20th Mar 2009 07:00
HgCapital Trust plc
The Directors present the Annual Financial Report of the Company for the yearended 31 December 2008. The financial information set out below does notconstitute the Company's statutory accounts for the years ended 31 December2008 or 2007. The full Annual Report and Accounts can be accessed via theCompany's website at www.hgcapitaltrust.com/results.htm or by contacting theCompany's Registrar (Computershare Investor Services plc) on telephone number0870 707 1037.Investment objective
The objective of the Company is to provide shareholders with long-term capital appreciation in excess of the FTSE All-Share Index by investing in unquoted
companies.
The Company provides investors with exposure to a diversified portfolio of private equity investments primarily in the UK and Continental Europe.
Financial highlights of 2008
+0.5% Positive net asset growth (assuming historic dividends are reinvested)
-12% Fall in share price compared with a 30% decrease in the FTSE All-Share Index and a 44% fall in the FTSE Small Cap Index
55% A high level of net assets available in liquid funds to deploy in attractive opportunities, equating to £5.16 per share
£92m Continued realisations in the year despite challenging market conditions
+14% Average annual operating profit growth for our top 10 investments over the last 12 months
+15% Ten year total return per annum versus 1% per annum from the FTSE All-Share Index
>4x Growth in value of shares over 10 years
Chairman's statement
This introductory statement forms part of the Directors' Report which continues below.
The Board believes that the Company, with a substantial holding of cash, is well positioned for a recession that will generate opportunities to acquire good businesses at reasonable prices
The year in review
Dramatic changes in financial markets made 2008 a turning point in the balanceof advantage between being fully invested or holding liquid assets, ready forinvestment at significantly lower prices than have been seen for severalyears. Your Company entered 2008 with liquid funds of £80 million,representing one-third of net assets, and finished the year with £130 million,equating to £5.16 per share, 55% of net assets, available for deployment asthe recession progresses, revealing opportunities to acquire good businessesat attractive prices.Our Manager, HgCapital, has rigorously pursued a policy of realisinginvestments before markets turned. Since June 2005 the Company has exited 30investments, receiving proceeds totalling £295 million and representing 2.7xoriginal cost. The Manager has continued to achieve good realisations, even ina falling market: since June 2007, when the credit crisis began to unfold, theCompany has completed 14 realisations, with proceeds of £186 million, andstill delivering 2.6x original cost.Realisations in the first half of 2008 added substantially to net asset value,which reached £10.32 per share at the 30th June valuation. The sale of AddisonSoftware and Orbiscom added further to net asset value in the second half, butthe fall in ratings of listed equities, magnified by the effect of gearing inthe underlying investments, has extinguished these gains from realisations,leaving net asset value at £9.29 per share, slightly down on the start of
theyear.Performance recordYear Net assets Revenue available
ended attributable Net asset Ordinary for ordinary Earnings Dividends31 December to ordinary value per share price shareholders per per shareholders ordinary p Gross £'000 ordinary ordinary £'000 share p revenue share p share p £'0001999 89,863 346.5 289.0 3,901 2,481 9.6 8.002000 103,521 411.0 356.5 7,332 4,623 17.9 14.502001 95,795 380.3 294.0 3,893 2,420 9.6 8.002002 83,837 332.9 219.5 3,528 2,148 8.5 8.002003 99,987 397.0 289.5 7,106 3,969 15.8 -**2004 122,040 484.5 451.5 4,905 2,649 10.5 12.002005 156,487 621.3 583.5 4,963 2,965 11.8 8.002006 187,135 743.0 731.0 7,769 4,519 17.9 10.002007 238,817 948.2 782.5 12,129 7,446 29.6 14.002008 234,094 929.4 668.5 12,068 7,445 29.6 25.00*
* Final dividend for the year ended 31 December 2007, declared on 13 March 2008, paid on 12 May 2008.
** Change in accounting standards relating to recognition of dividends. Valuation
The net asset value published in these results is based on the fair value ofunquoted investments at the reporting date. These have been valued based onthe International Private Equity and Venture Capital Valuation Guidelines(`IPEV'); how the Company applies these guidelines is described in note 1 tothe financial statements and the guidelines can be found in full atwww.privateequityvaluation.com. In November 2008, in light of the financialmarket turmoil and stock market volatility, the Board of IPEV publiclyreaffirmed its commitment to fair value as the best measure of valuing privateequity portfolio companies and investments in private equity funds.Against a background of economic recession, volatility in equity marketratings and the credit crisis, valuing private businesses is challenging andvaluations must be subject to uncertainty. The Manager has undertaken arigorous valuation of each investment at 31 December 2008 and the Board hasthoroughly probed the valuation methodology and examined these proposedvaluations in detail against the IPEV guidelines. Valuations have been basedon estimates of maintainable earnings made in the light of up-to-datemanagement accounts reporting trading to November 2008 or later, and theseestimates have been reviewed in the light of more recent figures as theybecame available. The Company's policy is not to revalue upwards any newinvestment until audited accounts for a full year since acquisition becomeavailable: however, in view of the deterioration in market conditions, all newholdings have been reviewed and all but one have been written down. Across theportfolio, sixteen investments have been written down in value or written offcompletely, while four have been revalued upwards to reflect improved trading,in two cases reversing earlier write-downs where management action hassuccessfully turned the business around. One investment remains at cost. Thebalance of the portfolio comprises small legacy assets awaiting finalrealisation.The principal factors that affect the valuation of each investment are:current estimates of maintainable earnings; the stock market rating ofcomparable businesses; the marketability discount applied; changes in theamount of debt in the business; the gearing effect of that debt, which tendsto magnify the increase or decrease in the value of equity; and, in the caseof investments whose functional currency is not sterling, the change in theexchange rate. The Annual Report and Accounts will contain, for the firsttime, graphical analyses of these movements in NAV and of the sources ofchange in the valuations of unrealised investments. In aggregate, in the firsthalf of the year values appreciated reflecting improving trading results; inthe second half the overwhelming driver of falling values was the decline instock market ratings of comparable businesses, despite most of our investmentstrading ahead of or in line with the previous year.A number of the Company's investments reported profits ahead of last year; amajority of these were businesses based in Germany and the Nordic region,reflecting the value of the diversification across several economies that theManager's pan-European focus provides. This also gave rise to a substantialforeign exchange gain as sterling fell against the Euro. A portion of thisgain has been protected through a foreign exchange hedge, which is explainedin the notes to the financial statements.
Performance
As a consequence, the total return on assets (NAV plus dividend) over the whole year was +0.5%, which while disappointing compares well against a decrease of 30% in the FTSE All-Share Index and a decrease of 44% in the FTSE Small-Cap Index. The Company's net asset value at year-end was £9.29 per share.
Total return to shareholders (share price growth plus dividend) was -12.0%,which was substantially better than the relevant FTSE indices. The Company'sshare price fell from £7.83 at the end of 2007 to £6.69 at the end of 2008, adiscount of 28.1% to the net asset value.The Company's long-term returns to shareholders continue to be strong, with atotal return (share price plus dividend) over the last ten years of 15.4%p.a., some 14.2% p.a. above the total return on the FTSE All-Share Index. Thestrong long-term performance delivered by HgCapital as Manager was recognisedwhen the Company was chosen, for the fourth consecutive year, as PrivateEquity Investment Trust of the Year in the Investment Week awards. Wecongratulate the Manager and its staff for their hard and dedicated work inachieving this consistently high level of performance.During the year, the Company received £91.6 million from the realisation ofinvestments (2007: £106.4 million) and invested £26.0 million (2007: £50.8million) in new and follow-on investments.
Revenue return was 29.6 pence per share (2007: 29.6 pence). Each year the Board recommends a dividend based on the revenue return that year, so as to maintain its status as an investment trust; this year the Board recommends an unchanged final dividend of 25.0 pence per share (2007: 25.0 pence).
