TIDMLWDB
RNS Number : 7884C
Law Debenture Corp PLC
25 February 2022
The Law Debenture Corporation p.l.c.
25 February 2022
Strong track record for consistent long-term outperformance and
dividend growth continues
The Law Debenture Corporation p.l.c. ("Law Debenture") today
published its results for the year ended 31 December 2021.
Group Highlights
-- NAV total return with debt and IPS at FV for 2021 of 25.1%,
outperforming the FTSE Actuaries All-Share Index by 6.8%
-- Another year of strong performance from the Independent
Professional Services business (IPS) with profit before tax up by
9.1% and valuation up 32.4% (2) to GBP166m
-- The capital structure has been reviewed to support further
investment, resulting in the issuance of 4.5 million new ordinary
shares at a premium to NAV, to existing and new investors, with net
proceeds of GBP32.9m. Two tranches of long-term debt, with a total
value of GBP50m, were also issued, with an average coupon of
2.54%
-- Continued low ongoing charges of 0.50%, compared to the industry average of 1.05%
-- Winner of Investment Week's UK Income Sector Investment Trust of the year
Dividend Highlights
-- 2021 FY dividends increased by 5.5% to 29.0 pence per ordinary share (2020: 27.5p)
-- Dividend yield of 3.7% (i) , Q4 dividend of 8.375 pence per ordinary share
-- 13.8% CAGR in dividends over last four years
Investment Highlights
-- Law Debenture has consistently outperformed its benchmark on
short- and longer-term performance measures
1 year 3 years 5 years 10 years
% % % %
NAV total return (with debt at par) (1) 23.1 49.3 59.7 199.2
----------------------------------------------- ------ ------- ------- --------
NAV total return (with debt at fair value) (1) 25.1 47.3 59.4 187.7
----------------------------------------------- ------ ------- ------- --------
FTSE Actuaries All-Share Index Total Return 18.3 27.2 30.2 110.7
----------------------------------------------- ------ ------- ------- --------
Share price total return 19.2 67.6 81.2 237.0
----------------------------------------------- ------ ------- ------- --------
Change in Retail Price Index 7.5 11.2 18.9 32.7
----------------------------------------------- ------ ------- ------- --------
IPS Highlights
-- The Group's leading wholly-owned independent provider of
professional services is a key differentiator to other investment
trusts
-- Profits before tax are up 9.1% and earnings per share are up
7.0% on prior period, reflecting consistent growth under new
management team, funding over a third of the increased 2021 full
year dividend
-- IPS CAGR of 8.5% for EPS over last four years
-- Fair value of the IPS business increased by 32.4% (2) in 2021
to GBP166m and by 114.5% 2017-21
-- IPS accounts for 18% of 2021 NAV but has contributed 36% of cashflows over last 10 years
-- Board's ambition to continue to grow IPS at mid to high single digits
Longer-Term Record
-- 133 years of value creation for shareholders
-- 43 years of increasing or maintained dividends to shareholders
-- 104% (3) increase to dividends over last 10 years
Robert Hingley, Chairman, said:
"Law Debenture aims to provide a steadily increasing income for
our shareholders whilst achieving long-term capital growth in real
terms. In 2021, we have continued to realise these ambitions,
exemplified through a significant IPS valuation uplift and another
good increase in our full-year dividend of 5.5%. I am pleased at
the consistent long-term outperformance of our benchmark.
We are confident that, in the long term, the combination of a
robust and well-positioned equity portfolio and continued growth in
our IPS business will deliver attractive returns for our
shareholders."
Denis Jackson, Chief Executive Officer, said:
"2021 marked another strong year of all round progress for Law
Debenture. I am particularly encouraged that IPS has now built a
proven record with four consecutive years of at least mid to high
single digit growth. We have invested significantly in our people,
bolstering our team and capabilities and we look forward to
capturing the opportunities ahead.
I am confident that our Investment Managers' focus on selecting
strong business models and attractive valuation opportunities will
enable them to continue to position the equity portfolio for future
longer-term growth and outperformance.
I remain optimistic in Law Debenture's longer-term outlook. We
are committed to growing and developing the IPS business and
continuing our unbroken 43-year record of maintaining or raising
the dividend."
+++
Investment Portfolio:
Our portfolio of investments is managed by James Henderson and
Laura Foll of Janus Henderson Investors.
Our objective is to achieve long-term capital growth in real
terms and steadily increasing income. The aim is to achieve a
higher rate of total return than the FTSE Actuaries All-Share Index
Total Return through investing in a diversified portfolio of
stocks.
Independent Professional Services:
We are a leading provider of independent professional services,
built on three excellent foundations: our Pensions, Corporate Trust
and Corporate Services businesses. We operate internationally, with
offices in the UK, New York, Ireland, Hong Kong, Delaware and the
Channel Islands.
Companies, agencies, organisations and individuals throughout
the world rely upon Law Debenture to carry out our duties with the
independence and professionalism upon which our reputation is
built.
Law Debenture +44 (0)20 7606 5451
Denis Jackson, Chief Executive Officer denis.jackson@lawdeb.com
Hester Scotton, Chief Financial Officer hester.scotton@lawdeb.com
Trish Houston, Chief Operating Officer trish.houston@lawdeb.com
Tulchan Communications (Financial PR) +44 (0)20 7353 4200
David Allchurch lawdebenture@tulchangroup.com
Deborah Roney
Tiwa Adebayo
Footnotes
(1) NAV is calculated in accordance with the AIC methodology,
based on performance data held by Law Debenture including fair
value of the IPS business and long-term borrowings. NAV is shown
with debt measured at par and with debt measured at fair value.
(2) Increase in annual valuation of IPS business, excluding
change in surplus net assets.
(3) Calculated on total dividend payments in respect of
accounting periods ended 31 December 2012 to 31 December 2021.
(i) Based on the closing share price of 783p as at 23 February
2022
ANNUAL FINANCIAL REPORT
YEARED 31 DECEMBER 2021 (AUDITED)
This is an announcement of the Annual Financial Report of The
Law Debenture Corporation p.l.c. as required to be published under
DTR 4 of the FCA Listing Rules.
The Directors recommend a final dividend of 8.375p per share
making a total for the year of 29.0p. Subject to the approval of
shareholders, the final dividend will be paid on 14 April 2022 to
holders on the register of the record date of 11 March 2022. The
annual financial report has been prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted by
the UK.
The financial information set out in this Annual Financial
Report does not constitute the Company's statutory accounts for
2020 or 2021. Statutory accounts for the years ended 31 December
2020 and 31 December 2021 have been reported on by the Independent
Auditor. The Independent Auditor's Reports on the Annual Report and
Financial Statements for 2020 and 2021 were unqualified, did not
draw attention to any matters by way of emphasis and did not
contain a statement under 498(2) or 498(3) of the Companies Act
2006.
Statutory accounts for the year ended 31 December 2020 have been
filed with the Registrar of Companies. The statutory accounts for
the year ended 31 December 2021 will be delivered to the Registrar
in due course.
The financial information in this Annual Financial Report has
been prepared using the recognition and measurement principles of
International Accounting Standards, International Financial
Reporting Standards and Interpretations adopted for use in the UK
(collectively Adopted IFRSs). The accounting policies adopted in
this Annual Financial Report have been consistently applied to all
the years presented and are consistent with the policies used in
the preparation of the statutory accounts for the year ended 31
December 2021. The principal accounting policies adopted are
unchanged from those used in the preparation of the statutory
accounts for the year ended 31 December 2020.
Financial summary
31 December 31 December 2020
2021
GBP000 GBP000 Change
----------------------------------- ------------ ----------------- -------
Net Asset Value - including debt
and IPS at fair value(1) 964,493 787,219 22.5%
----------------------------------- ------------ ----------------- -------
Total Net Assets per the balance
sheet 878,837 726,994 20.9%
----------------------------------- ------------ ----------------- -------
Pence Pence
----------------------------------- ------------ ----------------- -------
Net Asset Value (NAV) per share
at fair value(1)* 787.83 666.15 18.3%
----------------------------------- ------------ ----------------- -------
Revenue return per share
----------------------------------- ------------ ----------------- -------
Investment portfolio 18.09 12.12 49.3%
----------------------------------- ------------ ----------------- -------
Independent professional services 10.00 9.35 7.0%
----------------------------------- ------------ ----------------- -------
Group charges - 0.09 n/a
----------------------------------- ------------ ----------------- -------
Group revenue return per share 28.09 21.56 30.3%
----------------------------------- ------------ ----------------- -------
Capital (loss)/return per share 94.60 (19.06) 596.2%
----------------------------------- ------------ ----------------- -------
Dividends per share 29.00 27.50 5.5%
----------------------------------- ------------ ----------------- -------
Share price 799 690 15.8%
----------------------------------- ------------ ----------------- -------
% %
----------------------------------- ------------ -----------------
Ongoing charges(3)* 0.50% 0.55%
----------------------------------- ------------ -----------------
Gearing(3) 13% 9%
----------------------------------- ------------ -----------------
Premium/(Discount)* 1.4% 3.6%
----------------------------------- ------------ -----------------
Performance
1 year 3 years 5 years 10 years
% % % %
-------------------------------------- ------- -------- -------- ---------
NAV total return(2)(*) (with debt at
par) 23.1 49.3 59.7 199.2
-------------------------------------- ------- -------- -------- ---------
NAV total return(2)(*) (with debt at
fair value) 25.1 47.3 59.4 187.7
-------------------------------------- ------- -------- -------- ---------
FTSE Actuaries All-Share Index Total
Return(4) 18.3 27.2 30.2 110.7
-------------------------------------- ------- -------- -------- ---------
Share price total return(4)(*) 19.2 67.6 81.2 237.0
-------------------------------------- ------- -------- -------- ---------
Change in Retail Price Index(5) 7.5 11.2 18.9 32.7
-------------------------------------- ------- -------- -------- ---------
* Items marked "*" are considered to be alternative performance
measures and are described in more detail in the annual report.
(1) -Please refer below for the calculation of net asset
value.
(2) NAV is calculated in accordance with the AIC methodology,
based on performance data held by Law Debenture including fair
value of the IPS business and long-term borrowings. NAV is shown
with debt measured at par and with debt measured at fair value.
(3) Ongoing charges are calculated based on AIC guidance, using
the administrative costs of the investment trust and include the
Janus Henderson Investors' management fee, charged at the annual
rate of 0.30% of the NAV. There is no performance related element
to the fee. Gearing is described in the strategic report below and
in our alternative performance measures in the full annual
report.
(4) Source: Refinitiv.
(5) Source: Office for National Statistics.
Mark Bridgeman's retirement
Having completed nine years on the Board, Mark Bridgeman will
retire as a Non-Executive Director of the Company at the conclusion
of its Annual General Meeting (AGM), scheduled to take place on 7
April 2022. The Board would like to thank him for his invaluable
contributions over the years and wish him the best for the next
chapter of his career.
Pars Purewal and Clare Askem will succeed Mark as Chair of the
Audit and Risk Committee and designated Non-Executive Director for
Workforce Engagement respectively, with effect from 7 April
2022.
Chairman's statement
In an exciting and eventful year, Law Debenture has shown good
progress against its investment objectives and I am delighted to
introduce our 2021 Annual Report.
Performance
Whilst 2021 presented further global economic uncertainty and
lockdown-induced interruption, Law Debenture remained committed to
delivering on its objective to produce long-term capital growth and
steadily increasing income for our shareholders.
Our benchmark, the FTSE Actuaries All-Share Index, delivered a
18.3% total return, and we are pleased that the Company's share
price total return marginally outperformed this with a total return
of 19.2% for 2021. Additionally, the Company delivered a NAV(1)
total return (with debt at fair value) of 25.1%. These achievements
were anchored by the quality of our diversified equity portfolio
and growing IPS business.
Long-term outperformance remains the Board's priority. Our
investment managers have a strong record of share price
outperformance compared to the benchmark of the FTSE Actuaries
All-Share, outperforming by 40.4% over three years, 51.0% over five
years and by 126.3% over ten years. We were pleased to see our
performance recognised at the Investment Week Investment Company of
the Year Awards 2021 where we won UK Equity Income Sector
Investment Trust of the Year.
Dividend
In 2020, the market experienced unprecedented dividend cuts and
cancellations from listed companies. Although there has been a
marked improvement in the last 12 months, the residual effect of
the pandemic will likely affect dividend payments for the next
several years.
Given our investment objective, one of our top priorities is to
gradually increase income by increasing dividend payments. It is
with great pride that Law Debenture is now in its 43rd year of
maintaining or increasing its dividend payments. This record is
supported by the diversified nature of IPS revenues, which have
funded roughly 36% of dividends over the last 10 years.
Subject to your approval, we propose paying a final dividend of
8.375 pence per ordinary share. The dividend will be paid on 14
April 2022 to holders on the register on the record date of 11
March 2022. This will provide shareholders with a total dividend of
29.00 pence per share for 2021, an increase of 5.5% compared with
2020. This represents a dividend yield of 3.7% based on our share
price of 783 pence on 23 February 2022.
Capital structure
During the year, the Board decided to issue equity initially to
refinance the GBP20m acquisition of the Company Secretarial
Services (CSS) business from Eversheds Sutherland (International)
LLP in 2021. Shares were issued if they were trading at a premium
to net asset value, and so be accretive to existing shareholders.
Demand for the Company's shares was encouraging and led to the
issue of a total of 4.5m new shares during the year, resulting in
net proceeds received by the Company of GBP32.9m.
Having reviewed the capital structure of the Group, the Board
decided to issue two tranches of long-term debt, GBP20m at 2.54%
which matures in 2041, and GBP30m at 2.53%, maturing in 2050. The
debt has provided further opportunities for our Investment Managers
to be net investors in the market, along with providing optionality
to consider further inorganic growth for IPS, should the right
opportunity present itself.
Our investment portfolio
Our investment managers, James Henderson and Laura Foll have
continued to invest in high-quality companies at attractive
valuations, which offer good total return opportunities. IPS
earnings continue to support our dividend payments, allowing James
and Laura flexibility in portfolio construction.
The investment managers' review below offers further commentary
on the portfolio performance.
IPS
The IPS business remains a key differentiator between us and
other UK income funds.
Over the course of 2021, IPS grew its revenues by 20.6%, with
profit before tax up 9.1% and earnings per share up 7.0% compared
to 2020. The material increase in revenue was driven primarily by
the acquisition of CSS. CSS enhances our capabilities and growth
opportunities in an attractive market.
We continue to pursue a consistent strategy of developing IPS
through a combination of organic growth, operational improvements
and potential acquisitions that meet Law Debenture's strict
financial and strategic criteria.
2021 continued to test Law Debenture's employees, I am proud of
the inspiring efforts of the IPS teams. They have responded with
determination, helping clients in innovative ways, and have
successfully opened a new office in Manchester.
Environmental, Social and Governance (ESG) considerations
Sustainability and climate change is one of the biggest economic
and political challenges the world faces. The Board continues to
view ESG as part of Law Debenture's operations. Strong governance,
transparency and accountability underpin our approach across all
areas of the IPS business and investment portfolio.
