think about the outlook, it's almost impossible to project at a time when
the economy is declining by 20% or more and unemployment is spiking in the
United States. It is our hope that these conditions subside and reverse with
COVID-19 in decline.
Our efforts are dedicated towards generating cash, which includes selling
certain assets when the market is open as well as conserving cash by not
spending the Company's resources until we have clear visibility on when the
economy will be on the road to recovery.
As previously reported, we have reduced the Company's commitments to several
investments and will continue to do so to reduce the Company's cash
requirements. We have several of our real estate properties for sale, but,
again, it is very difficult to sell anything in this environment. In some
cases, we may support the business plan for certain of our properties to retain
value as well as to maximize value.
The schedule for realizing value in the real estate portfolio has been delayed
at least six to twelve months due to the COVID-19 crisis. As you've seen, the
real estate portfolio has been marked down significantly since we last reported
to you in August 2019. The decision by the Board to adopt this markdown was
made largely upon the basis of the updated appraisals done by the new appraiser
retained by the Company. Unfortunately post year end, COVID-19 has caused
severe impairment on certain retail real estate assets which may result in
further write- downs. We hope to make progress on realizing some of these
values once the market opens up.
We will keep you informed as to the results of our efforts to realize cash from
our investments. In the meantime, we hope everybody is healthy and safe and
that we can report brighter prospects when we report to you on our interim
results.
Thank you again for your support of the Company's revised investment strategy.
Yours faithfully,
Jordan/Zalaznick Advisers, Inc.
17 June 2020
Investment Review
The following investment review focuses on JZCP's largest investments (by
value) in the US micro-cap and also provides further analysis of the European
micro-cap and real estate portfolios.
US MICRO-CAP
Industrial Service Solutions ("ISS")
Portfolio: US Micro-cap (Vertical)
Date of Initial Investment: July 2012
Website: techholdings.com
Cost 29.2.2020 $48.25 million
Valuation $95.9 million
29.2.2020
The investment strategy for Industrial Service Solutions ("ISS") is to build a
uniquely positioned industrial repair, service and manufacturing holding
company with multiple value propositions across diversified industries.
ISS provides a broad set of services to critical-to-process equipment. These
services include: on-site mechanical and repair, regionally based shop
services, quality assurance and quality control inspection, testing, and parts
supply, rental and remanufacturing. The company also sells parts and supplies
for the products it services.
ISS serves a wide variety of industries, such as pulp and paper; petrochemical;
tire and rubber; oil and gas; power generation; cement; metals and mining;
water and waste water; and other industrial and commercial markets.
With hundreds of dedicated and skilled technicians, machinists, craftsmen,
project leaders and application engineers, ISS has the experience and talent to
deliver high-quality work on schedule and on budget. The increasing complexity
of equipment in industrial settings, along with fewer maintenance staff at
these plants, should encourage growth in ISS' customers' needs. This large and
very fragmented industry is well suited for a consolidation strategy.
Business Update
Combined sales for 2019 were $400.4 million (2018: $439.4 million) and combined
EBITDA of $47.4 million (2018:$51.0 million).
Testing Services Holdings, LLC ("TSH")
Portfolio: US Micro-cap (Vertical)
Date of Initial Investment: July 2012
Website: techholdings.com
Cost 29.2.2020 $23.8 million
Valuation $23.9 million
29.2.2020
Testing Services Holdings, LLC ("TSH") is a holding company established to
pursue a strategic build-up in the highly fragmented health, safety and
environmental ("HSE") market. Companies acquired under TSH provide service and
product-based health & safety solutions to a variety of end markets, with a
particular focus on the healthcare and life sciences sectors.
To date, TSH has established two vertical platforms, Contamination Control &
Certification Holdings, Inc. (the "Services Vertical" and Technical Solutions
Holdings, Inc. (the "Products Vertical"), to focus on two specific segments of
the larger HSE market:
· Testing, inspection, certification, repair and calibration service providers
· Value-added distribution and rental of industrial hygiene & safety equipment
The Services Vertical is an industry leading provider of comprehensive testing/
inspection, certification, calibration, and validation services for cleanrooms
and critical environments. Since 2018, the Services Vertical has acquired 16
companies in total throughout the U.S., and is able to gain significant
operating efficiencies as further acquisitions are made.
The Products Vertical is a manufacturer of premium high visibility safety
apparel and offers a comprehensive range of safety-related products including
rental instruments and calibration services. Since 2012, the Products Vertical
has acquired 8 companies in total throughout the U.S.
Business Update
Combined sales for 2019 were $112.2 million (2018: $102.5 million) and combined
EBITDA increased to $12.8 million (2018: $12.6 million).
TierPoint
Portfolio: US Micro-cap (Other)
Sector: Data Centre
Acquisition Date: June 2014
Website: www.tierpoint.com
Cost 29.2.2020 $44.3 million
Valuation $46.8 million
29.2.2020
TierPoint is a leading provider of information technology and data center
services, including colocation, cloud computing, disaster recovery and managed
IT services. TierPoint's hybrid IT solutions help clients increase business
agility, drive performance and manage risk. TierPoint operates via a network of
43 data centres in 20 markets across the United States.
There are several strong underlying demand characteristics that support
continued growth in the colocation and hosting sector: growth in data demand,
customer use of third-party infrastructure to minimise capital investment,
continued trend of IT outsourcing, rapid adoption of cloud solutions, increased
focus on compliance requirements and necessity of secure computing
environments. TierPoint is focused predominantly on Tier II markets that have
strong growth prospects and a robust small-to-medium sized business customer
population.
Deal summary and update
In June 2014, JZCP participated in the recapitalisation of TierPoint alongside
trusted co-investment partners with whom we have a long-term relationship. The
transaction was led by RedBird Capital Partners and TierPoint management. At
the time of the initial investment, TierPoint generated $27 million of EBITDA
and has since grown organically and via acquisitions to over $140 million of
Pro Forma Adjusted EBITDA.
High quality business
The data centre business is attractive due to a highly visible recurring
revenue model, sticky customer relationships, high free cash flow generation,
attractive internal reinvestment opportunities and a significant runway for
growth. Furthermore, TierPoint is focused on small-to-medium sized businesses
in Tier II US markets, which we believe to be an attractive niche. As TierPoint
transitions toward higher-value managed and cloud services via a series of
acquisitions and strategic initiatives, we believe the result will be greater
customer captivity, greater profitability and a structurally higher quality
business. TierPoint is led by Jerry Kent, CEO, who has an established track
record of great returns for his investors. As major shareholders of TierPoint,
management's interest and focus is fully aligned with investors.
Business update
Net sales for 2019 were $399.6 million (2018: $379.9 million) and annualised
adjusted EBITDA was $152 million (2018:$153 million).
Deflecto
Portfolio: US Micro-cap (Co-investments)
Sector: Consumer Products Acquisition Date: July 2018
Website: www.deflecto.com
Cost 29.2.2020 $40.1 million
Valuation $38.3 million
29.2.2020
Deflecto is a diversified designer, distributor and manufacturer of consumer
and commercial products operating across five industry segments. The company's
customers include major retailers, wholesalers and OEMs including major big box
and online retailers.
Deflecto is the world's largest chair mat, bicycle reflector and dryer venting
manufacturer and a global leader in sign and literature holders, office
workspace accessories and other air distribution products.
Added value is expected from the implementation of business processes to
simplify operations and improve profitability. Increased revenues and lower
costs are expected by focusing on largest customers and most popular products.
In 2018, Deflecto completed the acquisition of Evriholder Products which is
currently run as a standalone operating company. Evriholder has expertise in
managing retail relationships, new product introductions and has an
international supply chain.
Business update
Sales for 2019 were $194.0 million (2018: $187.5 million) and adjusted EBITDA
for 2019 was $16.9 million (2018: $13.6 million).
Felix Torch
Portfolio: US Micro-cap
Sector: Refrigeration
Acquisition Date: March 2017
Website: www.felixstorchinc.com
Cost 29.2.2020 $0.05 million
Valuation $24.5 million
29.2.2020
Felix Storch is a leading provider of specialty refrigeration and custom
appliances to residential small kitchen, professional, life sciences, food
service and hospitality markets. Felix Storch is a second generation family
business, founded in 1969 and based in The Bronx, NY. Felix Storch's products
now include a wide range of major appliances sold both nationally and
internationally.
Through its Summit Appliance division, Felix Storch manufactures the industry's
largest collection of undercounter and ADA compliant refrigeration products, as
well as a large selection of outdoor appliances and cooking appliances. The
Summit Commercial division focuses on the commercial foodservice market. Felix
Storch's Accucold brand has a growing line of medical, pharmacy, laboratory,
and scientific products.
Business Update
During the year, Felix Storch recapitalised its debt enabling the return to
JZCP of Preferred Equity of approximately $14 million.
Sales for 2019 were $95.6 million (2018: $87.3 million) and adjusted EBITDA for
2019 was $15.6 million (2018: $15.0 million).
Peaceable Street Capital ("PSC")
Portfolio: US Micro-cap (Co-investments)
Sector: Finance
Acquisition Date: March 2016
Website: www.peaceablestreet.com
Cost 29.2.2020 $28.0 million
Valuation $36.5 million
29.2.2020
Peaceable Street Capital ("PSC") is a specialty finance platform focused on
making structured investments in small and mid-sized income producing
commercial real estate. The company is built on a foundation of know-how,
creatively structuring preferred equity to provide senior equity in even the
most complex situations. With extensive investment experience throughout the
United States and Canada, Peaceable Street Capital's underwriting and decision
making process is designed to deliver creative, flexible and dependable
solutions quickly.
PSC focuses on a diverse portfolio of property types including multi-family,
office, self-storage, industrial, retail, RV parks, mobile home parks, parking
health care, hotels, etc.
PSC has a business plan to build a $300-$500 million portfolio in 3-5 years
with a management team with a track record of success.
Business Update
During 2019, PSC signed a strategic joint venture with an investment firm to
scale and grow the business.
PSC's valuation of $36.5 million (2018: $27.7 million) is largely based on the
net operating income and various capitalisation rates that pertain to the
underlying developed properties.
Salter Labs (incorporating SunMed)
Portfolio: US Micro-cap (Co-investments)
Sector: Respiratory medical products
Acquisition Date: October 2010
Website: salterlabs.com, sun-med.com
Cost 29.2.2020 $16.8 million
Valuation $21.8 million
29.2.2020
Salter Labs (incorporating SunMed) is a manufacturer and distributor of high
quality medical devices for use in hospitals and healthcare facilities
worldwide. SunMed's products includes airway management, anaesthesia,
respiratory, resuscitation/ ventilation, diagnostics, oxygen delivery and
surgical care products. In addition to the SunMed brand, Ventlab and Ethox
Medical branded products are part of the product range.
The company's headquarters in West Michigan, include a warehouse and
distribution center, production space, cleanroom, and administrative offices
for over 140 staff. Its overseas facility is their manufacturing hub featuring
even greater capacity. The company is rapidly growing with new, innovative
products that promote better patient care, and serves the healthcare industry
in over 40 countries.
Business Update
Sales for 2019 were $164.2 million (2018: $152.6 million) and adjusted EBITDA
for 2019 was $46.5 million (2018: $44.3 million).
Toro Finance ("Toro")
Portfolio: European Micro-cap
Sector: Financial Services
Acquisition Date: December 2013
Website: Toro Finance
Cost 29.2.2020 $21.6 million
Valuation $23.1 million
29.2.2020
Toro Finance ("Toro") is a provider of short term receivables financing to the
suppliers of major Spanish companies, taking advantage of the combined lack of
financing from banks for these highly rated credits. An opportunity was
identified to provide financing to this segment and in late 2013 JZCP
approached this market via a joint venture. In February 2016, JZCP realised its
equity in Toro but continues to hold an investment in the company's debt.
Business Update
In March 2020, just before the lockdown of Spain due to COVID-19, Toro
refinanced its funding facilities, significantly decreasing the cost of its
debt. Toro anticipates substantial commercial opportunities in the coming
years, as banks further retreat from making loans to small and medium
enterprises in Spain post COVID-19.
EUROPEAN MICRO-CAP
JZCP currently invests in the European micro-cap sector through its 18.75%
stake in JZI Fund III, which completed its final fund raising in December 2015.
Previously, JZCP's investments were made through EuroMicrocap Fund 2010, L.P.
The European investment team has worked together for over ten years and has a
proprietary network of intermediaries to deliver micro-cap buy-and-build
opportunities throughout the continent.
As at 29 February 2020, JZI Fund III was invested in 13 European micro-cap
companies. The portfolio has five investments in Spain, two in Scandinavia, UK
and Italy and one each in PortugaI and Luxembourg.
Summary of JZCP's investments in JZI Fund III's Investment Portfolio at 29
February 2020
Cost Valuation1 Valuation1
Company Industry 29.2.2020 29.2.2020 29.2.2020
Euro'000 Euro'000 US$'000
S.A.C S.A.C is an operational van leasing company 3,355 7,444 8,177
in Denmark, specialising in providing vans on
operational lease contracts to large
engineering companies.
Fincontinuo Fincontinuo is an Italian provider of 5,083 7,520 8,260
Cessione del Quinto ("CdQ") personal loans.
CDQ loans are salary-backed and are a
uniquely low risk market niche.
Collingwood A niche UK motor insurer with operations in 2,359 3,356 3,686
Newcastle and Gibraltar.
myLender myLender is a Finnish provider of unsecured 3,938 4,669 5,129
personal lending products.
Alianzas en Alianzas is a specialised steel service 3,760 4,406 4,840
Aceros centre business in Spain. The company is
unique due to its combination of strategic
asset acquisitions at a discount, its low
cost structure and the management's
extensive know-how/industry relationships.
ERSI ERSI operates within the reinforced steel 7,789 4,031 4,428
sector. It provides an integrated solution
to contractors, which encompasses the
entire value chain of reinforced steel used
in concrete structures.
Treee Comprised of six Italian companies, Treee 4,733 7,631 8,382
is a leading business in the treatment and
recycling of electronic goods across Italy.
Eliantus Eliantus is a build-up in the Spanish solar 4,377 8,438 9,269
power industry.
Factor Factor Energia is a leading independent 3,750 6,375 7,003
Energia supplier of electricity in Spain. The
company is focused on the highly profitable
SME segment.
BlueSites Fund III has entered into a transaction 1,313 1,950 2,142
with an experienced management team to
execute a build-up strategy to acquire cell
tower land leases in Portugal.
Luxida Luxida is a build-up in the Spanish 2,662 3,750 4,119
last-mile energy distribution sector,
presenting the opportunity to acquire
high-quality assets with long-term
regulated revenues at attractive entry
multiples.
Karium Karium has a buy-and- build strategy of 4,321 7,203 7,912
consumer brands in the UK and European
personal care sector.
Union Union Financiera Asturiana ("UFASA") is a 2,946 2,946 3,236
Financiera leading independent consumer lender in Spain.
Asturiana
Other net liabilities (7,696)
Total valuation 68,887
1JZCP's 18.75% share of Fund III gross investment valuation.
REAL ESTATE
JZCP invests in properties through JZCP Realty Fund, a wholly owned subsidiary.
The real estate portfolio has been assembled in partnership with RedSky
Capital, a Brooklyn based real estate company.
In 2012, JZCP started to invest in properties in Brooklyn, a borough of New
York City with a population of 2.5 million. Brooklyn has seen a renaissance
where areas that had been historically industrial and low income have seen
demographic changes, fuelled by an influx of young and affluent ex-Manhattan
residents.
In 2015, JZCP began to invest in the Wynwood and Design District neighbourhoods
of Miami, Florida. At the time, these two locations where showing rapidly
increasing retail rents and appeared attractive investment opportunities. In
2016, JZCP invested in Esperante Corporate Center, a trophy office building in
West Palm Beach, Florida.
JZCP's Real Estate portfolio at 29 February 2020, includes the following
property portfolios:
Wynwood Collection, Miami Florida
The Wynwood collection is comprised of six separate retail and office buildings
in one of Miami's most up and coming neighbourhoods. JZ Realty is looking at
how to maximise the value of this portfolio.
Bedford Ave, Williamsburg
JZ Realty's first acquisition. A prime retail asset in northern Brooklyn. In
2016, Apple opened its first Brooklyn store occupying the prime corner retail
unit.
India Street, Greenpoint
Large development site on the revitalised East River waterfront. The
development site has been marketed for sale and negotiations are continuing to
conclude the realisation.
Esperante, West Palm Beach Florida
Esperante Corporate Center is an iconic building on the downtown West Palm
Beach skyline. The building is approximately 85% leased and the intention is to
market this property in the near/medium future.
Williamsburg Retail Portfolio
Portfolio comprises several retail buildings along North 6th Street within the
Williamsburg neighborhood of Brooklyn and one development site. The portfolio
was acquired to reposition the properties into top-class retail spaces and
lease them at market rents.
Driggs Portfolio, Williamsburg
JZ Realty owns two separate development sites on Driggs Avenue very close to
the Apple store.
Flatbush Portfolio, Downtown Brooklyn
JZ Realty owns two mixed residential/retail properties within immediate
proximity of the Barclays Center, a 19,000 seat arena and home to the Brooklyn
Nets.
Roebling Portfolio, Williamsburg
The Roebling Portfolio is within two blocks of our Bedford Ave properties.
Hart St.,Bushwick
Hart St. is a loft building in the Bushwick neighbourhood of Brooklyn.
Design District, Miami Florida
The Design District has significant excess capacity and is currently
experiencing a low absorption rate. It is estimated it would take 2-3 years
before there would be sufficient demand for the intended JZCP developments.
With high carrying costs for the assemblage the investment proposition has
become untenable. JZ Realty is negotiating a forbearance agreement with the
lender and in line with most recent appraisal has marked the investment to nil.
Fulton Mall, Downtown Brooklyn
JZ Realty has assembled thirteen separate buildings in a vibrant and
transforming neighbourhood. Unable to exercise on the original investment plan,
JZ Realty is negotiating with the lender to allow time to enable a sale of the
assemblage whilst deferring interest payments.
Triangle, Downtown Brooklyn
Property was sold during the current financial year for $4.3 million (cost $4.6
million).
At 29 February 2020, JZCP's real estate portfolio was valued at $158.7 million
(28 February 2019: $443.0 million).
Cost1 JZCP Property Valuation
Equity % Value of JZCP's
Equity2
29.2.2020 29.2.2020 29.2.2020 29.2.2020
US$'000 US$'000 US$'000
Wynwood Collection, Miami Florida 67,363 76.80% 140,800 36,140
Bedford Ave, Williamsburg 17,480 59.03% 183,000 34,067
India Street, Greenpoint 43,356 42.32% 154,000 33,566
Esperante, Palm Beach Florida 14,053 59.71% 144,000 19,017
Williamsburg Retail Portfolio 69,141 76.43% 210,400 11,271
Driggs Portfolio, Williamsburg 7,343 76.70% 35,900 5,782
Flatbush Portfolio, Downtown Brooklyn 8,302 76.47% 35,400 5,386
Roebling Portfolio, Williamsburg 14,089 76.82% 62,000 3,896
Hart St.,Bushwick 3,369 76.06% 4,200 925
Design District, Miami Florida 164,717 77.38% 130,000 -
Fulton Mall, Downtown Brooklyn 23,288 39.37% 140,000 -
Other assets 9,763 8,661
Total assets 442,264 158,712
1Cost represents JZCP Realty's initial investment plus follow-on property
additions and development costs.
2Third party debt is deducted to arrive at the fair value of JZCP's equity
interests.
Investment Portfolio
29 February 2020 Percentage
of
Cost1 Value Portfolio
US$'000 US$'000 %
US Micro-cap portfolio
US Micro-cap (Verticals)
Industrial Services Solutions2
INDUSTRIAL SERVICES SOLUTIONS ("ISS")
Provider of aftermarket maintenance, repair,
and field services for critical process
equipment throughout the US
Total Industrial Services Solutions 48,250 95,889 13.8
valuation
Testing Services Holdings2
TECHNICAL SOLUTIONS AND SERVICES
Provider of safety focused solutions for the
industrial, environmental and life science
related markets
CONTAMINATION CONTROL & CERTIFICATION
Provider of testing, certification and
validation services for cleanroom, critical
environments and containment systems
Total Technical Solutions and Services 23,771 23,889 3.5
Vertical valuation
Flexible Packaging Vertical
ACW FLEX PACK, LLC
Provider of a variety of custom flexible
packaging solutions to converters and
end-users
Total Flexible Packaging Vertical valuation 10,032 11,496 1.7
Flow Controls
FLOW CONTROL, LLC
Manufacturer and distributor of
high-performance, mission-critical flow
handling products and components utilized to
connect processing line equipment
Total Flow Control Vertical valuation 14,040 15,507 2.2
Total US Micro-cap (Verticals) 96,093 146,781 21.2
US Micro-cap (Co-investments)
ABTB 8,256 8,256 1.2
Acquirer of franchises within the
fast-casual eateries and quick-service
restaurants sector
DEFLECTO 40,112 38,323 5.5
Deflecto designs, manufactures and sells
innovative plastic products to multiple
industry segments
GEORGE INDUSTRIES 12,179 12,177 1.8
Manufacturer of highly engineered, complex
and high tolerance products for the
aerospace, transportation, military and
other industrial markets
IGLOO2 6,040 1,450 0.2
Designer, manufacturer and marketer of
coolers and outdoor products
K2 TOWERS II 8,466 10,966 1.6
Acquirer of wireless communication towers
NEW VITALITY2 3,354 8,996 1.3
Direct-to-consumer provider of nutritional
supplements and personal care products
ORANGEWOOD PARTNERS II-A LP 6,754 6,754 1.0
Private fund managed by Orangewood Partners
currently invests in K2 Towers II (see
above) and Exer Urgent Care an urgent care
operator.
ORIZON 4,127 7,065 1.0
Manufacturer of high precision machine parts
and tools for aerospace and defence
industries
PEACEABLE STREET CAPITAL 28,041 36,541 5.3
Specialty finance platform focused on
commercial real estate
SALTER LABS2 16,762 21,778 3.1
Developer and manufacturer of respiratory
medical products and equipment for the
homecare, hospital, and sleep disorder
markets
SLOAN LED2 6,030 - -
Designer and manufacturer of LED lights and
lighting systems
SUZO HAPP GROUP2 2,572 11,700 1.7
Designer, manufacturer and distributor of
components for the global gaming, amusement
and industrial markets
VITALYST2 9,020 8,192 1.2
Provider of outsourced IT support and
training services
Total US Micro-cap (Co-investments) 151,713 172,198 24.9
US Micro-cap (Other)
AVANTE HEALTH SOLUTIONS 7,185 9,588 1.4
Provider of new and professionally
refurbished healthcare equipment
FELIX STORCH 50 24,500 3.5
Supplier of specialty, professional,
commercial, and medical refrigerators and
freezers, and cooking appliances
HEALTHCARE PRODUCTS HOLDINGS3 17,636 - -
Designer and manufacturer of motorised
vehicles
NATIONWIDE STUDIOS 26,324 5,000 0.7
Processor of digital photos for
pre-schoolers
TIERPOINT2 44,313 46,813 6.8
Provider of cloud computing and collocation
data centre services
Total US Micro-cap (Other) 95,508 85,901 12.4
Total US Micro-cap portfolio 343,314 404,880 58.5
European Micro-cap portfolio
EUROMICROCAP FUND 2010, L.P. 169 2,732 0.4
Invested in European Micro-cap entities
JZI FUND III, L.P. 48,513 68,887 9.9
At 29 February 2020, was invested in
thirteen companies in the European micro-cap
sector: Fincontinuo, S.A.C, Collingwood, My
Lender, Alianzas en Aceros, ERSI, Treee,
Eliantus, Factor Energia, BlueSites, Luxida,
Karium and UFASA
Total European Micro-cap (measured at Fair 48,682 71,619 10.3
Value)
Direct Investments
DOCOUT5 2,777 3,827 0.6
Provider of digitalisation, document
processing and storage services
OMBUDS5 17,198 - -
Provider of personal security, asset
protection and facilities management
services
TORO FINANCE5 21,619 23,078 3.3
Provides short term receivables finance to
the suppliers of major Spanish companies
XACOM5 2,055 4,067 0.6
Supplier of telecom products and
technologies
Total European Micro-cap (Direct 43,649 30,972 4.5
Investments)
Total European Micro-cap portfolio 92,331 102,591 14.8
Real Estate portfolio
JZCP REALTY4 442,264 158,712 22.9
Facilitates JZCP's investment in US real
estate
Total Real Estate portfolio 442,264 158,712 22.9
Other investments
BSM ENGENHARIA 6,115 459 0.1
Brazilian-based provider of supply chain
logistics, infrastructure services and
equipment rental
CERPI 1,056 1,056 0.2
Spruceview managed investment product
JZ INTERNATIONAL3 - 750 0.1
Fund of European LBO investments
SPRUCEVIEW CAPITAL 31,255 20,338 2.9
Asset management company focusing primarily
on managing endowments and pension funds
Total Other investments 38,426 22,603 3.3
Listed investments
U.S. Treasury Bill - Maturity 14 May 2020 3,385 3,386 0.5
Total Listed investments 3,385 3,386 0.5
Total - portfolio 919,720 692,172 100.0
1Original book cost incurred by JZCP adjusted for subsequent transactions. The
book cost represents cash outflows and excludes PIK investments.
2Co-investment with Fund A, a Related Party (Note 23).
3Legacy Investments. Legacy investments are excluded from the calculation of
capital and income incentive fees.
4JZCP invests in real estate indirectly through its investments in JZCP Realty
Ltd. JZCP owns 100% of the shares and voting rights of JZCP Realty, Ltd.
5Classified as Loans at Amortised Cost.
Board of Directors
David Macfarlane (Chairman)1
Mr Macfarlane was appointed to the Board of JZCP in 2008 as Chairman and a
non-executive Director. Until 2002 he was a Senior Corporate Partner at
Ashurst. He was a non-executive director of the Platinum Investment Trust Plc
from 2002 until January 2007.
James Jordan
Mr Jordan is a private investor who was appointed to the Board of JZCP in 2008.
He is a director of the First Eagle family of mutual funds, and of Alpha
Andromeda Investment Trust Company, S.A. Until 30 June 2005, he was the
managing director of Arnhold and S. Bleichroeder Advisers, LLC, a privately
owned investment bank and asset management firm; and until 25 July 2013, he was
a non-executive director of Leucadia National Corporation. He is an Overseer of
the Gennadius Library of the American School of Classical Studies in Athens,
and as Director of Pro Natura de Yucatan.
Sharon Parr2
Mrs Parr was appointed to the Board of JZCP in June 2018. In 2003 she completed
a private equity backed MBO of the trust and fund administration division of
Deloitte and Touche, called Walbrook, selling it to Barclays Wealth in 2007. As
a Managing Director of Barclays, she ultimately became global head of their
trust and fund administration businesses, comprising over 450 staff in 10
countries. She stepped down from her executive roles in 2011 to focus on other
areas and interests but has maintained directorships in several companies. She
is a Fellow of the Institute of Chartered Accountants in England and Wales and
a member of the Society of Trust and Estate Practitioners, and is a resident of
Guernsey.
Tanja Tibaldi
Ms Tibaldi was appointed to the Board of JZCP in April 2008. She was on the
board of JZ Equity Partners Plc from January 2005 until the company's
liquidation on 1 July 2008. She was managing director at Fairway Investment
Partners, a Swiss asset management company where she was responsible for the
Group's marketing and co-managed two fund of funds. Previously she was an
executive at the Swiss Stock Exchange and currently serves on the board of
several private companies. Ms Tibaldi intends to retire from the Board at the
Company's AGM in August 2020.
Patrick Firth
Mr Firth resigned from the Board and as Chairman of the Audit Committee on 27
June 2019.
Christopher Waldron
Mr Waldron resigned from the Board on 26 November 2019.
1Chairman of the nominations committee of which all Directors are members.
2Chairman of the audit committee of which all Directors are members.
Report of the Directors
The Directors present their annual report together with the audited financial
statements of JZ Capital Partners ("JZCP" or the "Company") for the year ended
29 February 2020.
Principal Activities
JZ Capital Partners Limited is a closed-ended investment company with limited
liability which was incorporated in Guernsey on 14 April 2008 under the
Companies (Guernsey) Law, 1994. The Company is subject to the Companies
(Guernsey) Law, 2008. The Company's Capital consists of Ordinary shares, Zero
Dividend Preference ("ZDP") shares and Convertible Unsecured Loan Stock
("CULS"). The Company's Ordinary shares, ZDP Shares and CULS are traded on the
London Stock Exchange's Specialist Fund Segment.