The market in the Company's shares
In 2007 there began a trend of widening discounts against NAV across the wholesector of private equity investment trusts and investment trusts in general,and this continued in 2008. Your Company's shares have traded at a narrowerdiscount than most of its peers, reflecting its very substantial holding ofliquid assets in the form of gilts. However, across the sector, discounts havebeen reported at levels never previously seen, largely reflecting the time lagbetween the dramatic fall in market ratings and the publication of valuations;in some cases this has been exacerbated by the risks arising fromover-commitment to new funds. As updated valuations are published, discountsto net asset value may be expected to tighten; however, the Board believesthat among the other factors that have led to such discounts is theuncertainty felt in the market about how recessionary conditions are affectingtrading in underlying investments, the risk that they will breach bankingcovenants, the response of banks to any breach, refinancing risk and thelikelihood that holding periods will lengthen resulting in lower annualreturns. Your Board, and HgCapital, have always considered it important toprovide comprehensive and transparent reports and we welcomed Sir DavidWalker's report Guidelines for Disclosure and Transparency in Private Equityas a contribution to greater standards of transparency across the privateequity sector. To assist shareholders' understanding of the prospects andrisks of our portfolio, we are publishing, in the Review of PrincipalInvestments section below, more information than ever before about ourprincipal investments. This section describes each business, the Manager'sinvestment rationale, the source of the investment and how the Manageraccomplished the acquisition, the strategy of the Manager in adding value,trading performance and exit strategy. A general update will also be providedwhen the half-year valuation is published in August and in our interimmanagement statements in May and October.The Board has regularly set out its policy with regard to the repurchase ofshares: at a time when there appears to be surplus capital and conditions fornew investment appear to be unfavourable, the Board will consider returningcapital to shareholders, usually through the market purchase of shares;consequently, the Board is once again asking shareholders to renew the powerto purchase shares at the forthcoming Annual General Meeting. However, theBoard's current view is that it is strongly in shareholders' interests toretain capital for investment, and that the purchase of shares would makelittle difference to the discount, which is driven by wider economicuncertainties, not an excess of supply over demand for the Company's shares.
Realisations
Realisations during the year totalled £91.6 million, of which £68.2 millioncame from five major sales: The Sanctuary Spa, Clarion Events and ClassicCopyright in the first half and Addison Software and Orbiscom in the secondhalf. All of these realisations have achieved proceeds above the values atwhich they were held in the Company's balance sheet. These major realisationsreturned a realised gain over their December 2007 book value of £35.8 million.Brief descriptions of these investments can be found in the Manager's review.
Investments
As I have noted in statements over the last two years, as market conditionshave become more challenging, value creation will rely all the more on organicgrowth and margin enhancement. The Board is reassured that HgCapital'sinvestment style, which has always been to work actively with management todefine and deliver strategies that add value to the underlying business and,when necessary, to take radical action to turn a business around, is wellsuited to these more uncertain times. This increasingly differentiatesHgCapital Trust from other private equity investment vehicles, many of whichare becoming funds of funds in which the Board and Manager are remote from theunderlying investments.The Manager acquired only three businesses this year, investing in total £18.9million on behalf of the Company: Casa Reha, a German care home operator;Achilles, a UK provider of purchasing services in the energy and transportindustries; and KVT, an industrial distribution business in Germany. Furtherinformation on all new investments can be found in the Manager's report and onthe Company's web-site at www.hgcapitaltrust.com.The Board and the Manager are united in believing that the dramatic fall inequity markets in recent months has created excellent conditions for newinvestment. However, the recession will be deep and recovery is likely to beslow, with the implication that private equity managers should be patient andselective in deploying funds. It remains the case that some owners ofbusinesses are only adjusting their expectations slowly to changed marketconditions. The banking crisis that puts pressure on owners to sell alsocontinues to impede the use of leverage to fund acquisitions.The market correction of 2008 marks the end of a long and benign period forinvestment; the recession of 2009 is the starting point for a new phase ofinvestment at less demanding prices. The Company enters this new phase withsubstantial liquid funds and late in 2008 the Board and the Manager agreed onterms for the company to commit to invest £250 million, and up to a further£50 million, alongside HgCapital's new fund, Hg6. The investment phase forthese funds will begin in 2009 and take place over 4 to 5 years, matching theforecast recovery from recession, which should in turn lead to an improvedmarket for realisations. The Company's commitment, and revised feearrangements with the Manager, were described in full in a circular toshareholders issued in December 2008 and accessible via the Company's website.I draw readers' attention to the unique characteristic of this commitment,namely that, should the Company have insufficient cash to invest in any newinvestment, it can opt out. This flexibility gives a high level of protectionfrom the potential effects of over-commitment that have seriously impactedother investment trusts. At a general meeting in January 2009, shareholdersapproved these new arrangements and a change in the Company's Articles toprolong the life of the Company to accommodate this new phase in theinvestment cycle.
Prospects
The immediate prospects for all businesses remain uncertain, and the Managerhas taken further steps to monitor and manage its portfolio companies closely,taking action to protect and enhance value and anticipating any potentialbreaches of bank covenants. The Manager has also reorganised internally inorder to focus on the sectors where it has the strongest franchise andpotential deal-flow. This also results in larger deal teams to facilitatedeeper due diligence on potential investments and negotiation of bank fundingon a club basis in the absence of underwritten syndicated loans.With substantial funds under management, HgCapital has the flexibility tounderwrite acquisitions with more equity than before and refinance with debtat a later date. Future deals may include more mezzanine-level funding which,until recently, had been largely squeezed out by easy bank lending.The best private equity managers find opportunity in change and thrive onadapting to it. We can expect deal structures to evolve to meet newconditions, but the fundamental skills involved in identifying businesses withpotential, redefining their strategy, and driving improvement remain the same.The Board retains confidence in the Manager's ability to take advantage, withdue caution and patience, of the new market conditions.Following realisations, the Company holds a reduced portfolio of unquotedinvestments that are diversified across sectors and economies, and largelyoriented towards non-cyclical growth. This provides a base for value creationin coming years. The Company also has the benefit of strong liquidity to growthe portfolio at advantageous prices. The Board therefore believes the Companyis well placed to resume its growth in value when market conditions settledown, while taking advantage of the market correction to acquire goodbusinesses at reasonable prices. The Board is confident that, for manyinvestors, an allocation to a well-managed private equity portfolio remainsappropriate, especially with the liquidity, transparency and governanceoffered by an investment trust. HgCapital Trust has created value forshareholders for more than a decade and the Board believes it will continue toprovide patient investors with an efficient vehicle for gaining exposure to adiversified portfolio in an asset class that offers attractive long-termprospects for growth.Roger MountfordChairman19 March 2009
Historical total return* performance
One year Three years Five years Seven years Ten years % p.a. % p.a. % p.a. % p.a. % p.a.Net asset value 0.5 16.6 21.1 15.7 16.0Share price (12.0) 6.8 21.0 15.3 15.4FTSE All-Share Index (29.9) (4.8) 3.5 1.5 1.2FTSE Small Cap Index (43.9) (15.4) (3.3) (2.2) 1.4
Based on the Company's share price at 31 December 2008 and allowing for dividends to be reinvested, an investment of £1,000 ten years ago would now be worth £4,183.
An equivalent investment in the FTSE All-Share Index would be worth £1,124.
* Total return assumes all dividends have been reinvested.
Investment activity 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Invested 40 25 20 20 15 22 35 45 50 26(£million)Realised 30 18 26 27 31 47 52 62 106 92(includingincome)(£million)Manager's ReportHgCapital Trust plc gives the investor access to a diversifiedprivate equity portfolio run by an experienced and well-resourced Manager whomakes investments in well-established companies over a number of geographiesand sectors.
We believe our approach will continue to reward investors with superior performance, both relative to the public markets and its peers over the long term.
Investing in private equityPrivate equityPrivate equity provides medium to long-term financing to unlistedcompanies to support their growth and success. In return for their investment,investors receive a share of the equity in the businesses they finance.Private equity investments aim to deliver higher returns than public equityover a rolling period of five to ten years. Investments are typically held forthree to seven years before they are realised, with potential interim proceedsduring this period also achievable.
Advantages of private equity
Compared with investment in the public markets, a private equity investor has significant advantages:
- More investment opportunities: there are significantly more private than listed companies;
- Better access to information: the ability to conduct detailed market, financial, legal and management due diligence;
- More control for the private equity manager over the management of the business and the timing of its sale;
- Alignment of interest of investors and private equity management, leading to better decision making: the opportunity to act like an owner rather than a fund manager, with the benefit of representation on the Board; and
- Management talent: the ability to attract high calibre management into the underlying investments and the alignment of that management's interests to the success of the investment through equity participation.
Investment profile
Private equity investments are less liquid than public equities.
To compensate for this, they offer greater control and more attractive returns. Over the ten years from 1997 to 2007 UK private equity funds outperformed the FTSE All-Share Index by 13.9% per annum and outperformed relevant asset classes over this period*.
Individual private equity investments have a risk profile which is dependent on the nature of the underlying business. Investing in a diversified portfolio helps to mitigate some of these risks; the quality of company selections by the private equity manager and its ability to successfully manage its portfolio further mitigates risk.