Within IPS, our core asset is our people. Throughout the year,
we have prioritised the well-being of our colleagues and it is
pleasing to see that Law Debenture's employee engagement survey
showed our staff are empowered, would recommend Law Debenture as a
place to work and have a real sense of pride about the services
they offer clients.
We want to maximise positive outcomes by embedding
sustainability in our culture and our operations and seeking to
reduce our impact on the environment. During the pandemic, we moved
into a new office which is rated BREEAM (Building Research
Establishment's Environmental Assessment Method) excellent for its
significant green components.
Our investment managers take positions in companies with
long-term sustainable business models. While James and Laura will
not exclude companies that can help Law Debenture to meet its
income and capital growth investment objectives, they carefully
take into account ESG-risks and opportunities when selecting
stocks. Our investment managers' approach to ESG is described in
the full annual report.
Governance
Robert Laing retired from the Board at the close of the AGM in
April 2021. On behalf of my fellow Board members, I would like to
thank Robert for his nine years of wise counsel and wish him the
very best for the future.
Mark Bridgeman will also retire from the Board at the close of
the 2022 AGM having served a tenure of nine years. We also thank
him for his invaluable contributions over the years and wish him
the best for the next chapter of his career.
During the year, we welcomed two new Non-Executive Directors to
the Board of Law Debenture. Clare Askem was appointed to the Board
on 10 June 2021 and Clare brings extensive experience in strategic
development, business change and digital transformation. Clare will
succeed Mark as designated Non-Executive Director for Workforce
Engagement, following his retirement at the close of the 2022
AGM.
We also welcomed Pars Purewal on 16 December 2021. Pars has
exceptional experience in accounting, investment trusts and
professional services. Pars will succeed Mark as Audit and Risk
Committee Chair, following his retirement.
We are pleased to have ranked second in the FTSE 250 for Women
on the Board and in Leadership roles, in the recently published
FTSE Women Leaders Review.
Looking ahead, the Board will continue to ensure its membership
is diverse in backgrounds, executive experience and
perspectives.
We will keep shareholders updated on arrangements to hold a
hybrid AGM this year and other investor events through our
website.
Looking forward
While the outlook for the pandemic for 2022 is more hopeful, it
will continue to affect economies and monetary policies around the
globe. However, the Board and our investment managers remain
confident that the portfolio is well-placed for long-term
outperformance.
Work has begun on two other key initiatives: i) expanding our
retail shareholder base and ii) articulating our approach to
Environmental, Social and Governance matters. This is a complex
area which requires us to balance the needs of our shareholders,
clients, employees and the wider community. We look forward to
sharing progress with shareholders as our work evolves.
IPS remains well-positioned to continue delivering a resilient
financial performance and capturing the growth potential in its
markets.
Finally, I would like to thank our shareholders for their
continuing support, and our investment managers and Executive team
for their hard work. I have been truly impressed by Law Debenture's
response to the pandemic.
Robert Hingley
Chairman of the Board
24 February 2022
(1) NAV is calculated in accordance with the AIC methodology,
based on performance data held by Law Debenture including fair
value of the IPS business and long-term borrowings. NAV returns are
shown with debt measured at par and with debt measured at fair
value above.
Chief Executive Officer's review
Introduction
2021 was a year of recovery blended with significant volatility.
It saw companies around the world attempt to bounce back from the
shocks of 2020, while adapting their business models to the "new
normal". For the UK, the economy registered strong GDP growth,
albeit against a very weak 2020, but trends across sectors varied
significantly. In the first quarter of 2021, the UK entered a third
lockdown and we all had to contend with ongoing Covid-19 related
disruptions to the economy. Our good performance through the year
reflects well on the Group's ability to adapt to a changeable
economic climate and navigate short-term periods of turbulence. Law
Debenture delivered on both of its objectives; producing long-term
capital growth and steadily increasing income for our shareholders.
Our investment managers, James Henderson and Laura Foll of Janus
Henderson Investors, have continued their successful long-term
record of material outperformance against our benchmark, the FTSE
Actuaries All Share Index, over one, three, five and ten years. Our
IPS business completed its fourth consecutive year of growth, with
net revenue up 20.6% and profit before tax up 9.1%, while retaining
its reputation for quality and outstanding client outcomes.
Consistent growth is our longer-term objective and IPS now has a
good record to build on. We have continued to invest in our people
to ensure we have strong foundations for continuing success. I
would like to thank our staff for their continued hard work and
focus on delivering good outcomes for our clients.
As a UK Equity Income Trust, this Company works to ensure
shareholders can depend on us for regular, reliable income. We aim
to gradually increase dividend payments over time. This year showed
how the unique combination of our equity portfolio and global
professional services business can drive value. I was delighted to
see Law Debenture's strong and attractive attributes recognised as
Investment Week's 2021 Investment Company of the Year in the UK
Equity Income sector.
We are proud to have delivered a 104% increase in dividend over
the last ten years with 43 years of increasing or maintaining
dividends to shareholders. This is supported by the diversified
nature of IPS, which has funded around 36% of dividends for the
trust over the past 10 years. IPS business net revenues for the
full year were up 20.6% at GBP41.6m (2020: GBP34.5m) and earnings
per share up by 7.0% to 10.0p (2020: 9.35p). We are committed to
grow the profits of our IPS business by mid to high single
percentage growth. In early 2021, we acquired CSS, which
strengthens our existing business and its longer-term earnings
outlook. We believe that the significant increase in our CSS market
footprint is of strategic importance to the growth of IPS. The
business has expanded our client reach and creates new
opportunities to cross-sell our other services. With continued
investment into our operating infrastructure and talent to support
future growth, I am encouraged by our 2021 performance.
Our unique proposition as an investment trust is that the IPS
business allows James and Laura increased flexibility in their
portfolio construction. This was again highlighted in 2021. The
strength of our diversified income streams allowed us to invest
into some emerging companies with excellent long-term growth
prospects, which may not pay dividends for many years.
Net revenue Net revenue Net revenue Growth
2019 2020 2021 2020/2021
DIVISION GBP000 GBP000 GBP000 %
-------------------- ------------ ------------ ------------ -----------
Corporate trust 9,024 10,788 9,771 (9.4)
Pensions 10,598 11,479 13,060 13.8
Corporate services 12,167 12,226 18,755 53.4
Total 31,789 34,493 41,586* 20.6
*Total net revenue is calculated by reducing segment income of
GBP49,513k for cost of sales of GBP7,927k.
Corporate services: 2021 includes additional revenue arising
from the acquisition of the CSS business from Eversheds Sutherland
(International) LLP.
Corporate trust
Law Debenture has been a bond trustee for over 133 years. The
role of a bond trustee is to act as a bridge between the issuer of
a bond and the individual bondholders. Our responsibilities can
vary whether servicing performing or defaulted bond issues.
Normal duties for the bond trustee to support performing issues
could include receipt of financial or other covenant-related
information, together with the distribution of such information to
bondholders. For this work, we are typically paid an annual fee
throughout the lifetime of the bond. For the majority of our
existing book of business, these annual fees are inflation-linked.
When an amendment to bond documentation is required, we can also
earn additional revenues to complete the necessary changes.
When bonds default, the workflow, risk, and revenue profiles of
our role change. A key duty of the bond trustee is to be the legal
creditor of the issuer on behalf of the bondholders. Our role in
such default situations requires incremental work that, given a
favourable outcome, can lead to significant additional income. That
said, defaults often take years to play out and the results are
uncertain. Given this, our revenues for this work in any particular
year can be somewhat unpredictable. However, such post-issuance
work has strong economic counter-cyclicality and has produced sound
returns for our shareholders over time.
Market dynamics
Following a strong year for primary debt issuance in Europe in
2020 where debt issuance revenues were up by 21% (Source: Dealogic)
primary market debt issuance revenues for 2021 were up just 1%
(Source: Dealogic).
Headwinds in primary issuance were compounded by a significantly
tougher market than we might have expected for post issuance work.
As we mentioned at the half year, a bi-product of the unprecedented
financial support offered to corporates around the world by central
governments has been a significant reduction in the number of
bankruptcies. November 2021 was the first month since the onset of
the pandemic in March 2020 that the number of bankruptcies in the
UK was higher than pre-pandemic levels. The full year numbers
showed bankruptcies at 14,056 compared to 17,198 in 2019 (Source:
The Insolvency Service).
The bankruptcy experience of the UK over the past two years is
mirrored by many major developed economies. We would expect
bankruptcies to return to more normal levels as temporary support
measures from central governments are removed and demand for our
post issuance expertise to increase correspondingly.
Highlights
The business achieved exceptional net revenue growth of 19.5% in
2020. With market conditions as previously described, delivering
revenue growth in 2021 was going to be a challenge. Reporting a
9.4% decrease in revenues to GBP9.8m is never something a business
leader wants to do; however, this is not reflective of the
longer-term business performance. In the past four years, since
Eliot Solarz was appointed to lead the business, corporate trust
has achieved compound revenue growth of 5.5% per annum.
Despite tough primary market conditions, we competed well.
During the year, we have been delighted to have been appointed to
support blue chip issuers including BT and Natwest in the UK,
Santander and Gamenet in Europe, Nippon Steel in Asia and Oi Movel
in South America.
The issuance of green, social, sustainable and
sustainability-linked bonds continue to grow rapidly. Regulators
are working hard to create alignment on an appropriate taxonomy and
we expect final rules of the EU Green Bond Standard to take shape
via the legislative process in 2022. In the UK, the FCA is seeking
input on whether it should recognise existing ICMA Principles or
develop its own UK green bond standard. The European Commission's
debut next generation EU green bonds and the UK Government's debut
of green gilts issuances were both significant landmarks in
2021.
These types of financing have strong momentum and it is critical
that we continue to develop our expertise in support of them.
Sustainability-linked bonds typically have a coupon step-up linked
to the issuer meeting pre-defined targets in relation to certain
key performance indicators, often related to CO(2) reduction.
During the year, we have been appointed to roles supporting
sustainability linked note issuances including Cullinan Luxembourg
and Rimini Italy. We also were appointed to support Hanetf's Carbon
Securities program and Lithuanian Emerald's issuance to develop
wind farms.
We have previously highlighted the work that we do to support
social housing issuers in the UK. The market is large, demand for
additional properties is vast and politicians of all parties are
looking to increase support for the sector. We continue to build on
our excellent footprint in this growing sector. Appointments for
new issuances in 2021 include Gateway, Scottish Boarders and
Metropolitan Thames Valley.
In last year's Annual Report, we explained the increasing demand
that we are seeing for our escrow products. We continued to build
on this in 2021. Our competitive strengths include our deep domain
expertise and ability to move fast. Among the more unusual escrow
activity in 2021, there were transactions relating to the
acquisition of aircraft landing slots and avoiding trapped
surpluses in corporate pension funds.
Outlook for our corporate trust business
Levels of primary market activity are difficult to predict;
growth in European primary debt issuance revenues in the past three
years illustrate this well at -14%, +21% and +1% respectively,
(Source: Dealogic). Our post-issuance work is equally difficult to
predict but historically has had a strong economic
counter-cyclicality. Over time, this business has produced
excellent returns to our shareholders. Large elements of our
revenue base are contractually repetitive and large elements are
inflation linked. Following a decade of very low inflation, the
recent increases in inflation will begin to filter through during
2022.
We continue to increase our range of products and have broad
relationships with clients, law firms and financial institutions
that underpin activity in this market. We have every confidence
that over time we can continue to grow this business within our
stated target range for the overall business of mid to high single
percentage growth.
Pensions
We are now in our sixth decade of serving clients in this sector
and we are one of the largest independent providers of pension
trustees in the UK. Our Pegasus offering of outsourced pensions
executive solutions is now a leading provider in the UK in a
fast-growing market.
Market dynamics
With assets of approx. GBP2.6 trillion (Source: WTW) the UK is
the world's third largest pensions market and there is significant
momentum to drive the professionalisation of the governance of
pension schemes in the UK.
The ability of a board of trustees to positively alter the
retirement outcomes for its pensioners is well understood and the
UK Pensions Regulator ("the Regulator") is, rightly, increasing its
demands of trustees, along with its expectations of governance
standards. The Pensions Scheme Act of 2021 introduces new duties
for those involved in running pension schemes. New guidance on
procedures for dealing with transfer requests comes into effect to
help scheme members avoid pensions scams. The Regulator also held a
consultation on new enforcement policies that include new powers to
impose high fines for malfeasance.
Managing a pension scheme is a serious, ever more complex task.
Some pension's governance recruiters still do not place sufficient
weight on the need for specialist skills or knowledge. At Law
Debenture, we appreciate that the sub-optimal management of
people's hard earned retirement monies has serious consequences.
All our pension trustees are experienced professionals and hold
accreditation from the Association of Professional Pension
Trustees.
Highlights
Back in 2001, an excellent decision was taken to hire Mark
Ashworth, who in turn recruited Michael Chatterton in 2010.
However, a number of years ago, Mark Ashworth and Michael
Chatterton indicated their desire to step back from their
leadership positions during 2021. They are leaders in their field
and, as leaders of our business, they grew the business
consistently. Over the past five years, revenue has grown from
GBP7.8m in 2016 to GBP13.2m last year.
Another strength of theirs was identifying talented individuals.
With Mark stepping down in January 2021 and Michael doing the same
at the end of the year, as of 1 January 2022, Vicky Paramour has
been promoted to lead our pensions business. Vicky Paramour joined
us in 2015, amongst a number of extremely capable hires. We are
fortunate that Mark and Michael remain with us as Senior Directors.
The orderly transition is testament to the superb way that Mark and
Michael have run the business. I would like to take this
opportunity to thank them both for their commitment to our
business.
2021 was another strong year for our pensions business with
growth in net revenues of 13.8%. Over the past four years, compound
revenue growth is 12.1%. In our core pension trustee business, we
were delighted to add incremental appointments that included HSBC
and Tesco.
We recognise that revenue growth is driven by investing in good
people. During the year, we made further appointments in legal and
restructuring expertise, and we believe this will continue to be a
growth area for us. We also invested in regional and international
talent. In Manchester, we hired our first pensions employees to
service a large pool of potential clients based in this area. We
also made our first appointment in Ireland, with Paul Torsney
joining during the first half of the year to develop our
Dublin-based pensions offering. We see increasing opportunities in
the Irish market from both local and international companies. We
have recently been appointed to work with the Workers Master Trust,
our first appointment for an entity based in Northern Ireland.
During the year, we were delighted to welcome Sankar Mahalingham
to lead Pegasus, our executive pensions offering. This offers
pension scheme secretarial services, at its simplest, right through
to fully outsourced pensions management and professional sole
trustee solutions at its most complex. From a standing start at the
end of 2017, this business now has revenues of approx. GBP3m per
annum. We have a broad product range and client base and we see
increasing demand for our expertise to independently support
projects such as GMP equalisation and de-risking. We also continue
to invest in hiring professionals with buy-in, buy-out and
wind-down experience which is of high value to a growing number of
schemes.