The Company's Investment Policy has been to target predominantly private
investments, seeking to back exceptional management teams to deliver on
attractive investment propositions. In executing its strategy, the Company
takes a long term view.
The Company focused on investing in the following areas, and is now focused on
supporting these investments:
(a) small or micro-cap buyouts in the form of debt and equity and preferred
stock in both the US and Europe; and
(b) US real estate interests.
The Investment Adviser has taken a dynamic approach to asset allocation.
However, the Company has sought to maintain a broad spread of investment risk.
Exposures are monitored and managed by the Investment Adviser under the
supervision of the Board. The Investment Adviser is able to invest globally but
with a particular focus on opportunities in the United States and Europe.
The Company's shareholders are due to vote on proposed changes to the Company's
investment policy. Under the proposals, the Company will make no further
investments except in respect of which it has existing obligations or to the
extent that investment is required to support existing investments. The
intention is to realise the maximum value of its investments and, after
repayment of all debt, to return capital to shareholders.
Business Review
The total loss attributable to Ordinary shareholders for the year ended 29
February 2020 was $304,549,000 (year ended 28 February 2019: loss of
$6,835,000). The net asset value ("NAV") of the Company at the year end was
$475,734,000 (28 February 2019: $810,262,000) equal to $6.14 (28 February 2019:
$10.04) per Ordinary share. The loss recorded for the year ended 29 February
2020 is largely attributable to valuation write downs in the Company's real
estate portfolio.
A review of the Company's activities and performance is detailed in the
Chairman's Statement and the Investment Adviser's Report. The valuations of the
unlisted investments are detailed on Investment Portfolio Schedule.
The implications of coronavirus ("COVID-19") on the Company, are further
explained in this report. At the date of signing this report, the Board have
been unable to quantify the impact on the valuation of the portfolio. It is
noted that in accordance with IFRS, the Board have judged any quantifiable
impact on the portfolio would not have been included within the 29 February
2020 valuations but would have been reported as a non-adjusting event within
the Subsequent Events note in the financial statements, as the lock down
impacting the Company's underlying investments occurred after the year end.
Principal Risks and Uncertainties
The Company's Board believes the principal risks and uncertainties that relate
to an investment in JZCP are as follows:
COVID-19
The impact of the COVID-19 outbreak evolved rapidly during 2020. The World
Health Organization declared the outbreak of coronavirus to be a Public Health
Emergency of International Concern on 30 January 2020 and recognised it as a
pandemic on 11 March 2020.
The Company is reporting its annual results as at 29 February 2020; this was
also the date the United States announced its first coronavirus death and the
Trump administration first announced travel restrictions to/from areas that at
the time were the most affected by the virus. At this date, the Company's
underlying investee portfolio was largely unaffected by the virus with only
minimal impacts on the supply chains for some micro-cap investments. The full
impact on the economy of the eventual 'lockdown' in the U.S., Europe and much
of the rest of the world, required to restrict contagion was not fully
envisaged.
The Board continue to monitor the impact of COVID-19 on the Company's
investments and its on-going viability. As the outbreak continues to evolve, it
is difficult, at this juncture, to estimate the full extent and duration of the
impact on the Company.
As disclosed in the Board's Going Concern Assessment, the market conditions
generated by COVID-19 have resulted in uncertainties that may cast significant
doubt on the Company's ability to continue as a going concern.
NAV Factors
(i) Macroeconomic Risks
The Company's performance, and underlying NAV, is influenced by economic
factors that affect the demand for products or services supplied by investee
companies and the valuation of Real Estate interests held. Economic factors
will also influence the Company's ability to invest and realise investments and
the level of realised returns. Approximately 15% of the Company's investments
are denominated in non-US dollar currencies, primarily the euro. Also the
Company has issued debt denominated in non-US dollar currencies, primarily
sterling. Fluctuations to these exchange rates will affect the NAV of the
Company.
(ii) Underlying Investment Performance
The Company is reliant on the Investment Adviser to source and execute suitable
investment opportunities. The Investment Adviser provides to the Board an
explanation of all investment decisions and also quarterly investment reports
and valuation proposals of investee companies. The Board reviews investment
performance quarterly and investment decisions are checked to ensure they are
consistent with the agreed long term investment strategy.
Portfolio Liquidity
The Company invests predominantly in unquoted companies and real estate.
Therefore, this potential illiquidity means there can be no assurance
investments will be realised at their latest valuation. The Board considers
this illiquidity when planning to meet its future obligations, whether
committed investments or the repayment of debt facilities or the future
repayment of CULS and ZDP shares. On a quarterly basis, the Board reviews a
working capital model produced by the Investment Adviser which highlights the
Company's projected liquidity and financial commitments.
Gearing and Financing Costs in the real estate Portfolio
The cost of servicing debt in the underlying real estate structures may impact
the net valuation of the real estate portfolio and subsequently the Company's
NAV. Gearing in the underlying real estate structures will increase any losses
arising from a downturn in property valuations.
Share Price Trading at Discount to NAV
JZCP's share price is subject to market sentiment and will also reflect any
periods of illiquidity when it may be difficult for shareholders to realise
shares without having a negative impact on share price. The Directors review
the share price in relation to Net Asset Value on a regular basis and determine
whether to take any action to manage the discount. The Directors with the
support of the Investment Adviser work with brokers to maintain interest in the
Company's shares through market contact and research reports.
Operational and Personnel
Although the Company has no direct employees, the Company considers what
dependence there is on key individuals within the Investment Adviser and
service providers that are key to the Company meeting its operational and
control requirements.
Other than the associated risks of COVID-19, the Board considers the principal
risks and uncertainties above are consistent with the prior year. The Board
recognises the Company will have an increased exposure to liquidity risk as
future debt obligations near maturity, for other risks noted the Company's
exposure to these risks is neither greater nor any less during the year ended
29 February 2020 compared to the year ended 28 February 2019.
Going Concern
A fundamental principle of the preparation of financial statements in
accordance with IFRS is the judgement that an entity will continue in existence
as a going concern for a period of at least 12 months from signing of the
financial statements, which contemplates continuity of operations and the
realisation of assets and settlement of liabilities occurring in the ordinary
course of business.
In the context of the delay in realising assets as previously announced, the
potential impact on the repayment of the Guggenheim facility and the CULS
together with the COVID-19 impact on valuation of the Company's investment
portfolio and related loan covenants, there are material uncertainties which
cast significant doubt on the ability of the Company to continue as a going
concern. However the financial statements have been prepared on a going concern
basis for the reasons set out below and as the Directors, with recommendation
from the Audit Committee, have a reasonable expectation that the Company has
adequate resources to continue in operational existence for the foreseeable
future.
In reaching its conclusion, the Board have considered the risks that could
impact the Company's liquidity over the period to 31 July 2021. This period,
which is longer than the required period of 12 months, has been considered to
be relevant due to the repayment date for the Company's CULS being only 43 days
after the 12 month period.
As part of their assessment the Audit Committee highlighted the following key
considerations:
1. Whether, the Company can generate sufficient cash through realisations of
its underlying investments to discharge its liabilities over the period to 31
July 2021
2. Whether, in the event that the realisation events previously referred to do
not materialise before the expiration of the current loan facility and the
repayment date of the CULS, the Company is able to implement an alternative
plan for refinancing the loan facility within the required timeframe
3. COVID-19 impact on valuation of the Company's investment portfolio and
related loan covanents
4. Valuation losses incurred by the Company during the year ended 29 February
2020
1. Whether, the Company can generate sufficient cash through realisations of
its underlying investments to discharge its liabilities over the period to 31
July 2021
As at 31 May 2020, the Company had cash and cash equivalents of approximately
$43 million which offers over 6 months of liquidity cover assuming no income
from realisations and making payments as forecast for follow-on investments,
debt financing and ongoing expenses and the retainment of $15 million cash
required for current loan.
The Company has two major debt obligations to settle towards the end of the
going concern period being:
i) the Loan facility with Guggenheim of approximately $150 million due for
settlement on 12 June 2021; and
ii) ii) CULS for settlement value of GBP38.9 million (approximately $50 million)
due for settlement on 30 July 2021.
It is anticipated that the liquidity required to settle the debt obligations
mentioned above, and other ongoing obligations in 2021, will be generated
from realisations within the going concern period. These forecast realisations
include two anticipated secondary sales of several micro-cap companies and also
certain other assets. Total realisation proceeds of approximately $260 million
are expected from the aforementioned events.
Prior to the COVID-19 pandemic and the resulting lockdown some of these
realisation events were close to completion. Whilst the Board still expects
these transactions to complete, the timing of the closure of the transactions
depends largely on the length and severity of the COVID-19 lockdown. The
Directors have also considered the levels of realisation proceeds
historically generated by the Company's micro-cap portfolios as well as the
accuracy of previous forecasts whilst concluding on the accuracy of the
forecast.
2. Whether, in the event that the realisation events referred to in (1) do not
materialise before the expiration of the current loan facility and the
repayment of the CULS, the Company is able to implement alternative plans for
refinancing within the required timeframe.
JZAI personnel manage the relationship with the Company's lender, monitor
compliance with loan terms and covenants and report to the Board on matters
arising. Throughout the year ended 29 February 2020, the Company has continued
to be in compliance with covenant terms and made all scheduled interest
payments on time. Post year end, the Company obtained agreement from the
parties to the loan facility for an extension to the time for delivery of this
annual report, the release of which was delayed on account of COVID-19.
Discussions are also ongoing regarding amendments to the loan agreement to
ensure any risk of breach of covenant in light of the uncertainties caused by
COVID-19 over post year end valuations is avoided.
3. COVID-19 impact on valuation of the Company's investment portfolio and
related loan covenants
The Board recognise the high degree of uncertainty in respect of the dynamic
situation which has unfolded with COVID-19 and is currently unable to assess
the likely duration and exact impact to the Company of the outbreak.
Whilst the effect of Covid-19 on the valuation of the Company's investment
portfolio cannot yet be estimated, there is an expectation that there will
be further write downs within the real estate portfolio following the interim
appraisals and also a lengthy lockdown period, especially in the US, could
adversely affect the valuation of the company's micro-cap portfolio.
Post year end, the Board has received regular updates from the Investments
Adviser of the impact of COVID-19 on the individual investments within the
Company's investment portfolio. To enable the Board to assess the ongoing risk
to the Company posed by the virus, information has been provided on the
following business aspects of portfolio companies:
· Demand for product/service;
· Supply Chain & operational issues;
· Flexibility and adaptability of workforce to perform duties;
· Financial Strength of Company - Liquidity Issues; and
· Support received from Government programmes.
The pandemic has unfortunately created an environment where the completion of
corporate transactions has predominantly stalled. Therefore, the Company have
had to consider the effect on liquidity. The Board have concluded that they
have a reasonable expectation that delays in scheduled realisations will be
short-lived and completed as financial markets return to a level of normality.
Future valuation losses may impact compliance with covenants placed on the
Company's loan facility which require a 4x asset value cover. The Board note
the current collateral/loan ratio is 4.5x and a further fall in the NAV of
approx. $70 million would see the required 4x cover of this loan covenant
breached. Discussions are ongoing between the Company and Guggenheim, in part
regarding the amendment of the loan agreement to ensure any risk of breach of
covenant is avoided in light of the uncertainties caused by COVID-19 over post
year end valuations.
4. Valuation losses incurred by the Company during the year ended 29 February
2020
The Company has incurred losses of $304.5 million during the year ended 29
February 2020. As previously announced towards the latter half of 2019, the
Company has dramatically revised downwards its valuation of its real estate
portfolio.
The Board have assessed that these losses, as they are valuation related, have
not impacted or created a material uncertainty around the Company's ability to
continue in existence as a going concern.
Going Concern Conclusion
After careful consideration and based on the reasons outlined above, the Board
are satisfied, as of today's date, that it is appropriate to adopt the going
concern basis in preparing the financial statements and they have a reasonable
expectation that the Company will continue in existence as a going concern for
the period ending 31 July 2021.
However, of the four key considerations identified above the Board have
concluded that three of them create material uncertainties which cast
significant doubt over the ability of the Company to continue as a Going
Concern, being:
· Whether, the Company will be able to generate sufficient realisation
proceeds before the expiration of the current loan facility and repayment of
the CULS;
· In the event sufficient realisation proceeds referenced above are not
generated the Company is able to implement alternative plans within a timetable
agreed with its lenders; and
The full impact of COVID-19 on the valuation of the Company's investment
portfolio and related loan covenants is not currently known.The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
Viability Statement
In accordance with the UK Corporate Governance Code (the "UK Code") the Board
has assessed the expectations that the Company will be able to continue in
operation and meet ongoing debt obligations. In order to make the assessment
the Board has carried out a robust review of the Company's principal risks and
uncertainties, as noted above, to which the Company is exposed and that
potentially threaten future performance and liquidity and has assessed the
Company's current position and prospects as detailed in the Chairman's
statement and Investment Adviser's report. The period covered by the viability
statement is the next three financial years to 28 February 2023.
As set out in the going concern statement, the viability of the Company is
dependent entirely on actions that are being and will be taken over the course
of the going concern period ended 31 July 2021. However, there are material
uncertainties which cast significant doubt over the ability of the Company to
continue as a going concern and its longer-term viability, being:
· Whether, the Company will be able to generate sufficient realisation
proceeds before the expiration of the current loan facility and repayment of
the CULS;
· In the event sufficient realisation proceeds referenced above are not
generated the Company is able to implement alternative plans within a timetable
agreed with its lenders; and
The full impact of COVID-19 on the valuation of the Company's investment
portfolio and related loan covenants is not currently known.
The Directors have continued to use the period of three years to assess
viability that has been used historically. This period is considered
appropriate as the actions will be directed at achieving liquidity from sales
of investments, at a level that will reasonably ensure the longer-term
viability of the operations of the Company. The Board will continue to review
the period of assessment on an annual basis and may in future adjust if
considered appropriate.
In reaching its conclusion on the Company's viability, the Directors have
considered the following:
(i) Recent Events
Reduction in Company's Net Asset Value
As noted in the Going Concern Assessment, during the February 2020 fiscal year,
the Company suffered valuation losses with its NAV being decreased by approx.
41% over the year. This reduction has weakened the Company's balance sheet and
the Board have subsequently had to consider the impact on the liquidity of the
Company.
In order to stabilise the Company's balance sheet, the Board are focused on
repaying debt. Investment is being curtailed to commitments and what is
necessary to maximise the value of the existing portfolio. No repayment of
capital will be made to shareholders until debt obligations have been met.
COVID-19
The Board and Investment Adviser are continuing to monitor the impact and
consequences of the virus on the Company and its investments (As noted above in
Going Concern Key Considerations).
(ii) Financing obligations
Guggenheim Loan - Maturity date 12 June 2021
The loan facility has a maturity date of June 2021, the balance outstanding to
Guggenheim Partners at 29 February 2020 was approximately $150 million. It is
expected the debt facility will be repaid in full or part from the proceeds of
realisations and/or refinancing of investments. The Investment Adviser and
Guggenheim Partners are in ongoing discussions regarding amendments to the loan
agreement to ensure any risk of a breach of covenant is avoided by providing
Guggenheim Partners with assurance that a percentage of any realisation
proceeds will be utilised to pay down the debt. The Board and Investment
Adviser will continue to review the option of potentially extending the
maturity date or rolling a smaller amount into a new facility to aid future
liquidity.
Convertible Unsecured Loan Stock - Maturity date 30 July 2021
The Company will redeem CULS in July 2021 amounting to GBP38.9 million (approx.
$50 million at year end exchange rate), assuming holders of CULS do not
convert their holdings to equity. It is expected the redemption of the CULS
will be met from the proceeds of realisations and/or refinancing of
investments.
Zero Dividend Preference (2022) shares - Maturity date 1 October 2022
JZCP is due to redeem GBP57.6 million (est. $73.6 million at year end exchange
rate), of ZDP shares on 1 October 2022, again it is expected the redemption of
the ZDPs will be met from the proceeds of realisations and/or refinancing of
investments.
Commitments
At 17 June 2020, JZCP had financial commitments of $50.4 million outstanding in
relation to fund investments.
(iii) Investment performance and portfolio liquidity
The Board reviews, on a quarterly basis, the valuation and prospects of all
underlying investee companies. The performance of JZCP's real estate portfolio
has limited the potential to realise liquidity from this portfolio and
therefore increased the risk to both liquidity and therefore viability. The
Board however, are satisfied in large with the performance of the JZCP's
micro-cap portfolios and believe there will be suitable realisation
opportunities and proceeds in order for the Company to meet its debt and other
obligations. JZCP's micro-cap portfolio has averaged annual realisations of
$137 million over the five years ending 29 February 2020. JZAI is currently
pursuing various opportunities to realise value, whilst COVID-19 has delayed
both the investment and realisation activity, the Board have concluded that
they have a reasonable expectation that this is a relatively short-term issue.
(iv) Loan covenants
At 29 February 2020, investments and cash valued at $668 million were held as
collateral on the Guggenheim loan. A covenant on the loan states the fair value
of the collateral must be 4x the loan value and the cost of collateral must
be at least 57.5% of total assets. The Company is also required to hold a
minimum cash balance of $15 million plus 50% of interest on any new debt. The
Board note the current collateral/loan ratio is 4.5x and a further fall in the
NAV of approx.
$70 million would see this covenant on the loan breached. As a result
discussions are ongoing regarding amendments
to the loan agreement to ensure any risk of a breach of covenant is avoided.
(v) Mitigation of other risks as outlined in the Principal Risks and
Uncertainties (detailed above).
Conclusion
In concluding on the viability of the Company, the Directors have concluded
that they have a reasonable expectation that the Company will be able to
continue in operation and meet its liabilities as they fall due over the period
of the assessment. They consider the going concern assumptions, material
uncertainties and conclusion set out above to be relevant.
Dividends
No dividends were paid or proposed for the years ended 29 February 2020 and 28
February 2019.
Ongoing Charges
Ongoing charges for the years ended 29 February 2020 and 28 February 2019 have
been prepared in accordance with the Association of Investment Companies
("AIC") recommended methodology. The ongoing charges ratio represents
annualised recurring operational expenses as a percentage of the average net
asset value. The Ongoing charges for the year ended 29 February 2020 were 2.71%
(28 February 2019: 2.42%) excluding incentive fees of -4.97% being the reversal
of prior year provision (28 February 2019: 0.30%).
Directors
The Directors listed below, who served on the Board during the year are all
deemed independent and non-executive, other than Patrick Firth and Christopher
Waldron they were in office at the end of the year and subsequent to the date
of this report. The biographical details of the Directors are shown in the
Board of Directors.
David Macfarlane (Chairman)
James Jordan
Sharon Parr
Tanja Tibaldi
Patrick Firth (resigned 27 June 2019)
Christopher Waldron (resigned 26 November 2019)
Substantial Shareholders
As at 17 June 2020, the Company has been notified in accordance with the
Disclosure Guidance and Transparency Rules of the following interests of 5% or
more of the total Ordinary share capital of the Company. The number and
percentage of Ordinary shares relate to the number informed by shareholders on
the relevant notification rather than the current share register. The number
and percentage of Ordinary shares set out below for each substantial
shareholder will therefore not take account of any Ordinary shares bought or
sold by them or the effect of any share buy backs undertaken by the Company on
their shareholdings, in each case, not so notified as required by, or in
accordance with, the Disclosure Guidance and Transparency Rules.
Ordinary % of
Ordinary
shares shares
Edgewater Growth Capital Partners 18,335,944 23.7%
L.P.
David W. Zalaznick 10,550,294 13.6%
John W. Jordan II & Affiliates 10,550,294 13.6%
Leucadia Financial Corporation 8,021,552 10.4%
Abrams Capital Management L.P. 7,744,366 10.0%
Arnhold, LLC 4,573,007 5.9%
Finepoint Capital L.P. 4,413,067 5.7%
The percentage of Ordinary shares shown above represents the ownership of
voting rights at the year end, before weighting for votes on Directors.
It is the responsibility of the shareholders to notify the Company of any
change to their shareholdings when it reaches 5% of shares in issue and any
subsequent change when the shareholding increases or decreases by a further 5%
(up to 30% of shares in issue i.e. 10%, 15%, 20%, 25% and 30%) and thereafter
50% and 75%.
Share Capital, Purchase of Own Shares and Convertible Unsecured Loan Stock
"CULS"
The beneficial interests of the Directors in the Ordinary shares of the Company
are shown below:
Number of Purchased Sold Number of
Ordinary in year in year Ordinary
shares at shares at
1 March 29 February
2019 2020
David Macfarlane 74,800 - (3,250) 71,550
James Jordan 40,800 - (1,676) 39,124
Tanja Tibaldi 2,720 - - 2,720
Patrick Firth1 5,440 (see
below)
Christopher Waldron2 4,000 (see
below)
127,760 - (4,926) 113,394
1Patrick Firth held 5,440 shares at 1 March 2019 and on his retirement from the
board at 27 June 2019.
2Christopher Waldron held 4,000 shares at 1 March 2019 and 3,827 on his
retirement from the board at 26 November 2019.
The beneficial interests of the Directors in the CULS of the Company are shown
at 29 February 2020 (no change from 28 February 2019 position):
Number of CULS
of GBP10 nominal value
David Macfarlane 734
Tanja Tibaldi 367
1,101
None of the Directors held any interest in the Zero Dividend Preference shares
during the year. There have been no changes in the Directors' interests of any
share class between 29 February 2020 and the date of this report.
Details of the ZDP shares and the Ordinary shares can be found in Notes 15 and
18. Details of the CULS can be found in Note 14.
Annual General Meeting
The Company's Annual General Meeting is due to be held on 12 August 2020.
Engaging with Stakeholders
In line with best practice, and under the 2019 AIC Code of Corporate Governance
(the "AIC Code"), the Board is required to ensure effective engagement with,
and participation from, its shareholders and stakeholders. The Board should
also understand the views of the Company's key stakeholders and describe in the
annual report how their interests and the matters set out in section 172 of the
Companies Act 2006 have been considered in board discussions and
decision-making.
The Board identifies its key stakeholders as the following:
· Shareholders and prospective investors
· JZAI, the Investment Adviser of its portfolio investments and other
service providers
The Company has no employees
Engaging with Shareholders
The Directors believe that the maintenance of good relations with both
institutional and retail shareholders is important for the long term prospects
of the Company. It therefore seeks active engagement with investors, bearing in
mind the duties regarding equal treatment of shareholders and the dissemination
of inside information. The Board receives feedback on shareholder views from
its Corporate Broker and Investment Adviser, and is circulated with Broker
reports on the Company.
The Board believes that the Annual General Meeting, a meeting for all
shareholders, is the key point in the year when the Board of Directors accounts
to all shareholders for the performance of the Company. In usual circumstances
the Directors encourage all shareholders to attend where Directors will be
present and available to engage with shareholders. In light of COVID-19,
shareholders should refer to the Notice of AGM for guidance on physical
attendance at this year's meeting.
The Board believes that the Company policy of reporting to shareholders as soon
as possible after the Company's year end and the holding of the Annual General
Meeting at the earliest opportunity is valuable.
The Company also provides an Interim Report and Accounts in accordance with IAS
34 and usually provides Interim Management statements for the quarterly
periods. No Interim Management statement was issued for the quarterly period
ended 30 November 2019 or will be for the quarter ended 31 May 2020, due to the
delayed release of the interim financial statements and annual report. In
addition, considering the uncertainties about valuation that result from
COVID19, the Company will be suspending its monthly NAV announcements until
circumstances allow for more informed judgements as to value.
Engaging with Service Providers
The Board visits the Investment Adviser at least annually for a comprehensive
review of the portfolio, its valuation methodology and general strategy. The
Board are also in regular communication with the Investment Adviser to discuss
the Company's strategy as well as being kept up to date with portfolio matters.
A Management Engagement Committee, was established in 2018, to review the
performance and contractual arrangements of the Company's service providers.
The Board look to engage with service providers and encourage communication of
any concerns of matters arising and deal with them appropriately.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and Financial
Statements in accordance with applicable laws and regulations. Guernsey Company
Law requires the Directors to prepare financial statements for each financial
year which give a true and fair view of the state of affairs of the Company as
at the end of the financial year and of the profit or loss for that year.
In preparing Financial Statements the Directors are required to:
· select suitable accounting policies and apply them consistently;
· make judgements and estimates that are reasonable and prudent;
· state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the Financial Statements;
· prepare the Financial Statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business;
· confirm that there is no relevant audit information of which the Company's
Auditor is unaware; and
· confirm that they have taken all reasonable steps which they ought to have
taken as Directors to make themselves aware of any relevant audit information
and to establish that the Company's Auditor is aware of that information.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and to enable them to ensure that the Financial Statements have been
properly prepared in accordance with the Companies (Guernsey) Law, 2008 and
International Financial Reporting Standards as adopted by the European Union
("IFRS"). They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of fraud
and other irregularities.
The Directors confirm that they have complied with these requirements in
preparing the Financial Statements.
Responsibility Statement of the Directors in respect of the Financial
Statements
The Directors confirm that to the best of their knowledge:
· the Financial Statements have been prepared in accordance with IFRS and
give a true and fair view of the assets, liabilities and financial position,
and profit or loss of the Company;
· the Annual Report includes a fair review of the development and
performance of the business and position of the Company together with the
description of the principal risks and uncertainties that the Company faces, as
required by the Disclosure Guidance and Transparency Rules of the UK Listing
Authority; and
· the Directors confirm that the Annual Report and Financial Statements,
taken as a whole, is fair, balanced and understandable and provides the
information necessary for Shareholders to assess the Company's performance and
strategy.
Directors' Statement
So far as each of the Directors is aware, there is no relevant audit
information of which the Company's auditor is unaware, and each Director has
taken all the steps they ought to have taken as a Director to make themselves
aware of any relevant audit information and to establish that the Company's
auditor is aware of that information.
Approved by the Board of Directors and signed on behalf of the Board on 17 June
2020.
David Macfarlane
Chairman
Sharon Parr
Director
Corporate Governance
Introduction
As a UK listed Company, JZCP's governance policies and procedures are based on
the principles of the UK Corporate Governance Code as required under the
Disclosure Guidance and Transparency Rules. The UK Code is available on the
Financial Reporting Council's website, www.frc.org.uk. The Company is subject
to the GFSC Code, which applies to all companies registered as collective
investment schemes in Guernsey. The GFSC has also confirmed that companies that
report against the UK Code or AIC Code are deemed to meet the GFSC Code. The
AIC Code addresses all the principles set out in the UK Code, as well as
setting out additional principles and recommendations on issues that are of
specific relevance to investment companies such as the Company. The Board
considers that reporting against the principles and recommendations of the AIC
Code provides better information to Shareholders.
Throughout the accounting period the Company has complied with the
recommendations of the AIC Code and thus 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
- appointment of a senior independent director
- whistle blowing policy
The Board considers these provisions are not relevant to the position of JZ
Capital Partners Limited, being an externally managed investment company. The
Company has therefore not reported further in respect of these provisions. The
Directors are non-executive and the Company does not have employees, hence no
whistle blowing policy is required. However, the Directors have satisfied
themselves that the Company's service providers have appropriate whistle
blowing policies and procedures and have received confirmation from the service
providers that nothing has arisen under those policies and procedures which
should be brought to the attention of the Board. There have been no other
instances of non-compliance, other than those noted above.
Guernsey Code of Corporate Governance
The Guernsey Financial Services Commission's (the "GFSC") "Finance Sector Code
of Corporate Governance" (the "Guernsey Code") came into effect on 1 January
2012 and was subsequently amended on 18 February 2016. The introduction to the
Guernsey Code states that companies which report against the UK Corporate
Governance Code or the AIC's Code of Corporate Governance are deemed to meet
the Guernsey Code.
The Board
Corporate Governance of JZCP is monitored by the Board which at the end of the
year comprised four Directors, all of whom are non-executive. Biographical
details of the Board members at the date of signing these Financial Statements
are shown in the Board of Directors and their interests in the shares of JZCP
are shown in the Report of the Directors. The Directors' biographies highlight
their wide range of relevant financial and sector experience.
Directors' Independence
The Board continually considers the independence of the Directors, including in
light of the circumstances which are set out in the AIC Code as likely to
impair a director's independence.
There are no circumstances that exist, including those under the AIC Code
(2019), which the Board considers likely to impair the independence of any of
the Directors.
A number of the Directors have, however, served on the Board for a period of
longer than nine years which is one of those circumstances set out in the AIC
Code. The conclusion the Board has reached is that despite having served on the
Board for more than nine years, this has not impacted the independence of such
Directors. However, the Board will continue to assess on an annual basis how
length of service could impair judgement and decision making both on the basis
of an individual Director and the Board as a whole.