Private Equity Investment Trusts
A Private Equity Investment Trust (`PEIT') offers the opportunityto participate in a diversified portfolio of private equity investments. Bybuying shares in a PEIT, which are freely traded, the investor benefits fromliquidity while participating in the potentially superior returns of a privateequity portfolio. In addition, PEITs allow investors access to private equitywithout having to commit to the ten year lock-in and minimum investmentrequired when investing in private equity via limited partnerships.Listed Private Equity (LPEQ) refers to public companies who investin private equity whose shares are listed and traded on a primary stockexchange. In Europe, primary exchanges include the London Stock Exchange andEuronext. Some private equity companies quoted on the London Stock Exchangeare structured as investment trusts. All listed private equity companies offerthe opportunity to participate in private equity investments in mainlyunlisted companies or portfolios of funds, without the need to be a verywealthy individual or institution.
The Company
The Company's objective is to provide shareholders with long-termcapital appreciation, by usually taking a minority position in all investmentsmade by HgCapital. This approach provides investors with exposure to a diverseportfolio of private equity investments across Western Europe run by a wellresourced and experienced manager.
*Source: BVCA Performance Measurement Survey 2007.
Manager's strategy
HgCapital provides access to attractive investment opportunities by acting as lead investor in middle market buyouts in Western Europe
Middle-market buyout focus
- HgCapital focuses on middle market buyouts with enterprise values of between £50 million and £500 million.
- The middle market offers a high volume of companies with proven, consistent financial performance and defensible market positions.
- Companies are small enough to provide opportunities to drive operational improvements, yet large enough to attract quality management and to offer multiple exit options across market cycles.
- Companies offer multiple value creation levers giving the potential to effect material operational improvements.
Pan-regional
- HgCapital focuses on investments in Western Europe, with the majority of activity taking place in the UK, Benelux, German speaking countries and the Nordic region.
- Local offices and local expertise, combined with a common culture and consistent processes, underpin HgCapital's ability to produce strong performance.
Broad coverage
- HgCapital`s dedicated sector teams provide investors with access to the substantial majority of private equity activity within their target size range and across their relevant geographies.
Clear investment criteria
- HgCapital applies a rigorous and commercial investment approach when evaluating all investment opportunities ensuring that only the most attractive investments are completed, irrespective of an opportunity's sector or geography.
- HgCapital seeks companies with protected business models and predictable revenues, which offer a platform for growing market share or have the potential for significant performance improvement.
- HgCapital targets situations where significant change is taking place and where the Manager's specialist knowledge and skills can make a real difference.
Manager's tactics
HgCapital aims to deliver attractive investment returns through the combination of deep sector knowledge, strong operational skills and the application of deep resources across the investment life cycle
Sector specialisation
- HgCapital's well-resourced sector teams combine the domain knowledge and expertise of a trade buyer with the flexibility of a financial investor.
- Deep sector knowledge optimises relevant deal flow and efficient investment selection.
- Dedicated teams cover the Healthcare, Industrials, Services and TMT sectors. In addition, over the last four years HgCapital has built a specialist team to identify businesses that will operate, construct and develop renewable energy projects in Western Europe.
Active portfolio management
- A dedicated team of experienced portfolio management professionals develop, execute and monitor value-enhancement strategies for each of HgCapital's investments.
- HgCapital typically invests as the lead, majority shareholder of portfolio companies and appoints HgCapital executives to the companies' boards to participate in business planning and to work with management.
- HgCapital regularly reviews the performance of all its investments to quickly identify any issues and ensure potential value is maximised.
Deep resources
- Continual investment in all areas of the HgCapital business ensures that high quality resources can be applied to each stage of the investment life cycle.
- HgCapital's team of approximately 80 people is well-positioned toproduce strong returns from a well-diversified portfolio of investments which,HgCapital believes, will continue to be superior to the returns generated bycomparable public equity markets.
Manager's review - the market
Current market conditions are challenging but present significant opportunities
2008 was a challenging year for the European buyout market.
The crisis in the global financial system reduced creditavailability and the ability of investors to finance new transactions.Simultaneously, the sharp downturn in the European economy, seen in the secondhalf of the year, put pressure on corporate profits. Against this uncertainbackdrop, European buyout deal volumes fell markedly to €69 billion, 54% downon the prior year.Although not immune from tightening credit conditions, the Europeanmiddle market has been less affected than the larger capital markets andleverage, albeit limited, remains available for high quality assets. HgCapitalbelieves it is well placed to continue to structure profitable transactions inthe current environment. We have historically adopted a conservative approachto leverage and are not reliant on plentiful debt finance in order to deliverstrong returns to clients. Over the past 10 years over 80% of value creationin HgCapital's buyout deals has come through operational improvements in theunderlying portfolio businesses, with less reliance on debt and financialstructuring. Going forward, this emphasis on developing and growing portfolioinvestments will remain a key focus for HgCapital.We see significant opportunities for private equity arising fromthe current economic environment. Falling public market valuations willpresent the opportunity to acquire high quality assets at attractive prices.An increasing number of businesses needing to restructure, refinance or driveoperational change will further increase opportunities for equity providers.Historically, private equity investments made through an economic downturnhave been particularly successful and we believe the coming period willrepresent an exciting opportunity.
Manager's review - the portfolio
Despite challenging economic conditions, trading in the unrealised portfolio has been generally positive
All investments referred to in this report, excluding the investment in Hg Renewable Power Partners LP, are held by HGT LP. The Company is the sole limited partner in HGT LP.
HgCapital Trust (the `Company') invests alongside other clients ofHgCapital. Typically, the Company's holding forms part of a much largermajority interest held by HgCapital clients in buyout investments in companieswith an enterprise value (`EV') of between £50 million and £500 million. TheManager's review generally refers to each transaction in its entirety, apartfrom the tables detailing the Company's participation or where it specificallysays otherwise.The Company's net asset value decreased slightly over the year,moving from £238.8 million to £234.1 million as declines in the unrealisedportfolio were largely offset by investments realised significantly in excessof their book value. During the period, the decrease in unrealised valuationswas £35.1 million and the realised proceeds in excess of the book value as at31 December 2007 were £35.8 million. The increase in NAV from realisations hasoccurred due to a number of exits throughout the year being achieved at asignificant uplift to prior book value. The decrease in unrealised valuationscomes despite satisfactory trading performance in the portfolio. Theunrealised value of most of the Company's investments is calculated withreference to the valuation ratings of a basket of publicly traded comparablecompanies. As a result, the large declines seen in public market ratings haveled to a fall in the book value of a majority of the unrealised investments.
Given the volatile economic conditions during the year, the Company adopted a cautious approach to new investment, investing a total of £26.0 million (2007: £50.8 million), mainly in three businesses. These new investments were made in Achilles (UK, £75 million EV), Casa Reha (Germany, €327 million EV), and KVT (Switzerland, CHF 530 million EV).
During the year, the Company invested a further €0.8 million out ofits €21 million commitment to the €303 million Hg Renewable Power Partnersfund. The fund's focus is on long-term investments in renewable power projectsusing proven technologies, including wind, solar, small hydro, landfill gasand waste-to-energy in Western Europe (see the Renewable Energy section belowfor further details).
Despite challenging market conditions the Company realised significant proceeds during the year (including gross income received) amounting to £91.6 million (2007: £106.3 million). These proceeds arose principally from the sale of Addison, Clarion, Classic Copyright, Hofmann, Orbiscom and The Sanctuary Spa.
Attribution analysis of current year movements in net asset value
£'000
Opening net asset value as at 1 January 2008 238,817Gross revenue 12,068Expenditure (3,505)Taxation (2,498)Dividends paid (6,297)Realised proceeds in excess of 31 December 2007 book value
35,755
(excludes gross revenue)Net unrealised depreciation of investments
(35,114)
Carried interest
(5,132)
Closing net asset value as at 31 December 2008
234,094
Realised and unrealised movements in net asset value during 2008
Net unrealised depreciation Realised proceeds in excess of investments £'m of 31 December 2007 book value £'m (excludes gross revenue)Addison - 11.0The Sanctuary - 9.0Pulse 6.9 -Orbiscom - 4.9Classic Copyright - 4.5Clarion Events - 3.2Schleich 2.4 -Clinphone - 1.5PBR - 0.7Rolfe & Nolan - 0.6Other (1.0) 0.4FTSA (2.0) -Cornish Bakehouse (2.3) -SLV (2.6) -Elite (2.6) -Sporting Index (2.8) -Euro Hedge (2.8) -KVT (4.1) -Atlas (4.3) -Voyage (4.6) -SHL (4.9) -Fabory (5.0) -WET (5.4) -Total (35.1) 35.8At the end of 2008, the Company held a portfolio of 37 investments(2007: 45), of which the 10 principal investments represent over 76% of theportfolio's value. Over the course of 2008 the top 10 companies grew operatingprofit at an average of 14% year on year. Whilst it cannot be immune from theglobal downturn, this remaining portfolio is diversified by sector andgeography served, and holds companies which should be long-term winners giventhe markets they serve, the nature of their business, and their competitiveposition. There will, of course, be challenges along the way.The Company continues to follow International Private Equity andVenture Capital Valuation Guidelines for the valuation of unrealisedinvestments. These guidelines require these investments to be shown at fairvalue. Valuations of all direct investments have been based on, or checkedagainst, ratings in public markets. As a result, recent falls in public equitymarkets have forced the Company to write down a number of investments despitemany showing generally robust trading through the year. This has led towritten down investments representing 33% by value of the portfolio (2007:7%). Despite this, HgCapital still believes these investments have potential:historically it has realised investments at an average of nearly 2x prior bookvalue since becoming independent in December 2000.