Outlook
The increasing governance burden for UK pension schemes means
that there are more opportunities for providing independent
professional support to schemes of all sizes. For example:
-- The Pensions Act 2021 contains more powers for the Regulator
which introduces new duties for those sponsoring and running
pension schemes
-- Schemes moving towards full de-risking solutions
-- Trustees face new reporting requirements intended to improve
the quality of governance and reporting as they address
climate-related risks and opportunities.
At the same time, sponsors of pension schemes are finding it
harder to find volunteers to become trustees as well as desiring a
focused business-to-business conversation with their trustee board
- this is true whatever the size and complexity of the scheme.
We see opportunities for working with new clients who will be
appointing their first ever professional trustee as well as other
schemes who will be looking to add further professional expertise
to their existing board. Working with schemes of all sizes as the
pensions landscape evolves, we are well placed to provide value to
smaller schemes leveraging insights from our wider portfolio for
their benefit.
Many sponsors of pension schemes will also be facing resourcing
issues, for example:
-- If in-house administration is outsourced for the first time
-- Succession planning as pension managers and their teams are due to retire
-- Increased governance requirements putting stress on under-resourced teams.
Rather than continue to operate with full in-house teams, an
increasing number will look to outsource all or part of their
function to third parties. This provides opportunities for Pegasus
to grow substantially by taking on these large, outsourced
mandates.
We believe that the market for our expanding range of pension
governance services will continue to increase steadily over time.
We continue to invest in the people and skills required to be a
market leader in this growth business.
Corporate services
This revenue stream has four constituents: structured finance
services, our whistleblowing division Safecall, service of process
and our company secretarial services (CSS) business. Pleasingly,
all businesses grew revenues during the year, but the combined
result of revenues up 53.4% was skewed by the acquisition of CSS on
29 January 2021.
Company Secretarial Services
Market dynamics
Corporate governance standards are being raised worldwide and
statutory and regulatory obligations continue to increase. Commerce
is becoming increasingly globalised and the ability to move fast
and expand geographically is often critical to success. Outsourcing
growth trends have arguably been accelerated by the pandemic. CFOs
are forced to examine their cost base and look to allocate capital
towards activities that will differentiate their company's
offering. Large in-house company secretarial departments are
decreasing in number. We have been offering solutions in this
sector for over twenty years. The newly acquired business gives us
critical mass and we are confident of our ability to increase our
share of a growing market.
Within CSS, we provide three main service lines:
Managed services: Based out of our new Manchester office, we
deliver global entity management services to over 350 clients. We
act as a single point of contact to ensure that legal entities of
international subsidiaries are kept in good standing. Client
appointments vary in scale and coverage, ranging from a single
legal entity in one country at its simplest to over 300
subsidiaries in 50 countries at its most complex. We are paid a
fixed annual fee to deliver annual compliance and corporate records
maintenance. We may also earn incremental revenues from additional
projects, such as incorporations and dissolutions, the
co-ordination of global corporate change projects and performing
entity validation work. Excellent workflow management and use of
technology is critical to compete effectively. We will continue to
invest in this space in 2022.
Corporate governance services: we provide all aspects of board
and committee support, from full outsourced company secretarial
support to attending and minuting meetings, in line with best
practice governance standards. We also offer practical company
secretarial services to companies preparing for an IPO transaction
including support post listing. Our clients range from major Main
Market and AIM listed companies, including investment trusts, to
leading UK operating subsidiaries of top global brands. Our fees
vary between fixed annual fees for specifically scoped mandates but
can also be time or project based. Demand here is often for skilled
professionals with prior experience in a particular industry and/or
governance framework who can seamlessly transition work from being
completed in-house. This team is based in London.
Interim resourcing: We offer immediate access to qualified
governance professionals whether on-site or remote, full time or
part time, as required by the client. Typically, we are paid on a
time spent basis, but may complete certain work on a fixed fee
basis.
Company secretarial services
Highlights
Client retention since acquisition has been excellent, with 99%
of the client base transitioning with the acquired business to Law
Debenture. It is pleasing that there have been a number of new
client wins, including several FTSE 100 and Fortune 500 groups on
the Managed Service side and FTSE 250 groups and regulated
challenger banks on the corporate governance services side. We have
also won several mandates for private groups on the journey to
IPO.
As with all of our businesses, the quality of our people will
determine our long-term success. We have invested in headcount and
incremental skills across all our product areas and will continue
to do so.
Whistleblowing: Safecall
Market dynamics
The emerging regulatory frameworks and standards that we have
highlighted in previous annual reports continue to build momentum
throughout the developed world. Whistleblowing has come of age. A
well-run whistleblowing framework is now part of good governance.
Excitingly for us, this is not limited to corporates. As many
high-profile news stories in 2021 underline, wider society has a
need to improve standards in a plethora of areas including sports,
charities and the public sector.
Whistleblowing: Safecall
Highlights
We provided a record number of reports to our clients in 2021,
up 25% on 2020. Feedback from our clients shows an increasing
appreciation for the value that we can bring to their
organisations. Graham Long took the decision to stand down as CEO
of Safecall and we were delighted to welcome the new leader of the
business, Joanna Lewis, at the end of August 2021. With the country
in another national lockdown, it was a slow start to the year, but
our sales gained momentum as the year went on and ended with 149
new clients, including Savills, DPD, Barnados and DLA Piper. We
ended the year with revenues up and, as we fully emerge from
Covid-19, we believe that we can accelerate our growth. We have
invested in our sales, account management and marketing efforts and
are increasingly providing training as clients look to improve the
quality of their responses to the increasing number of issues
requiring their attention.
The amount of incoming business through digital channels
continues to grow. Critical to our future success will be the
quality of our digital offering. We will increase our investment to
continue to meet the evolving needs of our clients.
Structured finance services
Market dynamics
This business provides accounting and administrative services to
special purpose vehicles (SPVs). Typical clients include financial
institutions that wish to gain risk exposure to a particular asset
type - for example aircraft leases or mortgages. These clients
regularly access third party outsource providers to help them with
the servicing of the assets. Boutique asset managers (private
equity and hedge funds), as well as challenger banks, are typical
buyers in a growing sector.
The competitive landscape is dominated by the larger providers
with long-established relationships. We are a small player and
receive strong praise from our clients. Our challenge is to achieve
the critical mass necessary to accelerate our growth.
Structured finance services
Highlights
We were delighted to receive appointments from market leading
names, including Carlyle, Avenue, Pepper, One William Street and
LendInvest. Particularly pleasing was a transaction that was a long
time in the making where we supported a deal for Reinsurance Group
of America. This structure uses the risk transfer capability of
capital markets and applies it to the insurance sector. The US
capital markets are widely used by the insurance sector for risk
transfer purposes. It is yet to be seen if Europe will adopt
similar practices, but it can only help to get experience at an
early stage in the market's development.
We added incremental business development resource to our
efforts here in 2021 and will do so again in 2022.
Service of process
Market dynamics
This is our highest volume business, and its results are closely
correlated with the economic cycle. Unsurprisingly, as the pandemic
took hold, 2020 was a particularly difficult year for this
business.
Service of process
Highlights
As we started out in 2021, our year-on-year comparators remained
equally unfavourable. The first two months of 2020 (pre-pandemic)
were strong whereas in the UK we entered 2021 with our second full
lock down from January 4th until March 9th at which point children
were allowed to return to school. Thankfully, global economic
conditions improved throughout the remainder of the year, and we
finished the year with our revenues up.
Anne Hills continues to lead our efforts. A new technology
platform was added to help build further scale to the business and
we added headcount that is increasingly client focused as we look
to be more proactive with our business development initiatives.
Outlook for our corporate services business
Following a difficult year in 2020, we are pleased to have grown
revenues in all the four businesses that make up our corporate
services reporting segment in 2021. Our CSS offering has been
transformed. Our whistleblowing business continues to build
momentum under a refreshed leadership. Our structured finance
services business has added to its high-quality roster of clients.
Our service of process business has yet again demonstrated its
durability. Demand for our products and services is strong and the
markets in which we operate are growing.
Central functions
After four years of compound growth of 8.2% in profit before
tax*, we recognise that, in order to continue to grow our business,
we need to ensure that we have an infrastructure that supports
this. With Trish Houston joining us as COO towards the end of 2020,
we have made significant progress.
Our people are the biggest asset of our IPS business. Ensuring
that we provide an exciting place to work, where people can grow
their careers is pivotal to our future success. During the year, we
have engaged with our people to articulate our values and culture.
The impact of this piece of work has been to unite people across
our business lines and our geographical regions to ensure we are
continuously challenging ourselves to provide the very best
outcomes for our clients. We have also invested in developing a
career framework to support our people in their advancement,
creating a pipeline of talented future leaders for our
business.
The acquisition of CSS, which has an office in Manchester,
presented us with an opportunity to look at the structure of our
business. As a result of this review, we have established a shared
services centre based in our Manchester office, which covers all
aspects of operational finance. This creates a scalable platform to
support both organic and inorganic growth across the business.
We have invested in business development support for each of our
teams. During the year, we have been delighted to build stronger
relationships with our existing clients as well as developing
relationships with new or potential clients.
*Excludes exceptional item in 2017 for gain on unlisted
investment of GBP3.275m.
Technology
The ability of professional services firms to flourish will be
increasingly defined by their commercial offerings' "ease of use".
Being technically excellent and providing outstanding outcomes for
clients, form an excellent foundation but, on their own, will no
longer be enough. Firms like ours, and the products that we
provide, must be easy to find, simple to engage with and
straightforward to use.
We continue to invest in the people, skills and infrastructure
required to deliver our professional expertise more efficiently and
more effectively using virtual channels.
During 2021, we made further progress with our Safecall and
service of process platforms, in particular. Given their relatively
high transaction volumes, these two businesses lend themselves well
to the effective use of technology.
The optimum technology platform for our clients and employees
requires consistent review. We must ensure that we continue to
invest in our working environment to provide our people with a
stable and sustainable platform upon which to grow our
business.
Prospects
Law Debenture has a differentiated and unique business model,
which has served the Group well for many years, and I remain
optimistic about our longer-term outlook. Over the last four years,
we have shown an IPS compound annual growth rate (CAGR) of 11.3%
and 8.5% respectively for revenue and earnings per share, which
compares favourably with our mid to high single percentage growth
objective. We are very focused on continuing to grow and develop
the IPS business and increase market share by seeking to further
capitalise on the significant market opportunities available
through both organic investment and disciplined acquisitions, like
CSS, where appropriate.
It is a source of great pride that the Group has outperformed
our benchmark of the FTSE Actuary All Share Index consistently and
by 77.0%, with debt and IPS at FV, over the last 10 years. I am
very grateful that Law Debenture has been able to benefit from both
James and Laura's expertise and experience. I am confident that
their focus on selecting strong business models and attractive
valuation opportunities, will enable them to continue to position
the equity portfolio for future longer-term growth and
outperformance. The fund has a selective, bottom-up approach.
On behalf of the Board, I would like to thank our employees for
their outstanding commitment and our shareholders for their
continued support. We also greatly value our close partnership with
clients. Our business model and actions undertaken in the year mean
that we are very well positioned to take advantage of growth
opportunities in the future and to continue to deliver on our
objective. We remain focussed on continuing our unbroken 43-year
track record of maintaining or raising the dividend.
Denis Jackson
Chief Executive Officer
24 February 2022
IPS net revenue and PBT - 5 year performance
5yr Revenue 5yr Revenue
Department 2017 2018 2019 2020 2021 Variance Variance
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 %
-------------------- --------- ------- ------- ------- ---------- ------------ ------------
Corporate trust 8,270 9,488 10,598 11,479 13,060 4,790 57.9%
-------------------- --------- ------- ------- ------- ---------- ------------ ------------
Pensions 7,900 8,362 9,024 10,789 9,772 1,872 23.7%
-------------------- --------- ------- ------- ------- ---------- ------------ ------------
Corporate services 10,977 11,734 12,167 12,226 18,755(1) 7,778 70.9%
-------------------- --------- ------- ------- ------- ---------- ------------ ------------
Total IPS income 27,147 29,584 31,789 34,494 41,586 14,439 53%
-------------------- --------- ------- ------- ------- ---------- ------------ ------------
% Revenue Growth 9% 7% 9% 21%
-------------------- --------- ------- ------- ------- ---------- ------------ ------------
Profit before
tax 9,717(2) 10,481 11,465 12,227 13,340 3,623 37%
-------------------- --------- ------- ------- ------- ---------- ------------ ------------
(1) Includes revenue from the acquisition of the Company
Secretarial Services business from Eversheds Sutherland
(International) LLP.
(2) Excludes exceptional item in 2017 for gain on unlisted
investment of GBP3.275m.
IPS Valuation
31.12.2017 31.12.2018 31.12.2019 31.12.2020 31.12.2021 5yr growth
GBP000 GBP000 GBP000 GBP000 GBP000 %
-------------------- ---------- ---------- ---------- ---------- -------------- ----------
EBITDA 9,797 10,424 11,515 13,335 15,369 56.9%
-------------------- ---------- ---------- ---------- ---------- -------------- ----------
Multiple 7.9 8.4 9.2 9.4 10.8 36.7%
-------------------- ---------- ---------- ---------- ---------- -------------- ----------
IPS fair value
(excluding net
assets) 77,396 87,562 105,938 125,349 165,985 114.5%
-------------------- ---------- ---------- ---------- ---------- -------------- ----------
NAV adjustment:
total value less
net assets already
included 72,757 78,439 91,860 112,407 135,885 86.8%
-------------------- ---------- ---------- ---------- ---------- -------------- ----------
Investment managers' review
The equity portfolio
The portfolio consists of a relatively long list of stocks (149
holdings at year end). The reason for this long list is the breadth
of our investment universe: we invest in large, medium and small
companies in the UK, as well as overseas if we see a distinct
opportunity. 83% of the portfolio was in UK listed companies at
year end, however in aggregate they derive well over half their
earnings in overseas markets. It is this diversity within the
portfolio that we hope will deliver a good level of consistency of
performance in different market conditions. Over time, the smaller
company element has produced better returns than the large
companies. However, when valuations become stretched and there is a
subsequent period of market weakness it will usually be in the
small company area that the largest falls occur. Some smaller
company holdings were reduced this year as the valuations looked
demanding but we have also added some new positions, refreshing the
overall portfolio.
The large company element was added to towards the end of 2020
when some bank positions were purchased, alongside some other
financials. This has helped recent performance, as the belief is
that interest rates will rise further from current modest levels,
and this will act as a boost for some financial companies'
earnings. It was the previous year's strongest performing area that
was the biggest drag this year, with the alternative energy stocks
experiencing share price falls. Reductions had been made during
their rise for portfolio balance reasons as well as the view that
the valuations had become too forward looking. We remain, however,
committed to the area as there are real opportunities as the global
economy transitions away from fossil fuels and towards renewables.
Banks and alternative energy stocks are part of an overall blend
that endeavours to provide balanced growth. The key is genuine
diversity in the holdings.
Our investment strategy
Active investment management that adds worthwhile value means
having a view that is different from the consensus. It is what is
different in the portfolio to others that will make the trust
perform differently over time. It is unnecessary to have strong
views about all aspects of the investment portfolio, but it is
important where the manager has an insight about an investment that
they make it count. We think that this can most consistently be
done at a stock level rather than building portfolios around a
single theme or a macroeconomic view. The reason is that there are
less variables at the stock level than in macroeconomic analysis.