Further details on the Board's processes and criteria for the appointment of
directors can be found under the section of this Annual Report detailing the
work of the Nomination Committee.
Succession Planning
The Board acknowledges that the Board and its Committees should have a
combination of skills, experience and knowledge and that membership should be
regularly refreshed. The Board annually evaluates its composition, diversity
and how effectively each member contributes and how they work together to
achieve objectives. Further details on the evaluation of the Board and its
Committees can be found below in this section of the Annual Report.
During the fiscal year, both Patrick Firth and Chris Waldron resigned from the
Board. Tanja Tibaldi intends to retire from the board at the forthcoming Annual
General Meeting and further Board refreshment is intended at the Annual General
Meeting in 2021. The Board is currently looking to recruit an additional
Guernsey resident director.
Chairman Tenure
The Board's policy on the Chairman's tenure is that continuity and experience
are considered to add significantly to the strength of the Board and as such
these attributes need to be weighed against any advantages that a new
appointment may bring. Therefore, no limit on the overall length of service of
the Chairman is imposed.
The Chairman has served on the Board since the Company's inception (April
2008), the Board therefore acknowledges that succession to the role needs to be
anticipated in line with effective succession planning. In the 2019 Annual
Report, it was noted a substantial refreshment of the board was planned to take
place in 2021, including the appointment of a new Chairman. In the light of the
events of the last fiscal year the Chairman will continue to oversee the
stabilisation of the Company. The Chairman will continue to seek re-election to
the Board annually.
Proceedings of the Board
The Directors have overall responsibility for the Company's activities and the
determination of its investment policy and strategy. The Company has entered
into an investment advisory and management agreement with its Investment
Adviser, JZAI, pursuant to which, subject to the overall supervision of the
Directors, the Investment Adviser acts as the investment manager to the Company
and manages the investment and reinvestment of the assets of the Company in
pursuit of the investment objective of the Company and in accordance with the
investment policies and investment guidelines from time to time of the Company
and any investment limits and restrictions notified by the Directors (following
consultation with the Investment Adviser). Within its strategic
responsibilities, the Board regularly considers corporate strategy as well as
dividend policy, the policy on share buy backs and corporate governance issues.
The Directors meet at least quarterly to direct and supervise the Company's
affairs. This includes reviewing the investment strategy, risk profile, gearing
strategy and performance of the Company and the performance of the Company's
functionaries, and monitoring compliance with the Company's objectives.
The Directors visit the Investment Adviser at least annually for a
comprehensive review of the portfolio, its valuation methodology and general
strategy. The Directors deem it appropriate to review the valuations of the
investment portfolio on a quarterly basis. The schedule of Board and Committee
meetings is shown in the Board and Committee meeting attendance.
Continuing terms of Investment Adviser agreement
In the opinion of the Directors, the continuing appointment of the Investment
Adviser on the terms agreed continues to be in the interests of Shareholders.
In reaching its conclusion the Board considers the Investment Adviser's
performance, expertise and ability in effectively assisting the management of
portfolio companies.
Supply of information
The Chairman ensures that all Directors are properly briefed on issues arising
at, and when necessary in advance of, Board meetings. The Company's advisers
provide the Board with appropriate and timely information in order that the
Board may reach proper decisions. Directors can, if necessary, obtain
independent professional advice at the Company's expense.
Directors' training
The Board is provided with information concerning changes to the regulatory or
statutory regimes as they may affect the Company, and are offered the
opportunity to attend courses or seminars on such changes, or other relevant
matters. An induction programme is available for any new Director appointments.
The induction programme offers training about the Company, its managers, their
legal responsibilities and investment company industry matters.
Chairman and Senior Independent Director
The Chairman is a non-executive Director, together with the rest of the Board.
There is no executive Director position within the Company. Day-to-day
management of the Company's affairs has been delegated to third party service
providers. Chris Waldron was appointed as Senior Independent Director on 7 May
2019 until his resignation on 26 November 2019. No further appointment to this
role has yet been made.
Board diversity
The Board has also given careful consideration to the recommendations of the
Davies Review and the findings of the Hampton-Alexander Review on the evolving
gender diversity debate. The Board continues to review its composition in terms
of diversity, appropriate range of skills and experience and the Board is
committed to ensuring that diversity is considered when appointments to the
Board are under consideration - as indeed has always been its practice.
Re-election of Directors
Previously, each Director having served longer than nine years was subject to
annual re-election and each Director having served less than nine years was
subject to re-election at the third annual general meeting after appointment or
(as the case may be) the general meeting at which he or she was last appointed.
In line with the 2019 AIC Code of Corporate Governance, all Directors are now
subject to annual re-election.
The Board's evaluation
The Board, Audit Committee, and Nomination Committee undertake an evaluation of
their own performance and that of individual Directors on an annual basis. In
order to review their effectiveness, the Board and its Committees carry out a
process of formal self-appraisal. The Board and Committees consider how they
function as a whole and also review the individual performance of its members.
This process is conducted by the Chairman reviewing each member's performance,
contribution and their commitment to the Company. The Board as a whole reviews
the performance of the Chairman. Each Board member is also required to submit
details of training they have undertaken on an annual basis. Currently, no
third party evaluation of the Directors effectiveness is undertaken. The
results of the evaluation process concluded the Board was functioning
effectively and the Board and its committees provided a suitable mix of skills
and experience.
Board Committees
In accordance with the AIC Code, the Board has established an Audit Committee
and a Nomination Committee, in each case with formally delegated duties and
responsibilities within written terms of reference. The identity of each of the
Chairmen of the committees referred to below is reviewed on an annual basis.
The Board, consisting of all non-executive Directors, has decided that the
entire Board should fulfil the role of the Audit and Nomination Committees. The
terms of reference of the committees are kept under review and can be viewed on
the Company's website www.jzcp.com.
Nomination Committee
In accordance with the Code, the Company has established a Nomination
Committee. The Nomination Committee leads the process for all board
appointments, oversees the development of and reports on, amongst other things,
its approach to a diverse pipeline for succession.
The Nomination Committee takes into consideration the Code's rules on
independence of the Board in relation to the Company, its senior management and
major shareholders. The Nomination Committee is chaired by David Macfarlane,
and each of the other Directors is also a member. The members of the committee
are independent of the Investment Adviser. The Nomination Committee has
responsibility for considering the size, structure and composition of the
Board, retirements and appointments of additional and replacement Directors and
making appropriate recommendations to the Board.
Due to the nature of the Company being a listed investment company investing in
private equity with an international shareholder base, the Company needs
Directors with a broad range of financial experience. For this reason,
Directors use external consultants as well as using their own contacts to
identify suitable candidates.
The final decision with regard to appointments always rests with the Board and
all such appointments are subject to confirmation by shareholders.
Audit Committee
The Audit Committee is chaired by Sharon Parr (as from 27 June 2019), prior to
this date it was chaired by Patrick Firth, before his resignation from the
Board. All the other Directors are members. Members of the Committee are
independent of the Company's external auditors and the Investment Adviser. All
members have the necessary financial and sector experience to contribute
effectively to the Committee. The Audit Committee meets at least twice a year
and meets the external auditors at least twice a year. The Audit Committee is
responsible for overseeing the Company's relationship with the external
auditors, including making recommendations to the Board on the appointment of
the external auditors and their remuneration. The Committee also considers the
nature, scope and results of the auditors' work and reviews, and develops and
implements policies on the supply of any non-audit services that are to be
provided by the external auditors.
Post year end, the Audit Committee has re-considered whether the Company is
able to continue as a going concern for the period ending 31 July 2021 and
whether it considers it appropriate to adopt the going concern basis of
accounting in preparing them, and identify any material uncertainties to the
company's ability to continue to do so. Also, the Audit Committee, has
considered the Company's current position and principal risks, and assessed the
prospects of the Company, over the viability period of three years to 28
February 2023.
The work undertaken by the Audit Committee is further described in the Audit
Committee Report and the recommendations to the Board made by the Audit
Committee, regarding the going concern and viability of the Company are
detailed in the Directors' Report.
A report of the Audit Committee detailing responsibilities and activities is
presented in the Audit Committee Report.
Management Engagement Committee
The Management Engagement Committee is chaired by David Macfarlane and
comprises the entire Board. Responsibilities include reviewing the performance
and contractual arrangements of the Company's service providers.
Remuneration Committee
In view of its non-executive and independent nature, the Board considers that
it is not appropriate for there to be a separate Remuneration Committee as
prescribed by the AIC Code. The process for agreeing the non-executive
Directors' fees is set out in the Directors' Remuneration Report.
Board and Committee meeting attendance
The number of formal meetings of the Board and its committees held during the
fiscal year and the attendance of individual Directors at these meetings was as
follows:
Number of meetings
Management
Board Ad Hoc Audit Nomination Engagement
Main AGM Meetings Committee Committee Committee
Total number of meetings 5 1 20 2 - 1
David Macfarlane 5 1 19 2 - 1
James Jordan 5 1 15 2 - 1
Sharon Parr 5 1 20 2 - 1
Tanja Tibaldi 5 1 14 2 - 1
Patrick Firth (resigned 27 June 2019) 1 1 4 1 - -
Christopher Waldron 4 1 12 1 - -
(resigned 26 November 2019)
The main Board meetings are held to agree the Company's valuation of its
investments, agree the Company's financial statements and discuss and agree
other strategic issues. Other meetings are held when required to agree board
decisions on ad-hoc issues.
UK Criminal Finances Act 2017
In respect of the UK Criminal Finances Act 2017 which has introduced a new
Corporate Criminal Offence of 'failing to take reasonable steps to prevent the
facilitation of tax evasion', the Board confirms that it is committed to zero
tolerance towards the criminal facilitation of tax evasion.
The Board also keeps under review developments involving other social and
environmental issues, such as Modern Slavery and General Data Protection
Regulation, and will report on those to the extent they are considered relevant
to the Company's operations.
Internal Controls
The Board is ultimately responsible for establishing and maintaining the
Company's system of internal financial and operating control and for
maintaining and reviewing its effectiveness on an annual basis. The Company's
risk matrix continues to be the core element of the Company's risk management
process in establishing the Company's system of internal financial and
reporting control. The risk matrix is prepared and maintained by the Board
which initially identifies the risks facing the Company and then collectively
assesses the likelihood of each risk, the impact of those risks and the
strength of the controls operating over each risk. The system of internal
financial and operating control is designed to manage rather than to eliminate
the risk of failure to achieve business objectives and by their nature can only
provide reasonable and not absolute assurance against misstatement and loss.
These controls aim to ensure that assets of the Company are safeguarded, proper
accounting records are maintained and the financial information for publication
is reliable. The Board confirms that there is an ongoing process for
identifying, evaluating and managing the principal risks faced by the Company.
This process has been in place for the year under review and up to the date of
approval of this Annual Report and Financial Statements and is reviewed by the
Board and is in accordance with the Internal controls: Guidance on Risk
Management, Internal Control and Related Financial and Business Reporting.
The Board has evaluated the systems of internal controls of the Company. In
particular, it has prepared a process for identifying and evaluating the
principal risks affecting the Company and the policies by which these risks are
managed.
The Board has delegated the day to day responsibilities for the management of
the Company's investment portfolio, the provision of depositary services and
administration, registrar and corporate secretarial functions including the
independent calculation of the Company's NAV and the production of the Annual
Report and Financial Statements which are independently audited.
Formal contractual agreements have been put in place between the Company and
providers of these services. Even though the Board has delegated
responsibility, it retains accountability for these functions and is
responsible for the systems of internal control. At each quarterly board
meeting, compliance reports are provided by the Administrator, Company
Secretary and Portfolio Manager. The Board also receives confirmation from the
Administrator of its accreditation under its Service Organisation Controls 1
report.
The Company's risk exposure and the effectiveness of its risk management and
internal control systems are reviewed by the Audit Committee at its quarterly
meetings and annually by the Board.
The Board believes that the Company has adequate and effective systems in place
to identify, mitigate and manage the risks to which it is exposed.
International Tax Reporting
For purposes of the US Foreign Account Tax Compliance Act ("FATCA"), the
Company registered with the US Internal Revenue Services ("IRS") as a Guernsey
reporting Foreign Financial Institution ("FFI"), received a Global Intermediary
Identification Number CAVBUD.999999.SL.831, and can be found on the IRS FFI
list.
The Common Reporting Standard ("CRS") is a global standard for the automatic
exchange of financial account information developed by the Organisation for
Economic Co-operation and Development ("OECD"), which has been adopted by
Guernsey and which came into effect on 1 January 2016. The CRS replaced the
intergovernmental agreement between the UK and Guernsey to improve
international tax compliance that had previously applied.
The Board will take necessary actions to ensure that the Company is compliant
with Guernsey regulations and guidance in this regard.
Directors' Remuneration Report
The Company's policy in regard to Directors' remuneration is to ensure that the
Company maintains a competitive fee structure in order to recruit, retain and
motivate non-executive Directors of excellent quality in the overall interests
of shareholders.
Remuneration Policy
The Directors do not consider it necessary for the Company to establish a
separate Remuneration Committee. All of the matters recommended by the Code
that would be delegated to such a committee are considered by the Board as a
whole.
It is the responsibility of the Board as a whole to determine and approve the
Directors' fees, following a recommendation from the Chairman who will have
given the matter proper consideration, having regard to the level of fees
payable to non-executive Directors in the industry generally, the role that
individual Directors fulfil in respect of Board and Committee responsibilities
and the time committed to the Company's affairs. The Chairman's remuneration is
decided separately and is approved by the Board as a whole.
The Company's Articles state that Directors' remuneration payable in any
accounting year shall not exceed in the aggregate an annual sum of US$650,000.
Each Director is also entitled to reimbursement of their reasonable expenses.
There are no commission or profit sharing arrangements between the Company and
the Directors. Similarly, none of the Directors is entitled to pension,
retirement or similar benefits. No element of the Directors' remuneration is
performance related.
The remuneration policy set out above is the one applied for the year ended 29
February 2020 and is not expected to change in the foreseeable future.
Directors' and Officers' liability insurance cover is maintained by the Company
on behalf of the Directors.
Remuneration for Services to the Company as Non-Executive Directors
Year Ended Year Ended
29 February 2020 28 February 2019
US$ US$
David Macfarlane (Chairman) 160,000 160,000
James Jordan 60,000 60,000
Sharon Parr (appointed 27 67,000 41,000
June 2018)
Tanja Tibaldi 60,000 60,000
Patrick Firth (resigned 27 23,000 70,000
June 2019)
Christopher Waldron (resigned 26 November 2019) 51,000 67,000
421,000 458,000
Ms Tibaldi intends to retire from the board at the forthcoming Annual General
Meeting.
As from 1 March 2020, fees payable to the Chairman and Directors (excluding Ms
Tibaldi) will be reduced to $120,000 per annum and $50,000 per annum
respectively. The Chairman of the Audit Committee will receive an additional
amount of $20,000 per annum.
No Director has a service contract with the Company, nor are any such contracts
proposed.
Directors' Term of Appointment
In the financial year ended 29 February 2020, each Director having served
longer than nine years was subject to annual re-election. Each Director who
served less than nine years being subject to re-election only at the third
annual general meeting after appointment or (as the case may be) the general
meeting at which he or she was last appointed and being eligible for
re-appointment.
In line with the 2019 AIC Code of Corporate Governance, all Directors seeking
re-election to the Board will do so on an annual basis regardless of their
tenure not yet exceeding nine years.
The Directors were appointed as non-executive Directors by letters issued in
April 2008 and June 2018 which state that their appointment and any subsequent
termination or retirement shall be subject to three-months' notice from either
party in accordance with the Articles. Each Director's appointment letter
provides that, upon the termination of his/her appointment, that he/she must
resign in writing and all records remain the property of the Company. The
Directors' appointments can be terminated in accordance with the Articles and
without compensation. There is no notice period specified in the Articles for
the removal of Directors. The Articles provide that the office of director
shall be terminated by, among other things: (a) written resignation; (b)
unauthorised absences from board meetings for six months or more; (c) unanimous
written request of the other directors; and (d) an ordinary resolution of the
Company.
Signed on behalf of the Board of Directors on 17 June 2020 by:
David Macfarlane
Chairman
Sharon Parr
Director
Audit Committee Report
Dear Shareholder,
We present the Audit Committee's Report, setting out the responsibilities of
the Audit Committee and its key activities during the year ended 29 February
2020. The Audit Committee has reviewed the Company's financial reporting, the
independence and effectiveness of the external auditor and the internal control
and risk management systems of the Company's service providers. In order to
assist the Audit Committee in discharging these responsibilities, regular
reports are received and reviewed from the Investment Manager, Administrator
and external auditor.
A member of the Audit Committee will continue to be available at each Annual
General Meeting to respond to any shareholder questions on the activities of
the Audit Committee.
Responsibilities
The terms of reference of the Audit Committee include the requirement to:
· monitor the integrity of the published Financial Statements of the
Company;
· review and report to the Board on the significant issues and judgements
made in the preparation of the Company's published Financial Statements,
(having regard to matters communicated by the external Auditors) and other
financial information;
· monitor and review the quality and effectiveness of the external Auditors
and their independence;
· consider and make recommendations to the Board on the appointment,
reappointment, replacement and remuneration of the Company's external Auditor;
· advise the Board that the annual report and accounts, taken as a whole, is
fair, balanced and understandable;
· review and consider the Company's Principal risks and uncertainties;
· consider the long-term viability of the Company;
· review the Company's procedures for prevention, detection and reporting of
fraud, bribery and corruption;
· monitor and review the internal control and risk management systems of the
service providers; and
· consider and make representations to the Board regarding Directors'
remuneration.
The Audit Committee's full terms of reference can be viewed on the Company's
website www.jzcp.com
Key Activities of the Audit Committee
The following sections discuss the assessments made by the Audit Committee
during the year:
Financial Reporting:
The Audit Committee's review of the Annual Financial Statements focused on the
following significant areas:
· COVID-19
Post year end, the Audit Committee has received regular updates from the
Investment Adviser of the impact of COVID-19 on the Company's investment
portfolio. Information has been provided on the following business aspects of
portfolio companies/properties, to enable the Board to assess the ongoing risk
to the Company and also any impact COVID-19 may have had on the reporting year
ended 29 February 2020:
i) Demand for product/service;
ii) Supply Chain & operational issues;
iii) Flexibility and adaptability of workforce to perform duties;
iv) Financial Strength of Company - Liquidity Issues;
v) Support received from Government programmes; and
vi) Real estate markets.
The Audit Committee have also been regularly updated on scheduled realisations
and liquidity projections in light of the COVID-19 lockdowns and delays in
corporate transactions.
· Assessment of Going Concern and Viability
The Audit Committee has considered the ability of the Company to continue as a
going concern over the period ending 31 July 2021. After careful consideration
the Committee have recommended to the Board that it is satisfied that it is
appropriate to adopt the going concern basis in preparing these financial
statements and they have a reasonable expectation that the Company will
continue in existence as a going concern for the period ending 31 July 2021.
The reasons for reaching this judgement are detailed in the Directors' report.
However, there are material uncertainties which cast significant doubt over the
ability of the Company to continue as a Going Concern, being:
i) Whether, the Company will be able to generate sufficient realisation
proceeds before the expiration of the current loan facility and repayment of
the CULS;
ii) In the event sufficient realisation proceeds referenced above are not
generated the Company is able to implement alternative plans within a timetable
agreed with its lenders; and
iii) The full impact of COVID-19 on the valuation of the Company's investment
portfolio and related loan covenants is not currently known.
For the viability assessment, the Audit Committee has assessed the expectations
that the Company will be able to continue in operation and meet ongoing debt
obligations over the period ending 28 February 2023. In making its
recommendation to the Board the Committee has carried out a robust review of
the Company's principal risks and uncertainties to which the Company is exposed
and that potentially threaten future performance and liquidity and has assessed
the Company's current position and prospects as detailed in the Chairman's
statement and Investment Adviser's report.
The key factors considered by the Committee are detailed in the Directors'
Report.
The Committee have concluded that they have a reasonable expectation that the
Company will be able to continue in operation and meet its liabilities as they
fall due over the period of the assessment. They consider the going concern
assumptions, material uncertainties and conclusion set out above to be
relevant.
The Audit Committee was also satisfied that the disclosures in the basis of
preparation note and the viability statement, relating to the going concern
assessment of the Company, were appropriately clear and transparent. In
particular that the several material uncertainties prevalent in the going
concern basis of preparation are disclosed in a fair, balanced and
understandable manner.
· Valuation of Unquoted Investment Fair Values including the impact on
management
fees
The fair value of the Company's unquoted securities at 29 February 2020, which
are valued using techniques detailed in note 5 of the financial statements, was
$661,200,000 accounting for 95.5% of the Company's investment portfolio. The
Committee has concentrated on ensuring the Investment Manager has applied
appropriate valuation methodologies to these investments in producing the net
asset value of the Company.
Additional focus was given in the year to the valuation of the real estate
portfolio with two external valuations undertaken over the majority of the
portfolio. The need for additional appraisals arose as indications of potential
impairment to the real estate portfolio emerged in the ordinary course of
business between the Company's Investment Adviser and third-party real estate
brokers.
Members of the Audit Committee meet the Investment Adviser at least annually to
discuss the valuation process. The Committee gains comfort in the valuations
produced by reviewing the methodologies used. The valuations were challenged
and approved by the Audit Committee in a recent visit to the Investment
Adviser. The Audit Committee has thus satisfied itself that the valuation
techniques are appropriate and accurate.
The valuation of the unquoted investments is the key driver of the Company's
gross asset value and the basis of the management fees payable to the
Investment Adviser and therefore the management fees payable could potentially
be misstated if there were to be an error in the calculation of the gross
assets. However, as each monthly NAV calculation is approved by the Investment
Adviser and the year-end NAV has been audited, the Audit Committee is satisfied
that the fees have been correctly calculated as stated in the Annual Report and
Financial Statements.
· Impairment of Direct Loans Measured at Amortised Cost
Risk that the carrying value of the direct loans might be misstated due to
application of inappropriate methodologies, inputs and/or judgemental factors
determining the expected credit loss in accordance with IFRS9.
Risk Management:
The Audit Committee continued to consider the process for managing the risk of
the Company and its service providers. Risk management procedures for the
Company, as detailed in the Company's risk assessment matrix, were reviewed and
approved by the Audit Committee. New risks are added to the matrix when deemed
appropriate.
Fraud, Bribery and Corruption:
The Audit Committee continues to monitor the fraud, bribery and corruption
policies of the Company. The Board receives a confirmation from all service
providers that there have been no instances of fraud, bribery or corruption.
The External Auditor
Ernst & Young LLP have acted as external auditor since the Company's inception
in April 2008. This is the second year of Andrew Dann's anticipated five year
tenure as audit partner. A full tender process was undertaken during December
2018 and January 2019 resulting in Ernst & Young LLP being reappointed.
Independence, objectivity and fees:
The independence and objectivity of the external auditor is reviewed by the
Audit Committee which also reviews the terms under which the external auditor
is appointed to perform non-audit services. Following the introduction of the
UK FRC Revised Ethical Standard on 18 December 2019 the Audit Committee has
introduced a general prohibition on the external auditor providing non-audit
services to the Company. This general prohibition does not extend to an interim
review report providing the fee for such interim review is subject to a 70% fee
cap when compared to the audit fee and is valid for accounting periods starting
after 1 March 2020.
The following table summarises the remuneration paid and payable by the Company
to Ernst & Young LLP and to other Ernst & Young LLP member firms for audit and
other services during the years ended 29 February 2020 and 28 February 2019.
$ $
Equivalent Equivalent
Year ended Year Year ended Year
ended ended
29.2.2020 29.2.2020 28.2.2019 28.2.2019
Ernst & Young LLP
- Annual audit GBP365,000 $454,206 GBP257,250 $332,000
- Auditor's interim N/A N/A GBP42,500 $56,000
review
Other Ernst & Young LLP affiliates
- Passive Foreign Investment Company tax - $65,000 - $65,000
services
During the year, JZCP incurred additional audit fees resulting from the real
estate property portfolio valuation issues as well as going concern
considerations, including COVID-19.
The interim report and financial statements for the six-month period ended 31
August 2019 were not reviewed by EY. Due to further requested information
provided by real estate appraisers it would not have been possible for EY to
have been able to complete their customary review of the interim results and
related report within the regulatory timeframe.
In line with the historic policies and procedures above, the Audit Committee
does not consider that the provision of non-audit services, which includes
determining whether the Company is a passive foreign investment company as
defined by the U.S. Internal Revenue Code, to have been a threat to the
objectivity and independence of the external auditor.
Performance and effectiveness:
During the year, when considering the effectiveness of the external auditor,
the Audit Committee has taken into
account the following factors:
· the audit plan presented to them before each audit;
· the post audit report including variations from the original plan;
· changes in audit personnel;
· the external auditor's own internal procedures to identify threats to
independence; and
· feedback received from both the Investment Adviser and Administrator.
The Audit Committee reviewed and challenged the audit plan and the post audit
report of the external auditor and concluded that audit risks had been
sufficiently identified and were sufficiently addressed. The Audit Committee
considered reports from the external auditor on their procedures to identify
threats to independence and concluded that the procedures were sufficient to
identify potential threats to independence.
There were no significant adverse findings from this evaluation.
The Audit Committee has examined the scope and results of the audit, its cost
effectiveness and the independence and objectivity of the external auditor and
considers Ernst & Young LLP, as external auditor, to be independent of the
Company.
Internal control and risk management systems:
Additional work performed by the Audit Committee in the areas of internal
control and risk management are disclosed in the Corporate Governance.
The Audit Committee has also reviewed the need for an internal audit function.
The Audit Committee has decided that the systems and procedures employed by the
Investment Adviser and the Administrator, including the Administrator's
internal audit function, provide sufficient assurance that a sound system of
internal control, which safeguards the Company's assets, is maintained. An
internal audit function specific to the Company is therefore considered
unnecessary.
In finalising the Annual Report and Accounts for recommendation to the Board
for approval, the Audit Committee has satisfied itself that the Annual Report
and Accounts taken as a whole are fair, balanced and understandable.
Sharon Parr
Chairman, Audit Committee
17 June 2020
Independent Auditor's Report
To The Members of JZ Capital Partners Limited
Opinion
We have audited the Financial Statements of JZ Capital Partners Limited (the
'Company') for the year ended
29 February 2020 which comprise the Statement of Comprehensive Income, the
Statement of Financial Position, the Statement of Changes in Equity, the
Statement of Cash Flows and the related notes 1 to 31, including a summary of
significant accounting policies. The financial reporting framework that has
been applied in their preparation is applicable law and International Financial
Reporting Standards as adopted by the European Union ('IFRS').
In our opinion, the financial statements:
· give a true and fair view of the state of the Company's affairs as at 29
February 2020 and of its loss for the year then ended;
· have been properly prepared in accordance with IFRS; and
· have been properly prepared in accordance with the requirements of the
Companies (Guernsey) Law, 2008.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
(UK) ('ISAs (UK)') and applicable law. Our responsibilities under those
standards are further described in the "Auditor's responsibilities for the
audit of the Financial Statements" section of our report below. We are
independent of the Company in accordance with the ethical requirements that are
relevant to our audit of the Financial Statements in the UK, including the
FRC's Ethical Standard as applied to listed entities, and we have fulfilled
our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Material uncertainty related to Going Concern
We draw your attention to Note 3 in the Financial Statements, which states that
there are material uncertainties in relation to the timing of realising
assets, the potential impact on the repayment of the Guggenheim facility
together with the impact of COVID-19 on the valuation of the Company's
investment portfolio and related covenants, which casts significant doubt
over the ability of the Company to continue as a Going Concern. The
Financial Statements do not include any adjust- ments that might result from
the outcome of these uncertainties.
We describe below how our audit responded to the risk relating to going
concern:
1. The audit engagement partner increased his time directing and supervising
the audit procedures on going concern;
2. We assessed the determination made by the Board of Directors of the Company
and the Investment Adviser, Jordan/Zalaznick Advisers, Inc ("JZAI") that the
Company is a going concern and the appropriateness of the Financial Statements
to be prepared on a going concern basis;
3. We obtained the cash flow forecasts and sensitivities prepared by
management and tested for arithmetical accuracy of the models including
reperforming the covenant tests therein;
4. We have discussed with management the Guggenheim Loan Facility refinancing
and associated agreement amendments, including the nature of facilities,
repayment terms and covenants;
5. We performed a stress testing for covenant compliance using market indices
up to 31 May 2020, to assess the likelihood of a reduction in fair values
triggering a covenant breach;
6. We challenged the appropriateness of management's forecasts by assessing
historical forecasting accuracy, challenging management's consideration of
downside sensitivity analysis including Management's scenario to reflect its
expectation of the impact of the timing of realising assets, the potential
impact on the repayment of the Guggenheim facility together with COVID-19, and
applying further sensitivities to understand the impact on liquidity of the
Company;
7. We assessed whether available funds, compared to commitments made to
underlying investments at year end and other ongoing commitments including
investment advisor and other expenses cast significant doubt over the going
concern status of the Company;
8. We held discussions with the Investment Adviser and the Audit Committee in
relation to the status of the secondary sales, real estate offers and
refinancing of the Guggenheim loan facility;
9. We discussed the likely success and risk factors of the Company's
alternative investing and financing plans with its Investment Adviser; and
10. We assessed the disclosures in the Annual Report and Financial
Statements relating to going concern, including the material uncertainties, to
ensure they were fair, balanced and understandable and in compliance with IAS1.