The Company's ten largest investments are generally performing well, generating year-on-year growth in earnings. Profiles of these companies can be found in the Review of Principal Investments section of this report.
At the same time, a number of investments performed below expectations in the year. Most notably:
- SHL, a provider of objective psychometric testing, has been impacted by falling recruitment activity.
- FTSA, a manufacturer of crash test dummies, WET, a manufacturer of automotive components, and KVT, a distributor of industrial expanders, have all been affected by the pronounced downturn in the automotive industry.
- Fabory, a distributer of industrial fasteners, has also been affected by some weakening in its end markets, although operational improvement programmes are proceeding well.
Over the last four years, the focus of the portfolio has shifted towards Continental Europe, with over half the Company's investments by value headquartered outside the UK.
We believe that the recent fall in public and private marketvaluations will offer significant opportunities to acquire high quality assetsat attractive prices. HgCapital is well positioned to exploit theseopportunities when they arise, given its focused investment strategy, compactexisting portfolio and well resourced team.
In the current market, the Company also benefits from strong liquidity, holding £129.9 million in liquid funds at year-end, available for reinvestment.
The Manager expects to use a portion of the funds committed by theCompany for investment alongside HgCapital 5 for the purpose of making furtherinvestments in existing portfolio companies. This will enable the Manager tocontinue to take advantage of opportunities to make value-accretive add-onacquisitions, of which it has made 60 to date in the MUST 4 and HgCapital 5portfolios. New investments by the Company are expected to be made from fundscommitted for investment alongside HgCapital 6.Asset class+Cash & other assets 53%Unquoted 47%*Deal type by value++Buyout 92%Renewable energy 4%Expansion 2%Funds 2%Valuation++Earnings-based 55%Written down 33%Net assets 6%Cost 5%Other 1%Geographic spread by value++UK 44%Nordic Region 22%Germany 20%Benelux 7%Rest of Europe 4%North America 2%Switzerland 1%Sector by value++Healthcare 25%TMT 24%Consumer & Leisure 22%Industrials 15%Services 8%Renewable energy 4%Funds 2%Vintage by value++2008 13%2007 26%2006 33%2005 11%Pre 2005 17%*
+ Percentages are based on net assets
++ Percentages are based on fixed assets and accrued interest and are shown by value
*12% relates to Pulse Staffing Limited
Investments
Selective investments in businesses which should perform acrossmarket cyclesCompany Sector Activity Deal Type Cost £'000Casa Reha Healthcare Care home operator Buyout 8,140
King Luxembourg (KVT) Industrials Distributor of industrial Buyout
5,535 fastenersAchilles TMT Supplier qualification Buyout 5,226 systemsOther 631New investments 19,532BMFCO (t/a Fabory) Services Distributor of industrial (3,480) fasteners
Investment syndication
(3,480)Pulse Staffing Healthcare Flexible staffing services Buyout 5,682 in healthcare sectorPortfolio purchase Secondary 2,711Hg RPP LP Renewable Renewable energy fund Fund 606 energyOther investments 936Further investments 9,935Total investment by 25,987the Company
Figures below refer to the total size of each acquisition, including debt raised from third parties, made by HgCapital on behalf of its clients, including the Company.
New investments
Casa Reha
In January 2008, HgCapital completed the €327 million buyout of Casa Reha, one of the leading German providers of elderly care services, specialising in high quality, affordable assisted living. Casa Reha has a nationwide portfolio of 52 homes providing over 7,000 beds and a further portfolio of homes currently under development. The business is highly profitable and has a track record of delivering strong revenue growth both organically and through acquisition. Casa Reha is well placed to exploit future opportunities in the German care home market which is largely insurance and state funded.
Achilles
In July 2008, HgCapital acquired Achilles for a consideration of £75 million. Achilles is a global leader in buyer-sponsored
supplier data management and validation services. Achilles operatesschemes where buyers in a certain industry require their multiple suppliers toprovide information (e.g. environmental compliance information) to theAchilles online database in order to be considered for a contract. Achillescurrently operates 30+ schemes in 22 countries and demonstrates rapid growthin both revenues and profitability.
KVT
In August 2008, HgCapital agreed with a Swiss private equity houseto fund jointly the acquisition of KVT for a consideration of CHF530 million.KVT is a leading distributor of specialist fasteners and expandersheadquartered in Switzerland, generating its main sales domestically and inGermany and Austria. The business has a market leading position, well investedinfrastructure and a high degree of revenue visibility from a diverse customerbase and offers the opportunity for continued growth in existing markets andfurther international expansion. It will not be immune from the globaldownturn but we still believe in its long-term growth prospects.
Pulse
In May 2008 HgCapital agreed to buy Bridgepoint Private Equity'sholding in Pulse Staffing Limited for £6.0 million. Pulse is one of the UK'sleading providers of labour management, recruitment and deployment services inthe healthcare sector. HgCapital originally invested in the business alongsideBridgepoint (then NatWest Private Equity) in 1999. The investment performedwell over the period 2000 to 2003 showing strong growth and paying downacquisition debt. From 2003 to 2005 changing NHS strategy and regulationimpacted Pulse's performance such that the investment was written down. Inrecent years Pulse has repositioned itself under new management to reducereliance on NHS business and is demonstrating significantly improvingperformance, with EBITDA up 500% in 2008 over 2007.
Realisations
Continued realisations in the year, despite challenging market conditions
During 2008, HgCapital realised total proceeds of £428 million onbehalf of its clients, including £91.6 million for the Company. HgCapital hassuccessfully completed 9 significant exits during the year despite challengingmarket conditions. As a result, HgCapital now has a small, focused portfolioand is well positioned to take advantage of future investment opportunities.Company Sector Exit Route Cost Proceeds *
Cumulative Current year
£'000 £'000
gain/(loss)** gain/(loss)***
£'000 £'000
The Sanctuary Spa Consumer & Trade sale 2,409 22,435 20,026 9,029
LeisureAddison TMT Trade sale 2,296 18,800 16,504 11,218Clarion Events TMT Financial 4,965 12,614 7,649 3,280 saleHofmann Industrials Financial 4,747 11,469 6,722 348 saleClassic Copyright TMT Financial 6,033 8,850 2,817 7,364 sale(t/a Boosey &Hawkes)Orbiscom TMT Trade sale 2,981 5,512 2,531 4,928Xtx (Xyratex) TMT Quoted 1,277 3,740 2,463 19 share saleClinphone Healthcare Quoted 316 2,270 1,954 1,461 share saleRolfe and Nolan TMT Trade sale 14 1,446 1,432 610Other (7) 12,817 2,535 (10,282) 333Full realisations 37,855 89,671 51,816 38,590 Schenck Industrials Release of - 373 373 115 escrowBMFCO (t/a Fabory) Services Profit on - 358 358 358 syndicationOther 343 1,192 849 559Partial realisations 343 1,923 1,580 1,032& deferred proceedsTotal realisations 38,198 91,594 53,396 39,622
* Includes gross revenue received during the year
** Realised proceeds including gross revenue received, in excess of residual cost
*** Realised proceeds including gross revenue received, in excess of 31 December 2007 book value and accrued interest
Realisation figures below refer to the total value of each transaction, including, where appropriate, repayment of third party debt. Proceeds to clients including the Company are stated net of any such repayment.
FULL REALISATIONSAddison
HgCapital completed the €72 million management buyout of Addison in June 2005. Addison is a leading German application software company that provides business-critical solutions to two related markets - tax accountancy and small to medium enterprises. The business was recapitalised in October 2007 returning 0.8x cost to clients, and was sold to Wolters Kluwer NV in October 2008 returning a further £96.2 million to clients and achieving returns over the life of the investment of 3.7x original cost.
Clarion Events
HgCapital completed the £45 million management buyout of ClarionEvents in October 2004. Clarion is the largest independent exhibition anddiversified conference business in the UK, developing, organising and owning aportfolio of 60 business and consumer events. HgCapital successfully sold thebusiness in February 2008 and returned £74 million of capital to clients,achieving a 2.5x multiple of original cost.