Stocks can be under-researched by investors, which means their
long-term value will be mispriced. Therefore, the approach used is
to pay close attention to companies while being aware of what is
happening in the wider economy.
There are several reasons why a company might be
under-appreciated and therefore have a share price that does not
reflect its long-term value. Investors may have a prejudice against
the company for reasons that are no longer valid. The management
may have remedied the historical problems. A company may have a
management team that is putting the building blocks in place for
long-term success but this has yet to be reflected in the reported
numbers. These are the sort of factors that lead to opportunities
for the active investment manager to acquire shares at levels that
will, over time, enhance relative performance. Of course, changes
in the economic background will always have a large effect on
short-term returns and they need to be factored in when looking at
individual companies. For example, at the moment, increasing
supply-chain costs and general inflationary pressures mean it is
very important, when analysing a prospective investment, to examine
whether is has real pricing power. Can it increase the price it
gets for goods or services given the onset of rising prices
elsewhere? It is through paying attention to the companies that the
question can be answered.
1 year 3 years 5 years 10 years
Alternative Performance Measures % % % %
---------------------------------- ------- -------- -------- ---------
NAV total return (with debt at
par)(1) 23.1 49.3 59.7 199.2
NAV total return (with debt and
IPS at fair value)(1) 25.1 47.3 59.4 187.7
FTSE Actuaries All-Share Index
total return(2) 18.3 27.2 30.2 110.7
(1) NAV is calculated in accordance with AIC methodology, based
on performance data held by Law Debenture including fair value of
IPS business. NAV total return with debt at par excludes the fair
value of long-term borrowings, whereas NAV total return with debt
at fair value includes the fair value adjustment.
(2) Source: Refinitiv Datastream, all references to 'FTSE
All-Share' and 'benchmark' in this review refer to the FTSE
Actuaries All-Share Index total return.
Overview of 2021
The economic backdrop
Following much debate in 2020 about what shape the economic
recovery would take, in 2021 it became clear that a 'V-shaped'
recovery was under way. The current expectation is that UK real GDP
will have grown 7% in 2021, with particularly strong growth of
above 5% in the second quarter as trading restrictions were eased.
At the company level, this economic growth was felt in a fast
restoration of demand, with many companies recovering pre-pandemic
sales levels quicker than expected. This good demand environment
came, however, at a time when supply remained constrained - many
companies were struggling with Covid-19 related staff absences and
broader difficulties in filling vacancies. At a global level, this
'inelastic' supply was also felt in commodities such as oil, where
demand recovered but the supply response remained muted following a
prolonged period of low capital investment. The result was price
rises across a broad range of areas, as illustrated by UK CPI
reaching over 5% in November.
This backdrop of a good economic recovery but rising inflation
had a clear directional impact on sector performance during the
year. Sectors where earnings benefit directly from rising commodity
prices (basic materials and energy) performed well, as did sectors
such as industrials that benefitted from a fast recovery in demand.
Conversely, consumer-facing sectors (consumer staples and consumer
services) underperformed the broader market, as it was perceived
that there would, at the very least, be a time lag between these
companies facing rising input costs and passing them on to the end
consumer.
UK market backdrop
While 2021 was a good year in absolute terms for UK equities,
from a relative perspective, the UK equity market continued to
underperform the US, while performing approximately in line with
Continental Europe. This meant there was no closure in the
valuation gap that has built up between UK equities and their
overseas peers. This valuation discount seems erroneous when it is
considered that the majority of earnings from UK equities are
derived from overseas. We would expect that, unless this discount
materially reduces, 2022 is likely to see further widespread
takeover offers for UK companies as buyers seek to take advantage
of this arbitrage opportunity.
Income backdrop
2021 saw an excellent recovery in UK dividends. Investment
income for the portfolio rose to GBP26.3m, a 45% rise from GBP18.1m
in 2020 (for pre-pandemic comparison, GBP29.2m investment income
was earned in 2019). Among the key drivers of dividend growth were
miners, as a result of high commodity prices, and banks, where
dividends resumed following their forced suspension by the
regulator in 2020. In a broader sense, there was also an
annualization benefit from a number of companies that suspended
dividends during the peak of the pandemic in Spring 2020, many of
which only resumed payments towards the end of that year.
When we look ahead, there are reasons for optimism on the
prospects for further dividend growth in the portfolio. This is
because there are a number of companies held that are yet to resume
dividends. These tend to be companies in industries most affected
by the pandemic, such as travel or hospitality. As these end
markets will recover, we see it as likely that these companies will
return to paying dividends, adding a further leg to portfolio
dividend growth. In addition, as we were sizeable net investors
over the course of 2021, this will benefit 2022 earnings from the
portfolio.
Portfolio activity
The most material active decision in 2021 was to continue to be
a net investor. We invested GBP58m (net) over the course of the
year, the vast majority of which (GBP55m) was invested in the UK.
Referring back to the 'UK market backdrop' section of this report,
this is because we continue to find widespread value opportunities
in UK equities relative to overseas peers.
While in the Spring of 2020 there was a deliberate tilt towards
purchasing companies that would benefit from the global economic
recovery (such as mining companies such as Rio Tinto, and retailers
like and Marks & Spencer), in 2021 there was greater breadth to
portfolio purchases. Purchases spanned further additions to
financials (such as banks, including Barclays, HSBC, Lloyds and
Natwest) as well as pharmaceuticals (with new positions in Sanofi
and Merck) and specialist retailers (such as Kingfisher and Vertu
Motors). The commonality among these purchases is that they are
well-managed by experienced teams and are often one of the market
leaders in what they are producing. In seeking out these
market-leading businesses, we are implicitly seeking out businesses
which have the capability to adapt and respond to higher inflation.
A company that is a market leader producing an excellent product
(or service) has a greater likelihood of being able to pass on
higher input costs. This capability will be of increasing
importance if, as we expect, inflation proves to be more persistent
than is widely expected.
Top five purchases
The five largest purchases during the year were:
Stock Amount purchased
---------------------------- ---------------------
Kingfisher GBP11.7m
Flutter Entertainment GBP11.0m
Barclays GBP8.8m
Jubilee Metals GBP8.6m
Sanofi GBP8.4m
Top five sales
The five largest sales during
the year were:
Stock Amount sold
------------------------------ ------------
Applied Materials GBP12.6m
Croda GBP11.3m
St Modwen Properties GBP10.3m
Ceres Power GBP7.5m
Meggitt GBP7.5m
Outlook
It appears Covid-19 may be receding as a problem. If this is
correct, 2022 should see reasonably strong economic growth as
supply bottlenecks are overcome and consumer confidence returns.
The macroeconomic concerns are turning from worries about recession
to increasing concerns about the persistence of inflation. There
are real worries that inflation as a longer-term problem is not
going away. There are many reasons for this. For instance, the move
to more environmentally sustainable economic growth will come at a
cost. The infrastructure required to move economic activity away
from fossil fuels to renewable energy will be expensive. However,
it will be an added stimulus to economic growth. Successful
companies will adapt to the inflationary environment and those with
strong product offerings will have the pricing power required to
protect their operating margins. We give careful consideration to
ESG factors when selecting stocks and constructing the portfolio.
Further information on our approach can be found in the ESG section
in the full annual report. Meanwhile, the valuations of the
companies held in the portfolio are
attractive if the earnings projected come through. Equities are
a good hedge against inflation if the dividend flow from the
underlying companies beats the rate of inflation. The real value of
the investment will rise. The stocks held are a diversified
collection of companies that as a blend are chosen for this
purpose.
James Henderson and Laura Foll
Investment managers
24 February 2022
Portfolio by sector and value
Portfolio by sector
2021 2020
-------------------- ------ ------
Oil and gas 10.1% 11.6%
Basic materials 9.7% 9.3%
Industrials 20.7% 22.0%
Consumer goods 7.4% 6.2%
Health care 7.2% 5.2%
Consumer services 8.8% 8.9%
Telecommunications 2.6% 1.9%
Utilities 4.4% 4.8%
Financials 27.5% 28.5%
Technology 1.6% 1.6%
Geographical distribution of portfolio by value
2021 2020
------------------------------------ ------------- ------
United Kingdom 82.6% 82.1%
North America 5.4% 5.4%
Europe 10.0% 10.1%
Japan 1.1% 1.1%
Other Pacific 0.7% 0.9%
Other 0.2% 0.4%
Fifteen largest holdings
as at 31 December 2021
Valuation Appreciation/ Valuation
2020 Purchases Sales (Depreciation) 2021
------ -------------------- ----------- -----------
Approx GBP000 GBP000 GBP000 GBP000 GBP000
Rank % of Market
2021 Company portfolio Cap.
------ -------------------- ----------- ----------- ---------- ---------- -------- ---------------- ----------
1 GlaxoSmithKline 2.71 GBP80.8bn 22,478 - - 4,433 26,911
2 Shell 2.04 GBP124.7bn 15,743 - - 4,537 20,280
3 Barclays 2.04 GBP31.3bn 7,261 8,766 - 4,169 20,196
4 HSBC 1.96 GBP91.1bn 11,881 5,297 - 2,276 19,454
5 BP 1.90 GBP65.2bn 14,524 - - 4,315 18,839
6 Rio Tinto 1.85 GBP81.0bn 20,512 - - (2,167) 18,345
7 Accsys Technologies 1.58 GBP0.3bn 11,131 1,372 - 3,220 15,723
Herald Investment
8 Trust 1.51 GBP4.6bn 17,505 - (4,034) 1,559 15,030
9 National Grid 1.50 GBP38.3bn 12,189 - - 2,745 14,934
10 Severn Trent 1.48 GBP7.4bn 11,440 - - 3,295 14,735
11 Relx 1.45 GBP46.3bn 10,755 - - 3,633 14,388
Lloyds Banking
12 Group 1.45 GBP33.9bn 7,652 3,572 - 3,116 14,340
13 Marks & Spencer 1.42 GBP4.5bn 6,951 1,475 - 5,689 14,115
14 NatWest 1.42 GBP25.5bn 9,213 1,480 - 3,407 14,100
Direct Line
15 Insurance 1.41 GBP3.7bn 10,368 5,197 - (1,615) 13,950
Changes in geographical distribution
Valuation Valuation
31 December Costs of Sales Appreciation/ 31 December
2020 Purchases acquisition proceeds (Depreciation)* 2021
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 %
---------------- ------------- ---------- ------------- ---------- ----------------- ------------- ------
United Kingdom 665,800 142,933 (558) (86,301) 97,560 819,434 82.6
North America 44,156 14,717 (2) (17,833) 12,627 53,665 5.4
Europe 82,343 42,446 (85) (33,684) 8,194 99,214 10.0
Japan 9,297 - - - 1,854 11,151 1.1
Other Pacific 7,077 - - (998) 1,004 7,083 0.7
Other 3,624 - - (1,624) (69) 1,931 0.2
---------------- ------------- ---------- ------------- ---------- ----------------- ------------- ------
812,297 200,096 (645) (140,440) 121,170 992,478 100.0
---------------- ------------- ---------- ------------- ---------- ----------------- ------------- ------
Extracts from the Strategic report
Who we are
From its origins in 1889, Law Debenture has diversified to
become a Group which provides our shareholders, clients and people
a unique combination of an investment portfolio and an independent
professional services business.
Our purpose and objective
Our purpose is to deliver peace of mind for our shareholders,
clients and people. This is central to our strategy, both at the
portfolio and IPS levels, and underpins the way we think and behave
every day.
Our objective as an investment trust is to achieve long-term
capital growth in real terms and steadily increasing income. The
aim is to achieve a higher rate of total return than the FTSE
Actuaries All-Share Index through investing in a diversified
portfolio of stocks and ownership of the IPS business.
Our IPS clients know that we are independent, experts and have
133 years of experience to call on in delivering vital aspects of
their business cycle.
Our purpose and objective are underpinned by our corporate
values of:
-- We believe it's possible
-- We make change happen
-- We are better together
-- We never stop learning
Our business model
Our business model is designed to position the Company for
optimal performance in the investment trust sector.
Total Shareholder Return
INVESTMENT PORTFOLIO INDEPENT PROFESSIONAL SERVICES
--------------------------------------------- ------------------------------------------------------------
(c. 82% of NAV - including IPS and (c. 18% of NAV - including IPS and
long-term long-term
borrowings at fair value) borrowings at fair value)
* Invests in a diverse equity portfolio * Trusted provider of independent governance services,
generating recurring revenue.
* Earns capital returns and dividends * Profits provide the investment trust with a steadily
increasing revenue stream.
* Tax efficient
* Low ongoing charges
INVESTMENT PORTFOLIO
----------------------------------------------------------------------------
* The Company's portfolio will typically contain
between 70 and 175 listed investments.
* The portfolio is diversified in order to spread
investment risk with no obligation to hold shares in
any particular type of company or industry.
* The IPS business does not form part of the investment
portfolio.
Whilst performance is measured against the FTSE Actuaries All-Share Index,
the composition of the index does not influence the construction of the
portfolio. As a consequence, it is expected that the Company's investment
portfolio and performance will deviate from the comparator index.
INDEPENT PROFESSIONAL SERVICES
---------------------------------------------------------------------------------------
Operating through a number of wholly owned subsidiary companies, we provide
pension trustee executives, outsourced pension services, corporate trust
services and corporate services to companies, agencies, organisations and
individuals throughout the world. The services are provided through offices
in the UK, Dublin, New York, Delaware, Hong Kong, the Channel Islands and
the Cayman Islands.
Group employees are employed by L.D.C. Trust Management Limited and Safecall
Limited (in the UK) or a locally incorporated entity (in the overseas jurisdictions).
As part of their duties, a number of the employees provide services to the
investment trust and their time is charged to the trust, forming a part
of the ongoing charges.
More details about the performance of the IPS business in 2021 are given
in the Chief Executive Officer's review above.
Law Debenture's shares are intended for private investors in the UK (retail
investors), professionally advised private clients and institutional investors.
When choosing an investment trust, shareholders typically accept the risk
of exposure to equities but hope that the pooled nature of an investment
trust portfolio will give some protection from the volatility in share price
movements that can sometimes affect individual equities.
Our strategy - implementation
Our strategy is centred round the unique combination of the
investment portfolio and our IPS business. Whilst overseen by the
Board, the IPS business operates independently from the
portfolio.
The IPS profits provide a regular source of revenue to the
investment trust, helping to smooth out equity peaks and troughs.
This supports the delivery of steadily increasing income for our
shareholders and ensures our investment managers are not
constrained to choosing stocks on yield. Instead, the investment
managers can benefit from increased flexibility in stock selection
supporting the delivery of long-term capital growth.
Our unique structure is also tax efficient as some tax relief,
arising from excess costs and interest payments which would
otherwise be unutilised, can be passed from the investment trust to
the IPS business reducing the tax liability for the Group and
increasing shareholder returns.
The way in which we implemented the investment strategy during
2021 is described in more detail in the investment managers' review
above.
Performance against KPIs is set out in the full annual report
and accounts, which contain tables, charts and data to explain
performance both during the year under review and over the
long-term.