We draw attention to the viability statement in the Annual Report, which
indicates that the key assumptions to the statement of viability are that a)
the realisation of the underlying investments will generate sufficient liquid
resources for the Company to meet its obligations and pay its expenses as and
when they fall due, (b) the refinancing of the Guggenheim Loan Facility will be
finalised and (c) COVID-19 will not have any significant impact on the
Company's long term viability. The Directors consider that the material
uncertainties referred to in respect of going concern casts significant doubt
over the future viability of the Company should these above events not
complete.
Our opinion is not modified in respect of this matter.
Conclusions relating to principal risks, going concern and viability statement
Aside from the impact of the matters disclosed in the material uncertainties
related to going concern section, we have nothing to report in respect of the
following information in the Annual Report, in relation to which the ISAs (UK)
require us to report to you whether we have anything material to add or draw
attention to:
· the disclosures in the Annual Report that describe the principal risks and
explain how they are being managed or mitigated;
· the Directors' confirmation in the Annual Report that they have carried
out a robust assessment of the principal risks facing the entity, including
those that would threaten its business model, future performance, solvency or
liquidity;
· whether the Directors' statement in the Annual Report in relation to going
concern and their assessment of the prospects of the Company required under the
Listing Rules is materially inconsistent with our knowledge obtained in the
audit; or
· the Directors' explanation in the Annual Report as to how they have
assessed the prospects of the entity, over what period they have done so and
why they consider that period to be appropriate, and their statement as to
whether they have a reasonable expectation that the entity will be able to
continue in operation and meet its liabilities as they fall due over the period
of their assessment, including any related disclosures drawing attention to any
necessary qualifications or assumptions.
Overview of our audit approach
Misstatement of Unquoted Investment Fair Values
Key audit matters including the impact on management fees; and
Impairment of direct loans measured at amortised
cost.
Audit scope We have audited the Financial Statements of the
Company for the year ended 29 February 2020.
Materiality Overall materiality of $4.8 million (2019: $16.2
million), which represents 1% (2019: 2%) of total
equity.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of
most significance in our audit of the Financial Statements of the current year.
In addition to the matters described in the 'Material Uncertainty Related to
Going Concern' section, we have determined the matters described below to be
the key audit matters to be communicated in our report. These matters were
addressed in the context of our audit of the Financial Statements as a whole,
and in forming our opinion thereon, and we do not provide a separate opinion on
these matters. For each matter below, our description of how our audit
addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor's
responsibilities for the audit of the Financial Statements section of our
report, including in relation to these matters. Accordingly, our audit included
the performance of procedures designed to respond to our assessment of the
risks of material misstatement of the Financial Statements. The results of our
audit procedures, including the procedures performed to address the matters
below, provide the basis for our audit opinion on the accompanying Financial
Statements.
Risk Our response to the risk Key observations
communicated to the
Audit Committee
Misstatement of Unquoted Our audit procedures consisted We reported to the
Investment Fair Values of: Audit Committee that
including the impact on overall there were no
management fees (2020: Updating and confirming our material matters
$0.661 billion; 2019: US$ understanding of the arising from our
1.014 billion) Company's processes and audit work on the
methodologies, including the valuation of the
99% (2019: 99%) of the use of industry specific Company's investments
carrying value of measures, and policies for that we wished to
investments relates to valuing unquoted investments bring to their
the Company's holdings in held by the Company attention.
unquoted investments,
which are valued using Challenged management on the
different valuation rationale for change in
techniques, as described independent real estate
in note 5 to the appraisers and, as part of
Financial Statements. our review of the
appraisals, specifically
The valuation is considered the credentials
subjective, with a high of the new appraiser for
level of judgement and such appraisals;
estimation linked to the
determination of the Obtaining and inspecting the
values with limited valuation decks and
market information supporting data for the
available, as a result of private equity investments,
the low level of to assess whether the data
liquidity in the private used is appropriate and
equity and real estate relevant, and discussing
markets at the year-end. these with Investment
Adviser to evaluate whether
the fair value of the
As a result, there is a Company's private equity
risk of an inappropriate investments are reasonably
valuation model being stated, challenging the
applied, together with assumptions made by JZAI and
the risk of inappropriate Board of Directors of the
inputs to the model/ Company;
calculation being
selected including the Obtaining and inspecting the
possible impact on the independent appraisals and
management fees. supporting data regarding
the real estate assets, to
The valuation of the assess whether the data used
unquoted investments is is appropriate and relevant,
the key driver of the and discussing these with
Company's net asset value Investment Adviser to
and total return. evaluate whether the fair
Incorrect valuation could value of the Company's real
have a significant impact estate investments are
on the net asset value of reasonably stated,
the Company and therefore challenging the assumptions
the return generated for made by JZAI and Board of
shareholders. Directors of the Company;
Refer to the Audit
Committee Report; Attending fair value
Accounting policies in discussions in relation to
Notes 2, 3 and 5, and 29 February 2020 valuations,
Note 12 to the Financial for both real estate and
Statements private equity investments.
Challenging the value roll
forward considerations
between the 31 December 2019
asset valuations and the
balance sheet date. These
included the Investment
Adviser, EY Guernsey, EY
valuation specialists,
RedSky (Real Estate Asset
Advisor) and the independent
valuation specialists
appointed by the Company;
Vouching valuation inputs
that do not require
specialist knowledge to
independent sources and
testing the arithmetical
accuracy of the Company's
calculations for a sample of
significant investments
selected based on their size
/value;
Performing back testing to
get an overview of how
management values the
investments on an overall
view compared to prior year
values;
For a sample of significant
private equity investments
selected based on their size
/value, we engaged EY Canada
("EY VME"), and for the real
estate investments, we
engaged EY New York and
Miami (collectively "EY
TRE") as valuation
specialists to:
use their knowledge of the
market to assess and
corroborate Investment
Adviser's and third party
specialists' market related
judgements and valuation
inputs (in relation to the
private equity investments
discount rates and EBITDA
multiples and in relation to
real estate assets discount
rates, rental per square
foot, selling price per
square foot) by reference to
comparable transactions, and
independently compiled
databases/indices;
assist us to determine
whether the methodologies
used to value private equity
investments and real estate
assets were consistent with
methods usually used by
market participants;
assist with enquiries with
the newly appointed
appraiser regarding changes
in approach, models and fair
values compared to the
appraiser in the prior year;
performed procedures to
assess whether, in light of
market data, the fair values
of certain recently acquired
investments continue to
approximate to their
consideration paid; and
assist us in determining
whether the Company's
specialist were
appropriately qualified and
independent.
Agreeing the valuation per
the Financial Statements
back to the models per the
valuation decks, relating to
private equity investments,
prepared by Investment
Adviser and agreeing the
proposed values per the
valuation decks to the
investment portfolio report
prepared by the
Administrator;
Reviewing the waterfall
calculations on the flow of
valuation through the SPV
structures to the Company
and reviewing the inputs to,
and arithmetic accuracy, of
the valuation calculations/
waterfall;
Updating our previous
understanding of the real
estate portfolio valuation
with the Investment Adviser
and RedSky with respect to
the qualitative factors and
other information used to
value real estate
investments;
Reporting to the Audit
Committee on the calibration
of investment valuations
against EY's ranges and
commenting on any specific
movements of valuation marks
in those ranges vs prior
periods; and
Identifying the significant
unobservable inputs to
valuations and reviewed and
assessed the reasonableness
of the sensitivity workings
and disclosures, comparing
the Investment Adviser's
position with EY's range of
acceptable inputs.
Re-performed the management
fee calculations for
mathematical accuracy and
consistency with the terms
of the investment advisory
agreement;
Impairment of direct For all direct loans we We confirmed that
loans measured at performed the following there were no
amortised cost (2020: $31 procedures: material matters
million; 2019 $58 arising from our
million) audit work on the
judgments and
Risk that the carrying estimates made by
value of the direct loans management regarding
might be misstated due to the expected credit
application of loss that we wished
inappropriate to bring to the
methodologies, inputs and attention of the
/or judgemental factors Committee.
determining the expected
credit loss in accordance We confirmed that the
with IFRS 9. expected credit loss
was not materially
Refer to the Audit misstated.
Committee Report;
Accounting policies in We obtained copies of the
Notes 2 and 3, and Notes signed loan agreements
7, 12 and 22 to the including any changes to the
Financial Statements terms and conditions of the
loans;
We re-performed the
amortised cost calculations
for mathematical accuracy
and consistency with the
terms of the loan
agreements;
We obtained the expected
credit loss calculation from
the Investment Advisor for
each material loan and
determined that the estimate
and judgements applied by
management specific to each
loan were in accordance with
IFRS 9; and
We reviewed the possible
default scenarios and credit
risk of each loan separately
and applied probabilities of
default to assess the ECL
over the next 12 months.
An overview of the scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation
of performance materiality determine our audit scope for the Company. This
enables us to form an opinion on the Financial Statements. We consider size,
risk profile, the organisation of the Company and effectiveness of controls,
including controls and changes in the business environment when assessing the
level of work to be performed. All audit work was performed directly by the
audit engagement team.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in
evaluating the effect of identified misstatements on the audit and in forming
our audit opinion.
Materiality
"Materiality" is the magnitude of omissions or misstatements that, individually
or in aggregate, could reasonably be expected to influence the economic
decisions of the users of the Financial Statements. Materiality provides a
basis for determining the nature and extent of our audit procedures.
We determined planning materiality for the Company to be $4.8 million (2019:
$16.2 million), which is 1% (2019: 2%) of total equity. This provided a basis
for determining the nature, timing and extent of risk assessment procedures,
identifying and assessing the risk of material misstatement and determining the
nature, timing and extent of further audit procedures. We used equity as a
basis for determining planning materiality because the Company's primary
performance measures for internal and external reporting are based on equity.
The basis was reduced from 2% to 1% as a result of risk factors associated with
external financing and the longer-term direction of the company.
Performance materiality
"Performance materiality" is the application of materiality at the individual
account or balance level. It is set at an amount to reduce to an appropriately
low level the probability that the aggregate of uncorrected and undetected
misstatements exceeds materiality.
Based on our risk assessment, together with our assessment of the Company's
overall control environment, our judgement was that overall performance
materiality (i.e. our tolerance for misstatement in an individual account or
balance) for the Company should be 50%. of materiality, namely $2.4 million
(2019: 75%. of materiality, namely $12.2 million). Although there is no history
of material misstatements, based on which our expectation of the likelihood of
misstatement in the future is low and we have a strong understanding of the
control environment, there were changes in circumstances or events outside the
normal course of business. As a result, we have increased the audit risk to
high (as there is a higher likelihood that misstatements may occur within the
Financial Statements) primarily as a result of the announcement made by the
Company in October 2019. Accordingly, we have reduced performance materiality
from 75% to 50%.
Our objective in adopting this approach was to ensure that total uncorrected
and undetected audit differences in the Financial Statements did not exceed our
materiality level.
Reporting threshold
"Reporting threshold" is an amount below which identified misstatements are
considered as being clearly trivial.
We agreed with the Audit Committee that we would report to them all audit
differences in excess of $0.24 million (2019: $0.8 million) which is set at 5%.
of planning materiality, as well as differences below that threshold that, in
our view, warranted reporting on qualitative grounds.
We evaluated any uncorrected misstatements against both the quantitative
measures of materiality discussed above and considering other relevant
qualitative considerations in forming our opinion.
Other information
The other information comprises the information included in the Annual Report,
other than the Financial Statements and our auditor's report thereon. The
Directors are responsible for the other information.
Our opinion on the Financial Statements does not cover the other information
and, except to the extent otherwise explicitly stated in this report, we do not
express any form of assurance conclusion thereon.
In connection with our audit of the Financial Statements, our responsibility is
to read the other information and, in doing so, consider whether the other
information is materially inconsistent with the Financial Statements or our
knowledge obtained in the audit or otherwise appears to be materially
misstated.
If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a material
misstatement in the Financial Statements or a material misstatement of the
other information. If, based on the work we have performed, we conclude that
there is a material misstatement of the other information, we are required to
report that fact.
We have nothing to report in this regard.
In this context, we also have nothing to report regarding our responsibility to
specifically address the following items in the other information and to report
as uncorrected material misstatements of the other information where we
conclude that those items meet the following conditions:
· Fair, balanced and understandable set out in the statement given by the
Directors that they consider the Annual Report and Financial Statements taken
as a whole is fair, balanced and understandable and provides the information
necessary for Shareholders to assess the Company's performance, business model
and strategy, is materially inconsistent with our knowledge obtained in the
audit; or
· Audit committee reporting set out in the section describing the work of
the audit committee does not appropriately address matters communicated by us
to the audit committee; or
· Directors' statement of compliance with the UK Corporate Governance Code
set out in the parts of the Directors' statement required under the Listing
Rules relating to the Company's compliance with the UK Corporate Governance
Code containing provisions specified for review by the auditor in accordance
with Listing Rule 9.8.10R(2) do not properly disclose a departure from a
relevant provision of the UK Corporate Governance Code.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters in relation to
which the Companies (Guernsey) Law, 2008 requires us to report to you if, in
our opinion:
· proper accounting records have not been kept by the Company; or
· the financial statements are not in agreement with the Company's
accounting records and returns; or
· we have not received all the information and explanations we require for
our audit.
Responsibilities of directors
As explained more fully in the Directors' Responsibilities Statement, the
Directors are responsible for the preparation of the Financial Statements and
for being satisfied that they give a true and fair view, and for such internal
control as the Directors determine is necessary to enable the preparation of
Financial Statements that are free from material misstatement, whether due to
fraud or error.
In preparing the Financial Statements, the Directors are responsible for
assessing the Company's ability to continue as a going concern, disclosing, as
applicable, matters related to going concern and using the going concern basis
of accounting unless the Directors either intend to liquidate the Company or to
cease operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the Financial
Statements as a whole are free from material misstatement, whether due to fraud
or error, and to issue an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on
the basis of these Financial Statements.
A further description of our responsibilities for the audit of the Financial
Statements is located on the Financial Reporting Council's website at https://
www.frc.org.uk/auditorsresponsibilities. This description forms part of our
auditor's report.
Use of our report
This report is made solely to the Company's members, as a body, in accordance
with Section 262 of the Companies (Guernsey) Law, 2008. Our audit work has been
undertaken so that we might state to the Company's members those matters we are
required to state to them in an auditor's report and for no other purpose. To
the fullest extent permitted by law, we do not accept or assume responsibility
to anyone other than the Company and the Company's members as a body, for our
audit work, for this report, or for the opinions we have formed.
Andrew Jonathan Dann, FCA
for and on behalf of Ernst & Young LLP
Guernsey, Channel Islands
17 June 2020
1. The maintenance and integrity of the Company's website is the sole
responsibility of the Directors; the work carried out by the auditors does not
involve consideration of these matters and, accordingly, the auditor accepts no
responsibility for any changes that may have occurred to the Financial
Statements since they were initially presented on the website.
2. Legislation in Guernsey governing the preparation and dissemination of
Financial Statements may differ from legislation in other jurisdictions.
Independent Auditors Report for audit conducted in accordance with auditing
standards generally accepted in the United States1
To The Directors of JZ Capital Partners Limited
We have audited the accompanying financial statements of JZ Capital Partners
Limited (the "Company"), which comprise the statement of financial position as
of 29 February, 2020, and the related statements of comprehensive income,
changes in equity and cash flows for the year then ended, and the related notes
to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these
financial statements in conformity with International Financial Reporting
Standards as adopted by the European Union ("IFRS"); this includes the design,
implementation, and maintenance of internal control relevant to the preparation
and fair presentation of financial statements that are free of material
misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
Financial Statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the Financial Statements. The procedures selected
depend on the auditor's judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control
relevant to the Company's preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control. Accordingly, we express no
such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting
estimates made by management, as well as evaluating the overall presentation of
the financial statements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of JZ Capital Partners Limited at
29 February 2020, and the results of its operations, changes in its equity, and
its cash flows for the year then ended, in conformity with IFRS.
Ability to continue as a going concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 in the
financial statements, the Company has stated that there are material
uncertainties in relation to the timing of realising assets, the potential
impact on the repayment of the Guggenheim facility together with the impact of
COVID-19 on the valuation of the Company's investment portfolio and related
covenants, which casts significant doubt over the ability of the Company to
continue as a Going Concern.
Management's evaluation of the events and conditions and management's plans
regarding these matters are also described in Note 3. The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
Our opinion is not modified in respect of this matter.
Supplementary Information
Our audit was conducted for the purpose of forming an opinion on the financial
statements as a whole. The accompanying Supplemental U.S. GAAP Disclosures and
Certain Regulatory Disclosures are presented for the purposes of additional
analysis and are not a required part of the financial statements. Such
information is the responsibility of management and was derived from and
relates directly to the underlying accounting and other records used to prepare
the financial statements. The information has been subjected to the auditing
procedures applied in the audit of the financial statements and certain
additional procedures, including comparing and reconciling such information
directly to the underlying accounting and other records used to prepare the
financial statements or to the financial statements themselves, and other
additional procedures in accordance with auditing standards generally accepted
in the United States of America. In our opinion, the information is fairly
stated, in all material respects, in relation to the financial statements as a
whole.
Ernst & Young LLP
Guernsey, Channel Islands
17 June 2020
1In order to comply with the U.S. Securities and Exchange Commission's custody
rule, an audit opinion was requested, by the Company's Investment Adviser,
which satisfies the requirements of auditing standards generally accepted in
the United States.
Statement of Comprehensive Income
For the Period from 1 March 2019 to 29 February 2020
Year Ended Year Ended
29 February 28 February
2020 2019
Note US$'000 US$'000
Income and investment and other gains
Investment income 8 33,264 28,823
Bank and deposit interest 455 525
Realisations from investments held in escrow 27 5,559 3,303
accounts
Net foreign currency exchange gains/(loss) 664 (1,354)
Gain on financial liabilities at fair value 14 4,388 5,696
through profit or loss
44,330 36,993
Expenses and losses
Net loss on investments at fair value 6 (316,506) (2,773)
through profit or loss
Expected credit losses 7 (29,318) (75)
Investment Adviser's base fee 10 (15,224) (16,733)
Investment Adviser's incentive fee 10 35,880 (2,161)
Administrative expenses 10 (3,708) (2,641)
Directors' remuneration 10 (421) (458)
(329,297) (24,841)
Operating (loss)/profit (284,967) 12,152
Finance costs 9 (20,460) (18,987)
Loss before taxation (305,427) (6,835)
Withholding taxes 11 878 -
Loss for the year (304,549) (6,835)
Weighted average number of Ordinary shares 24 79,053,060 82,757,833
in issue during the year
Basic loss per Ordinary share 24 (385.25)c (8.26)c
Diluted loss per Ordinary share 24 (385.25)c (10.52)c
The format of the Statement of Comprehensive Income has changed from prior
years in that it now presents income in one column format rather than a split
between capital and revenue.
The accompanying notes form an integral part of the Audited Financial
Statements.
Statement of Financial Position
As at 29 February 2020
29 February 28 February
2020 2019
Note US$'000 US$'000
Assets
Investments at fair value through profit or 12 661,200 1,014,316
loss
Loans at amortised cost 12 30,972 58,012
Other receivables 13 119 1,286
Cash at bank 52,912 50,994
Total Assets 745,203 1,124,608
Liabilities
Zero Dividend Preference (2022) shares 15 64,510 63,838
Convertible Unsecured Loan Stock 14 49,886 54,274
Loans payable 16 150,362 149,227
Investment Adviser's incentive fee 10 2,307 42,771
Investment Adviser's base fee 10 1,179 2,102
Other payables 17 1,225 2,134
Total Liabilities 269,469 314,346
Equity
Share capital 18 216,625 246,604
Other reserve 20 353,528 353,528
Retained (deficit)/earnings 20 (94,419) 210,130
Total Equity 475,734 810,262
Total Liabilities and Equity 745,203 1,124,608
Number of Ordinary shares in issue at year end 18 77,474,175 80,666,838
Net Asset Value per Ordinary share 26 $6.14 $10.04
These Audited Financial Statements were approved by the Board of Directors and
authorised for issuance on
17 June 2020. They were signed on its behalf by:
David Macfarlane
Chairman
Sharon Parr
Director
The accompanying notes form an integral part of the Audited Financial
Statements.
Statement of Changes in Equity
For the Year Ended 29 February 2020
Retained
Share Other Earnings/
Capital Reserve (Deficit) Total
Note US$'000 US$'000 US$'000 US$'000
Balance as at 1 March 2019 246,604 353,528 210,130 810,262
Loss for the year - - (304,549)
(304,549)
Buy back of Ordinary shares 18 (29,979) - - (29,979)
Balance at 29 February 2020 216,625 353,528 (94,419) 475,734
Comparative for the Year ended 28 February 2019
Share Other Retained
Capital Reserve Earnings Total
US$'000 US$'000 US$'000 US$'000
Balance as at 1 March 2018 265,685 353,528 218,360 837,573
Impact of adoption of IFRS 9 - - (1,395) (1,395)
Adjusted Balance as at 1 March 265,685 353,528 216,965 836,178
2018
Loss for the year - - (6,835) (6,835)
Buy back of Ordinary shares 18 (19,081) - - (19,081)
Balance at 28 February 2019 246,604 353,528 210,130 810,262
The format of the Statement of Changes in Equity has changed from prior periods
in that it now reflects the one column income presentation in the Statement of
Comprehensive Income format. The Company's profit/loss are now posted to
retained earnings rather than individual revenue/capital reserves.
The accompanying notes form an integral part of the Audited Financial
Statements
Statement of Cash Flows
For the Year Ended 29 February 2020
29 February 28 February
2020 2019
Note US$'000 US$'000
Cash flows from operating activities
Cash inflows
Realisation of investments 140,296 215,582
Maturity of treasury bills 6,700 78,099
Escrow receipts received 5,559 3,303
Interest received from unlisted investments 1,669 2,076
Income distributions received from investments 1,781 -
Bank Interest received 455 525
Cash outflows
Direct investments and capital calls (77,110) (194,431)
Purchase of treasury bills (6,706) (6,579)
Real estate deposit paid - (700)
Investment Adviser's base fee paid (16,147) (16,856)
Investment Adviser's incentive fee paid (4,584) (996)
Other operating expenses paid (4,188) (3,174)
Foreign exchange loss realised (626) (171)
Net cash inflow before financing activities 47,099 76,678
Cash flows from financing activities
Finance costs paid:
* Convertible Unsecured Loan Stock (2,956) (3,155)
* Loan Payable (12,436) (12,142)
Buy back of Ordinary shares 18 (29,979) (19,081)
Net cash outflow from financing activities (45,371) (34,378)
Increase in cash and cash equivalents 1,728 42,300
Reconciliation of Net Cash Flow to Movements in Cash and
Cash Equivalents
Cash at bank at beginning of year 50,994 9,000
Increase in cash and cash equivalents as above 1,728 42,300
Unrealised foreign exchange movements on cash at 190 (306)
bank
Cash at bank at year end 52,912 50,994
Reconciliation of Cash Inflows from Realisations to numbers presented in the
Chairman's Statement, Investment Adviser's Report and Note 12 of the financial
statements
Year Ended Year Ended
29 February 28 February
2020 2019
US$'000 US$'000
Proceeds from realisation and repayment of 146,996 268,694
investments (note 12)
Less proceeds from maturity of treasury bills (6,700) (78,099)
Proceeds received post year end from realisation of - 24,987
treasury bills
Cash inflow from realisation of unlisted investments 140,296 215,582
(above)
Adjusted to reconcile to totals quoted in Annual
Report
Cash inflow from realisation of unlisted investments 140,296
(above)
Escrow receipts 5,559
Income received from distributions/realisations 2,322
148,177
The accompanying notes form an integral part of the Audited Financial
Statements.
Notes to the Annual Financial Statements
1. General Information
JZ Capital Partners Limited ("JZCP" or the "Company") is a Guernsey domiciled
closed-ended investment company which was incorporated in Guernsey on 14 April
2008 under the Companies (Guernsey) Law, 1994. The Company is now subject to
the Companies (Guernsey) Law, 2008. The Company is classified as an authorised
fund under the Protection of Investors (Bailiwick of Guernsey) Law 1987. The
Company's Capital consists of Ordinary shares, Zero Dividend Preference ("ZDP")
shares and Convertible Unsecured Loan Stock ("CULS"). The Company's shares
trade on the London Stock Exchange's Specialist Fund Segment ("SFS").
The Company's Investment Policy is to target predominantly private investments,
seeking to back management teams to deliver on attractive investment
propositions. In executing its strategy, the Company takes a long term view.
The Company seeks to invest directly in its target investments, although it may
also invest through other collective investment vehicles. The Company may also
invest in listed investments, whether arising on the listing of its private
investments or directly. The Investment Adviser is able to invest globally but
with a particular focus on opportunities in the United States and Europe. Post
year end, the Board has proposed a new investment policy, to be formally
adopted, whereby the Company will make no further investments outside of its
existing obligations or to the extent that investment may be made to support
selected existing portfolio investments. The intention is to realise the
maximum value of the Company's investments and, after repayment of all debt, to
return capital to shareholders.
The Company is currently mainly focused on investing in the following areas:
(a) small or micro-cap buyouts in the form of debt and equity and preferred
stock in both the US and Europe; and
(b) real estate interests.
The Investment Adviser takes a dynamic approach to asset allocation and, though
it doesn't expect to, in the event that the Company were to invest 100% of
gross assets in one area, the Company will, nevertheless, always seek to
maintain a broad spread of investment risk. Exposures are monitored and managed
by the Investment Adviser under the supervision of the Board.
The Company has no direct employees. For its services, the Investment Adviser
receives a management fee and is also entitled to performance related fees
(Note 10). The Company has no ownership interest in the Investment Adviser.
During the year under review the Company was administered by Northern Trust
International Fund Administration Services (Guernsey) Limited.
2. Basis of Accounting and Significant Accounting Policies
Statement of compliance
The financial statements have been prepared in accordance with the
International Financial Reporting Standards as adopted by the European Union
("IFRS"), which comprise standards and interpretations approved by the
International Accounting Standards Board ("IASB") together with applicable
legal and regulatory requirements of Guernsey Law, and the SFS.
Basis of preparation
The financial statements of the Company have been prepared in accordance with
IFRS. The financial statements have been prepared on a historical-cost basis,
except for financial assets and financial liabilities held at fair value
through profit or loss ("FVTPL").
The financial statements are presented in US dollars, which is the functional
currency of the Company, and all values are rounded to the nearest thousand
dollars ($000), except where otherwise indicated.
The format of the Statement of Comprehensive Income has changed from prior
years in that it now presents profit/loss in one column format rather than a
split between capital and revenue. This change is also reflected in the format
of the Statement of Changes in Equity, the Company's profit/loss is now posted
to retained earnings/deficit rather than individual revenue/capital reserves.
The Company now presents its Statement Of Cash Flows statement on a
direct-basis rather the indirect basis of previous years.
Both of the above changes were made to improve and simplify presentation.
The Company's Statement of Financial Position's is presented in order of
liquidity, which provides information in a format that is deemed relevant to
the Company.
New and amended standards and interpretations
The Company applied, for the first time, certain standards and amendments,
which are effective for annual periods beginning on or after 1 January 2019.
The new standards or amendments to existing standards and interpretations,
effective from 1 March 2019, did not have a material impact of the Company's
Financial Statements. The Company has assessed the impact of standards issued
but not yet applicable, and have concluded that they will not have a
material impact on the Financial Statements.
Changes in accounting policy and disclosure
The accounting policies adopted in the preparation of these audited annual
financial statements have been consistently applied during the year and are
consistent with those of the previous year, unless otherwise stated.