Classic Copyright (t/a Boosey & Hawkes)
HgCapital completed the £75 million buyout of Classic Copyright(Holdings) Limited in December 2003. Classic Copyright, trading as Boosey &Hawkes, is one of the world's largest publishers of classical music, with a14% market share. It has a catalogue of classical music copyrights includingworks by composers such as Rachmaninoff, Strauss and Stravinsky. The businesswas sold in April 2008 returning £29.6 million to clients, equivalent to 1.5xoriginal cost. This relatively disappointing performance is a result of theprice paid in the expectation of higher growth, which did not materialise.
Clinphone
HgCapital completed its investment in Clinphone Holdings inDecember 1996. Clinphone is a UK based company engaged in providing web-basedsolutions enabling the capture and transfer of data in clinical trials of newpharmaceutical products. HgCapital exited the business via an IPO during June2006, selling down the last of its shares in August 2008. Over the life of theinvestment, it returned 3.3x original cost.
Hofmann
HgCapital completed the €138 million buyout of Hofmann in November 2005. Headquartered in Boxberg-Schweigern, Germany, Hofmann is a market-leading provider of frozen food products as well as related on-site catering for small business canteens and social organisations such as care homes, hospitals, and schools in Germany and Austria. In January 2008, HgCapital sold the business to a private equity buyer returning 2.4x original cost.
OrbiscomIn August 2001, HgCapital completed an early stage investment inOrbiscom. Orbiscom sells a payment platform to credit and debit card issuers,whereby a unique transaction number is substituted for the permanent cardnumber. By using this "proxy number", the card-holder avoids disclosinghis/her details to the merchant or indeed, the web. In December 2008, thebusiness was sold to Mastercard returning £24.7 million to clients anddelivering 1.8x original cost with a residual interest subject to performance.Orbiscom is the last of the early-stage technology investments made byHgCapital.
Rolfe & Nolan
In March 2003, HgCapital completed the £17.3 millionpublic-to-private management buyout of Rolfe & Nolan. The business is thenumber two global supplier of back-office processing software to theexchange-traded derivatives industry. The company supports over 250 bank,brokerage and exchange clients in 20 countries providing business criticalprocessing software and services, with a majority of revenues on recurring orsubscription contracts. The business was recapitalised in 2004 and 2007returning £35.8 million to clients, and was sold to a strategic buyer in July2008 returning a further £8.4 million to clients and achieving overall returnsof 2.6x original cost.The Sanctuary SpaIn November 1995, HgCapital made its initial investment in theSanctuary Spa. The Sanctuary Spa operates the women's day health spa, TheSanctuary, in Covent Garden and also owns a range of beauty productsdistributed through The Sanctuary and Boots the Chemist. In January 2008, thecompany was sold to PZ Cussons returning proceeds of £50.2 million to clientsgiving a total return over the life of the investment of 7.0x original cost.
Xtx (Xyratex)
In September 2003, HgCapital completed the £107 million acquisition of Xyratex, a world leader in the hard disk and network storage technology market for over 20 years. An IPO of the business on NASDAQ was achieved in June 2004. HgCapital's final remaining shares in Xyratex were sold in early 2008 for £23.6 million, resulting in a total return over the life of the investment of 2.2x original cost.
Other realisations
Other disposals totalling proceeds of £2.5 million include the saleof quoted shares in PRA International Limited. Azinger Ltd, Profiad Ltd, andBurns e-Commerce Solutions were also realised. These had previously beenwritten off. Axiom, which had been underperforming in recent years, was soldto a trade buyer in Finland.
PARTIAL REALISATIONS
Fabory
Fabory is a full-line wholesale distributor of industrial fastenerswith a market-leading position in the Benelux markets. The initial investmentwas completed in October 2007; a portion of this investment was syndicated toco-investors during February 2008.
Other
Other partial realisations included the release of escrow proceeds in respect of Schenck and PBR and the sale of the Company's interest in Biffa plc, which was tendered at the acquiring consortium's offer price.
Review of principal investments
1 VISMA www.visma.com
Date Invested: May 2006
Original Enterprise Value:NOK 4.3 billion
Total HgCapital Clients' Equity: 53%
Business Description
- VISMA is the number one provider of business software and related services to small and medium-sized enterprises in the Nordic region.
- The company provides accounting, resource planning and payroll software, outsourced book-keeping, payroll services and transaction process outsourcing to a customer base of over 200,000 companies.
Investment Rationale
- Strong organic growth in revenue, with good visibility from a highly recurring and predictable customer base.
- Significant potential to improve margins to industry standard levels.
- Country specific markets with high barriers to entry driven by local regulatory requirements: highly fragmented market with significant potential for acquisition led growth.
Sourcing and Conversion
- HgCapital had completed a significant number of other SME software investments in Western Europe and sourced the deal by contacting the CEO directly.
- HgCapital worked closely with management to complete a complex public-to-private transaction on an accelerated timetable.
Portfolio Management
- Plan: Grow through acquisition and organically in high potential niche areas. Improve EBITDA margins to industry standard levels through increased operational focus in the business units.
- Initiatives: Supported management in making and integrating 16 bolt-on acquisitions to date. Implemented operational improvements driving margin expansion from 14% to 18% within 18 months.
Performance
- Current trading: Performance in the year remained strong, with significant growth in both sales and EBITDA.
- Exit strategy: Approaches have already been received from a number of private buyers. An IPO or trade sale to software/publishing companies provide alternative exit options.
Company's Investment - VISMA
Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost £'000 value interest value methodology £'000 £'000 £'000TMT Nordic 2006 13,326 12,638 1,753 14,391 Earnings-based Region2 Pulse www.pulsejobs.comDate Invested: June 1999
Original Enterprise Value: £67 million
Total HgCapital Clients' Equity: 74%
Business Description
- Pulse is one of the UK's leading providers of comprehensive labour management, recruitment and deployment services in the healthcare sector.
- The company works in partnership with healthcare organisations in the public and private sectors to provide staffing, management services and consultancy.
Investment Rationale
- Leading player in the healthcare staffing sector with opportunities for growth in related sectors.
- Further growth possible through launch of new services around the core business.
- Opportunity to reduce costs and improve margins.
Sourcing and Conversion
- HgCapital completed the public-to-private acquisition of Pulse in 1999, with Bridgepoint Private Equity acting as joint bidder.
- In 2008 HgCapital acquired Bridgepoint's stake in Pulse to become the lead investor in the business.
Portfolio Management
- Plan: Grow organically and through acquisition, continued rationalisation of cost base to boost margins
- Initiatives: Increased focus on non-healthcare job sectors, continued cost reduction programme, launched new services around core business offering.
Performance
- Current trading: Both revenues and EBITDA are significantly up year on year. The business has no external borrowings.
- Exit strategy: Pulse is anticipated to be a target for both private equity and trade buyers.
Company's Investment - PulseSector Location Year of Residual Unrealised Accrued Total Valuation investment cost £'000 value interest value methodology £'000 £'000 £'000Healthcare UK 1999 6,131 12,858 - 12,858 Earnings-based
3 Mondo www.mondominerals.com
Date Invested: October 2007
Original Enterprise Value: €230 million
Total HgCapital Clients' Equity: 91%
Business Description
- Mondo is the world number two in talc mining and processing. The company's core markets are the European paper and paint industries.
- Mondo supplies the majority of talc for paper producers in the highly regional market of Finland, the rest of the Nordic region and Northern Europe.
Investment Rationale
- Mondo's core customer base is the paper industry which provides sustainable long-term demand. The product is a critical, but low cost, component of the manufacturing process.
- The opportunity also exists to push into other high margin applications.
- Opportunity for significant improvements in operating efficiencies, especially as the company was carved out of a larger conglomerate.
Sourcing and Conversion
- HgCapital's German office was directly introduced to management by the CEO of an existing portfolio company.
- As a result, HgCapital was able to move quickly and developed a strong relationship with management.
Portfolio Management
- Plan: Grow sales modestly in strategic markets, deliver operational improvements and significantly increase EBITDA margins through 2011.
- Initiatives: Driving of sales in higher margin, non-paper market. Implementation of operational improvements, switching of milling operations from oil to electricity and the hedging of nickel prices.
Performance
- Current trading: Performance remains robust, with sales broadly flat as planned, but a significant increase in EBITDA. The effect of nickel price decline has largely been mitigated through the company's hedging policy.
- Exit strategy: Mondo is anticipated to be an attractive target for both private equity and trade buyers.