Agreement with the investment managers
Appointed investment managers: James Henderson & Laura Foll,
Janus Henderson Investors.
On a fully discretionary basis, our investment managers are
responsible for implementing the Company's investment strategy. The
contract in place is terminable by either side on six months'
notice.
The agreement with Janus Henderson does not cover custody, which
is the responsibility of the depository (see section on regulatory
compliance in the Directors' Report in the annual report and
accounts). It also does not cover the preparation of data
associated with investment performance or record keeping, both of
which remain the responsibility of the Company.
Our strategy - guidelines
The Board sets the investment strategy and actively monitors
both the investment managers' and Executive Leadership team's
adherence through a series of guidelines and parameters in each
scheduled Board meeting. The strategy is reviewed periodically to
ensure that the investment trust delivers on its objective.
Permitted types of investments
Investments are: Restrictions:
Equity Shares Trading is not permitted
in suspended shares or
short positions
------------------------------------------ -------------------------------
Collective Investment Products No more than 15% of gross
including Open Ended Investment assets will be invested
Companies (OEICs) in other UK listed investment
trusts
------------------------------------------ -------------------------------
Fixed Interest Securities No investment may be
made which raises the
aggregate value of the
largest 20 holdings,
excluding investments
in collective investment
vehicles that give exposure
to Japan, Asia Pacific
or emerging market regions,
to more than 40% of the
portfolio, including
gilts and cash
------------------------------------------ -------------------------------
Interests in Limited Liability The value of a new acquisition
Partnerships in any one company may
not exceed 5% of the
total portfolio value
(including cash) at the
time the investment is
made
------------------------------------------ -------------------------------
Cash Further additions shall
not cause a single holding
to exceed 5%, and Board
approval must be sought,
at the next Board meeting,
to retain a holding should
its value increase above
the 5% limit
------------------------------------------ -------------------------------
Liquid Assets The Company may not make
investments in respect
of which there is unlimited
liability
------------------------------------------ -------------------------------
The regional parameters are:
------------------------------------------ -------------------------------
Minimum Maximum
------------------- ---------- --------- -------------------------------
% %
------------------- ---------- ---------
United Kingdom 55 100
----------------------------------- ---------- ---------
North America 0 20
----------------------------------- ---------- ---------
Europe 0 20
----------------------------------- ---------- ---------
Japan 0 10
----------------------------------- ---------- ---------
Other Pacific 0 10
----------------------------------- ---------- ---------
Other 0 10
----------------------------------- ---------- --------- -------------------------------
Derivatives May be used with prior authorisation
of the Board
------------------------------------------ -------------------------------
Hedging Currency hedges may be put
in place to protect against
foreign exchange movements
on the capital and income accounts
------------------------------------------ -------------------------------
Stock-lending Up to 30% of the value of NAV
may be lent
------------------------------------------ -------------------------------
Gearing The Company applies a ceiling
on effective gearing of 50%.
Typically effective gearing,
net of cash, is between 10%
and 20%. The Board retains
the ability to reduce equity
exposure so that net cash is
above 10% if deemed appropriate
------------------------------------------ -------------------------------
Gearing and long-term borrowing
Investment trusts have the benefit of being able to 'gear' their
portfolios according to market conditions. This means that they can
raise debt (either short or long-term) to generate funds for
further investment. These funds can be used to increase the size of
the portfolio. Alternatively, assets from within the portfolio can
be sold to reduce debt and the portfolio can even be 'negatively
geared'. This means selling assets to hold cash so that less than
100% of the Company's assets are invested in equities. At 31
December 2021, our gearing was 13% (2020: 9%).
The Company has four debentures (long dated sterling denominated
financing) details of which are in the full annual report. The
weighted average interest payable on the Company's debentures is
3.966% (2020: 4.589%).
The fair value of long-term borrowings held by the Group is
disclosed in note 21 to the annual report and accounts. The
methodology of fair valuing all long-term borrowings is to
benchmark the Group debt against A rated UK corporate bond
yields.
Valuation of our IPS business
Accounting standards require us to consolidate the income, costs
and taxation of our IPS business into the Group income statement
below. The assets and liabilities of the business are also
consolidated into the Group column of the statement of financial
position below. A segmental analysis is also provided below which
shows a detailed breakdown of the split between the investment
portfolio, IPS business and Group charges.
Consolidating the value of the IPS business in this way does not
fully recognise the value created for the shareholder by the IPS
business in the NAV. To address this, from December 2015, the NAV
we have published for the Group has included a fair value for the
standalone IPS business.
The current fair value of the IPS business is calculated based
upon historical earnings before interest, taxation, depreciation
and amortisation (EBITDA) for 2021, with an appropriate multiple
applied. The EBITDA for the IPS business for 2021 was GBP15.4m.
This number is reached by taking the return, including profit
attribution on ordinary activities before interest and taxation of
GBP13.3m from note 6 in the full annual report and accounts and
adding back the depreciation charge for property plant and
equipment of GBP1.2m, the amortisation of intangible assets of
GBP0.5m, and interest on the lease liabilities shown in note 3 in
the full annual report and accounts.
The calculation of the IPS valuation and methodology used are
included at note 14 in the full annual report and accounts. In
determining a calculated basis for the fair valuation of the IPS
business, the Board has taken appropriate external professional
advice. The multiple applied in valuing the IPS business is based
on comparable companies sourced from market data, with appropriate
adjustments to reflect the difference between the comparable
companies and IPS business in respect of size, liquidity, margin
and growth. A range of multiples is then provided by the
professional valuation firm, from which the Board selects an
appropriate multiple to apply.
The challenge that we faced in this valuation cycle is that many
of our core comparators, as presented in the 2020 Annual Report,
have been subject to mergers and acquisition activity in the past
year. As a result of the premium this builds into the valuations,
the companies most like our IPS business were excluded from the
comparator group. Whilst the group of companies presented in the
table have some likeness to IPS, further work has been required in
producing a multiple reflective of the fair value to attribute to
IPS.
The multiple of 10.8x has been applied to value the business.
The uplift reflects that the IPS business now has four years of
revenue and profit growth. The multiple selected represents a
discount of almost 13% on the mean multiple across the comparable
businesses presented below, to reflect the relative size of the IPS
business and the fact that it is unlisted.
The comparable companies used, and their recent performance, are
presented in the table below:
Company Revenue LTM EV/EBITDA Revenue CAGR EBITDA margin
LTM(1) 31 Dec 2021 2017-2021 LTM
(GBPm)
---------------------------- --------- -------------- ------------- --------------
Law Deb IPS 42 10.8x 10.5% 37%
SEI Investments Company 1,378 13.9x 5.1% 31%
SS&C Technologies Holding,
Inc 3,674 13.1x 31.2% 37%
EQT Holdings Limited 55 13.8x 3.8% 36%
Perpetual Limited 354 10.3x 3.6% 22%
(1) LTM refers to the trailing 12 months 'results' which are
publicly available.
Source: Capital IQ.
Of the comparator companies previously presented above, the
following were the subject of mergers and acquisitions activity:
Sanne Group plc was subject to a valuation 23.5x of EBITDA, Link
Administration Holdings Limited a valuation 13.4x of EBITDA and
Intertrust a valuation at 12.3x of EBITDA.
Valuation guidelines require that the fair value of the IPS
business be established on a stand-alone basis. Therefore, the
valuation does not reflect the value of Group tax relief applied
from the investment trust to the IPS business, which reduced the
tax charge by GBP1.89m (2020: GBP1.5m).
It is hoped that our continued initiatives to inject growth into
the IPS business will result in a corresponding increase in
valuation over time. As stated above, management is aiming to
achieve mid to high single percentage growth in 2022. The total
valuation (including surplus net assets) of the business has
increased by GBP79.5m/88% since the first valuation of the business
as at 31 December 2015.
In order to assist investors, the Company restated its
historical NAV in 2015 to include the fair value of the IPS
business for the last ten years. This information is provided in
the Annual Report within the 10-year record.
Calculation of NAV per share
The table below shows how the NAV at fair value is calculated.
The value of assets already included within the NAV per the Group
statement of financial position that relate to the IPS business
have been removed (GBP34.1m) and substituted with the calculation
of the fair value and surplus net assets of the business (GBP170
m). An adjustment of GBP50.2m is then made to show the Group's debt
at fair value, rather than the book cost that is included in the
NAV per the Group statement of financial position. This calculation
shows a NAV fair value for the Group as at 31 December 2021 of
GBP964.5m or 787.83 pence per share.
31 December 2021 31 December 2020
--------------------- ---------------------
Pence per Pence per
GBP000 share GBP000 share
-------------------------------- --------- ---------- --------- ----------
Net asset value (NAV) per
Group statement of financial
position 878,837 717.86 726,994 615.19
-------------------------------- --------- ---------- --------- ----------
Fair valuation of IPS:
EBITDA at a multiple of
10.8x (2020: 9.4x) 165,985 135.58 125,349 106.07
Surplus net assets 4,041 3.31 10,605 8.97
Fair value of IPS business 170,026 138.89 135,954 115.05
Removal of assets already
included in NAV per financial
statements (34,141) (27.89) (23,547) (19.93)
Fair value uplift for IPS
business 135,885 111.00 112,407 95.12
Debt fair value adjustment (50,229) (41.03) (52,182) (44.16)
-------------------------------- --------- ---------- --------- ----------
NAV at fair value 964,493 787.83 787,219 666.15
-------------------------------- --------- ---------- --------- ----------
Our approach to risk
The Group's risk management and internal control framework is
embedded in everyday operations and subject to regular enhancements
in a continuous risk management process as demonstrated in the
diagram below. Top-down Board-level oversight for the Investment
Portfolio and IPS business is provided by the Audit and Risk
Committee. The Executive Risk Committee has responsibility for the
oversight of operational risk within the IPS business. Detailed,
bottom-up risk identification and management is owned by individual
business lines and overseen by the Group Risk Manager. This
framework enables the Board to identify, evaluate and manage
principal risks to support the delivery of long-term priorities.
The Board recognises that there are certain risks which are
inherent in the Group, such as market risk with respect to its
investment portfolio, and the controls to mitigate against such
risks are paramount to the delivery of our objectives.
On an annual basis, the Audit and Risk Committee consider the
risks to the Group and the adequacy of the controls in place to
appropriately manage those risks. Consideration is also given to
emerging risks to ensure that the risk management framework is
updated to protect the business. Where there is insufficient
information on the potential risk, ongoing monitoring is put in
place.
Following the 2020 review of Group-wide risks and processes, we
have continued to enhance our risk management framework. In Autumn
2021 we appointed a new Group Risk Manager, Vicky Skaife. We have
also designed a new incident management system, which allows us to
more easily identify, assess, evaluate, mitigate and report events
in real-time.
Categorisation of Group risks
The principal risks of the Law Debenture Group are split into
three categories: Group risks, IPS risks and emerging risks.
The identified Group risks predominantly relate to the
investment portfolio as that comprises c. 82% of net asset value.
We also identify IPS operational risks which could have a material
impact on the IPS valuation and therefore the Group.
Given our objective to deliver sustainable long-term capital
growth, we continually horizon scan for emerging risks which may
impact our ability to deliver to shareholders.
Governance
The Group's risk management and internal control framework is
managed through its governance structure shown in the diagram set
out in the full annual report and overseen by the Audit and Risk
Committee. IPS business risks are managed through regular business
unit risk committees and management meetings. The outputs of these
are fed through to the Executive Risk Committee for its review.
Group risk summary and mitigating actions
PRINCIPAL GROUP RISKS MITIGATING ACTIVITIES
1. Investment Performance and Market Risk
The risk of the investment portfolio Even though this is an accepted
failing to deliver and/or failing risk given the nature of the
to consider and react to market investment portfolio, the Board
conditions to deliver the publicly is responsible for ensuring
stated strategic objectives that there are adequate controls
to: to help manage the inherent
* Achieve long-term capital growth. risk. As such, the Board has
put in place various controls,
such as:
* Deliver steadily increasing income. * Regular review of the investment managers' report
including risk indicators.
* Achieve a rate of return greater than the FTSE
Actuaries All-Share Index. * Clear risk exposure limits at a stock and regional
level which are monitored by Janus Henderson.
Investment performance and market
risk is the largest risk which * Open dialogue with the investment managers on their
the Group is exposed to. However, approach and performance.
this is an accepted risk and
one which the Board actively
takes as it believes long-term Furthermore, the NAV is published
equity investment is an attractive daily and subject to review
proposition. by the CFO, which enables ongoing
monitoring of the investment
portfolio's performance.
The Board further notes that
the IPS business represents
18% of the NAV and also provides
an additional layer of diversification
for the portfolio, meaning that
the investment portfolio and
the Group as a whole are less
exposed to any potential dividend
cuts from the equity holdings.
-----------------------------------------------------------
2. Financial Reporting
The risk of inaccurate publication To mitigate these risks, Finance
of financial statements, annual have implemented processes with
reports, NAV, factsheets and embedded controls to mitigate
other market data that can adversely potential risks. The management
impact financial results, investor and production of all financial
decisions, reputation or which reporting is overseen by appropriately
may lead to regulatory fines skilled and trained colleagues
or sanctions. within the Group's Finance team,
Material financial judgements with review from the CFO.
are supported by advice and Additionally, the Board, Executive
review from appropriately qualified Leadership team, Business Heads
independent advisors. and investment managers review
and challenge financial information,
giving collective ownership
of the financial information.
The financial statements in
the Annual Report are audited
by a reputable accounting firm.
The NAV valuation is calculated
internally, based on data reconciled
to the custodian/depositary
and Janus Henderson, using a
specialist third party data
source for the pricing and the
NAV is reported to the London
Stock Exchange and Morningstar
daily.
-----------------------------------------------------------
3. Cyber, technology and Systems Risk
The risk of cyberattacks and Investment and increased use
security vulnerabilities is of cloud services across the
ever present, and failures here Group continued in 2021 preparing
could lead to reduced revenue, us for sustainable, scalable
increased costs, liability claims, technology growth in 2022 and
or harm to our reputation or beyond. Incident reporting procedures
competitive position. This includes are in place as well as cyber
the systems of Janus Henderson, insurance.
including business continuity/ We conduct regular penetration
disaster recovery incidents testing and take steps to address
and wider control issues such identified weaknesses.
as fraud or conflicts of interest. Janus Henderson are subject
to an annual ISAE3402 audit
and AAF review to ensure there
are no material deficiencies.
The Executive Risk Committee
also receive a monthly operational
report with respect to Janus
Henderson's risks and controls.
-----------------------------------------------------------
IPS business risk summary and mitigating actions
IPS BUSINESS RISKS MITIGATING ACTIVITIES
1. Strategic & Financial
A strategic risk arises that To mitigate this strategic risk,
the current business model becomes there has been significant investment
obsolete due to a lack of technical in people and technology to
or commercial innovation, market support the IPS business strategy
disruption, product obsolesce and this will continue to be
or regulatory or legislative monitored along with the three
change. year financial budgeting and
Financial risk arises if the planning which forms part of
IPS business is not able to the Group's longer-term viability
scale up and deliver on its statement. There are also regular
growth plans to generate revenue IPS board meetings where the
growth, profitability, cost strategy of the business is
savings and react to any changes discussed with the Business
in market conditions. Heads and the Executive Leadership
To mitigate the financial risks, team.
monthly management information
is provided to the CEO and Business
Heads to monitor and assess
business performance.