Significant Accounting Policies
Financial instruments
Financial assets and financial liabilities are offset and the net amount is
reported in the Statement of Financial Position if, and only if, there is a
currently enforceable legal right to offset the recognised amounts and there is
an intention to settle on a net basis, or to realise the asset and settle the
liability simultaneously. This is generally not the case with master netting
agreements unless one party to the agreement defaults and the related assets
and liabilities are presented gross in the statement of financial position.
In accordance with IFRS 9, the Company classifies its financial assets and
financial liabilities at initial recognition into the categories of financial
assets and financial liabilities discussed below.
Financial assets
The Company classifies its financial assets as subsequently measured at
amortised cost or measured at FVTPL on the basis of both:
· The entity's business model for managing the financial assets; and
· The contractual cash flow characteristics of the financial asset.
i) Financial assets measured at amortised cost
A debt instrument is measured at amortised cost if it is held within a business
model whose objective is to hold financial assets in order to collect
contractual cash flows and its contractual terms give rise on specified dates
to cash flows that are solely payments of principal and interest on the
principal ("SPPI") amount outstanding. The Company includes in this category
loans at amortised cost, short-term non-financing receivables and other
receivables.
ii) Financial assets measured at FVTPL
A financial asset is measured at fair value through profit or loss if:
· Its contractual terms do not give rise to cash flows on specified dates
that are SPPI on the principal amount outstanding; or
· It is not held within a business model whose objective is either to
collect contractual cash flows, or to both collect contractual cash flows and
sell; or
· At initial recognition, it is irrevocably designated as measured at FVPL
when doing so eliminates or significantly reduces a measurement or recognition
inconsistency that would otherwise arise from measuring assets or liabilities
or recognising the gains and losses on them on different bases.
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
ii a) Classification
Financial assets classified at FVTPL are those that are managed and their
performance evaluated on a fair value basis in accordance with the Company's
investment strategy as documented in its prospectus.
The Company includes in this category:
· Investments in the equity and preferred stock of micro cap, real estate
and other investments;
· Investments in subsidiaries and associates: Investment in subsidiaries: In
accordance with the exception under IFRS10, the Company does not consolidate
subsidiaries in the financial statements unless the subsidiary is not itself an
investment entity and its main purpose and activities are providing services
that relate to the Company's investment activities. The Company has no
consolidated subsidiaries.
· Investment in associates: In accordance with the exemption in IAS28
Investments in Associates and Joint Ventures, the Company does not account for
its investments in associates using the equity method. Instead, the Company has
elected to measure its investments in associates at FTVPL.
· Investments in debt instruments which include investments that are held
under a business model to manage them on a fair value basis for investment
income and fair value gains.
ii b) Measurement
Investments made by the Company are measured initially and subsequently at fair
value, with changes in fair value taken to the Statement of Comprehensive
Income. Transaction costs are expensed in the Statement of Comprehensive Income
in the year in which they arise for those financial instruments classified at
FVTPL.
ii c) Fair value estimate
The fair value of financial assets traded in active markets (such as publicly
traded securities) is based on quoted market prices at the Statement of
Financial Position date. The quoted market price used for financial assets held
by the Company is the bid price.
Unquoted preferred shares, micro cap loans, unquoted equities and equity
related securities investments are typically valued by reference to their
enterprise value, which is generally calculated by applying an appropriate
multiple to the last twelve months' earnings before interest, tax, depreciation
and amortisation ("EBITDA"). In determining the multiple, the Directors
consider inter alia, where practical, the multiples used in recent transactions
in comparable unquoted companies, previous valuation multiples used and where
appropriate, multiples of comparable publicly traded companies. In accordance
with the International Private Equity and Venture Capital Association
("IPEVCA") valuation guidelines, a marketability discount is applied which
reflects the discount that in the opinion of the Directors, market participants
would apply in a transaction in the investment in question.
The valuation techniques to derive the fair value of real estate interests and
other investments are detailed in Note 5.
iii) Other receivables
Other receivables do not carry any interest and are short-term in nature and
are accordingly stated at their nominal value as reduced by appropriate
allowances for estimated irrecoverable amounts.
iv) Cash on deposit and cash and cash equivalents
Cash on deposit comprises bank deposits with an original maturity of three
months or more. Cash and cash equivalents comprise bank balances and cash held
by the Company, including short-term bank deposits with a maturity of three
months or less. Cash also includes amounts held in interest-bearing overnight
accounts.
Financial liabilities
For financial liabilities designated as FVTPL using the fair value option
("FVO"), the amount of change in the fair value of such financial liabilities
that is attributable to changes in the Company's credit risk must be presented
in Other Comprehensive Income ("OCI"). The remainder of the change in fair
value is presented in profit or loss, unless presentation in OCI of the fair
value change in respect of the liability's credit risk would create or enlarge
an accounting mismatch in profit or loss.
Financial liabilities are classified according to the substance of the
contractual arrangements entered into. Financial liabilities, other than CULS
(see overleaf) are recorded at the amount of proceeds received, net of issue
costs.
Financial liabilities may be designated at fair value through profit or loss
rather than stated at amortised cost, when the Board have considered the
appropriate accounting treatment for the specific liability.
i) Financial liabilities measured at FVTPL
Convertible Unsecured Loan Stock ("CULS")
The CULS issued by the Company is denominated in a currency (GBP) other than
the Company's functional currency and hence fails the 'fixed-for-fixed'
criteria for equity classification. Rather than account for the host debt and
embedded conversion element separately, the Company elects to account for the
CULS in its entirety in accordance with the IFRS 9 'Fair Value Option'.
The CULS' fair value is deemed to be the listed offer price at the year end.
CULS is translated at the exchange rate at the reporting date and both
differences in fair value due to the listed offer price and exchange rates are
recognised in the Statement of Comprehensive Income.
ii) Financial liabilities measured at amortised cost
This category includes all financial liabilities, other than those measured at
fair value through profit or loss. The Company includes in this category, Zero
Dividend Preference ("ZDP") shares, Guggenheim loan and other short-term
payables.
a) Zero Dividend Preference ("ZDP") shares
ZDP shares meet the definition of a financial liability in accordance with IAS
32 Financial Instruments: Presentation, as the shares are redeemable at a fixed
date and holders are entitled to a fixed return. ZDP shares are recorded at
amortised cost using the effective interest rate method.
b) Guggenheim loan
The loan is recorded at amortised cost using the effective interest rate
method.
c) Other payables
Other payables (include the accrual of Investment Adviser's fees) are
classified as financial liabilities at amortised cost. Other payables are not
interest-bearing and are stated at their nominal value.
Equity
Equity is classified according to the substance of the contractual arrangements
entered into. An equity instrument is any contract that evidences a residual
interest in the assets of the Company after deducting all of its liabilities.
Equity are recorded at the amount of proceeds received, net of issue costs.
Ordinary Shares are classified as equity in accordance with IAS 32 - "Financial
Instruments: Presentation" as these instruments include no contractual
obligation to deliver cash and the redemption mechanism is not mandatory.
Interest revenue
Interest revenues are recognised in the Statement of Comprehensive Income for
all interest-bearing financial instruments using the effective interest method.
Dividend income
Dividend income is recognised when the Company's right to receive payment is
established. When there is reasonable doubt that income due to be received will
actually be received, such income is not accrued until it is clear that its
receipt is probable. Where, following an accrual of income, receipt becomes
doubtful, the accrual is either fully or partly written off until the
reasonable doubt is removed.
Escrow accounts
Where investments are disposed of, the consideration given may include
contractual terms requiring that a percentage of the consideration is held in
an escrow account pending resolution of any indemnifiable claims that may arise
and as such the value of these escrow amounts is not immediately known. The
Company records gains realised on investments held in escrow in the Statement
of Comprehensive Income following confirmation that any such indemnifiable
claims have been resolved and none is expected in the future.
Taxation
The company has been granted Guernsey tax exempt status in accordance with The
Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 (as amended). However, in
some jurisdictions, investment income and capital gains are subject to
withholding tax deducted at the source of the income. The Company presents the
withholding tax
separately from the gross investment income in the Statement of Comprehensive
Income.
3. Estimates and Judgements
The preparation of the Company's financial statements requires management to
make estimates, judgements, and assumptions that affect the reported amounts
recognised in the financial statements. However, uncertainty about these
assumptions and estimates could result in outcomes that could require a
material adjustment to the carrying amount of the asset or liability affected
in future periods.
The following are the key judgements and other key sources of estimation
uncertainty at the end of the reporting year, that have a significant risk of
causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year:
Estimates
Fair Value of Investments at Fair Value Through Profit or Loss
Certain investments are classified as FVTPL, and valued accordingly, as
disclosed in Note 2. The key source of estimation uncertainty is on the
valuation of unquoted equities, equity-related securities and real estate
investments.
In reaching its valuation of the unquoted equities, equity-related securities
and real estate investments the key estimates management has to make are those
relating to the multiples, discount factors and real estate valuation factors
(Note 5) used in the valuation models.
Judgements
Assessment as an Investment Entity
Entities that meet the definition of an investment entity within IFRS 10 are
required to measure their subsidiaries at fair value through profit or loss
rather than consolidate them. The criteria which define an investment entity
are as follows:
· An entity that obtains funds from one or more investors for the purpose of
providing those investors with investment services;
· An entity that commits to its investors that its business purpose is to
invest funds solely for returns from capital appreciation, investment income or
both; and
· An entity that measures and evaluates the performance of substantially all
of its investments on a fair value basis.
The Company has a wide range of investors; through its Investment Adviser
management services it enables investors to access private equity, real estate
and similar investments.
The Company's objective to provide a "significant capital appreciation" is
consistent with that of an investment entity. The Company has clearly defined
exit strategies for each of its investment classes, these strategies are again
consistent with an investment entity.
In determining the fair value of unlisted investments JZCP follows the
principles of IPEVCA valuation guidelines. The Valuation Guidelines have been
prepared with the goal that Fair Value measurements derived when using these
Valuation Guidelines are compliant with IFRS. The Board of JZCP evaluates the
performance of unlisted investments quarterly on a fair value basis. Listed
investments are recorded at Fair Value in accordance with IFRS being the last
traded market price where this price falls within the bid-ask spread.
The Board has also concluded that the Company meets the additional
characteristics of an investment entity, in that it has more than one
investment; the investments are predominantly in the form of equities and
similar securities and it has more than one investor.
Investment in Associates
An associate is an entity over which the Company has significant influence. An
entity is regarded as a subsidiary only if the Company has control over its
strategic, operating and financial policies and intends to hold the investment
on a long-term basis for the purpose of securing a contribution to the
Company's activities.
In accordance with the exemption within IAS 28 Investments in Associates and
Joint Ventures, the Company does not account for its investment in EuroMicrocap
Fund 2010, L.P., JZI Fund III GP, L.P., Spruceview Capital Partners, LLC and
Orangewood Partners Platform LLC using the equity method. Instead, the Company
has elected to measure its investment in its associates at FVTPL.
The Directors have determined that although the Company has over 50% economic
interest in EuroMicrocap Fund 2010, L.P., JZI Fund III GP, L.P. and Orangewood
Partners Platform LLC, it does not have the power to govern the financial and
operating policies of the entities, but does have significant influence over
the strategic, operating and financial policies.
Expected Credit Losses ("ECL")
Certain financial assets are classified as Loans at Amortised cost, and valued
accordingly as disclosed in note 2. The key source of estimation uncertainty is
on the various default scenarios for prescribed future periods and the
probability of each scenario occurring which are considered when estimating the
ECLs.
Going Concern
A fundamental principle of the preparation of financial statements in
accordance with IFRS is the judgement that an entity will continue in existence
as a going concern for a period of at least 12 months from signing of the
financial statements, which contemplates continuity of operations and the
realisation of assets and settlement of liabilities occurring in the ordinary
course of business.
In the context of the delay in realising assets as previously announced, the
potential impact on the repayment of the Guggenheim facility and the CULS
together with COVID-19, there are material uncertainties which casts
significant doubt on the ability of the Company to continue as a going concern.
However the financial statements have been prepared on a going concern basis
for the reasons set out below and as the Directors, with recommendation from
the Audit Committee, have a reasonable expectation that the Company has
adequate resources to continue in operational existence for the foreseeable
future.
In reaching its conclusion, the Board have considered the risks that could
impact the Company's liquidity over the period to 31 July 2021. This period,
which is longer than the required period of 12 months, has been considered to
be relevant due to the repayment date for the Company's CULS being only 43 days
after the 12 month period.
As part of their assessment the Audit Committee highlighted the following key
considerations:
1. Whether, the Company can generate sufficient cash through realisations of
its underlying investments to discharge its liabilities over the period to 31
July 2021
2. Whether, in the event that the realisation events previously referred to do
not materialise before the expiration of the current loan facility and the
repayment date of the CULS, the Company is able to implement an alternative
plan for refinancing the loan facility within the required timeframe
3. COVID-19
4. Valuation losses incurred by the Company during the year ended 29 February
2020
1. Whether, the Company can generate sufficient cash through realisations of
its underlying investments to discharge its liabilities over the period to 31
July 2021
As at 31 May 2020, the Company had cash and cash equivalents of approximately
$43 million which offers over 6 months of liquidity cover assuming no income
from realisations and making payments as forecast for follow-on investments,
debt financing and ongoing expenses and the retainment of $15 million cash
required for current loan covenant.
The Company has two major debt obligations to settle towards the end of the
going concern period being:
i. the Loan facility with Guggenheim of approximately $150 million due for
settlement on 12 June 2021; and
ii. the settlement of its CULS on 30 July 2021 for GBP38.9 million
(approximately $50 million).
It is anticipated that the liquidity required to settle the debt obligations
mentioned above, and other ongoing obligations in 2021, will be generated from
realisations within the going concern period. These forecast realisations
include two anticipated secondary sales of several micro-cap companies and also
certain other assets. Total realisation proceeds of approximately $260 million
are expected from the aforementioned events.
Prior to the COVID-19 pandemic and the resulting lockdown, some of these
realisation events were close to completion. Whilst the Board still expects
these transactions to complete, the timing of the closure of the transactions
depends largely on the length and severity of the COVID-19 lockdown. The
Directors have also considered the levels of realisation proceeds historically
generated by the Company's micro-cap portfolios as well as the accuracy of
previous forecasts whilst concluding on the accuracy of the forecast.
2. Whether, in the event that the realisation events referred to in (1) do not
materialise before the expiration of the current loan facility and the
repayment of the CULS, the Company is able to implement alternative plans for
refinancing within the required timeframe.
JZAI personnel manage the relationship with the Company's lender, monitor
compliance with loan terms and covenants and report to the Board on matters
arising. Throughout the year ended 29 February 2020, the Company has continued
to be in compliance with covenant terms and made all scheduled interest
payments on time. Post year end, the Company obtained agreement from the
parties to the loan facility for an extension to the time for delivery of this
annual report, the release of which was delayed on account of COVID-19.
Discussions are also ongoing regarding amendments to the loan agreement to
ensure any risk of breach of covenant in light of the uncertainties caused by
COVID-19 over post year end valuations is avoided.
3. COVID-19
The Board recognise the high degree of uncertainty in respect of the dynamic
situation which has unfolded with COVID-19 and is unable to currently assess
the likely duration and exact impact to the Company of the outbreak.
Whilst the effect of Covid-19 on the valuation of the Company's investment
portfolio cannot yet be estimated, there is an expectation that there will be
further write downs within the real estate portfolio following the interim
appraisals and also a lengthy lockdown period, especially in the US, could
adversely affect the valuation of the company's micro cap portfolio.
Post year end, the Board has received regular updates from the Investment
Adviser of the impact of COVID-19 on the individual investments within the
Company's investment portfolio. To enable the Board to assess the ongoing risk
to the Company, information has been provided on the following business aspects
of portfolio companies:
· Demand for product/service;
· Supply Chain & operational issues;
· Flexibility and adaptability of workforce to perform duties;
· Financial Strength of Company - Liquidity Issues; and
· Support received from Government programmes.
The pandemic has unfortunately created an environment where the completion of
corporate transactions has predominantly stalled. Therefore, the Company have
had to consider the effect on liquidity. The Board have concluded that they
have a reasonable expectation that delays in scheduled realisations will be
short-lived and completed as financial markets return to a level of normality.
Future valuation losses may impact compliance with covenants placed on the
Company's loan facility which require a 4x asset value cover. The Board note
the current collateral/loan ratio is 4.5x and a further fall in the NAV of
approx.
$70 million would see the required 4x cover of this loan covenant breached.
Discussions are ongoing between the Company and Guggenheim, in part regarding
the amendment of the loan agreement to ensure any risk of breach of covenant is
avoided in light of the uncertainties caused by COVID-19 over post year end
valuations.
4. Valuation losses incurred by the Company during the year ended 29 February
2020
The total loss attributable to Ordinary shareholders for the year ended 29
February 2020 is $304.5 million. As previously announced towards the latter
half of 2019, the Company has dramatically revised downwards its valuation of
the Company's real estate portfolio.
The Board have assessed that these losses, as they are valuation related, have
not impacted or created a material uncertainty around the Company's ability to
continue in existence as a going concern.
Going Concern Conclusion
After careful consideration and based on the reasons outlined above, the Board
are satisfied, as of today's date, that it is appropriate to adopt the going
concern basis in preparing the financial statements and they have a reasonable
expectation that the Company will continue in existence as a going concern for
the period ending 31 July 2021.
However, of the four key considerations identified above the Board have
concluded that three of them create material uncertainties which cast
significant doubt over the ability of the Company to continue as a Going
Concern, being:
· Whether, the Company will be able to generate sufficient realisation
proceeds before the expiration of the current loan facility and repayment of
the CULS;
· In the event sufficient realisation proceeds referenced above are not
generated the Company is able to implement alternative plans within a timetable
agreed with its lenders; and
The full impact of COVID-19 on the valuation of the Company's investment
portfolio and related loan covenants is not currently known.The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
4. Segment Information
The Investment Manager is responsible for allocating resources available to the
Company in accordance with the overall business strategies as set out in the
Investment Guidelines of the Company. The Company is organised into the
following segments:
· Portfolio of US micro-cap investments
· Portfolio of European micro-cap investments
· Portfolio of Real estate investments
· Portfolio of Other investments - (not falling into above categories)
The investment objective of each segment is to achieve consistent medium-term
returns from the investments in each segment while safeguarding capital by
investing in a diversified portfolio.
Investments in treasury bills and corporate bonds are not considered as part of
the investment strategy and are therefore excluded from this segmental
analysis.
Segmental Profit/(Loss)
For the year ended 29 February 2020
US European Real Other
Micro-Cap Micro-Cap Estate Investments Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Interest revenue 27,372 4,499 (454) - 31,417
Other portfolio income 560 1,221 - - 1,781
Total segmental 27,932 5,720 (454) - 33,198
revenue
Net gain/(loss) on 12,459 1,941 (330,906) - (316,506)
investments at FVTPL
Expected credit losses - (29,318) - - (29,318)
Realisations from 5,559 - - - 5,559
investments held in
Escrow
Withholding tax (126) - - 1,004 878
Investment Adviser's (6,454) (1,583) (5,860) (307) (14,204)
base fee
Investment Adviser's - - 35,880 - 35,880
capital incentive fee1
Total segmental 39,370 (23,240) (301,340) 697 (284,513)
operating profit/(loss)
For the year ended 28 February 2019
US European Real Other
Micro-Cap Micro-Cap Estate Investments Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Interest revenue 22,135 6,486 142 - 28,763
Total segmental 22,135 6,486 142 - 28,763
revenue
Net gain/(loss) on 16,686 7,053 (26,512) - (2,773)
investments at FVTPL
Expected credit losses - (75) - - (75)
Realisations from 3,303 - - - 3,303
investments held in
Escrow
Investment Adviser's (6,725) (1,772) (6,852) (255) (15,604)
base fee
Investment Adviser's (8,074) 637 5,291 (15) (2,161)
capital incentive fee1
Total segmental 27,325 12,329 (27,931) (270) 11,453
operating profit/(loss)
1The capital incentive fee is allocated across segments where a realised or
unrealised gain or loss has occurred. Segments with realised or unrealised
losses are allocated a credit pro rata to the size of the loss and segments
with realised or unrealised gains are allocated a charge pro rata to the size
of the gain.
Certain income and expenditure is not considered part of the performance of an
individual segment. This includes net foreign exchange gains, interest on cash,
finance costs, management fees, custodian and administration fees, directors'
fees and other general expenses.
The following table provides a reconciliation between total segmental operating
profit and operating profit.
29.2.2020 28.2.2019
US$ '000 US$ '000
Total Segmental Operating (Loss)/Profit (284,513) 11,453
Gain on financial liabilities at fair value through profit or loss 4,388 5,696
Net foreign exchange gain/(loss) 664 (1,354)
Interest on treasury notes and corporate bonds 66 60
Interest on cash 455 525
Fees payable to investment adviser based on non-segmental assets (1,020) (1,129)
Expenses not attributable to segments (4,129) (3,099)
Withholding tax (878) -
Operating (Loss)/Profit (284,967) 12,152
The following table provides a reconciliation between total segmental revenue
and Company revenue.
29.2.2020 28.2.2019
US$ '000 US$ '000
Total segmental revenue 33,198 28,763
Non-segmental revenue
Interest on treasury bills 66 60
Bank and deposit interest 455 525
Total revenue 33,719 29,348
Segmental Net Assets
At 29 February 2020
US European Real Other
Micro-Cap Micro-Cap Estate Investments Total
Segmental assets US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Investments at FVTPL 404,880 71,619 158,712 22,603 657,814
Loans at amortised - 30,972 - - 30,972
cost
Other receivables - - 80 - 80
Total segmental 404,880 102,591 158,792 22,603 688,866
assets
Segmental liabilities
Payables and accrued (3,290) (113) (501) (23) (3,927)
expenses
Total segmental (3,290) (113) (501) (23) (3,927)
liabilities
Total segmental net 401,590 102,478 158,291 22,580 684,939
assets
At 28 February 2019
US European Real Other
Micro-Cap Micro-Cap Estate Investments Total
Segmental assets US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Investments at FVTPL 478,970 70,686 443,044 18,302 1,011,002
Loans at amortised cost - 58,012 - - 58,012
Other receivables - - 1,275 - 1,275
Total segmental assets 478,970 128,698 444,319 18,302 1,070,289
Segmental liabilities
Payables and accrued (38,768) 1,321 (10,573) 1,850 (46,170)
expenses
Total segmental (38,768) 1,321 (10,573) 1,850 (46,170)
liabilities
Total segmental net 440,202 130,019 433,746 20,152 1,024,119
assets
Other receivables and prepayments are not considered to be part of individual
segment assets. Certain liabilities are not considered to be part of the net
assets of an individual segment. These include custodian and administration
fees payable, directors' fees payable and other payables and accrued expenses.
The following table provides a reconciliation between total segmental assets/
liabilities and total assets/liabilities.
29.2.2020 28.2.2019
US$ '000 US$ '000
Total Segmental Assets 688,866 1,070,289
Non Segmental Assets
Cash at bank 52,912 50,994
Treasury bills 3,386 3,314
Other receivables 39 11
Total Assets 745,203 1,124,608
Total Segmental Liabilities (3,927) (46,170)
Non Segmental Liabilities
Zero Dividend Preference (2022) shares (64,510) (63,838)
Convertible Unsecured Loan Stock (49,886) (54,274)
Loans payable (150,362) (149,227)
Other payables (784) (837)
Total Liabilities (269,469) (314,346)
Total Net Assets 475,734 810,262
5. Fair Value of Financial Instruments
The Company classifies fair value measurements of its financial instruments at
FVTPL using a fair value hierarchy that reflects the significance of the inputs
used in making the measurements. The financial assets valued at FVTPL are
analysed in a fair value hierarchy based on the following levels:
Level 1
Quoted prices (unadjusted) in active markets for identical assets or
liabilities.
Level 2
Those involving 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). For example, investments which
are valued based on quotes from brokers (intermediary market participants) are
generally indicative of Level 2 when the quotes are executable and do not
contain any waiver notices indicating that they are not necessarily tradable.
Another example would be derivatives such as interest rate swaps or forward
currency contracts where inputs are observable and therefore may also fall into
Level 2.
Level 3
Those involving inputs for the asset or liability that are not based on
observable market data (that is, unobservable inputs). Investments in JZCP's
portfolio valued using unobservable inputs such as multiples, capitalisation
rates, discount rates (see Quantitative information of significant unobservable
inputs and sensitivity analysis to significant changes in unobservable inputs
within Level 3 hierarchy table below) fall within Level 3.
Differentiating between Level 2 and Level 3 fair value measurements i.e.,
assessing whether inputs are observable and whether the unobservable inputs are
significant, may require judgement and a careful analysis of the inputs used to
measure fair value including consideration of factors specific to the asset or
liability.
The following table shows financial instruments recognised at fair value,
analysed between those whose fair value is based on:
Financial assets at 29 February 2020
Level 1 Level 2 Level 3 Total
US$ '000 US$ '000 US$ '000 US$ '000
US Micro-cap - - 404,880 404,880
European Micro-cap - - 71,619 71,619
Real Estate - - 158,712 158,712
Other Investments - - 22,603 22,603
Listed 3,386 - - 3,386
Investments
3,386 - 657,814 661,200
Financial assets at 28 February 2019
Level 1 Level 2 Level 3 Total
US$ '000 US$ '000 US$ '000 US$ '000
US Micro-cap - - 478,970 478,970
European Micro-cap - - 70,686 70,686
Real Estate - 443,044 443,044
Other Investments - - 18,302 18,302
Listed Investments 3,269 - - 3,269
3,269 - 1,011,002 1,014,271
Financial liabilities designated at fair value through profit or loss at
inception
Financial liabilities at 29 February 2020
Level 1 Level 2 Level 3 Total
US$ '000 US$ '000 US$ '000 US$ '000
Convertible Subordinated Unsecured Loan - 49,886 - 49,886
Stock
- 49,886 - 49,886
Financial liabilities at 28 February 2019
Level 1 Level 2 Level 3 Total
US$ '000 US$ '000 US$ '000 US$ '000
Convertible Subordinated Unsecured Loan 54,274 - - 54,274
Stock
54,274 - - 54,274
Transfers between levels
During the year, it was concluded that market transactions for the CULS do not
take place with sufficient frequency and volume to provide adequate pricing
information on an ongoing basis and therefore do not justify a Level 1
categorisation. Therefore, it is now considered the CULS are not traded in an
active market and are therefore categorised at Level 2 as defined by IFRS. The
transfer took place on 31 August 2019, based on the closing price at the date
of transfer being
GBP10.60 (total value GBP41.2 million or $50.2 million using the appropriate
exchange rate).
Valuation techniques
In valuing investments in accordance with IFRS, the Board follows the
principles as detailed in the IPEVCA guidelines. When fair values of listed
equity and debt securities at the reporting date are based on quoted market
prices or binding dealer price quotations (bid prices for long positions),
without any deduction for transaction costs, the instruments are included
within Level 1 of the hierarchy.
Investments for which there are no active markets are valued according to one
of the following methods:
Real estate
JZCP makes its real estate investments through a wholly-owned subsidiary, which
in turn owns interests in various residential, commercial, and development real
estate properties. The net asset value of the subsidiary is used for the
measurement of fair value. The underlying fair value of JZCP's Real Estate
holdings, however, is represented by the properties themselves. The Company's
Investment Adviser and Board review the fair value methods and measurement of
the underlying properties on a quarterly basis. Where available, the Company
will use third party appraisals on the subject property, to assist the fair
value measurement of the underlying property. Third-party appraisals are
prepared in accordance with the Appraisal and Valuation Standards (6th edition)
issued by the Royal Institution of Chartered Surveyors. Fair value techniques
used in the underlying valuations are:
- Use of comparable market values per square foot of properties in recent
transactions in the vicinity in which the property is located, and in similar
condition, of the relevant property, multiplied by the property's square
footage.
- Discounted Cash Flow ("DCF") analysis, using the relevant rental stream,
less expenses, for future periods, discounted at a Market Capitalisation ("MC")
rate, or interest rate.
- Relevant rental stream less expenses divided by the market
capitalization rate; this method approximates the enterprise value construct
used for non-real estate assets.
- Income capital approach using the relevant sell out analysis, less
expenses and costs.
For each of the above techniques third party debt is deducted to arrive at fair
value.
The valuations obtained in relation to the real estate portfolio are dated 31
December 2019 and were received in March 2020. In discussions after the year
end with the appraisers there was no indication that there may have been a
significant shift in values between 31 December and 29 February. Due to the
inherent uncertainties of real estate valuation, the values reflected in the
financial statements may differ significantly from the values that would be
determined by negotiation between parties in a sales transaction and those
differences could be material.