Company's Investment - Mondo
Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost £'000 value interest value methodology £'000 £'000 £'000Industrials Nordic 2007 7,004 8,475 1,293 9,768 Earnings-based Region4 Schleich www.schleich-s.comDate Invested: December 2006
Original Enterprise Value: €165 million
Total HgCapital Clients' Equity: 76%
Business Description
- Schleich is the leading producer of classic plastic toy figurines, such as farm and wildlife animals, historical characters and The Smurfs.
- Its products, trading under the well recognised brand Schleich-S, are sold in over 30 countries, including its home market of Germany, the US, the UK and France.
Investment Rationale
- Schleich's figurines are attractive to retailers, given their low seasonality and high sales per square metre.
- Relatively high barriers to entry, given the wide product range, retailer network and a high quality manufacturing process.
- Revenue growth is supported by continual innovation in the product range.
Sourcing and Conversion
- Local corporate finance advisors invited HgCapital into a limited auction process.
- HgCapital secured the support of the CEO in the transaction, based upon the plan for the business and the team's track record in the German market.
Portfolio Management
- Plan: Drive sales growth organically in existing markets and through international expansion. Capture margin improvement through increased scale and the streamlining of the management structure.
- Initiatives: Established new retail relationships in the US; revised local product selection and in-store displays to drive growth; reviewed manufacturing footprint.
Performance
- Current trading: Continued growth in both revenues and EBITDA during the year.
- Exit strategy: Several multi-national toy makers represent natural trade buyers; stable profits and risk profile could also support an IPO.
Company's Investment - Schleich
Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost £'000 value interest value methodology £'000 £'000 £'000Consumer & Germany 2006 4,634 7,420 1,321 8,741 Earnings-basedLeisure5 Casa Reha www.casa-reha.deDate Invested: January 2008
Original Enterprise Value: €327 million
Total HgCapital Clients' Equity: 51%
Business Description
- Casa Reha is a leading private German provider of elderly care services, specialising in high quality, affordable assisted living.
- Founded in 1995, Casa Reha has a nationwide portfolio of 52 homes providing around 7,000 beds.
Investment Rationale
- The market offers multiple opportunities for expansion, both organically and through acquisition.
- Business model benefits from strong earnings visibility and low capex and working capital requirements for growth.
Sourcing and Conversion
- The Healthcare team identified Casa Reha during a strategic review of German care homes and approached the then owner (Advent) in mid-2007.
- HgCapital was able to complete due diligence and hold discussions with management and the vendor prior to the launch of a formal auction process.
Portfolio Management
- Plan: Prioritise organic growth, targeting a significant increase in bed numbers, in order to capture anticipated private sector market growth of 6%-7% p.a., as charitable/local authority sector stagnates through under-investment.
- Initiatives: Increased the rate of openings of new homes andcontinued building the pipeline of future homes. New organisational structure,customer relationship management tools and other initiatives were implementedto maintain profitability of existing homes.
Performance
- Current trading: Like-for-like sales grew and EBITDA was broadly flat in 2008.
- Exit strategy: The business should be a strong IPO candidate or attractive to large-cap private equity buyers.
Company's Investment - Casa Reha
Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost £'000 value interest value methodology £'000 £'000 £'000Healthcare Germany 2008 8,140 7,878 - 7,878 Written down
6 Sporting Index www.sportingindex.com
Date Invested: November 2005
Original Enterprise Value: £73 million
Total HgCapital Clients' Equity: 70%
Business Description
- Sporting Index is a sports spread betting firm, with a leading market share in the UK.
- It aims to offer more markets, more `fun bets', and more choice than any other sports spread betting company.
Investment Rationale
- The core sports spread betting business is robust, cash generative and growing steadily, providing a base from which to expand the group.
- Industry is fragmented offering opportunities to expand by acquisitions.
- New products and new geographies offer further opportunities for growth.
Sourcing and Conversion
- HgCapital identified the company in 2002 and maintained close contact with management over the following three years, before completing an acquisition of the business in November 2005.
Portfolio Management
- Plan: Develop direct marketing abilities and customer database to increase retention and usage; develop new distribution channels for spread betting; expand international client base.
- Initiatives: Refocused development expenditure away from mass market games, instead focusing on sale of pricing expertise to third parties; delivered cost cutting programme and realignment of resources to front line profit making activities.
Performance
- Current trading: Sales and profit grew year on year.
- Exit strategy: The company will be positioned for a trade exit, most likely to an industry consolidator.
Company's Investment - Sporting Index
Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost £'000 value interest value methodology £'000 £'000 £'000Consumer & UK 2005 7,186 4,405 2,229 6,634 WrittenLeisure down7 Voyage www.voyagecare.comDate Invested: April 2006
Original Enterprise Value: £322 million
Total HgCapital Clients' Equity: 52%
Business Description
- Voyage is an operator of small community-based homes for adults with learning disabilities and associated physical disabilities, autistic spectrum disorders, complex needs and acquired brain injury.
- At completion, the company had 1,600 beds in 242 homes across England and Scotland.
Investment Rationale
- Significant shortage of supply for residential care at this level leaves opportunity for growth.
- Voyage enjoys a strong market position and a high quality estate of stable, cash generative properties.
Sourcing and Conversion
- HgCapital took advantage of a "broken auction" that had collapsed due to a breakdown in communications between bidder and seller.
Portfolio Management
- Plan: Continued growth through the roll-out of new homes, margin improvement through the consolidation of sites to improve occupancy, close control of cost inflation and move to a higher margin, professional led model.
- Initiatives: Implemented move towards a professional led model, focused on control of costs, continued successful roll out of new homes, supported management in reviewing acquisition targets.
Performance
- Current trading: Performance in 2008 was strong, with significant growth in both sales and EBITDA..
- Exit strategy: Projected exit to either a secondary or a trade buyer, although an IPO is also possible.
Company's Investment - Voyage
Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost £'000 value interest value methodology £'000 £'000 £'000Healthcare UK 2006 8,755 4,179 2,277 6,456 Written down8 Americana www.bench.co.ukDate Invested: March 2007
Original Enterprise Value: £180 million
Total HgCapital Clients' Equity: 45%
Business Description
- Americana is a branded apparel business, manufacturing and marketing the Bench brand targeted at the youth market.
- The company predominantly operates through UK wholesale channels, with increasing wholesale revenues in continental Europe, and is building a UK retail presence.
Investment Rationale
- Bench is a strong brand that can be developed internationally.
- The company had a proven track record of growing revenue and profits and an excellent supply chain based in China.
Sourcing and Conversion
- HgCapital was previously in contact with the Chairman and had been monitoring the company for over two years.
- HgCapital secured the deal as it was able to convince the founders that it could address the challenges that faced the business, namely management succession and international expansion.
Portfolio Management
- Plan: Grow wholesale revenues internationally using new and existing distribution agreements and increased investment in sales and marketing; pilot retail expansion and expand if successful.
- Initiatives: Accelerated roll-out of retail concept; strengthened management team; implemented rigorous management reporting and business planning.
Performance
- Current trading: Sales were up but profit was down in 2008. Profits are projected to recover in 2009.
- Exit strategy: Options include a trade sale or secondary buyout.
Company's Investment - Americana
Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost £'000 value interest value methodology £'000 £'000 £'000Consumer & UK 2007 4,625 4,483 1,251 5,734 Earnings-basedLeisure9 Achilles www.achilles.comDate Invested: July 2008
Original Enterprise Value: £75 million
Total HgCapital Clients' Equity: 79%
Business Description
- Achilles is a global leader in buyer-sponsored supplier data management and validation services.
- The company has 22 offices worldwide and has more than 32,000 customers, with focus on industries with "high cost of supplier failure" (e.g. oil & gas, construction).
Investment Rationale
- Achilles is a global market leader in a market with high barriers to entry.
- The company enjoys high visibility of future earnings and shows strong organic growth rates.
- The market offers multiple expansion opportunities both into new industries and new geographies.
Sourcing and Conversion
- HgCapital joined a competitive auction process designed to find a private equity buyer as an alternative to a utility which had previously bid for the business.
- Management was attracted to HgCapital given our prior experience of subscription-based businesses in the TMT sector.
Portfolio Management
- Plan: Extract more value from existing schemes through product additions, roll out existing schemes in new geographies and industries and drive margin expansion.
- Initiatives: Implemented review of best practices across business and rolled out across geographies.
Performance
- Current trading: Still relatively early, but so far trading has been on plan, with continued strong growth in sales and EBITDA.
- Exit strategy: Exit options for Achilles are potentially via an IPO, secondary or a trade sale to a software company, outsourcer or B2B exchange.