---------------------------------------
2. Change Management
IPS is in a period of operational Governance is in place to provide
and cultural change; new improved oversight of operations across
systems and technology, evolution the IPS business including a
of our culture and purchase monthly operations committee.
of a new company secretarial New projects across the group
business. are given oversight via the
We run the risk that the change project committee. There is
does not meet its intended objective, dedicated experienced project
is delivered late or over budget, management resources across
or that management time is diverted IT and operations teams.
away from business as usual
to projects, to the detriment
of clients, current systems
or colleagues.
In order to ensure the integration
of the new teams and new joiners,
we have increased the headcount
in our people team by three,
including a Director of People
Strategy and a dedicated recruiter.
---------------------------------------
3. Financial Crime NEW
---------------------------------------
Across all jurisdictions the Enhanced incident reporting
Group's activities are subject procedures for the Group with
to various financial crime laws timelines for notifications
and regulations, including sanctions and clear reporting lines.
and export control, anti-bribery, Whistleblowing procedures and
anti-corruption, anti-money a clearly defined reporting
laundering and counter-terrorist structure with colleagues having
financing. Changes to these the option to raise any concerns
laws could have a material adverse with their line manager, the
impact on our operations or General Counsel and HR Manager
financial results. or if those avenues are not
appropriate, to the Chairman
of the Audit and Risk Committee,
who is the employee representative
of the Board. If they do not
wish to report to any of these
persons for any reason, they
may report their concerns using
our whistleblowing service provided
by Safecall, which is available
24 hours a day. Reports using
this channel may be made anonymously.
There are robust policies in
place covering AML, fraud prevention,
anti-bribery and corruption
which are supported by group-wide
interactive mandatory training
modules. Specialist external
training courses are also available
to staff.
---------------------------------------
Emerging risks and mitigating actions
EMERGING RISKS MITIGATING ACTIVITIES
1. ESG Considerations NEW
As ESG becomes an area of increased The group is reviewing this
focus, we are yet to fully understand and will publish the outcome
the risks to our stakeholders. from our ESG review on our Group
There is also a significant website during 2022. This is
uptick in the ESG regulatory being managed by regular discussion,
landscape; we must ensure that led by the Group ESG Manager
we do not fall behind in meeting working with the Board, the
these requirements including ESG committee, finance and the
climate and ESG-related targets. General Counsel. Meetings have
been scheduled throughout 2022
to ensure we are on track to
meeting any mandatory requirements
and also to consider and assess
non-mandatory requirements.
----------------------------------------
2. Digital Disruptors and Change
NEW
----------------------------------------
For the IPS business, the prominence In 2022, we will review and
of digital applications and assess the possibilities of
client portals could be a threat a more digitalised client proposition.
if we are unable to keep up
with the pace of change resulting
in losing new and existing customers.
----------------------------------------
Viability statement
The UK Corporate Governance Code requires the Board to issue a
'viability statement' declaring whether the Directors believe the
Company can operate and meet its liabilities, taking into account
its current position and principal risks. The overriding aim is to
ensure that the Board focuses on the longer-term and is actively
involved in the oversight of the risk management framework and
internal control environment.
The Board is required to assess the Company's viability over a
period greater than 12 months. Our stated financial objective is to
deliver long-term capital growth in real terms and steadily
increasing income to our shareholders. As such, the Board considers
that the Company is a long-term investment vehicle and, for the
purposes of this statement, has decided that three years is an
appropriate period over which to consider its viability. We have
aligned our business planning process and remuneration at a senior
level accordingly.
In assessing the viability of the Company over the review
period, the Board have considered a number of key factors,
including:
Our business model and strategy
-- The Board seeks to ensure that the Company delivers long-term
performance. The closed-ended nature of the investment trust
creates a stable capital basis, which enables our investment
manager to take a longer-term view in their construction and
management of the portfolio. This significantly mitigates the risk
to the Group of potential liquidity issues should shareholders wish
to sell their shares, avoiding any untimely requirements to sell
down the portfolio.
-- As an investment trust, we benefit from the unique structure
of a mainly UK-based equity portfolio with a diversified revenue
stream arising from the IPS business. As demonstrated by both our
long-term performance and during the recent economic crisis brought
about by Covid-19, the IPS revenue streams provide protection to
the long-term viability of the Company. Over a three year period,
the share-price total return is 67.6%. Additionally, the NAV total
return with debt and IPS at fair value is 47.3%.
-- The IPS business holds enough working capital to meet any
short-term requirements of the Group and provides a steady, largely
recurring, flow of income. In addition, the majority of the
portfolio is invested in UK listed securities which are traded on
major stock exchanges, providing the Group with the ability to
quickly liquidate assets, should the need arise. This mitigates
potential risks to liquidity and the potential inability to meet
our obligations.
-- A related risk is a breach of our debt covenants resulting in
a requirement for the Group to repay the debentures at short
notice. Whilst the Board acknowledges this risk, the uncertainty
arising due to the Covid-19 pandemic demonstrates the Group's
ability to navigate these challenges. At the height of market
decline on 23 March 2020, the Group maintained significant headroom
on all covenants.
-- The Company has an ongoing charge of 0.50%, which is lower
than other comparable trusts within our sector.
Our business operations
-- The Company retains ownership of all assets held by the
custodian under the terms of formal agreements with the custodian
and depositary. This supports our ability to meet our legal and
regulatory requirements and acts as a control to both verify the
existence of our assets and further safeguard the interests of our
shareholders.
-- The Group's cash is all held with banks approved by the
Board. The Group's total cash balance, including money market
funds, at 31 December 2021 was GBP25.5m (30 December 2020:
GBP41.3m), with IPS holding a further GBP9.9m.
-- There is long-term borrowing in place comprising of four debentures:
Maturity date Amount Interest
--------------- --------- ------------------
2034 GBP40m 6.125%
2041 GBP20m 2.54%
2045 GBP75m 3.77%
2050 GBP30m 2.53%
Total GBP165m Weighted average:
3.966%
The weighted average cost of borrowing is 3.966%. Each debenture
is subject to a formal agreement, including financial covenants,
which the Company has complied with in full during the year. As at
the end of December 2021, net gearing was 13%, which is well within
the typical operating range of 10%-20%.
-- During January 2021, the Company also made arrangements to
put in place a GBP50m unsecured overdraft facility with HSBC.
Whilst available, this facility is currently not in use but
provides further mitigation of any liquidity risk.
-- The Board reviews the investment trust's performance
including revenue forecasts, along with other key metrics such as
gearing at each Board meeting and receives monthly financial
reporting to monitor and manage the principle risk relating to
investment performance.
In addition to this, the Board carries out a robust assessment
of our principal risks and uncertainties which could threaten the
Company's business model. The Board has assessed the emerging risks
which may impact the operations of the Group and will continue to
actively review the likely impact of these potential risks.
In light of the current conditions, the Board has considered the
Company's current financial position and the potential impact of
its principal risks and uncertainties, and has a reasonable
expectation that the Company will be able to continue in operation
and meet its liabilities as they fall due for a period of three
years from the date of this Annual Report.
Balance sheet resilience
As at 31 December 2021, Law Debenture Corporation held total
investments, including cash and the IPS business (based on the
valuation as 31 December 2021), of GBP1.178bn (31 December 2020:
GBP966m). With the exception of the IPS business, the majority of
these assets are liquid and could be sold down within a short
period of time.
The Board and the Executive Leadership team have actively
monitored the cash position across the Group throughout the year,
mindful of our commitment to pay quarterly dividends to
shareholders. As of 31 December 2021, the Group holds cash of
GBP35.8m (31 December 2020: GBP41.7m). In addition to this, the
Company has an overdraft facility of GBP50m to protect against any
significant fall in cash inflows.
Repurchase and issue of shares
At the 2021 AGM, the Directors were given power to buy back up
to 17,756,514 ordinary shares or if less the number of shares equal
to 14.99% of the Company's issued share capital at that date.
During the year, the Company did not repurchase any of its shares
for cancellation. This authority will expire at the 2022 AGM. The
Company intends to seek shareholder approval to renew its powers to
repurchase shares for cancellation up to 14.99% of the Company's
issued share capital if circumstances are appropriate, at the 2022
AGM.
The Directors were also given power to allot up to 11,845,573
ordinary shares at the 2021 AGM. From the 2021 AGM to the date of
this report the Company issued a total of 4.5m ordinary shares
under its share issuance programme, launched in February 2021 our
SAYE scheme. The authority will expire at the 2022 AGM at which the
Company intends to seek shareholder approval to renew its powers to
issue shares up to 10% of the Company's share capital in issue at
24 February 2022.
Share capital and significant shareholdings
The Company's share capital is made up of ordinary shares with a
nominal value of 5p each. The voting rights of the shares on a poll
are one vote for every share held. There are no restrictions on the
transfer of the Company's ordinary shares or voting rights and no
shares which carry specific rights with regard to the control of
the Company. There are no other classes of share capital and none
of the Company's issued shares are held in treasury. As at 31
December 2021, there were 122,915,835 ordinary shares in issue with
122,915,835 voting rights. Note 18 in the full annual report and
accounts includes details of share capital changes in the year.
As at 24 February 2022, there were no shareholders that had
notified the Company of a beneficial interest in 3% or more of the
issued share capital.
Significant financial issues relating to the 2021 accounts
The Code requires us to describe any significant issues
considered in relation to the financial statements and how those
issues were addressed.
The significant issues considered by the Audit and Risk
Committee include the valuation of IPS, the acquisition and
corresponding accounting treatment of CSS, Pension Defined Benefit
Scheme, and a review of the non-application of the IFRS 10
Investment Entity Exemption.
No new significant issues arose during the course of the audit.
During the course of the year, the Finance operations of the
business underwent significant modernisation, including
establishing a Shared Service Centre in our Manchester office and
the implementation of a new Finance system.
The Committee is satisfied that the judgements made by
management are reasonable and that appropriate disclosures have
been included in the accounts. Taken in its entirety, the Committee
was able to conclude that the financial statements themselves and
the Annual Report as a whole are fair, balanced and understandable
and provide the necessary information for shareholders to assess
the Company and Group's position and performance, business model
and strategy. That conclusion was reported to the Board.
Directors' responsibility statement pursuant to DTR4
The Directors confirm to the best of their knowledge that:
-- the Financial Statements have been prepared in accordance
with international financial reporting standards adopted pursuant
to Regulation (EC) No 1606/2002 as it applies in the European
Union and give a true and fair view of the assets, liabilities,
financial position and profit and loss of the Group; and
-- the Annual Report includes a fair review of the development
and performance of the business and the financial position
of the Group, together with a description of the principal
risks and uncertainties that they face.
By order of the Board
Group income statement
as at 31 December 2021
2021 2020
-------------------------------- --------------------------------- ----------------------------------
Revenue Capital Total Revenue Capital Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------- ---------- --------- ---------- ---------- ---------- ----------
UK dividends 21,426 - 21,426 14,794 - 14,794
UK special dividends 250 - 250 458 - 458
Overseas dividends 4,583 - 4,583 2,685 - 2,685
Overseas special dividends - - - - - -
-------------------------------- ---------- --------- ---------- ---------- ---------- ----------
Total dividend income 26,259 - 26,259 17,937 - 17,937
Interest income - - - 89 - 89
Independent professional
services fees 49,513 - 49,513 38,898 - 38,898
Other income 551 - 551 219 - 219
-------------------------------- ---------- --------- ---------- ---------- ---------- ----------
Total income 76,323 - 76,323 57,143 - 57,143
-------------------------------- ---------- --------- ---------- ---------- ---------- ----------
Net gain/(loss) on investments
held at fair value through
profit or loss - 121,170 121,170 - (16,354) (16,354)
-------------------------------- ---------- --------- ---------- ---------- ---------- ----------
Total income and capital
gains/(losses) 76,323 121,170 197,493 57,143 (16,354) 40,789
-------------------------------- ---------- --------- ---------- ---------- ---------- ----------
Cost of sales (8,037) - (8,037) (4,405) - (4,405)
Administrative expenses (31,680) (2,456) (34,136) (24,879) (2,216) (27,095)
Provision for onerous
contracts - - - 118 - 118
-------------------------------- ---------- --------- ---------- ---------- ---------- ----------
Operating profit/(loss) 36,606 118,714 155,320 27,977 (18,570) 9,407
Finance costs
Interest payable (1,319) (3,958) (5,277) (1,320) (3,958) (5,278)
-------------------------------- ---------- --------- ---------- ---------- ---------- ----------
Profit/(loss) before taxation 35,287 114,756 150,043 26,657 (22,528) 4,129
Taxation (1,210) - (1,210) (1,178) - (1,178)
-------------------------------- ---------- --------- ---------- ---------- ---------- ----------
Profit/(loss) for the
year 34,077 114,756 148,833 25,479 (22,528) 2,951
-------------------------------- ---------- --------- ---------- ---------- ---------- ----------
Return per ordinary share
(pence) 28.09 94.60 122.69 21.56 (19.06) 2.50
Diluted return per ordinary
share (pence) 28.08 94.57 122.66 21.56 (19.06) 2.50
-------------------------------- ---------- --------- ---------- ---------- ---------- ----------
Group statement of comprehensive income
as at 31 December 2021
2021 2020
----------------------------------- ------------------------------- --------------------------------
Revenue Capital Total Revenue Capital Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------------- --------- --------- --------- --------- ---------- ---------
Profit/(loss) for the
period 34,077 114,756 148,833 25,479 (22,528) 2,951
----------------------------------- --------- --------- --------- --------- ---------- ---------
Foreign exchange gain
on translation of foreign
operations - 654 654 - 105 105
Pension actuarial gains/(losses) 8,500 - 8,500 (6,500) - (6,500)
Taxation on pension (1,615) - (1,615) 1,235 - 1,235
----------------------------------- --------- --------- --------- --------- ---------- ---------
Other comprehensive income/(loss)
for year 6,885 654 7,539 (5,265) 105 (5,160)
----------------------------------- --------- --------- --------- --------- ---------- ---------
Total comprehensive income/(loss)
for the year 40,962 115,410 156,372 20,214 (22,423) (2,209)
----------------------------------- --------- --------- --------- --------- ---------- ---------
Statement of financial position
as at 31 December 2021
GROUP COMPANY
------------------------------------------ --------------------- ----------------------
2021 2020 2021 2020
Assets GBP000 GBP000 GBP000 GBP000
------------------------------------------ ---------- --------- ----------- ---------
Non-current assets
------------------------------------------ ---------- --------- ----------- ---------
Goodwill 18,973 1,914 - -
Property, plant and equipment 1,974 1,088 - -
Right-of-use asset 5,542 5,413 - -
Other intangible assets 3,516 619 16 16
Investments held at fair value through
profit or loss 992,478 812,297 992,378 812,083
Investments in subsidiary undertakings - - 61,283 61,283
Retirement benefit asset 6,577 - - -
Deferred tax assets - 771 - -
------------------------------------------ ---------- --------- ----------- ---------
Total non-current assets 1,029,060 822,102 1,053,677 873,382
------------------------------------------ ---------- --------- ----------- ---------
Current assets
------------------------------------------ ---------- --------- ----------- ---------
Trade and other receivables 20,466 16,664 57,581 4,185
Contract assets 6,611 5,994 583 1,889
Cash and cash equivalents 35,880 41,762 25,507 32,098
------------------------------------------ ---------- --------- ----------- ---------
Total current assets 62,957 64,420 83,671 38,172
------------------------------------------ ---------- --------- ----------- ---------
Total assets 1,092,017 886,522 1,137,348 911,554
------------------------------------------ ---------- --------- ----------- ---------
Current liabilities
------------------------------------------ ---------- --------- ----------- ---------
Amounts owed to subsidiary undertakings - - 87,631 61,698
Trade and other payables 29,329 27,405 13,447 13,075
Lease liability 287 - - -
Corporation tax payable 925 238 - -
Deferred tax liability 1,060 - - -
Other taxation including social security 1,543 860 850 793
Contract liabilities 5,620 4,367 34 16
------------------------------------------ ---------- --------- ----------- ---------
Total current liabilities 38,764 32,870 101,962 75,582
------------------------------------------ ---------- --------- ----------- ---------
Non-current liabilities
------------------------------------------ ---------- --------- ----------- ---------
Long-term borrowings 164,245 114,201 124,586 74,569
Contract liabilities 4,054 4,011 125 125
Lease liability 6,117 5,606 - -
Retirement benefit liability - 2,840 - -
Total non-current liabilities 174,416 126,658 124,711 74,694
------------------------------------------ ---------- --------- ----------- ---------
Total net assets 878,837 726,994 910,675 761,278
------------------------------------------ ---------- --------- ----------- ---------
Equity
------------------------------------------ ---------- --------- ----------- ---------
Called up share capital 6,145 5,923 6,145 5,923
Share premium 41,865 9,277 41,865 9,277
Own shares (3,215) (1,461) - -
Capital redemption 8 8 8 8
Translation reserve 2,656 2,002 - -
Capital reserves 789,423 674,591 835,293 733,189
Retained earnings 41,955 36,654 27,364 12,881
------------------------------------------ ---------- --------- ----------- ---------
Total equity 878,837 726,994 910,675 761,278
------------------------------------------ ---------- --------- ----------- ---------
Total equity pence per share 717.86 615.19
------------------------------------------ ---------- ---------
As permitted by Section 408 of the Companies Act 2006, the
Company has not presented its own income statement, however its
gain for the year was GBP151,510,000 (2020: gain GBP5,658,000).