Post year end, effects of the COVID-19 crisis since then on values of the real
estate investments are expected to be significant and adverse although their
quantum cannot yet be estimated. Further appraisals will be commissioned to
establish the value of the real estate portfolio as at 31st August 2020, the
Company's half year end and the date to which the Interim Results for the
Company's financial year ending 28th February 2021 will be presented.
Unquoted preferred shares, unquoted equities and equity related
securities
Unquoted equities and equity related securities investments are classified in
the Statement of Financial Position as Investments at fair value through profit
or loss. These investments are typically valued by reference to their
enterprise value, which is generally calculated by applying an appropriate
multiple to the last twelve months' earnings before interest, tax, depreciation
and amortisation ("EBITDA"). In determining the multiple, the Board consider
inter alia, where practical, the multiples used in recent transactions in
comparable unquoted companies, previous valuation multiples used and where
appropriate, multiples of comparable publicly traded companies. In accordance
with IPEVCA guidelines, a marketability discount is applied which reflects the
discount that in the opinion of the Board, market participants would apply in a
transaction in the investment in question. The increase of the fair value of
the aggregate investment is reflected through the unquoted equity component of
the investment and a decrease in the fair value is reflected across all
financial instruments invested in an underlying company.
In respect of unquoted preferred shares the Company values these investments at
fair value by reference to the attributable enterprise value as the exit
strategy in respect to these investments would be a one tranche disposal
together with the equity component. The fair value of the investment is
determined by reference to the attributable enterprise value reduced by senior
debt and marketability discount.
Micro-cap loans
Investments in micro-cap debt are valued at fair value by reference to the
attributable enterprise value when the Company also holds an equity position in
the investee company.
When the Company invests in micro-cap loans and does not hold an equity
position in the underlying investee company these loans are valued at amortised
cost in accordance with IFRS 9 (Note 2). The carrying value at amortised cost
is considered to approximate to fair value.
Other Investments
Other investments at year end, comprise of mainly the Company's investment in
the asset management business -Spruceview Capital Partners ("Spruceview").
Spruceview is valued using a valuation model which considers both current
assets under management ("AUM") and the potential for new AUM.
Quantitative information of significant unobservable inputs and sensitivity
analysis to significant changes in unobservable inputs within Level 3 hierarchy
The significant unobservable inputs used in fair value measurement categorised
within Level 3 of the fair value hierarchy together with a quantitative
sensitivity as at 29 February 2020 and 28 February 2019 are shown below:
Value Valuation Unobservable Sensitivity Effect on Fair
29.2.2020 Value
US$'000 Technique input Range used US$'000
(weighted
average)
US micro-cap 404,880 EBITDA Average EBITDA 6.5% - 16.3% -0.5x/+0.5x (32,240) 33,918
investments Multiple Multiple of (8.7%)
Peers
Discount to 10% - 30% +5%/-5% (39,497) 40,898
Average (17%)
Multiple
European 71,619 EBITDA Average EBITDA 6.7x - 14.0x -0.5x / (4,210) 4,210
micro-cap Multiple Multiple of (10.0x) +0.5x
investments Peers
Discount to 3% - 58% +5% /-5% (4,380) 4,380
Average (16%)
Multiple
Real estate 73,126 Comparable Market Value $286 - -10%/+10% 22,717
1,2,3 Sales Per Square $1,964 (21,188)
Foot ($795) per
sq ft
45,283 DCF Model/ Capitalisation 5.25%-5.75% +50bps/ 27,497
Income Rate (5.5%) -50bps (19,797)
Approach Discount Rate 6.25%-7.50%
(6.5%)
32,518 Cap Rate/ Capitalisation 4.75%-6.0% +50bps/ (13,671) 16,084
Income Rate (5.75%) -50bps
Approach
Other 20,338 AUM AUM $3.2 Bn -10%/+10% (4,065) 4,065
investments Approach
% Applied to 2.6% -10%/+10% (2,034) 2,034
AUM
Value Valuation Unobservable Range Sensitivity Effect on Fair
28.2.2019 Technique input (weighted used 1 Value
US$'000 average) US$'000
US 478,970 EBITDA Average EBITDA 6.0x - 16.3x -0.5x / 39,780
micro-cap Multiple Multiple of (8.5x) 0.5x (37,624)
investments Peers
Discount to 15% - 35% +5% / -5% 49,662
Average (23%) (47,352)
Multiple
European 70,686 EBITDA Average EBITDA 5.2x - 12.1x -0.5x / (8,934) 8,934
micro-cap Multiple Multiple of (8.7x) 0.5x
investments Peers
Discount to 0% - 29% (19%) +5% / -5% (7,316) 7,316
Average
Multiple
Real estate 443,043 Comparable Market Value $324 - -5% /+5% (13,852) 13,141
1,2 Sales Per Square $3,113
Foot ($1,441) per
sq ft
DCF Model/ Discount Rate 5.5% - 6.5% +25bps /-25bps (939) 1,479
Income (6.2%)
Approach3
Cap Rate/ Capitalisation 3.25 - 5.5% +25bps /-25bps (6,692) 7,116
Income Rate (4.5%)
Approach
Other 17,093 AUM AUM $2.6 Bn - 10%/+10% (3,112) 3,294
investments Approach $2.0 Bn
1 The Fair Value of JZCP's investment in financial interests in Real Estate is
measured as JZCP's percentage interest in the value of the underlying
properties.
2 Sensitivity is applied to the property value and then the debt associated to
the property is deducted before the impact to JZCP's equity value is
calculated. Due to gearing levels in the property structures an increase in the
sensitivity of measurement metrics at property level will result in a
significantly greater impact at JZCP's equity level.
The sensitivity applied for the year ended 29 February 2020 has been increased
to reflect the potential increased volatility of the real estate portfolio.
3 Other real estate assets totalling $7.8 million are excluded from sensitivity
analysis.
The following table shows a reconciliation of all movements in the fair value
of financial instruments categorised within Level 3 between the beginning and
the end of the reporting year.
Year ended 29 February 2020
US European Real Other
Micro-Cap Micro-Cap Estate Investments Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
At 1 March 2019 478,970 70,686 443,044 18,302 1,011,002
Investments in year 9,678 12,635 51,196 4,301 77,810
including capital
calls
Payment In Kind 26,205 - - - 26,205
("PIK")
Proceeds from (122,031) (13,643) (4,622) - (140,296)
investments realised
Net gains/(losses) 12,459 1,941 (330,906) - (316,506)
on investments
Movement in accrued (401) - - - (401)
interest
At 29 February 2020 404,880 71,619 158,712 22,603 657,814
Year ended 28 February 2019
US European Real Other
Micro-Cap Micro-Cap Estate Investments Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
At 1 March 2018 488,258 46,108 463,391 15,302 1,013,059
Investments in year 106,540 18,388 57,965 3,000 185,893
including capital
calls
Payment In Kind 20,514 - - - 20,514
("PIK")
Proceeds from (153,371) (863) (51,800) - (206,034)
investments realised
Net gains/(losses) 16,686 7,053 (26,512) - (2,773)
on investments
Movement in accrued 343 - - - 343
interest
At 28 February 2019 478,970 70,686 443,044 18,302 1,011,002
Fair value of Zero Dividend Preference ("ZDP") shares
The fair value of the ZDP shares is deemed to be their quoted market price. As
at 29 February 2020, the ask price for the ZDP (2022) shares was GBP4.34 (28
February 2019: GBP4.36) the total fair value of the ZDP shares was $66,010,000
(28 February 2019: $69,056,000) which is $1,500,000 (28 February 2019:
$5,218,000) higher than the liability recorded in the Statement of Financial
Position.
ZDP shares are recorded at amortised cost and would fall in to the Level 1
hierarchy if valued at FVTPL.
6. Net Loss on Investments at Fair Value Through Profit or Loss
Year Ended Year Ended
29.2.2020 28.2.2019
US$ '000 US$ '000
Net loss on investments held in investment portfolio at
year end
Net movement in unrealised gains/losses position (342,851) (86,839)
during year
Net unrealised gains in prior years now 13,576 79,476
realised
Net unrealised loss on investments held at the year (329,275) (7,363)
end
Gains on investments realised in year
Proceeds from investments realised 140,296 256,974
Cost of investments realised (113,951) (172,908)
Net realised 26,345 84,066
gains
Net unrealised gains in prior years now (13,576) (79,476)
realised
Total gains in the year on investments 12,769 4,590
realised
Net loss on investments during the year (316,506) (2,773)
7. Expected credit losses
Year Ended Year Ended
29.2.2020 28.2.2019
US$ '000 US$ '000
Impairments on loans during 29,318 75
year
Expected Credit Losses ("ECLs") are recognised in three stages. Stage one being
for credit exposures for which there has not been a significant increase in
credit risk since initial recognition, ECLs are provided for credit losses that
result from default events that are possible within the next 12-months (a
12-month ECL). Stage two being for those credit exposures for which there has
been a significant increase in credit risk since initial recognition, a loss
allowance is required for credit losses expected over the remaining life of the
exposure, irrespective of the timing of the default (a lifetime ECL). Stage
three being credit exposures which are considered credit-impaired, interest
revenue is calculated based on the amortised cost (i.e. the gross carrying
amount less the loss allowance). Financial assets in this stage will generally
be assessed individually. Lifetime expected credit losses are recognised on
these financial assets.
As from 1 June 2019, the Company recognised ECLs on its investment in Ombuds
per the stage two methodology due to the likelihood that the portfolio
company would enter bankruptcy (which it did in the summer of 2019). As from 1
December 2019 the Company provided for ECLs to write down the value of the
Ombuds loans to nil as no recovery of the loan is expected. Following the
default event, the loan is now classified as Level 3 stage, consequently no
further interest is being recognised on the loan. ECLs recognised on other
direct loan investments are done per the stage one methodology being the
recognition of expected losses over a 12 month period (or to maturity date if
earlier).
See Note 21 for information on credit risk, how amounts are determined and
staging.
8. Investment Income
Year Ended Year Ended
29.2.2020 28.2.2019
US$ '000 US$ '000
Interest revenue calculated using the effective 5,740 7,884
interest method
Other interest and similar 27,524 20,939
income
33,264 28,823
Income for the year ended 29 February 2020
Preferred Loan note Other
Dividends Dividends PIK Cash Income Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ US$ '000
'000
US micro-cap 560 26,131 218 1,023 - 27,932
portfolio
European micro-cap - - 4,499 - 1,221 5,720
portfolio
Real estate - - - - (454) (454)
Treasury bills - - - - 66 66
560 26,131 4,717 1,023 833 33,264
Income for the year ended 28 February 2019
Preferred Loan note Other
Dividends Dividends PIK Cash Income Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ US$ '000
'000
US micro-cap - 20,737 119 1,279 - 22,135
portfolio
European micro-cap - - 6,079 407 - 6,486
portfolio
Real estate - - - - 142 142
Treasury bills - - - - 60 60
- 20,737 6,198 1,686 202 28,823
9. Finance Costs
Year Ended Year Ended
29.2.2020 28.2.2019
US$ '000 US$ '000
Interest expense calculated using the effective
interest method
ZDP shares (Note 15) 3,211 3,148
Loan interest (Note 16) 14,293 12,684
17,504 15,832
Other interest and similar expense
CULS finance costs paid (Note 14) 2,956 3,155
Total finance costs 20,460 18,987
10. Expenses
Year Ended Year Ended
29.2.2020 28.2.2019
US$ '000 US$ '000
Investment Adviser's base fee 15,224 16,733
Investment Adviser's incentive fee (35,880) 2,161
Directors' remuneration 421 458
(20,235) 19,352
Administrative expenses:
Legal fees 1,730 956
Other professional fees 666 482
Accounting, secretarial and 350 370
administration fees
Auditors' remuneration 458 290
Auditors' remuneration - non-audit fees 65 121
Custodian fees 27 45
Other expenses 412 377
3,708 2,641
Total expenses (16,527) 21,993
Administration Fees
Northern Trust International Fund Administration Services (Guernsey) Limited
was appointed as Administrator to the Company on 1 September 2012. The
Administrator is entitled to an annual fee of $350,000 (28 February 2019:
$350,000) payable quarterly in arrears. Fees payable to the Administrator are
subject to an annual fee review. In the comparative year, a further fee of
$20,000 was paid to the Administrator during the year in relation to services
provided for facilitating share buy backs.
Directors' Remuneration
For the year ended 29 February 2020 total Directors' fees included in the
Statement of Comprehensive Income were$421,000 (year ended 28 February 2019:
US$458,000), of this amount $58,000 was outstanding at the year end (28
February 2019: $80,000). The Directors' remuneration report in the annual
report provides further details of the remuneration paid.
Investment Advisory and Performance fees
The Company entered into the amended and restated investment advisory and
management agreement with Jordan/Zalaznick Advisers, Inc. (the "Investment
Adviser") on 23 December 2010 (the "Advisory Agreement").
Pursuant to the Advisory Agreement, the Investment Adviser is entitled to a
base management fee and to an incentive fee. The base management fee is an
amount equal to 1.5 per cent. per annum of the average total assets under
management of the Company less excluded assets as defined under the terms of
the Advisory Agreement. The base management fee is payable quarterly in
arrears; the agreement provides that payments in advance on account of the base
management fee will be made.
For the year ended 29 February 2020, total investment advisory and management
expenses, based on the average total assets of the Company, were included in
the Statement of Comprehensive Income of $15,224,000 (year ended 28 February
2019: $16,733,000). Of this amount $1,179,000 (28 February 2019: $2,102,000)
was due and payable at the year end.
The incentive fee has two parts. The first part is calculated by reference to
the net investment income of the Company ("Income Incentive fee") and is
payable quarterly in arrears provided that the net investment income for the
quarter exceeds 2 per cent of the average of the net asset value of the Company
for that quarter (the "hurdle") (8 per cent. annualised). The fee is an amount
equal to (a) 100 per cent of that proportion of the net investment income for
the quarter as exceeds the hurdle, up to an amount equal to a hurdle of per
cent, and (b) 20 per cent. of the net investment income of the Company above a
hurdle of 2.5 per cent in any quarter. Investments categorised as legacy
investments and other assets identified by the Company as being excluded are
excluded from the calculation of the fee. A true-up calculation is also
prepared at the end of each financial year to determine if further fees are
payable to the Investment Adviser or if any amounts are recoverable from future
income incentive fees.
For the years ended 29 February 2020 and 28 February 2019 there was no income
incentive fee.
The second part of the incentive fee is calculated by reference to the net
realised capital gains ("Capital Gains Incentive fee") of the Company and is
equal to: (a) 20 per cent. of the realised capital gains of the Company for
each financial year less all realised capital losses of the Company for the
year less (b) the aggregate of all previous capital gains incentive fees paid
by the Company to the Investment Adviser. The capital gains incentive is
payable in arrears within 90 days of the fiscal year end. Investments
categorised as legacy investments and assets of the EuroMicrocap Fund 2010,
L.P. and JZI Fund III, L.P. are excluded from the calculation of the fee.
For the purpose of calculating incentive fees, cumulative preferred dividends
received on the disposal of an investment are treated as a capital return
rather than a receipt of income.
At 29 February 2020, a CGIF of $2,307,000 (28 February 2019: $21,429,000) based
on net realised gains was payable to the Investment Adviser based on realised
gains during the year ended 28 February 2019.
During the process of announcing the Company's interim results the Investment
Adviser agreed to waive fees payable by the Company of $14.5 million relating
to realised gains in the year ended 28 February 2019. Further fees becoming
payable for realised gains in the current fiscal year of $10.1 million have
also been waived. No further incentive fees will be paid to the Investment
Adviser until the Company and Investment Adviser have mutually agreed to
reinstate such payments.
The Company also provides for a CGIF based on unrealised gains, calculated on
the same basis as that of the fee on realised gains/losses. As at 29 February
2020, accumulated unrealised losses exceeded unrealised gains therefore no
provision (28 February 2019: $21,429,000) has been included.
Provision Provision Paid In Year Reversal of
At At Expense
29.2.2020 28.2.2019 29.2.2020 29.2.2020
US$ '000 US$ '000 US$ '000 US$ '000
Provision for CGIF on - (21,342) - (21,342)
unrealised investments
CGIF on realised investments 2,307 (21,429) 4,584 (14,538)
2,307 (42,771) 4,584 (35,880)
Provision Provision Paid In Year Expense
At At
28.2.2019 28.2.2018 28.2.2019 28.2.2019
US$ '000 US$ '000 US$ '000 US$ '000
Provision for CGIF on 21,342 (40,610) - (19,268)
unrealised investments
CGIF on realised investments 21,429 (996) (996) 21,429
42,771 (41,606) (996) 2,161
The Advisory Agreement may be terminated by the Company or the Investment
Adviser upon not less than two and one-half years' (i.e. 913 days') prior
notice (or such lesser period as may be agreed by the Company and Investment
Adviser).
Custodian Fees
HSBC Bank (USA) N.A, (the "Custodian") was appointed on 12 May 2008 under a
custodian agreement. The Custodian is entitled to receive an annual fee of
$2,000 and a transaction fee of $50 per transaction. For the year ended 29
February 2020, total Custodian expenses of $27,000 (28 February 2019: $45,000)
were included in the Statement of Comprehensive Income of which $10,000 (28
February 2019: $13,000) was outstanding at the year end and is included within
Other Payables.
Auditors' Remuneration
During the year ended 29 February 2020, the Company incurred fees for audit
services of $458,000 (28 February 2019:$290,000). Fees are also payable to
Ernst & Young for non-audit services including taxation services in relation to
the Company's status as a Passive Foreign Investment Company.
29.2.2020 28.2.2019
US$ '000 US$ '000
Audit Fees
Audit fees accrued - 2020: GBP305,0001 395 -
Audit fees - 2019: GBP257,750 63 269
Disbursements relating to 2019 - 13
audit
Audit fees - 2018: GBP218,000 under accrual at prior - 8
year end
Total audit fees 458 290
Non-audit Fees Paid to Ernst & Young US$ '000 US$ '000
Interim Review - no review for 31 August 2019 (31 - 56
August 2018: GBP42,500)
Taxation services 65 65
Total non-audit fees 65 121
1 Post year end, additional audit fees of GBP60,000 were agreed by the Audit
Committee.
11. Taxation
The Company has been granted Guernsey tax exempt status in accordance with The
Income Tax (Exempt Bodies)(Guernsey) Ordinance 1989 (as amended).
During the year, withholding tax of $126,000 was provided for on receipt of a
dividend from an unlisted investment. At 29 February 2020, a prior period
provision of $1,004,000 was reversed. This related to dividends received from a
listed investment realised in 2012. At 29 February 2020, the Company has
provided for $523,000 (28 February 2019: $1,401,000 of potential witholding
tax).
12. Investments
Category of financial instruments
Listed Unlisted Unlisted Carrying
Value
FVTPL FVTPL Loans Total
29.2.2020 29.2.2020 29.2.2020 29.2.2020
US$ '000 US$ '000 US$ '000 US$ '000
Book cost at 1 March 2019 3,312 980,120 66,849 1,050,281
Investments in year including capital 6,706 77,810 - 84,516
calls
Payment in kind ("PIK") - 26,205 5,090 31,295
Proceeds from realisation and (6,700) (140,296) - (146,996)
repayment of investments
Interest received on maturity 67 - - 67
Net realised investment and foreign - 26,345 - 26,345
exchange gain
Book cost at 29 February 2020 3,385 970,184 71,939 1,045,508
Unrealised net investment and foreign - (316,149) (11,077) (327,226)
exchange loss
Impairment on loans at amortised cost - - (30,261) (30,261)
Accrued interest 1 3,779 371 4,151
Carrying value at 29 February 3,386 657,814 30,972 692,172
2020
Comparative reconciliation for the year ended 28 February 2019
Category of financial instruments
Listed Unlisted Unlisted Carrying
Value
FVTPL FVTPL Loans Total
28.2.2019 28.2.2019 28.2.2019 28.2.2019
US$ '000 US$ '000 US$ '000 US$ '000
Book cost at 1 March 2018 49,845 895,680 60,956 1,006,481
Investments in year including capital 6,579 183,722 12,304 202,605
calls
Payment in kind ("PIK") - 20,514 5,893 26,407
Proceeds from realisation and repayment (53,112) (203,862) (11,720) (268,694)
of investments
Net realised investment and foreign - 84,066 (584) 83,482
exchange gain/loss
Book cost at 28 February 2019 3,312 980,120 66,849 1,050,281
Unrealised investment gain and foreign - 26,702 (8,389) 18,313
exchange gain/(loss)
Impairment on loans at amortised cost - - (1,470) (1,470)
Accrued interest 2 4,180 1,022 5,204
Carrying value at 28 February 3,314 1,011,002 58,012 1,072,328
2019
The cost of PIK investments is deemed to be interest not received in cash but
settled by the issue of further securities when that interest has been
recognised in the Statement of Comprehensive Income.
Loans at amortised cost
Direct loans to European micro-cap companies are classified and measured as
Loans at amortised under IFRS 9.
Interest on the loans accrues at the following rates:
As At 29 February 2020 As At 28 February 2019
8% 10% 14% Total 8% 10% 14% Total
Loans at amortised 25,289 1,616 4,067 30,972 24,902 1,528 31,582 58,012
cost
Maturity dates are as follows:
As At 29 February 2020 As At 28 February 2019
0-6 7-12 1-2 Total 0-6 7-12 1-2 Total
months months years months months years
US$ US$ US$ US$ US$ US$ US$ US$
'000 '000 '000 '000 '000 '000 '000 '000
Loans at 3,827 27,145 - 30,972 35,550 - 22,462 58,012
amortised
cost
Investment in Associates
An associate is an entity over which the Company has significant influence. An
entity is regarded as a subsidiary only if the Company has control over its
strategic, operating and financial policies and intends to hold the investment
on a long-term basis for the purpose of securing a contribution to the
Company's activities. The Company has elected for an exemption for 'equity
accounting' for associates and instead classifies its associates as Investments
at fair value through profit or loss.
29.2.2020 28.2.2019
Entity Place of % US$'000 US$'000
incorporation Interest
JZI Fund III GP, LP (has 18.75% Cayman 75% 68,887 66,816
partnership interest in JZI Fund
III, LP)
Orangewood Partners Platform LLC1 Delaware 79% 74,694 57,493
Spruceview Capital Partners, LLC Delaware 49% 20,338 17,093
EuroMicrocap Fund 2010, L.P. ("EMC Cayman 75% 2,732 3,870
2010")2
Investments in associates at fair 166,651 145,272
value
The principal activity of all the JZI Fund III, EuroMicrocap Fund 2010, L.P.
and Orangewood Partners Platform LLC is the acquisition of micro-cap companies.
The principal activity of Spruceview Capital Partners, LLC is that of an asset
management company. There are no significant restrictions on the ability of
associates to transfer funds to the Company in the form of dividends or
repayment of loans or advances.
Entity 29.2.2020 28.2.2019
US$'000 US$'000
JZI Fund III GP, L.P. 94,830 103,182
Orangewood Partners Platform LLC1 91,941 57,493
Spruceview Capital Partners, LLC 20,558 19,083
EuroMicrocap Fund 2010, L.P.2 2,732 3,870
210,061 183,628
1Invests in K2 Towers II, George Industries, Peaceable Street Capital, ABTB and
Orangewood Partners II-A L.P.
2EMC-C and EMC 2010 have now merged in to one entity EuroMicrocap Fund 2010,
L.P.
Investment in Subsidiaries
The principal place of business for subsidiaries is the USA. The Company meets
the definition of an Investment Entity in accordance with IFRS 10. Therefore,
it does not consolidate its subsidiaries but rather recognises them as
investments at fair value through profit or loss.
Entity Place of % 29.2.2020 28.2.2019
incorporation Interest US$'000 US$'000
JZCP Realty, Ltd Cayman 100% 158,712 443,044
JZBC, Inc. (Invests in Spruceview Delaware 99% 20,338 17,093
Capital Partners, LLC)
Investments in subsidiaries at fair value 179,050 460,137
There are no significant restrictions on the ability of subsidiaries to
transfer funds to the Company. The Company has no contractual commitments to
provide any financial or other support to its unconsolidated subsidiaries.
JZCP Realty Ltd has a 100% interest in the following Delaware incorporated
entities: JZCP Loan 1 Corp, JZCP Loan Fulton Corp, JZCP Loan Flatbush Corp,
JZCP Loan Flatbush Portfolio Corp, JZCP Loan Metropolitan Corp, JZCP Loan
Greenpoint Corp, JZCP Loan Florida Corp, JZCP Loan Design Corp and JZCP Loan
Esperante Corp.
JZCP Realty Ltd has a 99% interest in the following Delaware incorporated
entities: JZ REIT Fund 1, LLC, JZCP Loan Fulton Corp, JZ REIT Fund Fulton, LLC,
JZ REIT Fund Flatbush, LLC, JZ REIT Fund Flatbush Portfolio, LLC, JZ REIT Fund
Metropolitan, LLC, JZ REIT Fund Greenpoint, LLC, JZ REIT Fund Florida LLC, JZ
REIT Fund Design LLC and JZ REIT Fund Esperante LLC.
13. Other Receivables
29.2.2020 28.2.2019
US$ '000 US$ '000
Deposits paid on behalf of JZCP - 700
Realty, Ltd
Accrued interest due from JZCP - 495
Realty, Ltd
Other receivables and prepayments 119 91
119 1,286
14. Convertible Subordinated Unsecured Loan Stock ("CULS")
On 30 July 2014, JZCP issued GBP38,861,140 6% CULS. Holders of CULS may convert
the whole or part (being an integral multiple of GBP10 in nominal amount) of
their CULS into Ordinary Shares. Conversion Rights may be exercised at any time
during the period from 30 September 2014 to 10 business days prior to the
maturity date being the 30 July 2021. The initial conversion price is GBP6.0373
per Ordinary Share, which shall be subject to adjustment to deal with certain
events which would otherwise dilute the conversion of the CULS. These events
include consolidation of Ordinary Shares, dividend payments made by the
Company, issues of shares, rights, share-related securities and other
securities by the Company and other events as detailed in the Prospectus.
CULS bear interest on their nominal amount at the rate of 6.00% per annum,
payable semi-annually in arrears. During the year ended 29 February 2020:
$2,956,000 (28 February 2019: $3,155,000) of interest was paid to holders of
CULS and is shown as a finance cost in the Statement of Comprehensive Income.
29.2.2020 28.2.2019
US$ '000 US$ '000
Fair Value of CULS at 1 March 54,274 59,970
Unrealised movement in fair value of (2,326) (3,748)
CULS
Unrealised currency gain to the Company on translation during (2,062) (1,948)
the year
Gain on financial liabilities at fair value (4,388) (5,696)
through profit or loss
Fair Value of CULS based on offer 49,886 54,274
price
The CULS are valued at fair value being the listed offer price at the year end.
Given the illiquid nature of the instruments, which drove the reclassification
to Level 2, the Company considers the potential need to apply an adjustment to
the listed offer price. No adjustment was applied at the year-end. The Company
has assessed the movement in the fair value of the CULS and concluded changes
in the offer price are the result of increased demand due to the underlying
price of the Company's Ordinary shares and underlying interest rates. Any
change in the fair value due to perceived changes in the Company's credit risk
is deemed immaterial.
15. Zero Dividend Preference ("ZDP") Shares
On 1 October 2015, the Company rolled over 11,907,720 existing ZDP (2016)
shares in to new ZDP shares with a 2022 maturity date. The ZDP (2022) shares
have a gross redemption yield of 4.75% and a total redemption value of GBP
57,598,000 (approximately $73,569,000 using the exchange rate at year end). The
remaining 8,799,421 ZDP (2016) shares were redeemed on 22 June 2016 the total
redemption value being GBP32,870,000.
ZDP shares are designed to provide a pre-determined final capital entitlement
which ranks behind the Company's creditors but in priority to the capital
entitlements of the Ordinary shares. The ZDP shares carry no entitlement to
income and the whole of their return will therefore take the form of capital.
In certain circumstances, ZDP shares carry the right to vote at general
meetings of the Company as detailed in the Company's Memorandum of Articles and
Incorporation. Issue costs are deducted from the cost of the liability and
allocated to the Statement of Comprehensive Income over the life of the ZDP
shares.
ZDP (2022) Shares 29.2.2020 28.2.2019
US$ '000 US$ '000
Amortised cost at 1 March 63,838 62,843
Finance costs allocated to Statement of Comprehensive Income 3,211 3,148
Unrealised currency gain to the Company on translation (2,539) (2,153)
during the year
Amortised cost at year end 64,510 63,838
Total number of ZDP (2022) shares in issue 11,907,720 11,907,720
16. Loan Payable
29.2.2020 28.2.2019
US$ '000 US$ '000
Guggenheim Partners Limited 150,362 149,227
150,362 149,227
Guggenheim Partners Limited
On 12 June 2015, JZCP entered into a loan agreement with Guggenheim Partners
Limited. The agreement was structured so that part of the proceeds (EUR18
million) was received and will be repaid in Euros and the remainder of the
facility were received in US dollars ($80 million). During April 2017, JZCP
increased its credit facility with Guggenheim Partners by $50 million.