Company's Investment - Achilles
Sector Location Year of Residual Unrealised Accrued Total Valuation investment cost £'000 value interest value methodology £'000 £'000 £'000TMT UK 2008 5,226 5,226 - 5,226 Cost
10 Elite (t/a SiTel) www.sitelsemi.com
Date Invested: June 2005
Original Enterprise Value: $74 million
Total HgCapital Clients' Equity: 80%
Business Description
- SiTel designs chip sets for the home wireless voice and data applications market.
- Customers include global manufacturers of home cordless telephone systems, such as Siemens and Panasonic.
Investment Rationale
- SiTel has a strong market position and had delivered strong revenue growth.
- Fully outsourced operations (a fabless business model) allowing a high return on capital.
- Significant customer lock-in provides visibility of earnings.
- Strong market growth and opportunity to drive revenues further through growth into adjacent niche markets.
Sourcing and Conversion
- SiTel was carved out as an integrated unit from a US parent.
- Initially a limited auction, HgCapital gained exclusivity early in the process.
Portfolio Management
- Plan: Transition to a fully outsourced model, drive organic growth and expand into new markets.
- Initiatives: Managed move to a fabless business model, driving growth through focused R&D spend; reduced inventory levels to improve cash flow.
Performance
- Current trading: Trading remains very challenging and EBITDA declined significantly in 2008. However, the business is now free of external debt.
- Exit strategy: SiTel will most likely be sold to a competitor looking to consolidate its market position.
Company's Investment - Elite / SiTelSector Location Year of Residual Unrealised Accrued Total Valuation investment cost £'000 value interest value methodology £'000 £'000 £'000TMT Benelux 2003 5,749 3,490 1,721 5,211 Written downRenewable energy
Hg Renewable Power Partners LP
In June 2006, the Company made a commitment of €21 million to HgRenewable Power Partners LP, a dedicated renewable energy fund managed byHgCapital. The €303 million fund is one of the largest raised to date forrenewable energy investments in Europe and is focused on long-term investmentsin renewable power projects using proven technologies, including wind, smallhydro, landfill gas and waste-to-energy in Western Europe.
Renewable energy benefits from a highly favourable regulatory and policy environment with climate change solidly on the political agenda. The investment in the fund will give the Company exposure to a diversified portfolio of assets offering both income and capital appreciation in a rapidly growing sector.
The fund has investments in eight wind projects in construction or operation totalling 200 MW and four biogas projects that are in operation totalling 2 MW. It has made investments in companies that develop wind projects, giving it the right to acquire a further 286 MW of wind projects. The fund's investments are in France, Germany, Ireland, Italy, Sweden and the United Kingdom.
The fund's portfolio now includes the following investments:
Tir Mostyn
A 21.25 MW operating wind farm in North Wales. The original investment was made in November 2004, with construction completed in October 2005. The wind farm has now been operating for over three years.
Sorne Wind
A 32 MW operating wind farm in Donegal, Ireland. This investment was made in July 2005, with the farm entering operation in November 2006.
Picardy Wind
A portfolio of four wind farms in Northern France in operation or under construction with a total capacity of 47.5 MW. The initial investment was made in July 2006. Two operating projects total 23.5 MW and the other two are under construction.
Wind Direct
A business that installs, owns and operates wind turbines on UK industrial sites, providing its customers with low cost, direct energy supplies. The investment was made in 2006 and includes one 4 MW site in operation and one entering construction, with 15 sites in development.
Havsn¤s
A 95.4 MW project is under construction, located in central Sweden. The investment, which is the first project-financing of renewable generation in the Nordic market, was completed in March 2008. The project will be the largest on-shore wind farm in Sweden. Construction began in April 2008 and commercial operation will begin in April 2010.
RidgeWind
A United Kingdom wind farm developer with 300 MW of wind farms indevelopment, including two projects totalling 52 MW that have secured planningpermission, and the 16 MW Bagmoor project that is in construction. The Bagmoorproject is located in Lincolnshire. Commercial operations are expected tobegin in 2009.
Rewind
An investment of €2.1 million was made in August 2006, in return for the option to acquire a 120 MW portfolio of wind farms in Sicily.
Bayern Energie
Four operating anaerobic digestion (biogas) plants with a combined capacity of 1.4 MW in Germany. Our involvement in this project was terminated during the year with no further costs.
Cost and valuation of the Company's holding
Company Deal type Residual cost Valuation Valuation £'000 £'000 Methodology*Hg Renewable Power Partners Renewable 4,409 4,319 Net assetsLP energy
The difference between cost and valuation is due to establishment and running costs, fees, foreign exchange movements in the fund and the revaluation of investments.
\* The primary valuation methodology applied to the fund's investments is a discountedcash flow basis.Investment portfolio†Company Sector Principal Residual Total
Year of Portfolio Cum. location valuation* cost investment value Value % £'000 £'000 %
1 VISMA Holdings + TMT Nordic 13,326 14,391
2006 13.2% 13.2%
Region2 Pulse Staffing Ltd + Healthcare UK 6,131 12,858 1999 11.8% 25.0%3 Mondo Minerals Co-op + Industrials Nordic 7,004 9,768
2007 9.0% 34.0%
Region
4 Schleich Luxembourg SA Consumer & Germany 4,634 8,741
2006 8.0% 42.0% + Leisure5 Casa Reha SARL + Healthcare Germany 8,140 7,878 2008 7.2% 49.2%6 Sporting Index Group Consumer & UK 7,186 6,634 2005 6.1% 55.3% Ltd + Leisure7 Voyage Group Ltd + Healthcare UK 8,755 6,456 2006 5.9% 61.2%8 Americana Consumer & UK 4,625 5,734 2007 5.3% 66.5%
International Holdings Leisure
Ltd
9 Achilles Group TMT UK 5,226 5,226
2008 4.8% 71.3%
Holdings Limited +10 Elite Holding SA (t/a TMT Benelux 5,749 5,211
2005 4.8% 76.1%
SiTel) +11 Hg Renewable Power Renewable Europe 4,409 4,319
2006 4.0% 80.1%
Partners LP + Energy12 Atlas Energy Group Ltd Services UK 8,153 4,261
2007 3.9% 84.0%
+
13 SLV Electronik SARL + Industrials Germany 5,962 3,850
2007 3.5% 87.5%14 BMFCO UA (t/a Fabory) Services Benelux 7,391 2,964
2007 2.7% 90.2%
+
15 Cornish Bakehouse Consumer & UK 4,200 2,207
2007 2.0% 92.2%
Investments Ltd + Leisure16 Weston Presidio Fund North 2,271 2,137
1998 2.0% 94.2%
Capital III, LP America17 Hoseasons Group Ltd + Consumer & UK 2,197 2,133
2003 2.0% 96.2%
Leisure18 SHL Group Holdings 1 Services UK 6,489 1,975
2006 1.8% 98.0%
Ltd +19 King Luxembourg Sarl Industrials Switzerland 5,535 1,428
2008 1.3% 99.3%
(t/a KVT)20 Software (Cayman), LP TMT UK 530 1,261
2006 1.2% 100.5%
- re Blue Minerva21 Hirschmann Electronics Industrials Germany - 1,129
2004 1.0% 101.5%
Holdings SA +22 Software (Cayman), LP TMT UK 253 585
2007 0.5% 102.0%
- re Guildford23 PBR Holding SA + Healthcare Europe - 209 2002 0.2% 102.2%24 Tiger Capital Ltd + TMT UK 632 135 2008 0.1% 102.3%25 Doc M SARL Healthcare Germany - 128 2004 0.1% 102.4%26 ACT Venture Capital Fund Ireland 38 70
1994 0.1% 102.5%
Ltd
27 Crest Avenue Ltd + Fund Ireland 41 41 1992 0.1% 102.6%28 Addison Luxembourg SA TMT Germany - - 2005 - 102.6%
+
29 W.E.T Holding Industrials Germany 7,619 -
2003 - 102.6% Luxembourg SA +30 FTSA Holdings Ltd + Industrials North 6,813 - 2006 - 102.6% America31 Wastebidco Ltd Industrials UK - - 2007 - 102.6%32 Wand / Yankelovich LP Fund North 7 - 1992 - 102.6% America33 SGI (Holdings) Ltd + Services UK 1,720 - 1999 - 102.6%34 Schenck Process SA + Industrials Germany - - 2005 - 102.6%35 Newchurch Ltd Healthcare UK 1,295 - 2000 - 102.6%36 Lantor plc (formerly Industrials Ireland - - 1992 - 102.6% South Wharf plc)37 Hofmann M.M. SA + Industrials Germany - - 2005 - 102.6% Hg5 Euro Hedge n/a n/a - (2,801) 2008 (2.6%) 100.0% Total 136,331 108,928 100.0% 100.0%
+ Through its management of the Company and other funds, HgCapital holds more than 50% of the voting equity shares
* Including investment valuation of £94,732,000 and accrued interest £14,196,000. See Note 11 to the Financial Statements
†The above investments, other than Hg Renewable Power Partners LP, are held through the Company's investment in HGT LP. See Note 1 of the Financial Statements.