Approved and authorised for issue by the Board on 24 February 2022
and signed on its behalf by:
R. Hingley, Chairman | D. Jackson, Chief Executive Officer
The Law Debenture Corporation p.l.c. registered number
00030397
Group statement of changes in equity
as at 31 December 2021
Called
up share Share Own Capital Translation Capital Retained
capital premium shares redemption reserve reserves earnings Total
GROUP GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------- ---------- --------- --------- ------------ ------------ ---------- ---------- ----------
Balance at
1 January
2021 5,923 9,277 (1,461) 8 2,002 674,591 36,654 726,994
-------------------- ---------- --------- --------- ------------ ------------ ---------- ---------- ----------
Profit/(loss)
for the period - - - - - 114,756 34,077 148,833
Foreign exchange - - - - 654 76 (738) (8)
Actuarial
gain on pension
scheme (net
of tax) - - - - - - 6,885 6,885
-------------------- ---------- --------- --------- ------------ ------------ ---------- ---------- ----------
Total comprehensive
profit
for the period - - - - 654 114,832 40,224 155,710
-------------------- ---------- --------- --------- ------------ ------------ ---------- ---------- ----------
Issue of
shares 222 32,588 - - - - - 32,810
Movement
in own shares - - (1,754) - - - - (1,754)
Dividend
relating
to 2020 - - - - - - (9,614) (9,614)
Dividend
relating
to 2021 - - - - - - (25,309) (25,309)
-------------------- ---------- --------- --------- ------------ ------------ ---------- ---------- ----------
Total equity
at 31 December
2021 6,145 41,865 (3,215) 8 2,656 789,423 41,955 878,837
-------------------- ---------- --------- --------- ------------ ------------ ---------- ---------- ----------
Called
up share Share Own Capital Translation Capital Retained
capital premium shares redemption reserve reserves earnings Total
GROUP GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------- ---------- --------- --------- ------------ ------------ ---------- ---------- ----------
Balance at
1 January
2020 5,921 9,147 (1,332) 8 1,897 697,119 62,512 775,272
-------------------- ---------- --------- --------- ------------ ------------ ---------- ---------- ----------
Profit/(loss)
for the period - - - - - (22,528) 25,479 2,951
Foreign exchange - - - - 105 - - 105
Actuarial
gain on pension
scheme (net
of tax) - - - - - - (5,265) (5,265)
-------------------- ---------- --------- --------- ------------ ------------ ---------- ---------- ----------
Total comprehensive
loss for
the
period - - - - 105 (22,528) 20,214 (2,209)
-------------------- ---------- --------- --------- ------------ ------------ ---------- ---------- ----------
Issue of
shares 2 130 - - - - - 132
Movement
in own shares - - (129) - - - - (129)
Dividend
relating
to 2019 - - - - - - (22,976) (22,976)
Dividend
relating
to 2020 - - - - - - (23,096) (23,096)
-------------------- ---------- --------- --------- ------------ ------------ ---------- ---------- ----------
Total equity
at 31 December
2020 5,923 9,277 (1,461) 8 2,002 674,591 36,654 726,994
-------------------- ---------- --------- --------- ------------ ------------ ---------- ---------- ----------
Capital reserves comprises realised and unrealised gains on
investments held at fair value through profit or loss.
Statement of changes in equity
as at 31 December 2021
Share Share Own Capital Translation Capital Retained
capital premium shares redemption reserve reserves earnings Total
COMPANY GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ----------
Balance at
1 January
2021 5,923 9,277 - 8 - 733,189 12,881 761,278
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ----------
Profit/(loss)
for the period - - - - - 114,756 36,754 151,510
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ----------
Total comprehensive
profit for
the
period - - - - - 114,756 36,754 151,510
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ----------
Issue of shares 222 32,588 - - - - - 32,810
Dividend relating
to 2020 - - - - - - (9,614) (9,614)
Dividend relating
to 2021 - - - - - (12,652) (12,657) (25,309)
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ----------
Total equity
at 31 December
2021 6,145 41,865 - 8 - 835,293 27,364 910,675
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ----------
Share Share Own Capital Translation Capital Retained
capital premium shares redemption reserve reserves earnings Total
COMPANY GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ----------
Balance at
1 January
2020 5,921 9,147 - 8 - 755,717 30,767 801,560
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ----------
Profit/(loss)
for the period - - - - - (22,528) 28,186 5,658
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ----------
Total comprehensive
profit for
the
period - - - - - (22,528) 28,186 5,658
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ----------
Issue of shares 2 130 - - - - - 132
Dividend relating
to 2019 - - - - - - (22,976) (22,976)
Dividend relating
to 2020 - - - - - - (23,096) (23,096)
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ----------
Total equity
at 31 December
2020 5,923 9,277 - 8 - 733,189 12,881 761,278
--------------------- --------- --------- -------- ------------ ------------ ---------- ---------- ----------
Capital reserves comprises realised and unrealised gains on
investments held at fair value through profit or loss.
Statements of cash flows
for the year ended 31 December 2021
GROUP COMPANY
----------------------------------------- ----------------------- -----------------------
2021 2020 2021 2020
GBP000 GBP000 GBP000 GBP000
----------------------------------------- ----------- ---------- ----------- ----------
Operating activities
----------------------------------------- ----------- ---------- ----------- ----------
Operating profit before interest
payable and taxation 155,320 9,406 157,077 10,843
Losses/(gains) on investments (121,170) 18,570 (121,170) 18,570
Non-cash dividends - - (10,000)
Depreciation of property, plant
and equipment 220 37 - -
Depreciation of right-of-use assets 858 1,179 - -
Interest on lease liability - 49 - -
Amortisation of intangible assets 490 59 - -
Loss on sale of fixed assets - (15) - -
Decrease/(increase) in receivables (4,419) (9,007) 2,139 (3,377)
(Decrease)/increase in payables 1,920 14,926 2,920 11,922
Transfer from capital reserves - (1,341) - (1,341)
Normal pension contributions in
excess of cost (940) (960) - -
----------------------------------------- ----------- ---------- ----------- ----------
Cash generated from operating
activities 32,279 32,903 40,966 26,617
----------------------------------------- ----------- ---------- ----------- ----------
Taxation (307) (1,103) - -
----------------------------------------- ----------- ---------- ----------- ----------
Operating cash flow 31,972 31,800 40,966 26,617
----------------------------------------- ----------- ---------- ----------- ----------
Investing activities
----------------------------------------- ----------- ---------- ----------- ----------
Acquisition of property, plant
and equipment (1,075) (1,079) - -
Expenditure on intangible assets - (574) - -
Cash consideration transferred (18,214) - - -
in relation to acquisition
Purchase of investments (200,096) (173,831) (200,096) (173,831)
Sale of investments 140,440 166,908 140,327 166,908
Goodwill relating to subsidiary - 19 - -
undertakings
Amounts receivable from intercompany - - (55,935) -
----------------------------------------- ----------- ---------- ----------- ----------
Cash flow from investing activities (78,945) (8,557) (115,704) (6,923)
----------------------------------------- ----------- ---------- ----------- ----------
Financing activities
----------------------------------------- ----------- ---------- ----------- ----------
Intercompany funding - - 25,933 17,708
Interest paid (5,277) (5,278) (5,567) (5,206)
Dividends paid (34,923) (46,071) (34,923) (46,071)
Payment of lease liability (371) (1,163) - -
Proceeds of increase in share
capital 32,810 132 32,810 132
Proceeds of issuance of long-term
borrowings 50,000 - 50,000 -
Purchase of own shares (1,754) (129) - -
----------------------------------------- ----------- ---------- ----------- ----------
Net cash flow from financing activities 40,485 (52,509) 68,253 (33,437)
----------------------------------------- ----------- ---------- ----------- ----------
Net increase/(decrease) in cash
and cash equivalents (6,488) (29,266) (6,485) (13,743)
----------------------------------------- ----------- ---------- ----------- ----------
Cash and cash equivalents at beginning
of period 41,762 71,236 32,098 46,128
Foreign exchange (losses)/gains
on cash and cash equivalents 606 (208) (106) (287)
----------------------------------------- ----------- ---------- ----------- ----------
Cash and cash equivalents at end
of period 35,880 41,762 25,507 32,098
----------------------------------------- ----------- ---------- ----------- ----------
NB: Total cash received in relation to dividend income was:
Group: GBP27,550k (2020: GBP18,206k)
Company: GBP42,500k (2020: GBP31,915k)
Extracts from the Notes to the Accounts
Going concern
The financial statements have been prepared on a going concern
basis and under the historical cost basis of accounting, modified
to include the revaluation of investment at fair value.
The assets of the Company consist of securities that are readily
realisable and, accordingly, the Directors believe that the Company
has adequate resources to continue in operational existence for at
least twelve months from the date of approval of the financial
statements.
The Directors have also considered the ongoing impact of
Covid-19, across the Group, including cash flow forecasting,
balance sheet review at entity level, a review of covenant
compliance including the headroom above the covenants and an
assessment of the liquidity of the portfolio. They have concluded
that the Group is able to meet its financial obligations, including
the repayment of the debenture interest, as they fall due for a
period of at least twelve months from the date of approval of the
financial statements. Having assessed these factors and the
principal risks, the Directors are not aware of any material
uncertainties that cast significant doubt on the Group's ability to
continue as a going concern.
Segment analysis
Independent
professional
Investment portfolio services Group charges Total
---------------- ----------------------- ------------------------ ----------------------- ------------------------
31 31 31 31 31 31 31
December December December 31 December December December December December
2021 2020 2021 2020 2021 2020 2021 2020
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------- ---------- ----------- ---------- ------------ ---------- ----------- ----------- -----------
Revenue
---------------- ---------- ----------- ---------- ------------ ---------- ----------- ----------- -----------
Dividend
income 26,259 17,937 - - - - 26,259 17,937
IPS fees
Corporate
trust - - 13,317 15,069 - - 13,317 15,069
Corporate
services - - 22,981 12,249 - - 22,981 12,249
Pensions - - 13,215 11,580 - - 13,215 11,580
---------------- ---------- ----------- ---------- ------------ ---------- ----------- ----------- -----------
Segment income 26,259 17,937 49,513 38,898 - - 75,772 56,835
Other income 551 213 - 6 - - 551 219
Cost of sales (110) - (7,927) (4,405) - - (8,037) (4,405)
Administration
costs (3,434) (2,570) (28,246) (22,301) - (8) (31,680) (24,879)
Release of
onerous
contracts - - - - - 118 - 118
---------------- ---------- ----------- ---------- ------------ ---------- ----------- ----------- -----------
23,266 15,580 13,340 12,198 - 110 36,606 27,888
Interest
payable (net) (1,319) (1,260) - 29 - - (1,319) (1,231)
---------------- ---------- ----------- ---------- ------------ ---------- ----------- ----------- -----------
Return,
including
profit on
ordinary
activities
before
taxation 21,947 14,320 13,340 12,227 - 110 35,287 26,657
---------------- ---------- ----------- ---------- ------------ ---------- ----------- ----------- -----------
Taxation - - (1,210) (1,178) - - (1,210) (1,178)
---------------- ---------- ----------- ---------- ------------ ---------- ----------- ----------- -----------
Return,
including
profit
attributable
to
shareholders 21,947 14,320 12,130 11,049 - 110 34,077 25,479
---------------- ---------- ----------- ---------- ------------ ---------- ----------- ----------- -----------
Revenue return
per
ordinary
share (pence) 18.09 12.12 10.00 9.35 - 0.09 28.09 21.56
---------------- ---------- ----------- ---------- ------------ ---------- ----------- ----------- -----------
Assets 1,020,114 850,255 71,903 36,246 - 21 1,092,017 886,522
Liabilities (175,418) (146,992) (37,762) (12,536) - - (213,180) (159,528)
---------------- ---------- ----------- ---------- ------------ ---------- ----------- ----------- -----------
Total net
assets 844,696 703,263 34,141 23,710 - 21 878,837 726,994
---------------- ---------- ----------- ---------- ------------ ---------- ----------- ----------- -----------
Net revenue is calculated by reducing segment income by cost of
sales.
For the purposes of reporting segmental performance, the table
above presents a split of the revenue column between the investment
portfolio, the IPS business and Group charges. Group dividends are
paid from the investment portfolio segment of revenue reserves.
Geographic location of revenue: 90% of revenue is based in the
UK. Geographic location is based on the jurisdiction in which the
contracting legal entity is based.
Major customers: Due to the diverse nature of the IPS revenue
streams, there is no single customer or concentration of customers
that represents more than 3% of gross revenue streams.