The loan matures on 12 June 2021 (6 year term) and interest is payable at 5.75%
+ LIBOR(1). There is an interest rate floor that stipulates LIBOR will not be
lower than 1%. In this agreement, the presence of the floor does not
significantly alter the amortised cost of the instrument, therefore separation
is not required and the loan is valued at amortised cost using the effective
interest rate method. There was an early repayment charge of 1% of the total
loan, which expired in 2017.
At 29 February 2020, investments and cash valued at $668,141,000(2) (28
February 2019: $951,164,000) were held as collateral on the loan. A covenant on
the loan states the fair value of the collateral must be 4x the loan value and
the cost of collateral must be at least 57.5% of total assets. The Company is
also required to hold a minimum cash balance of $15 million plus 50% of
interest on any new debt. At 29 February 2020 and throughout the year, the
Company was in full compliance with covenant terms. Post year end, the Company
obtained agreement from the parties to the loan facility for an extension to
the time for delivery of this annual report, the release of which was delayed
on account of COVID-19.
29.2.2020 28.2.2019
US$ '000 US$ '000
Amortised cost (Dollar drawdown) - 1 March 128,838 128,407
Amortised cost (Euro drawdown) - 1 March 20,389 21,718
Finance costs charged to Statement of Comprehensive Income 14,293 12,684
Interest and finance costs paid (12,436) (12,142)
Unrealised currency gain on translation of Euro drawdown (722) (1,440)
Amortised cost at year end 150,362 149,227
Amortised cost (Dollar drawdown) 130,523 128,838
Amortised cost (Euro drawdown) 19,839 20,389
150,362 149,227
The carrying value of the loans approximates to fair value.
(1) LIBOR rates applied are the US dollar 3 month rate ($80 million) and the
Euro 3 month rate (EUR18 million).
(2) Investments held as collateral exclude the Company's investment in
Spruceview and 35% of the value of investments held by JZCP Realty.
17. Other Payables
29.2.2020 28.2.2019
US$ '000 US$ '000
Provision for tax on dividends received not 523 1,401
withheld at source
Legal fee provision 250 250
Audit fees 190 185
Directors' remuneration 58 80
Other expenses 204 218
1,225 2,134
18. Share Capital
Authorised Capital
Unlimited number of ordinary shares of no par
value.
Ordinary shares - Issued Capital
29.2.2020 28.2.2019
Number of Number of
shares shares
Total Ordinary shares in issue 77,474,175 80,666,838
During the year, the Company bought back 3,192,663 of its own Ordinary shares
as part of a tender offer. The shares were purchased at a price of $9.39 (GBP
7.67) per share being a 5% discount to the NAV at 31 July 2019, the total cost
of the repurchase of the shares was $29.979 million. In the comparative year
ended 28 February 2019, the Company bought back 3,240,678 of its Ordinary
shares at a cost of $19.081 million. All shares repurchased have subsequently
been cancelled.
The Company's shares trade on the London Stock Exchange's Specialist Fund
Segment.
The Ordinary shares carry a right to receive the profits of the Company
available for distribution by dividend and resolved to be distributed by way of
dividend to be made at such time as determined by the Directors.
In addition to receiving the income distributed, the Ordinary shares are
entitled to the net assets of the Company on a winding up, after all
liabilities have been settled and the entitlement of the ZDP shares have been
met. In addition, holders of Ordinary shares will be entitled on a winding up
to receive any accumulated but unpaid revenue reserves of the Company, subject
to all creditors having been paid out in full but in priority to the
entitlements of the ZDP shares. Any distribution of revenue reserves on a
winding up is currently expected to be made by way of a final special dividend
prior to the Company's eventual liquidation.
Holders of Ordinary shares have the rights to receive notice of, to attend and
to vote at all general meetings of the Company.
Capital raised on issue of new shares and capital repaid on buy back of shares
Subsequent amounts raised by the issue of new shares (net of issue costs) and
amounts paid to buy back Ordinary shares, are credited/debited to the share
capital account.
Share Capital Account
29.2.2020 28.2.2019
US$ '000 US$ '000
At beginning of year 246,604 265,685
Buy back of Ordinary shares (29,979) (19,081)
At year end 216,625 246,604
19. Capital Management
The Company's capital is represented by the Ordinary shares, ZDP shares and
CULS.
As a result of the ability to issue, repurchase and resell shares, the capital
of the Company can vary. The Company is not subject to externally imposed
capital requirements and has no restrictions on the issue, repurchase or resale
of its shares. The Company's objectives for managing capital are:
· To invest the capital in investments meeting the description, risk
exposure and expected return indicated in its prospectus;
· To achieve consistent returns while safeguarding capital by investing in
a diversified portfolio;
· To maintain sufficient liquidity to meet the expenses of the Company; and
· To maintain sufficient size to make the operation of the Company
cost-efficient.
The Company's current focus is on realising the maximum value of the Company's
investments and repaying debt. Once this has been achieved, and after the
repayment of all debt, the Company intends to return capital to shareholders
and will at this point keep under review opportunities to buy back Ordinary
shares or ZDP shares. The Company will be seeking shareholder approval for the
return of capital to shareholders, should the Company be in a position to do
so.
The Company monitors capital by analysing the NAV per share over time and
tracking the discount to the Company's share price.
20. Reserves
Capital raised on formation of Company
The Royal Court of Guernsey granted that on the admission of the Company's
shares to the Official List and to trading on the London Stock Exchange's
market, the amount credited to the share premium account of the Company
immediately following the admission of such shares be cancelled and any surplus
thereby created accrue to the Company's distributable reserves to be used for
all purposes permitted by The Companies (Guernsey) Law, 2008, including the
purchase of shares and the payment of dividends.
Summary of reserves attributable to Ordinary shareholders
29.2.2020 28.2.2019
US$ '000 US$ '000
Share capital account 216,625 246,604
Other reserve 353,528 353,528
Retained earnings (94,419) 210,130
475,734 810,262
Other reserve
There was no movement in the Company's Other reserve for the years ended 29
February 2020 and 28 February 2019.
Subject to satisfaction of the solvency test, all of the Company's capital and
reserves are distributable in accordance with The Companies (Guernsey) Law,
2008.
Retained earnings
The Company's loss is now posted to one 'retained earnings' reserve.
Previously, profit/loss was split between revenue and capital and reflected in
separate reserve accounts. The comparative reserve accounts have been adjusted
accordingly.
29.2.2020 28.2.2019
US$ '000 US$ '000
At beginning of year 210,130 218,360
Impact of adoption of IFRS 9 - (1,395)
Loss for the year attributable to revenue (304,549) (6,835)
At year end (94,419) 210,130
21. Financial Risk Management Objectives and Policies
Introduction
The Company's objective in managing risk is the creation and protection of
shareholder value. Risk is inherent in the Company's activities, but it is
managed through a process of ongoing identification, measurement and
monitoring, subject to risk limits and other controls. The process of risk
management is critical to the Company's continuing profitability. The Company
is exposed to market risk (including currency risk, fair value interest rate
risk, cash flow interest rate risk and price risk), credit risk and liquidity
risk arising from the financial instruments it holds.
Risk management structure
The Company's Investment Adviser is responsible for identifying and controlling
risks. The Directors supervise the Investment Adviser and are ultimately
responsible for the overall risk management approach within the Company.
Risk mitigation
The Company's prospectus sets out its overall business strategies, its
tolerance for risk and its general risk management philosophy. The Company may
use derivatives and other instruments for trading purposes and in connection
with its risk management activities.
Market risk
Market risk is defined as "the risk that the fair value or future cash flows of
a financial instrument will fluctuate because of changes in variables such as
equity price, interest rate and foreign currency rate".
The Company's investments are subject to normal market fluctuations and there
can be no assurance that no depreciation in the value of those investments will
occur. There can be no guarantee that any realisation of an investment will be
on a basis which necessarily reflects the Company's valuation of that
investment for the purposes of calculating the NAV of the Company.
Changes in industry conditions, competition, political and diplomatic events,
tax, environmental and other laws and other factors, whether affecting the
United States alone or other countries and regions more widely, can
substantially and either adversely or favourably affect the value of the
securities in which the Company invests and, therefore, the Company's
performance and prospects.
The Company's market price risk is managed through diversification of the
investment portfolio across various sectors. The Investment Adviser considers
each investment purchase to ensure that an acquisition will enable the Company
to continue to have an appropriate spread of market risk and that an
appropriate risk/reward profile is maintained.
Equity price risk
Equity price risk is the risk of unfavourable changes in the fair values of
equity investments as a result of changes in the value of individual shares.
The equity price risk exposure arose from the Company's investments in equity
securities.
The Company does not generally invest in liquid equity investments and the
previous portfolio of listed equity investments resulted from the successful
flotation of unlisted investments.
For unlisted equity and non-equity shares the market risk is deemed to be
inherent in the appropriate valuation methodology (earnings, multiples,
capitalisation rates etc). The impact on fair value and subsequent profit or
loss, due to movements in these variables, is set out in Note 5.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates
will affect future cash flows or the fair values of financial instruments. It
has not been the Company's policy to use derivative instruments to mitigate
interest rate risk, as the Investment Adviser believes that the effectiveness
of such instruments does not justify the costs involved.
The table below summarises the Company's exposure to interest rate risks:
Interest bearing Non
interest
Fixed Floating bearing Total
rate rate
29.2.2020 29.2.2020 29.2.2020 29.2.2020
US$ '000 US$ '000 US$ '000 US$ '000
Investments at FVTPL 218,757 - 442,443 661,200
Loans at amortised cost 30,972 - - 30,972
Cash and cash equivalents - 52,912 - 52,912
Other receivables and - - 119 119
prepayments
Loans payable - (150,362) - (150,362)
ZDP shares (2022) (64,510) - - (64,510)
CULS (49,886) - - (49,886)
Other payables - - (4,711) (4,711)
135,333 (97,450) 437,851 475,734
The table below summarises the Company's exposure to interest rate risks:
Interest bearing Non
interest
Fixed Floating bearing Total
rate rate
28.2.2019 28.2.2019 28.2.2019 28.2.2019
US$ '000 US$ '000 US$ '000 US$ '000
Investments at FVTPL 281,665 - 732,651 1,014,316
Loans at amortised cost 58,012 - - 58,012
Cash and cash equivalents - 50,994 - 50,994
Other receivables and - - 1,286 1,286
prepayments
Loans payable - (149,227) - (149,227)
ZDP shares (2022) (63,838) - - (63,838
CULS (54,274) - - (54,274)
Other payables - - (47,007) (47,007)
221,565 (98,233) 686,930 810,262
The following table analyses the Company's exposure in terms of the interest
bearing assets and liabilities maturity dates. The Company's assets and
liabilities are included at their carrying value.
As at 29 February 2020
0-3 4-12 1 - <3 3 - <5 <5 No Total
months months years years years maturity
date
US$ US$ US$ US$ US$ US$ '000 US$
'000 '000 '000 '000 '000 '000
Investments at 3,386 5,000 4,138 - - 206,233 218,757
FVTPL
Loans at - 30,972 - - - - 30,972
amortised cost
Cash and cash - - - - - 52,912 52,912
equivalents
Loans payable - - (150,362) - - -
(150,362)
ZDP shares - - (64,510) - - - (64,510)
(2022)
CULS - - (49,886) - - - (49,886)
3,386 35,972 (260,620) - - 259,145 37,883
As at 28 February 2019
0-3 4-12 1 - <3 3 - <5 <5 No Total
months months years years years maturity
date
US$ US$ US$ '000 US$ '000 US$ US$ '000 US$ '000
'000 '000 '000
Investments at - 3,314 17,065 - - 261,286 281,665
FVTPL
Loans at - 35,550 22,462 - - - 58,012
amortised cost
Cash and cash - - - - - 50,994 50,994
equivalents
Loans payable - - (149,227) - - -
(149,227)
ZDP shares - - - (63,838) - - (63,838)
(2022)
CULS - - (54,274) - - - (54,274)
- 38,864 (163,974) (63,838) - 312,280 123,332
The income receivable by the Company is not subject to significant amounts of
risk due to fluctuations in the prevailing levels of market interest rates.
However, whilst the income received from fixed rate securities is unaffected by
changes in interest rates, the investments are subject to risk in the movement
of fair value. The Investment Adviser considers the risk in the movement of
fair value as a result of changes in the market interest rate for fixed rate
securities to be insignificant, hence no sensitivity analysis is provided.
The Company values the CULS issued at fair value, being the quoted offer price.
As the stock has a fixed interest rate of 6% an increase/decrease of prevailing
interest rates will potentially have an effect on the demand for the CULS and
the subsequent fair value. Other factors such as the Company's ordinary share
price and credit rating will also determine the quoted offer price. The overall
risk to the Company due to the impact of interest rate changes to the CULS'
fair value is deemed immaterial. Therefore no sensitivity analysis is
presented.
Of the cash and cash equivalents held, $52,912,000 (28 February 2019:
$50,994,000) earns interest at variable rates and the income may rise and fall
depending on changes to interest rates.
The Investment Adviser monitors the Company's overall interest sensitivity on a
regular basis by reference to the current market rate and the level of the
Company's cash balances. The Company has not used derivatives to mitigate the
impact of changes in interest rates.
The table below demonstrates the sensitivity of the Company's profit/(loss) for
the year to a reasonably possible change in interest rates. The Company has
cash at bank and loans payable for which interest receivable and payable are
sensitive to a fluctuation to rates. The below sensitivity analysis assumes
year end balances and interest rates are constant through the year.
Interest Receivable1 Interest Payable2
29.2.2020 28.2.2019 29.2.2020 28.2.2019
Change in basis points US$ '000 US$ '000 US$ '000 US$ '000
increase/decrease
+100/-100 476/(429) 384/(345) (1,153)/ (1,300)/1,300
1,300
+300/-300 1,429/(429) 1,151/(345) (1,153)/ (4,452)/2,100
4,432
1 Sensitivity applied to money market account balance and applying the year end
rate of 0.9%
2 Sensitivity applied to year end balances at relevant rates being $130 million
at 7.88% and EUR18 million at 6.76%
Currency risk
Currency risk is the risk that the value of a financial instrument will
fluctuate due to changes in foreign exchange rates.
Changes in exchange rates are considered to impact the fair value of the
Company's investments denominated in Euros and Sterling. However, under IFRS
the foreign currency risk on these investments is deemed to be part of the
market price risk associated with holding such non-monetary investments. As the
information relating to the non-monetary investments is significant, the
Company also provides the total exposure and sensitivity changes on
non-monetary investments on a voluntary basis.
The following table sets out the Company's exposure by currency to foreign
currency risk.
Exposure to Monetary Assets/Liabilities (held in foreign currencies)
Euro Sterling Total Euro Sterling Total
29.2.2020 29.2.2020 29.2.2020 28.2.2019 28.2.2019 28.2.2019
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Loans at 30,972 - 30,972 58,012 - 58,012
Amortised
Cost
Cash at Bank 352 27 379 7,206 28 7,234
Other - 39 39 - 11 11
Receivables
Liabilities -
CULS - (49,886) (49,886) - (54,274) (54,274)
ZDP (2022) - (64,510) (64,510) - (63,838) (63,838)
shares
Loans payable (19,839) - (19,839) (20,389) - (20,389)
Other - (352) (352) - (503) (503)
payables
Net Currency 11,485 (114,682) (103,197) 44,829 (118,576) (73,747)
Exposure
The sensitivity analysis for monetary and non-monetary net assets calculates
the effect of a reasonably possible movement of the currency rate against the
US dollar on an increase or decrease in net assets attributable to shareholders
with all other variables held constant. An equivalent decrease in each of the
aforementioned currencies against the US dollar would have resulted in an
equivalent but opposite impact.
Effect on net assets attributable to
shareholders
(relates to monetary financial assets and
liabilities)
29.2.2020 28.2.2019
Currency Change in Currency Rate US$ '000 US$ '000
Euro +10% 1,149 4,483
GBP +10% (11,468) (11,858)
Exposure to Non-Monetary Assets (held in foreign currencies)
Euro Sterling Total Euro Sterling Total
29.2.2020 29.2.2020 29.2.2020 28.2.2019 28.2.2019 28.2.2019
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Financial assets 60,770 11,599 72,369 55,952 15,484 71,436
at FVTPL
Net Currency 60,770 11,599 72,369 55,952 15,484 71,436
Exposure
Effect on net assets attributable to
shareholders
(relates to non-monetary financial assets and
liabilities)
29.2.2020 28.2.2019
Currency Change in Currency US$ '000 US$ '000
Rate
Euro +10% 6,077 5,595
GBP +10% 1,160 1,548
Credit risk
The Company takes on exposures to credit risk, which is the risk that a
counterparty to a financial instrument will cause a financial loss to the
Company by failing to discharge an obligation. These credit exposures exist
within debt instruments and cash & cash equivalents. They may arise, for
example, from a decline in the financial condition of a counterparty or from
entering into derivative contracts under which counterparties have obligations
to make payments to the Company. As the Company's credit exposure increases, it
could have an adverse effect on the Company's business and profitability if
material unexpected credit losses were to occur. In the event of any default on
the Company's loan investments by a counterparty, the Company will bear a risk
of loss of principal and accrued interest of the investment, which could have a
material adverse effect on the Company's income and ability to meet financial
obligations.
In accordance with the Company's policy, the Investment Adviser regularly
monitors the Company's exposure to credit risk in its investment portfolio, by
reviewing the financial statements, budgets and forecasts of underlying
investee companies. Agency credit ratings do not apply to the Company's
investment in investee company debt. The 'credit quality' of the debt is deemed
to be reflected in the fair value valuation of the investee company. The
Company's investment in accumulated preferred stock is excluded from below
analysis as the instruments are deemed to be more closely associated with the
investment in the portfolio companies' equity than its debt.
The table below analyses the Company's maximum exposure to credit risk.
Total Total
29.2.2020 28.2.2019
US$ '000 US$ '000
US micro-cap debt 9,138 17,065
European micro-cap debt 30,972 58,012
US Treasury Bills 3,386 3,314
Cash and cash equivalents 52,912 50,994
96,408 129,385
A proportion of micro-cap debt held does not entitle the Company to interest
payment in cash. This interest is capitalised (PIK) and as a result there is a
credit risk to the Company, as there is no return until the loan plus all the
interest, is repaid in full. During the year ended 29 February 2020, the
Company recognised PIK interest of $4,717,000 (28 February 2019: $6,198,000)
from debt investments as income in the Statement of Comprehensive Income in
line with the Company's policy of recognising interest in proportion to the
carrying value versus cost.
The following table analyses the concentration of credit risk in the Company's
debt portfolio by industrial distribution.
29.2.2020 28.2.2019
US$ '000 US$ '000
Financial General 58% 30%
House, Leisure & Personal 12% 7%
Goods
Healthcare Services & 10% 5%
Equipment
Telecom 10% 6%
Document Processing 10% 5%
Private Security - 36%
Logistics - 11%
100% 100%
Loans at Amortised Cost and Expected Credit Losses ("ECL")
The Company's direct loans to European micro-cap companies are classified as
loans at amortised cost. The credit risk in these investments is deemed to be
reflected in the performance and valuation of the investee company. Using IFRS
9's "expected credit loss" model, the Company calculates the allowance for
credit losses by considering the cash shortfalls it would incur in various
default scenarios for prescribed future periods and multiplying the shortfalls
by the probability of each scenario occurring. The allowance is the sum of
these probability weighted outcomes. The IFRS ECL model assumed all loans and
receivables carries with it some risk of default, every such asset has an
expected loss attached to it from the moment of its origination or acquisition.
At the reporting date, the credit risk on the loans to Docout, Toro Finance and
Xacom are deemed low-risk and therefore the ECL are considered over the future
12 months or maturity if sooner. In July 2019, Ombuds entered bankruptcy the
Company do not believe there will be proceeds to pay any portion of JZCP's loan
hence a provision has been made to bring the carrying value down to $nil.
ECL Provision 29.2.2020 28.2.2019
US$ '000 US$ '000
ECL at 1 March 1,470 1,395
Provision during the year for ECL on stage 1 credit 1,187 75
exposures
Provision during the year for ECL on stage 2 credit 14,106 -
exposures
Provision during the year for ECL on stage 3 credit exposures 14,025 -
Total ECL provision during the year 29,318 75
Foreign exchange movement of Euro denominated loss provision (527) -
revalued at year end
ECL at year end 30,261 1,470
'As at 29 February 2020, of the $30,261,000 (28 February 2019: $1,470,000)
recognised as total ECL $905,000 (28 February 2019: $1,470,000) are provisions
on stage 1 credit exposures and $29,356,000 (28 February 2019: $nil) are
provisions on stage 3 credit exposures. See Note 7 for information on the three
stages that ECLs are recognised.
The table below analyses the Company's cash and cash equivalents by rating
agency category.
Standard & Poor's LT Issuer Default Rating 29.2.2020
Outlook
Credit ratings $'000
HSBC Bank USA NA Negative (2019: Fitch A+ (2019: AA-) 52,595
Stable)
Raymond James Bank Stable (2019: Stable) S&P BBB+ (2019: BBB+) 1
Northern Trust (Guernsey) Stable (2019: Stable) S&P A-1+ (2019: A-1+) 316
Limited
52,912
Bankruptcy or insolvency of the Banks may cause the Company's rights with
respect to these assets to be delayed or limited. The Investment Adviser
monitors risk by reviewing the credit rating of the Bank. If credit quality
deteriorates, the Investment Adviser may move the holdings to another bank.
Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter
difficulty in meeting obligations associated with financial liabilities.
Liquidity risk arises because of the possibility that the Company could be
required to pay its liabilities earlier than expected. There has been no change
during the year in the Company's processes and arrangements for managing
liquidity.
The Company's investments are predominately private equity, real estate and
other unlisted investments. By their nature, these investments will generally
be of a long term and illiquid nature and there may be no readily available
market for sale of these investments. None of the Company's assets/liabilities
are subject to special arrangement due to their illiquid nature.
The Company has capital requirements to repay CULS and a debt facility in 2021
and ZDP shareholders in 2022. At the year end the Company has outstanding
investment commitments of $48,769,000
(28 February 2019: $43,618,000) see Note 22.
The Company manages liquidity risk and the ability to meet its obligations by
monitoring current and expected cash balances from forecasted investment
activity.
The table below analyses JZCP's financial liabilities into relevant maturity
groups based on the remaining period at the reporting date to the contractual
maturity date. Amounts attributed to CULS and ZDP share include future
contractual interest payments. Financial commitments are contractual outflows
of cash and are included within the liquidity statement.
At 29 February 2020
Less than >1 year - >3 years - >5 years No stated
1 year 3 years 5 years maturity
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
CULS 2,978 54,594 - - -
ZDP (2022) shares - 73,569 - - -
Loans payable 10,163 152,829 - - -
Other payables 4,711 - - - 523
Financial commitments 12,049 34,441 2,279 - -
(see note 22)
29,901 315,433 2,279 - 523
At 28 February 2019
Less than 1 >1 year - >3 years - >5 years No stated
year 3 years 5 years maturity
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
CULS 3,101 56,591 - - -
ZDP (2022) shares - - 74,387 - -
Loans payable 12,640 170,029 - - -
Other payables 22,162 - - - 22,743
Financial commitments 20,173 18,183 5,262 - -
(see note 22)
58,076 244,803 79,649 - 22,743
22. Commitments
At February 2020 and 28 February 2019, JZCP had the following financial
commitments outstanding in relation to fund investments (the below table also
shows the amount of outstanding commitments at date signing these financial
statements):
Expected 17.6.2020 29.2.2020 28.2.2019
date
of Call US$ '000 US$ '000 US$ '000
JZI Fund III GP, L.P. EUR23,617,789 over 2 years 27,634 25,943 36,366
(28.2.2019: EUR31,936,400)
Orangewood Partners II-A LP over 3 years 15,901 17,247 -
CERPI 2,880 3,080 -
Spruceview Capital Partners, over 1 year 1,675 220 1,990
LLC
Suzo Happ Group1 over 3 years 2,039 2,039 4,491
Igloo Products Corp over 3 years 240 240 771
50,369 48,769 43,618
1Commitment reduced per amended and restated agreement of Limited Partnership.
23. Related Party Transactions
JZCP invests in European micro-cap companies through JZI Fund III, L.P. ("Fund
III"). Previously investments were made via the EuroMicrocap Fund 2010, L.P.
("EMC 2010") and EuroMicrocap Fund-C, L.P. ("EMCC"). Fund III, EMC 2010 and
EMCC are managed by an affiliate of JZAI, JZCP's investment manager. JZAI was
founded by David Zalaznick and John ("Jay") Jordan, II. At 29 February 2020,
JZCP's investment in Fund III was valued at $66.8 million (28 February 2019:
$66.8 million). JZCP's investment in EMC 2010 was valued at $2.7 million (28
February 2019: $2.7 million). EMCC was liquidated in December 2018 and its
remaining assets were transferred to EMC 2010.
JZCP has invested in Spruceview Capital Partners, LLC on a 50:50 basis with Jay
Jordan and David Zalaznick (or their respective affiliates). The total amount
committed by JZCP to this investment at 17 June 2020, was $33.5 million with
$1.7 million (28 February 2019: $2.0 million) of commitments outstanding. In
March 2019, JZCP increased its commitment by an additional $1.475 million to
cover JZCP's initial commitment alongside Messrs. Jordan and Zalaznick (and
their affiliates) on a 50%/50% basis to Spruceview CERPI PE Fund 2019, L.P.
("CERPI"). JZCP received shareholder approval in June 2019, to invest a further
$15 million in Spruceview Capital Partners, LLC, the investment being on the
same 50:50 basis with Jay Jordan and David Zalaznick (or their respective
affiliates). In March 2020, JZCP increased its commitment by an additional
$2.275 million.
JZCP has co-invested with Fund A, Fund A Parallel I, II and III Limited
Partnerships in a number of US micro-cap buyouts. These Limited Partnerships
are managed by an affiliate of JZAI. JZCP invested in a ratio of 82%/18% with
the Fund A entities. At 29 February 2020, the total value of JZCP's investment
in these co-investments was $218.7 million (28 February 2019: $251.5 million).
Fund A, Fund A Parallel I, II and III Limited Partnerships are no longer making
platform investments alongside JZCP and, having failed, in the case of Testing
Services Holdings, LLC, to make certain preferred ownership investments, the
common ownership interest of the Fund A Partnerships in Testing Services has
been diluted.
JZAI is a US based company that provides advisory services to the Company in
exchange for management fees, paid quarterly. Fees paid by the Company to the
Investment Adviser are detailed in Note 10. JZAI and various affiliates provide
services to certain JZCP portfolio companies and may receive fees for providing
these services pursuant to the Advisory Agreement.
JZCP is able to invest up to $75 million in "New JI Platform Companies". The
platform companies are being established to invest primarily in buyouts and
build-ups of companies and in growth company platforms in the US micro-cap
market, primarily healthcare equipment companies. At 29 February 2020 and 28
February 2019, JZCP had invested (before returns of capital) $41.3 million in
Avante (formerly named Jordan Health Products) and is therefore able to invest
a further $33.7 million. JZCP co-invests 50/50 in Avante with other investors
("JI members"). David Zalaznick and an affiliated entity of Jay Jordan own
approximately 33.7% of the JI members' ownership interests.
During the year, JZCP obtained shareholder approval for the sale of 80% of its
holdings in both Avante and Orizon to Edgewater Growth Capital Partners
("Edgewater"). Edgewater is a substantial shareholder of JZCP and therefore a
related party of the Company. JZCP received proceeds of $37.5 million for the
Avante realisation and $28.0 million for Orizon.
During the year, JZCP obtained shareholder approval for the merger of Priority
Express with Capstone Logistics. The Merger has resulted in the Company
realising its investment in Priority Express by disposing of its entire
ownership interests as well as its debt investments therein. Capstone Logistics
is a portfolio company of Resolute Fund III. JZCP received proceeds of $17.2
million from the realisation.
Total Directors' remuneration for the year ended 29 February 2020 was $421,000
(28 February 2019: $458,000).
24. Basic and Diluted Earnings/(Loss) Per Share
Basic earnings/(loss) per share is calculated by dividing the earnings/(loss)
for the year by the weighted average number of Ordinary shares outstanding
during the year.
For the year ended 29 February 2020, the weighted average number of Ordinary
shares outstanding during the year was 79,053,060 (Year ended 28 February 2019:
82,757,833).