Capital element: The capital element of the income statement is
wholly gains and losses relating to investments held at fair value
through profit and loss (2021 gain of GBP121,170,000; 2020 loss of
GBP16,354,000), administrative expenses (2021: GBP2,456,000; 2020:
GBP2,216,000), interest payable (2021: GBP3,958,000; 2020:
GBP3,958,000) and a capital dividend payable of GBP12,652,000 which
corresponds to amounts classified as capital in nature in
accordance with the SORP are shown in the capital column of the
income statement above.
Financial instruments
The principal risks facing the Group in respect of its financial
instruments remain unchanged from 2020 and are:
Market risk
Price risk, arising from uncertainty in the future value of
financial instruments. The Board maintains strategy guidelines
whereby risk is spread over a range of investments, the number of
holdings normally being between 70 and 175. In addition, the stock
selections and transactions are actively monitored throughout the
year by the investment manager, who reports to the Board on a
regular basis to review past performance and develop future
strategy. The investment portfolio is exposed to market price
fluctuation: if the valuation at 31 December 2021 fell or rose by
10%, the impact on the Group's total profit or loss for the year
would have been GBP99.2m (2020: GBP81.2m). Corresponding 10%
changes in the valuation of the investment portfolio on the
Company's total profit or loss for the year would have been
GBP99.2m (2020: GBP81.2m).
Foreign currency risk, arising from movements in currency rates
applicable to the Group's investment in equities and fixed interest
securities and the net assets of the Group's overseas subsidiaries
denominated in currencies other than sterling. The Group's
financial assets denominated in currencies other than sterling
were:
2021 2020
--------------------------------------- ---------------------------------------
Total Total
Net monetary currency Net monetary currency
Investments assets exposure Investments assets exposure
------------------
GROUP GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ------------ ------------- ---------- ------------ ------------- ----------
US Dollar 44.7 3.6 48.3 40.1 11.7 51.8
Canadian Dollar 6.1 - 6.1 5.5 - 5.5
Euro 72.6 1.1 73.7 65.2 0.4 65.6
Danish Krone 2.3 - 2.3 2.3 - 2.3
Swedish Krona 1.2 - 1.2 - - -
Swiss Franc 9.6 - 9.6 9.5 - 9.5
Hong Kong Dollar - 1.0 1.0 - 1.0 1.0
Japanese Yen 11.2 - 11.2 9.3 - 9.3
------------------ ------------ ------------- ---------- ------------ ------------- ----------
Total 147.7 5.7 153.4 131.9 13.1 145.0
------------------ ------------ ------------- ---------- ------------ ------------- ----------
The Group US dollar net monetary assets is that held by the US
operations of GBP2m (2020: GBP1.4m) together with GBP3.6m (2020:
GBP10.3m) held by non-US operations.
2021 2020
--------------------------------------- ---------------------------------------
Total Total
Net monetary currency Net monetary currency
Investments assets exposure Investments assets exposure
COMPANY GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ------------ ------------- ---------- ------------ ------------- ----------
US Dollar 44.7 0.1 44.8 40.1 9.9 50.0
Canadian Dollar 6.1 - 6.1 5.5 - 5.5
Euro 72.6 - 72.6 65.2 - 65.2
Danish Krone 2.3 - 2.3 2.3 - 2.3
Swedish Krona 1.0 - 1.0 - - -
Swiss Franc 9.6 - 9.6 9.5 - 9.5
Japanese Yen 11.2 - 11.2 9.3 - 9.3
----------------- ------------ ------------- ---------- ------------ ------------- ----------
Total 147.5 0.1 147.6 131.9 9.9 141.8
----------------- ------------ ------------- ---------- ------------ ------------- ----------
The holding in Scottish Oriental Smaller Companies Trust is
denominated in sterling but has underlying assets in foreign
currencies equivalent to GBP7.1m (2020: GBP7.1m. Investments made
in the UK and overseas have underlying assets and income streams in
foreign currencies which cannot easily be determined and have not
been included in the sensitivity analysis. If the value of all
other currencies at 31 December 2021 rose or fell by 10% against
sterling, the impact on the Group's total profit or loss for the
year would have been GBP17.3m and GBP14.1m respectively (2020:
GBP15.5m and GBP12.5m). Corresponding 10% changes in currency
values on the Company's total profit or loss for the year would
have been the same. The calculations are based on the investment
portfolio at the respective year end dates and are not
representative of the year as a whole.
Interest rate risk, arising from movements in interest rates on
borrowing, deposits and short-term investments. The Board reviews
the mix of fixed and floating rate exposures and ensures that
gearing levels are appropriate to the current and anticipated
market environment. The Group's interest rate profile was:
2021
------------------------------------------------------------------
GROUP COMPANY
------------------------------------------ ----------------------
Sterling HK Dollars US Dollars Euro Sterling US Dollars
GBPm GBPm GBPm GBPm GBPm GBPm
--------------- --------- ----------- ----------- ----- --------- -----------
Floating rate
assets 29.7 1.0 3.6 1.1 25.0 0.1
--------------- --------- ----------- ----------- ----- --------- -----------
2020
------------------------------------------------------------------
GROUP COMPANY
------------------------------------------ ----------------------
Sterling HK Dollars US Dollars Euro Sterling US Dollars
GBPm GBPm GBPm GBPm GBPm GBPm
--------------- --------- ----------- ----------- ----- --------- -----------
Floating rate
assets 28.2 1.0 11.7 0.4 22.0 9.9
--------------- --------- ----------- ----------- ----- --------- -----------
The Group holds cash and cash equivalents on short-term bank
deposits and money market funds. Interest rates tend to vary with
bank base rates. The investment portfolio is not directly exposed
to interest rate risk.
GROUP COMPANY
-------------------- --------------------
2021 2020 2021 2020
Sterling Sterling Sterling Sterling
GBPm GBPm GBPm GBPm
--------------------------------- --------- --------- --------- ---------
Fixed rate liabilities 164.2 114.2 124.2 74.5
--------------------------------- --------- --------- --------- ---------
Weighted average fixed rate for
the year 3.966% 4.589% 3.276% 3.770%
--------------------------------- --------- --------- --------- ---------
If interest rates during the year were 1.0% higher the impact on
the Group's total profit or loss for the year would have been
GBP314,000 credit (2020: GBP458,000 credit). It is assumed that
interest rates are unlikely to fall below the current level.
The Company holds cash and cash equivalents on short-term bank
deposits and money market funds, it also has short-term borrowings.
Amounts owed to subsidiary undertakings include GBP40m at a fixed
rate. Interest rates on cash and cash equivalents and amounts due
to subsidiary undertakings at floating rates tend to vary with bank
base rates. A 1.0% increase in interest rates would have affected
the Company's profit or loss for the year by GBP233,000 credit
(2020: GBP317,000 credit). The calculations are based on the
balances at the respective year end dates and are not
representative of the year as a whole.
Liquidity risk
Is the risk arising from any difficulty in realising assets or
raising funds to meet commitments associated with any of the above
financial instruments. To minimise this risk, the Board's strategy
largely limits investments to equities and fixed interest
securities quoted in major financial markets. In addition, cash
balances are maintained commensurate with likely future
settlements. The maturity of the Group's existing borrowings is set
out in note 21 in the full annual report and accounts. The interest
on borrowings is paid bi-annually on March and September for the
2045 secured senior notes, April and October for the 2034 secured
bonds and May and November for the 2041 and 2050 senior secured
notes.
Credit risk
Is the risk arising from the failure of another party to perform
according to the terms of their contract. The Group minimises
credit risk through policies which restrict deposits to highly
rated financial institutions and restrict the maximum exposure to
any individual financial institution. The Group's maximum exposure
to credit risk arising from financial assets is GBP56.3m (2020:
GBP57.9m). The Company's maximum exposure to credit risk arising
from financial assets is GBP83.1m (2020: GBP36.2m).
Stock lending
Stock lending agreements are transactions in which the Group
lends securities for a fee and receives cash as collateral. The
Group continues to recognise the securities in their entirety in
the statement of financial position because it retains
substantially all of the risks and rewards of ownership. Because as
part of the lending arrangement the Group sells the contractual
rights to the cash flows of the securities, it does not have the
ability to use the transferred assets during the term of the
arrangement.
Stock lending transactions are carried out with a number of
approved counterparties. Details of the value of securities on loan
at the year end can be found in note 28 in the full annual report
and accounts. In summary, the Group only transacts with
counterparties that it considers to be credit worthy.
Trade and other receivables
Trade and other receivables not impaired but past due by the
following:
GROUP COMPANY
---------------- ----------------
2021 2020 2021 2020
GBP000 GBP000 GBP000 GBP000
------------------------ ------- ------- ------- -------
Between 31 and 60 days 3,342 2,382 - -
Between 61 and 90 days 2,403 1,108 - -
More than 91 days 10,941 10,614 - -
------------------------ ------- ------- ------- -------
Total 16,686 14,104 - -
------------------------ ------- ------- ------- -------
IFRS 9 credit loss rates
The Group applies the IFRS 9 simplified approach to measuring
expected credit losses using a lifetime expected credit loss
provision for trade receivables and contract assets. To measure
expected credit losses trade receivables are grouped based on
similar risk characteristics including business area and business
geography and ageing.
The expected loss rates are based on the Company's historical
credit losses experienced over a three-year period prior to the
year end. The historical loss rates are adjusted for current and
forward-looking information on macroeconomic factors affecting the
Company's customers. The Group has identified gross domestic
product (GDP) and unemployment trends act as key economic
indicators which may impact our customers' future ability to pay
debt.
The below table displays the gross carrying amount against the
expected credit loss provision and specific provisions. Specific
provisions relate to balances 91+ days overdue.
The total specific and credit loss provision at 31 December 2021
is GBP3,314,000 (2020: GBP3,206,000).
1-30 days 31-60 days 61-90 days 91+ days
Current overdue overdue overdue overdue Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------- -------- ---------- ----------- ----------- --------- --------
31 December 2021
Expected loss rate 2.98% 2.94% 2.42% 4.45% 4.12% 3.62%
Gross carrying
amount 1,343 3,939 3,342 2,403 10,941 21,968
Expected credit
loss provision (40) (116) (81) (107) (451) (795)
Specific provision - - - - (2,519) (2,519)
--------------------- -------- ---------- ----------- ----------- --------- --------
Net carrying amount 1,303 3,823 3,261 2,296 7,971 18,654
--------------------- -------- ---------- ----------- ----------- --------- --------
31 December 2020
Expected loss rate 2.64% 4.07% 4.03% 5.23% 4.35% 4.09%
Gross carrying
amount 2,725 2,506 2,382 1,108 10,614 19,335
Expected credit
loss provision (72) (102) (96) (58) (462) (790)
Specific provision - - - - (2,416) (2,416)
--------------------- -------- ---------- ----------- ----------- --------- --------
Net carrying amount 2,653 2,404 2,286 1,050 7,736 16,129
--------------------- -------- ---------- ----------- ----------- --------- --------
Trade and other payables
GROUP COMPANY
---------------- ----------------
2021 2020 2021 2020
GBP000 GBP000 GBP000 GBP000
------------------------------------------ ------- ------- ------- -------
Due in less than one month 27,988 27,139 10,860 13,075
Due in more than one month and less than - 266 - -
three months
------------------------------------------ ------- ------- ------- -------
Total 27,988 27,405 10,860 13,075
------------------------------------------ ------- ------- ------- -------
Fair value
The Directors are of the opinion that the fair value of
financial assets and liabilities of the Group are not materially
different to their carrying values, with the exception of the
long-term borrowings. The Group's basis of fair value calculation
on these long-term borrowings uses quoted prices (unadjusted) in
active markets for identical liabilities that the entity can access
at the measurement date. The Group does not make adjustments to
quoted prices, only under specific circumstances, for example when
a quoted price does not represent the fair value (i.e. when a
significant event takes place between the measurement date and
market closing date).
Related party transactions
GROUP
Transactions between the Company and its subsidiaries, which are
related parties, have been eliminated on consolidation.
COMPANY
The related party transactions between the Company and its
wholly owned subsidiary undertakings are summarised as follows:
2021 2020
GBP000 GBP000
----------------------------------------------------------- ------- -------
Dividends from subsidiaries 14,950 13,709
Interest on intercompany balances charged by subsidiaries 2,559 2,378
Management charges from subsidiaries 700 700
----------------------------------------------------------- ------- -------
The key management personnel are the Directors of the Company.
Details of their compensation are included in note 4 and in Part 2
of the remuneration report in the full annual report and accounts.
Key management personnel costs inclusive of employers national
insurance are GBP1,438,456 (2020: GBP1,352,977).
Annual General Meeting (AGM)
The 132(nd) AGM will be held in-person at the offices of The Law
Debenture Corporation p.l.c., 8th Floor, 100 Bishopsgate, London,
EC2N 4AG and electronically on 7 April 2022 at 11.00am. Further
details are included in the Notice of AGM included in the full
annual report and accounts.
Access to the Annual Report
On 4 March 2022, the annual report and accounts will be
available for download from the National Storage Mechanism (NSM) at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism and on the
Company's website at
https://www.lawdebenture.com/investment-trust/shareholder-information/financial-statements
.
Corporate Information
Company advisers and information
Directors Investment portfolio manager
Robert Hingley(*+) Janus Henderson Global Investors
Tim Bond 201 Bishopsgate, London EC2M 3AE
Mark Bridgeman(#)
Claire Finn() Investment managers
Pars Purewal James Henderson and Laura Foll are joint
Clare Askem managers. They also manage Lowland Investment
Denis Jackson Company plc, Henderson Opportunities Trust
Trish Houston plc and the Henderson UK Equity Income
& Growth Fund.
(*) Chairman of the Board
(+) Chairman of the Nomination James joined Henderson Global Investors
Committee (now Janus Henderson Investors) in 1983
() Chairman of the Remuneration and has been an investment trust portfolio
Committee manager since 1990. He first became involved
(#) Chairman of the Audit in the management of Law Debenture's portfolio
and Risk Committee in 1994 and took over lead responsibility
for management of the portfolio in June
2003.
Laura joined Janus Henderson Investors
in 2009 and has held the position of portfolio
manager on the Global Equity Income team
since 2014. She first became involved with
Law Debenture's portfolio in September
2011 and became joint portfolio manager
in 2019.
Website
https://www.lawdebenture.com
Registrar
Computershare Investor Services
PLC
The Pavilions, Bridgwater
Road, Bristol BS99 6ZZ
T: 0370 707 1129
Auditors
Deloitte LLP, 110 Queen Street,
Glasgow, G1 3BX
Alternative Investment Fund
Manager
The Law Debenture Corporation
p.l.c.
Global custodian
HSBC Bank plc (under delegation
by the depositary)
8 Canada Square, London E14
5HQ
Broker
J.P. Morgan Cazenove Limited
25 Bank Street, London E14
5JP
Depositary
NatWest Trustee and Depositary
Services Limited
250 Bishopsgate, London EC2M
4AA
The Law Debenture Corporation p.l.c. is registered in England,
company registration number 30397. LEI number -
2138006E39QX7XV6PP21
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END
FR BKQBNBBKBDBB
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