The Company's diluted loss per share is calculated by considering adjustments
required to the earnings and weighted average number of shares for the effects
of potential dilutive Ordinary shares. The weighted average of the number of
Ordinary shares is adjusted assuming the conversion of the CULS ("If-converted
method"). The adjusted weighted average of the number of Ordinary shares for
the year ended 29 February 2020 was 85,489,901 (28 February 2019: 89,194,674).
Conversion is assumed even though at 29 February 2020 and 28 February 2019 the
exercise price of the CULS is higher than the market price of the Company's
Ordinary shares and are therefore deemed 'out of the money'. Earnings are
adjusted to remove the fair value gain of $4,388,000 (28 February 2019:
$5,696,000 and finance cost attributable to CULS of $2,956,000 (28 February
2019: $3,155,000). For the year ended 29 February 2020, the potential
conversion of the CULS would have been anti-dilutive to the total loss per
share, therefore the diluted loss per share, for the comparative year, is
presented as per the basic loss per share calculation.
25. Controlling Party
The issued shares of the Company are owned by a number of parties, and
therefore, in the opinion of the Directors, there is no ultimate controlling
party of the Company, as defined by IAS 24 - Related Party Disclosures.
26. Net Asset Value Per Share
The net asset value per Ordinary share of $6.14 (28 February 2019: $10.04) is
based on the net assets at the year end of$475,734,000 (28 February 2019:
$810,262,000) and on 77,474,175 (28 February 2019: 80,666,838) Ordinary shares,
being the number of Ordinary shares in issue at the year end.
27. Contingent Assets
Amounts held in escrow accounts
When investments have been disposed of by the Company, proceeds may reflect
contractual terms requiring that a percentage is held in an escrow account
pending resolution of any indemnifiable claims that may arise. At 29 February
2020 and 28 February 2019, the Company has assessed that the likelihood of the
recovery of these escrow accounts cannot be determined and has therefore
recognised the escrow accounts as a contingent asset.
As at 29 February 2020 and 28 February 2019, the Company had the following
contingent assets held in escrow accounts which had not been recognised as
assets of the Company:
Company Amount in Escrow
29.2.2020 28.2.2019
US$'000 US$'000
Bolder Healthcare Solutions 343 3,090
Waterline Renewal Technologies 431 -
Water Treatment Systems 213 6,051
Xpress Logistics (AKA Priority Express) 153 -
Water Filtration Systems - 120
1,140 9,261
During the year ended 29 February 2020 proceeds of $5,559,000 (28 February
2019: $3,303,000) were realised during the year and recorded in the Statement
of Comprehensive Income.
Year Ended Year Ended
29.2.2020 28.2.2019
US$'000 US$'000
Escrows at beginning of year 9,261 1,952
Escrows added on realisation of investments 431 9,261
Potential escrows at prior year end no longer (2,993) -
recorded
Escrow receipts during the year (5,559) (3,303)
Additional escrows recognised in year not reflected in - 1,351
opening position
Escrows at year end 1,140 9,261
28. Notes to the Statement of Cash Flows
Investment income and interest received during the Year Ended Year Ended
year
29.2.2020 28.2.2019
US$ '000 US$ '000
Interest on investments 1,669 2,076
Dividends on unlisted investments 1,781 -
Bank interest 455 525
3,905 2,601
Purchases and sales of investments are considered to be operating activities of
the Company, given its purpose, rather than investing activities. The cash
flows arising from these activities are shown in the Statement of Cash Flows.
Changes in financing liabilities arising from both cash flow and non-cash flow
items
Non-cash changes
1.3.2019 Cash Fair Finance Foreign 29.2.2020
flows Value Costs Exchange
US$ '000 US$ '000 US$ US$ '000 US$ '000 US$ '000
'000
Zero Dividend 63,838 - - 3,211 (2,539) 64,510
Preference (2022)
shares
Convertible Unsecured 54,274 (2,956) 2,956 (2,062) 49,886
Loan Stock (2,326)
Loans payable 149,227 - 14,293 (722) 150,362
(12,436)
267,339 20,460 (5,323) 264,758
(15,392) (2,326)
Non-cash changes
1.3.2018 Cash Fair Finance Foreign 28.2.2019
flows Value Costs Exchange
US$ '000 US$ '000 US$ US$ '000 US$ '000 US$ '000
'000
Zero Dividend 62,843 - - 3,148 (2,153) 63,838
Preference (2022)
shares
Convertible Unsecured 59,970 (3,155) 3,155 (1,948) 54,274
Loan Stock (3,748)
Loans payable 150,125 - 12,684 (1,440) 149,227
(12,142)
272,938 18,987 (5,541) 267,339
(15,297) (3,748)
29. Dividends Paid and Proposed
No dividends were paid or proposed for the years ended 29 February 2020 and 28
February 2019.
30. IFRS to US GAAP Reconciliation
The Company's Financial Statements are prepared in accordance with IFRS, which
in certain respects differ from US GAAP. These differences are not material and
therefore no reconciliation between IFRS and US GAAP has been presented. For
reference, please see below for a summary of the key judgments and estimates
taken into account with regards to the Company as of 29 February 2020, as well
as the Shareholders' financial highlights required under US GAAP.
Assessment as an Investment Entity
As stated in Note 2, the Company meets the definition of an investment entity
under IFRS 10 and is therefore required to measure its subsidiaries at fair
value through profit or loss rather ("FVTPL") than consolidate them. Per US
GAAP (Financial Services - Investment Companies (Topic 946): Amendments to the
Scope, Measurement, and Disclosure Requirements or "ASC 946"), the Company
meets the definition of an investment company, and as required by ASC 946, JZCP
measures its investment in Subsidiaries at FVTPL.
Fair Value Measurement of Investments
The fair value of the underlying investments held by the Company are determined
in accordance with US GAAP and IFRS based on valuation techniques and inputs
that are observable in the market which market participants have access to and
will use to determine the exit price or selling price of the investments.
Measurement of Liabilities
The Company's loan facility and ZDP shares are recorded at amortised cost using
the effective interest rate method in accordance with US GAAP and IFRS. The
CULS' fair value is deemed to be the listed offer price at the year end. CULS
is translated at the exchange rate at the reporting date and both differences
in fair value due to the listed offer price and exchange rates are recognised
in the Statement of Comprehensive Income in accordance with US GAAP and IFRS.
The following table presents performance information derived from the financial
statements.
29.2.2020 28.2.2019
US$ US$
Net asset value per share at the beginning of the year 10.04 9.98
Performance during the year (per
share):
Net investment income 0.42 0.35
Net realised and unrealised (loss)/ (4.30) 0.06
gain
Incentive fee 0.45 (0.03)
Operating expenses (0.24) (0.25)
Finance costs (0.25) (0.23)
Accretion from the buy back of Ordinary shares at a 0.02 0.16
discount to NAV
Total return (3.90) 0.06
Net asset value per share at the end of the 6.14 10.04
year
Total Return (38.81%) 0.61%
Net investment income to average net assets excluding 4.64% 1.01%
incentive fee
Operating expenses to average net (2.71%) (2.42%)
assets
Incentive fees to average net assets 4.97% (0.30%)
Operating expenses to average net assets including 2.26% (2.72%)
incentive fee
Finance costs to average net assets (2.76%) (2.33%)
31. Subsequent Events
These financial statements were approved by the Board on 17 June 2020.
Subsequent events have been evaluated until this date.
The implications for the Company, of COVID-19 and the resulting lockdown post
year end, are further explained within the Directors' Report and Note 2 to the
Financial Statements. The Board considers the emergence and spread of COVID-19
to be a non-adjusting post balance sheet event.
At the date of signing this report, the Board have been unable to quantify the
impact on the valuation of the portfolio. As discussed in the Investment
Adviser's Report, Covid-19 has severely affected commercial retail real estate
and therefore further write downs in the value of the Company's real estate
assets are expected. Since the end of the year the Board have been in
continuous discussions with the Investment Adviser to assess the impact of
COVID-19 on the micro-cap portfolios and to remain up to date on liquidity and
performance within the portfolio. As at the date of signing of these financial
statements, the Board are pleased with reports that the micro-cap portfolio has
so far performed robustly throughout the pandemic, this has enabled the Board
to be optimistic about the micro-cap valuations presented in these financial
statements.
The uncertainty of the effect of COVID-19 on the valuation of the Company's
investment portfolio and also its ability to realise investments within a
timeframe to repay debt obligations are considered by the Board to be material
uncertainties which could impact the Company's ability to operate as a going
concern as noted within the Directors' Report and Note 2 to the Financial
Statements.
Company Advisers
Investment Adviser
The Investment Adviser to JZ Capital Partners Limited ("JZCP") is Jordan/
Zalaznick Advisers, Inc., ("JZAI") a company beneficially owned by John (Jay) W
Jordan II and David W Zalaznick. The company offers investment advice to the
Board of JZCP. JZAI has offices in New York and Chicago.
Jordan/Zalaznick Advisers, Inc.
9 West, 57th Street
New York NY 10019
Registered Office
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3QL
JZ Capital Partners Limited is registered in Guernsey Number 48761
Administrator, Registrar and Secretary
Northern Trust International Fund Administration
Services (Guernsey) Limited
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3QL
UK Transfer and Paying Agent
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
US Bankers
HSBC Bank USA NA
452 Fifth Avenue
New York NY 10018
(Also provides custodian services to JZ Capital Partners Limited under the
terms of a Custody Agreement).
Guernsey Bankers
Northern Trust (Guernsey) Limited
PO Box 71
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3DA
Independent Auditor
Ernst & Young LLP
PO Box 9
Royal Chambers
St Julian's Avenue
St Peter Port
Guernsey GY1 4AF
UK Solicitors
Ashurst LLP
London Fruit & Wool Exchange
1 Duval Square
London E1 6PW
US Lawyers
Monge Law Firm, PLLC
333 West Trade Street
Charlotte, NC 28202
Mayer Brown LLP
214 North Tryon Street
Suite 3800
Charlotte NC 28202
Winston & Strawn LLP
35 West Wacker Drive
Chicago IL 60601-9703
Guernsey Lawyers
Mourant
Royal Chambers
St Julian's Avenue
St Peter Port
Guernsey GY1 4HP
Financial Adviser and Broker
JP Morgan Cazenove Limited
20 Moorgate
London EC2R 6DA
Useful Information for Shareholders
Listing
JZCP Ordinary, Zero Dividend Preference ("ZDP") shares and Convertible
Unsecured Loan Stock ("CULS") are listed on the Official List of the Financial
Services Authority of the UK, and are admitted to trading on the London Stock
Exchange Specialist Fund Segment for listed securities.
The price of the Ordinary shares are shown in the Financial Times under
"Conventional Private Equity" and can also be found at https://markets.ft.com
along with the prices of the ZDP shares and CULS.
ISIN/SEDOL numbers
Ticker Symbol ISIN Code Sedol Number
Ordinary shares JZCP GG00B403HK58 B403HK5
ZDP (2022) shares JZCZ GG00BZ0RY036 BZ0RY03
CULS JZCC GG00BP46PR08 BP46PR0
Key Information Documents
JZCP produces Key Information Documents to assist investors' understanding of
the Company's securities and to enable comparison with other investment
products. These documents are found on the Company's website -www.jzcp.com/
investor-relations/key-information-documents.
Alternative Performance Measures
In accordance with ESMA Guidelines on Alternative Performance Measures ("APMs")
the Board has considered what APMs are included in the annual report and
financial statements which require further clarification. An APM is defined as
a financial measure of historical or future financial performance, financial
position, or cash flows, other than a financial measure defined or specified in
the applicable financial reporting framework. APMs included in the annual
report and financial statements, which are unaudited and outside the scope of
IFRS, are deemed to be as follows:
Total NAV Return
The Total NAV Return measures how the net asset value ("NAV") per share has
performed over a period of time, taking into account both capital returns and
dividends paid to shareholders. JZCP quotes NAV total return as a percentage
change from the start of the period (one year) and also three-month,
three-year, five-year and seven year periods. It assumes that dividends paid to
shareholders are reinvested back into the Company therefore future NAV gains
are not diminished by the paying of dividends. JZCP also produces an adjusted
Total NAV Return which excludes the effect of the appreciation/dilution per
share caused by the buy back/issue of shares at a discount to NAV, the result
of the adjusted Total NAV return is to provide a measurement of how the
Company's Investment portfolio contributed to NAV growth adjusted for the
Company's expenses and finance costs. The Total NAV Return for the year ended
29 February 2020 was -38.8%, which only reflects the change in NAV as no
dividends were paid during the year. The Total NAV Return for the year ended 28
February 2019 was 0.6%.
Total Shareholder Return (Ordinary shares)
A measure showing how the share price has performed over a period of time,
taking into account both capital returns and dividends paid to shareholders.
JZCP quotes shareholder price total return as a percentage change from the
start of the period (one year) and also three-month, three-year, five-year and
seven-year periods. It assumes that dividends paid to shareholders are
reinvested in the shares at the time the shares are quoted ex dividend. The
Shareholder Return for the year ended 29 February 2020 was -40.7%, which only
reflects the change in share price as no dividends were paid during the year.
The Shareholder Return for the year ended 28 February 2019 was -3.5%.
NAV to market price discount
The NAV per share is the value of all the company's assets, less any
liabilities it has, divided by the number of shares. However, because JZCP
shares are traded on the London Stock Exchange's Specialist Fund Segment, the
share price may be higher or lower than the NAV. The difference is known as a
discount or premium. JZCP's discount is calculated by expressing the difference
between the period end dollar equivalent share price and the period end NAV per
share as a percentage of the NAV per share.
At 29 February 2020, JZCP's Ordinary shares traded at GBP2.58 (28 February 2019:
GBP4.35) or $3.30 (28 February 2019:$5.79) being the dollar equivalent using the
year end exchange rate of GBP1: $1.28 (28 February 2019 GBP1: $1.33). The shares
traded at a 46% (28 February 2019: 42%) discount to the NAV per share of $6.14
(2019: $10.04).
Ongoing Charges calculation
A measure expressing the Ongoing annualised expenses as a percentage of the
Company's average annualised net assets over the year 2.71% (2019: 2.42%).
Ongoing charges, or annualised recurring operating expenses, are those expenses
of a type which are likely to recur in the foreseeable future, whether charged
to capital or revenue, and which relate to the operation of the company,
excluding the Investment Adviser's Incentive fee, financing charges and gains/
losses arising on investments.
Ongoing expenses for the year are $19,353,000 (2019: $19,832,000) comprising of
the IA base fee $15,224,000 (2019:$16,733,000), administrative fees $3,708,000
(2019: $2,641,000) and directors fees $421,000 (2019:$458,000). Average net
assets for the year are calculated using quarterly NAVs $713,333,000 (2019:
$818,383,000).
Criminal Facilitation of Tax Evasion
The Board has approved a policy of zero tolerance towards the criminal
facilitation of tax evasion, in compliance with the Criminal Finances Act 2017.
Non-Mainstream Pooled Investments
From 1 January 2014, the FCA rules relating to the restrictions on the retail
distribution of unregulated collective investment schemes and close substitutes
came into effect. JZCP's Ordinary shares qualify as an 'excluded security'
under these rules and will therefore be excluded from the FCA's restrictions
which apply to non-mainstream investment products. Therefore Ordinary shares
issued by JZ Capital Partners can continue to be recommended by financial
advisers as an investment for UK retail investors.
Internet Address
The Company: www.jzcp.com
Financial Diary
Annual General Meeting 12 August 2020
Interim report for the six months ended 31 November 2020 (date to be
August 2020 confirmed)
Results for the year ended 28 February 2021 May 2021 (date to be confirmed)
JZCP will be issuing an Interim Management Statement for the quarters ending 31
May 2020 and 30 November 2020. These Statements will be sent to the market via
RNS within six weeks from the end of the appropriate quarter, and will be
posted on JZCP's website at the same time, or soon thereafter.
Payment of Dividends
In the event of a cash dividend being paid, the dividend will be sent by cheque
to the first-named shareholder on the register of members at their registered
address, together with a tax voucher. At shareholders' request, where they have
elected to receive dividend proceeds in Sterling, the dividend may instead be
paid direct into the shareholder's bank account through the Bankers' Automated
Clearing System. Payments will be paid in US dollars unless the shareholder
elects to receive the dividend in Sterling. Existing elections can be changed
by contacting the Company's Transfer and Paying Agent, Equiniti Limited on +44
(0) 121 415 7047.
Share Dealing
Investors wishing to buy or sell shares in the Company may do so through a
stockbroker. Most banks also offer this service.
Foreign Account Tax Compliance Act
The Company is registered (with a Global Intermediary Identification Number
CAVBUD.999999.SL.831) under The Foreign Account Tax Compliance Act ("FATCA").
Share Register Enquiries
The Company's UK Transfer and Paying Agent, Equiniti Limited, maintains the
share registers. In event of queries regarding your holding, please contact the
Registrar on 0871 384 2265, calls to this number cost 8p per minute from a BT
landline, other providers' costs may vary. Lines are open 8.30 a.m. to 5.30
p.m., Monday to Friday, If calling from overseas +44 (0) 121 415 7047 or access
their website at www.equiniti.com. Changes of name or address must be notified
in writing to the Transfer and Paying Agent.
Nominee Share Code
Where notification has been provided in advance, the Company will arrange for
copies of shareholder communications to be provided to the operators of nominee
accounts. Nominee investors may attend general meetings and speak at meetings
when invited to do so by the Chairman.
Documents Available for Inspection
The following documents will be available at the registered office of the
Company during usual business hours on any weekday until the date of the Annual
General Meeting and at the place of the meeting for a period of fifteen minutes
prior to and during the meeting:
(a) the Register of Directors' Interests in the stated capital of the Company;
(b) the Articles of Incorporation of the Company; and
(c) the terms of appointment of the Directors.
Warning to Shareholders - Boiler Room Scams
In recent years, many companies have become aware that their shareholders have
been targeted by unauthorised overseas-based brokers selling what turn out to
be non-existent or high risk shares, or expressing a wish to buy their shares.
If you are offered, for example, unsolicited investment advice, discounted JZCP
shares or a premium price for the JZCP shares you own, you should take these
steps before handing over any money:
· Make sure you get the correct name of the person or organisation
· Check that they are properly authorised by the FCA before getting involved
by visiting http://www.fca.org.uk/firms/systems-reporting/register
· Report the matter to the FCA by calling 0800 111 6768
· If the calls persist, hang up
· More detailed information on this can be found on the Money Advice Service
website www.moneyadviceservice.org.uk
US Investors
General
The Company's Articles contain provisions allowing the Directors to decline to
register a person as a holder of any class of ordinary shares or other
securities of the Company or to require the transfer of those securities
(including by way of a disposal effected by the Company itself) if they believe
that the person:
(a) is a "US person" (as defined in Regulation S under the US Securities Act of
1933, as amended) and not a "qualified purchaser" (as defined in the US
Investment Company Act of 1940, as amended, and the related rules thereunder);
(b) is a "Benefit Plan Investor" (as described under "Prohibition on Benefit
Plan Investors and Restrictions on Non-ERISA Plans" below); or
(c) is, or is related to, a citizen or resident of the United States, a US
partnership, a US corporation or a certain type of estate or trust and that
ownership of any class of ordinary shares or any other equity securities of the
Company by the person would materially increase the risk that the Company could
be or become a "controlled foreign corporation" (as described under "US Tax
Matters").
In addition, the Directors may require any holder of any class of ordinary
shares or other securities of the Company to show to their satisfaction whether
or not the holder is a person described in paragraphs (A), (B) or (C) above.
US Securities Laws
The Company (a) is not subject to the reporting requirements of the US
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and does not
intend to become subject to such reporting requirements and (b) is not
registered as an investment company under the US Investment Company Act of
1940, as amended (the "1940 Act"), and investors in the Company are not
entitled to the protections provided by the 1940 Act.
Prohibition on Benefit Plan Investors and Restrictions on Non-ERISA Plans
Investment in the Company by "Benefit Plan Investors" is prohibited so that the
assets of the Company will not be deemed to constitute "plan assets" of a
"Benefit Plan Investor". The term "Benefit Plan Investor" shall have the
meaning contained in 29 C.F.R. Section 2510.3-101, as modified by Section 3(42)
of the US Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and includes (a) an "employee benefit plan" as defined in Section 3
(3) of ERISA that is subject to Part 4 of Title I of ERISA; (b) a "plan"
described in Section 4975(e)(1) of the US Internal Revenue Code of 1986, as
amended (the "Code"), that is subject to Section 4975 of the Code; and (c) an
entity whose underlying assets include "plan assets" by reason of an employee
benefit plan's or a plan's investment in such entity. For purposes of the
foregoing, a "Benefit Plan Investor" does not include a governmental plan (as
defined in Section 3(32) of ERISA), a non-US plan (as defined in Section 4(b)
(4) of ERISA) or a church plan (as defined in Section 3(33) of ERISA) that has
not elected to be subject to ERISA.
Each purchaser and subsequent transferee of any class of ordinary shares (or
any other class of equity interest in the Company) will be required to
represent, warrant and covenant, or will be deemed to have represented,
warranted and covenanted, that it is not, and is not acting on behalf of or
with the assets of, a Benefit Plan Investor to acquire such ordinary shares (or
any other class of equity interest in the Company).
Under the Articles, the directors have the power to require the sale or
transfer of the Company's securities in order to avoid the assets of the
Company being treated as "plan assets" for the purposes of ERISA.
.
The fiduciary provisions of laws applicable to governmental plans, non-US plans
or other employee benefit plans or retirement arrangements that are not subject
to ERISA (collectively, "Non-ERISA Plans") may impose limitations on investment
in the Company. Fiduciaries of Non-ERISA Plans, in consultation with their
advisers, should consider, to the extent applicable, the impact of such
fiduciary rules and regulations on an investment in the Company.
Among other considerations, the fiduciary of a Non-ERISA Plan should take into
account the composition of the Non-ERISA Plan's portfolio with respect to
diversification; the cash flow needs of the Non-ERISA Plan and the effects
thereon of the illiquidity of the investment; the economic terms of the Non-
ERISA Plan's investment in the Company; the Non-ERISA Plan's funding
objectives; the tax effects of the investment and the tax and other risks
associated with the investment; the fact that the investors in the Company are
expected to consist of a diverse group of investors (including taxable,
tax-exempt, domestic and foreign entities) and the fact that the management of
the Company will not take the particular objectives of any investors or class
of investors into account.
Non-ERISA Plan fiduciaries should also take into account the fact that, while
the Company's board of directors and its investment adviser will have certain
general fiduciary duties to the Company, the board and the investment adviser
will not have any direct fiduciary relationship with or duty to any investor,
either with respect to its investment in Shares or with respect to the
management and investment of the assets of the Company. Similarly, it is
intended that the assets of the Company will not be considered plan assets of
any Non-ERISA Plan or be subject to any fiduciary or investment restrictions
that may exist under laws specifically applicable to such Non-ERISA Plans. Each
Non-ERISA Plan will be required to acknowledge and agree in connection with its
investment in any securities to the foregoing status of the Company, the board
and the investment adviser that there is no rule, regulation or requirement
applicable to such investor that is inconsistent with the foregoing description
of the Company, the board and the investment adviser.
Each purchaser or transferee that is a Non-ERISA Plan will be deemed to have
represented, warranted and covenanted as follows:
(a) The Non-ERISA Plan is not a Benefit Plan Investor;
(b) The decision to commit assets of the Non-ERISA Plan for investment in the
Company was made by fiduciaries independent of the Company, the Board, the
Investment adviser and any of their respective agents, representatives or
affiliates, which fiduciaries (i) are duly authorized to make such investment
decision and have not relied on any advice or recommendations of the Company,
the Board, the Investment adviser or any of their respective agents,
representatives or affiliates and (ii) in consultation with their advisers,
have carefully considered the impact of any applicable federal, state or local
law on an investment in the Company;
(c) The Non-ERISA Plan's investment in the Company will not result in a
non-exempt violation of any applicable federal, state or local law;
(d) None of the Company, the Board, the Investment adviser or any of their
respective agents, representatives or affiliates has exercised any
discretionary authority or control with respect to the Non-ERISA Plan's
investment in the Company, nor has the Company, the Board, the Investment
adviser or any of their respective agents, representatives or affiliates
rendered individualized investment advice to the Non-ERISA Plan based upon the
Non-ERISA Plan's investment policies or strategies, overall portfolio
composition or diversification with respect to its commitment to invest in the
Company and the investment program thereunder; and
(e) It acknowledges and agrees that it is intended that the Company will not
hold plan assets of the Non-ERISA Plan and that none of the Company, the Board,
the Investment adviser or any of their respective agents, representatives or
affiliates will be acting as a fiduciary to the Non-ERISA Plan under any
applicable federal, state or local law governing the Non-ERISA Plan, with
respect to either (i) the Non-ERISA Plan's purchase or retention of its
investment in the Company or (ii) the management or operation of the business
or assets of the Company. It also confirms that there is no rule, regulation,
or requirement applicable to such purchaser or transferee that is inconsistent
with the foregoing description of the Company, the Board and the Investment
adviser.
US Tax Matters
This discussion does not constitute tax advice and is not intended to be a
substitute for tax advice and planning. Prospective holders of the Company's
securities must consult their own tax advisers concerning the US federal, state
and local income tax and estate tax consequences in their particular situations
of the acquisition, ownership and disposition of any of the Company's
securities, as well as any consequences under the laws of any other taxing
jurisdiction.
The Board may decline to register a person as, or to require such person to
cease to be, a holder of any class of ordinary shares or other equity
securities of the Company because of, among other reasons, certain US ownership
and transfer restrictions that relate to "controlled foreign corporations"
contained in the Articles of the Company. A Shareholder of the Company may be
subject to forced sale provisions contained in the Articles in which case such
shareholder could be forced to dispose of its securities if the Company's
directors believe that such shareholder is, or is related to, a citizen or
resident of the United States, a US partnership, a US corporation or a certain
type of estate or trust and that ownership of any class of ordinary shares or
any other equity securities of the Company by such shareholder would materially
increase the risk that the Company could be or become a "controlled foreign
corporation" within the meaning of the Code (a "CFC"). Shareholders of the
Company may also be restricted by such provisions with respect to the persons
to whom they are permitted to transfer their securities.
In general, a foreign corporation is treated as a CFC if, on any date of its
taxable year, its "10% US Shareholders" collectively own (directly, indirectly
or constructively within the meaning of Section 958 of the Code) more than 50%
of the total combined voting power or total value of the corporation's stock.
For this purpose, a "10% US Shareholder" means any US person who owns
(directly, indirectly or constructively within the meaning of Section 958 of
the Code) 10% or more of the total combined voting power of all classes of
stock of a foreign corporation or 10% or more of the total value of shares of
all classes of stock of a foreign corporation. The Tax Cuts and Jobs Act (the
"Tax Act") eliminated the prohibition on "downward attribution" from non-US
persons to US persons under Section 958(b)(4) of the Code for purposes of
determining constructive stock ownership under the CFC rules. As a result, the
Company's US subsidiary will be deemed to own all of the stock of the Company's
non-US subsidiaries held by the Company for purposes of determining such
foreign subsidiaries' CFC status. The legislative history under the Tax Act
indicates that this change was not intended to cause the Company's non-US
subsidiaries to be treated as CFCs with respect to a 10% US Shareholder that is
not related to the Company's US subsidiary. However, the IRS has not yet issued
any guidance confirming this intent and it is not clear whether the IRS or a
court would interpret the change made by the Tax Act in a manner consistent
with such indicated intent. The Company's treatment as a CFC as well as its
foreign subsidiaries' treatment as CFCs could have adverse tax consequences for
10% US Shareholders.
The Company has been advised that it is NOT a passive foreign investment
company ("PFIC") for the fiscal years ended February 2019 and 2018. An analysis
for the financial year ended 29 February 2020 will be undertaken this year. A
classification as a PFIC would likely have adverse tax consequences for US
taxpayers.
The taxation of a US taxpayer's investment in the Company's securities is
highly complex. Prospective holders of the Company's securities must consult
their own tax advisers concerning the US federal, state and local income tax
and estate tax consequences in their particular situations of the acquisition,
ownership and disposition of any of the Company's securities, as well as any
consequences under the laws of any other taxing jurisdiction.
Investment Adviser's ADV Form
Shareholders and state securities authorities wishing to view the Investment
Adviser's ADV form can do so by following the link below:
https://adviserinfo.sec.gov/IAPD/IAPDFirmSummary.aspx?ORG_PK=160932
END
(END) Dow Jones Newswires
June 18, 2020 02:00 ET (06:00 GMT)
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