Income statementfor the year ended 31 December 2008 Note Revenue return Capital return Total return 2008 2007 2008 2007 2008 2007 £'000 £'000 £'000 £'000 £'000 £'000Gains on investments and 10 - - 641 55,714 641 55,714government securitiesCarried interest 3(b) - - (5,132) (6,189) (5,132) (6,189)Income 2 12,068 12,129 - - 12,068 12,129Investment management fee 3(a) (643) (840) (1,930) (2,519) (2,573) (3,359)Other expenses 4(a) (932) (669) - - (932) (669)Return/(deficit) on ordinary 10,493 10,620 (6,421) 47,006 4,072 57,626activities before taxationTaxation on ordinary activities 6(a) (3,048) (3,174) 550 756 (2,498) (2,418)Transfer to/(from) reserves 7,445 7,446 (5,871) 47,762 1,574 55,208Return/(deficit) per ordinary 7 29.56p 29.56p (23.31p) 189.63p 6.25p 219.19pshareThe total return column of this statement represents the Company's profit andloss. The supplementary revenue and capital return columns are prepared underguidance published by the Association of Investment Companies. All recognisedgains and losses are disclosed in the Revenue and the Capital columns of theIncome Statement and as a consequence no Statement of Total Recognised Gainsand Losses has been presented.
The movements in reserves are set out in note 17 to the financial statements.
All revenue and capital items in the above statement derive from continuing operations.
No operations were acquired or discontinued during the year.
The following notes form part of these financial statements.
Balance sheetas at 31 December 2007 Note 2008 2007 £'000 £'000Fixed assetsInvestments held at fair valueQuoted at market valuation - 6,482Unquoted at Directors' valuation 94,732 147,885 9 94,732 154,367Current assetsDebtors 11 16,258 13,906Government securities 12 124,014 79,723Cash 13(a) 5,841 117 146,113Creditors - amounts falling due within one 14 (6,751) (9,296)yearNet current assets 139,362 84,450Net assets 234,094 238,817 Capital and reservesCalled up share capital 16 6,296 6,296Share premium account 17 14,123 14,123Capital redemption reserve 17 1,248 1,248Capital reserve - realised 17 238,606 197,852Capital reserve - unrealised 17 (40,943) 5,682Revenue reserve 17 14,764 13,616Total equity shareholders' funds 234,094 238,817Net asset value per ordinary share 7 929.4p 948.2p
These financial statements were approved and authorised for issue by the Board of Directors on 19 March 2009 and signed on its behalf by:
Roger Mountford, ChairmanRichard Brooman, Director
The following notes form part of these financial statements.
Cash flow statementfor the year ended 31 December 2008 Note 2008 2007 £'000 £'000
Net cash inflow/(outflow) from operating 4(b) 1,550 (2,259) activities Taxation paid
(5,514) (2,137)Capital expenditure and financialinvestmentPurchase of fixed asset investments (25,987) (50,757)Proceeds from the sale of fixed asset 86,027 103,283
investments
Net cash inflow from capital expenditure 60,040 52,526and financial investmentEquity dividends paid 8 (6,297) (3,526) Net cash inflow before management of 49,779 44,604liquid resourcesManagement of liquid resourcesPurchase of government securities 12 (185,679) (181,486)
Sale/redemption of government securities 12 141,624 134,731 Net cash outflow from management of liquid
(44,055) (46,755)
resources
Increase/(decrease) in cash in the period 13(a) 5,724 (2,151)
Reconciliation of movements in shareholders' funds for the year ended 31 December 2008
Called up Share Capital redemption Note share premium Capital Revenue reserve capital account reserves reserve Total £'000 £'000 £'000 £'000 £'000 £'000At 31 December 2007 6,296 14,123 1,248 203,534 13,616 238,817Net (deficit)/return from - - - (5,871) 7,445 1,574ordinary activities aftertaxDividends paid 8 - - - - (6,297) (6,297)At 31 December 2007 16,17 6,296 14,123 1,248 197,663 14,764 234,094 At 31 December 2005 6,296 14,123 1,248 155,772 9,696 187,135Net return from ordinary - - - 47,762 7,446 55,208activities after taxDividends paid 8 - - - - (3,526) (3,526)At 31 December 2006 16,17 6,296 14,123 1,248 203,534 13,616 238,817
The following notes form part of these financial statements. Notes to the financial statements
1. Principal activity and accounting policies
The principal activity of the Company is that of an investment trust company.The Company is an investment company as defined by section 833 of theCompanies Act 2006 and an investment trust within the meaning of section 842of the Income and Corporations Taxes Act 1988.
Basis of preparation
The accounts have been prepared in accordance with applicable UK law and Accounting Standards (GAAP) and with the Statement of Recommended Practice `Financial Statements of Investment Trust Companies' (SORP), dated January 2003 and revised in December 2005. All of the Company's operations are of a continuing nature. Further details on going concern are provided in the Directors' Report.
Organisational structure
In May 2003, the Company entered into a partnership agreement with HGT GeneralPartner Limited and MUST 4 Carry LP. A limited partnership, HGT LP, wasconstituted to carry on the business of an investor with the Company being thesole limited partner in this entity.Under the partnership agreement, the Company made a capital commitment of itsnon-cash investment portfolio to HGT LP, with the result that the Company nowholds an investment in HGT LP and all fixed asset investments, excluding theinvestment in Hg Renewable Power Partners LP, are now held by HGT LP. Note 9and the Investment Portfolio above present the underlying investments held byHGT LP. The income and capital accruals relating to the investments held inHGT LP are shown in notes 2 and 11. Carried interest paid to the FounderPartner is shown on the Income Statement as it is the first charge oninvestment gains.The agreement stipulates that the associated income and capital profits, afterpayment of the carried interest and the General Partner share, are distributedto the Company and consequently these amounts (including the associated cashflows) are shown in the appropriate lines within the Income Statement, CashFlow Statement and the related notes.
Investment income and interest receivable
As stated above, all income of HGT LP is distributed to the Company and this income is recognised and shown as income in the Financial Statements of the Company. The accounting policies below apply to the income of HGT LP.
Income from equity investments, including taxes deducted at source, isincluded in revenue by reference to the date on which the investment is quotedex-dividend. Where the Company elects to receive dividends in the form ofadditional shares rather than cash dividends, the equivalent of the cashdividend is recognised as income in the revenue account and any excess in thevalue of the shares received over the amount of the cash dividend isrecognised in Capital reserve - realised. Interest income is accounted for onan accruals basis. Dividends receivable on equity shares where there is noex-dividend date and on non-equity shares are brought into account when theCompany's right to receive payment is established.
Management fee and finance costs
The annual investment management fee and finance costs are charged 75% to Capital reserve - realised and 25% to the revenue account.
This is in line with the Board's expected split of long-term returns, in theform of capital gains and income respectively, from the investment portfolioof the Company.Expenses
All expenses are accounted for on an accruals basis. All administrative expenses, excluding the management fee, are charged wholly to the revenue account. Expenses that are incidental to the purchase or sale of an investment are included within the cost or deducted from the proceeds of the investment.
Foreign currency
All transactions in foreign currencies are translated into sterling at therates of exchange ruling at the dates of such transactions. Foreign currencyassets and liabilities at the balance sheet date are translated into sterlingat the exchange rates ruling at that date. Exchange differences arising on thetranslation of foreign currency assets and liabilities are taken to Capitalreserve - realised.
Taxation
Income taxes represent the sum of the tax currently payable, withholding taxessuffered and deferred tax. Tax is charged or credited in the income statement.Deferred taxation is recognised in respect of all timing differences that haveoriginated but not reversed at the balance sheet date where transactions orevents that result in an obligation to pay more tax in the future, or theright to pay less, have occurred at the balance sheet date. This is subject todeferred assets only being recognised if it is considered more likely than notthat there will be suitable profits from which the future reversal of theunderlying timing differences can be deducted. Timing differences aredifferences between the Company's taxable profits and its results, as statedin the financial statements, which are capable of reversal in one or moresuitable periods.
Investments
The general principle applied is that investments should be reported at "fair value" in accordance with FRS26 and the International Private Equity and Venture Capital (`IPEV') Valuation Guidelines, October 2006 edition. Where relevant, the Company applies the policies stated below to the investments held by HGT LP, in order to determine fair value of its investment in HGT LP.
Quoted: Quoted investments are designated as held at fair value, which is deemed to be bid market prices.
Unquoted: Unquoted investments are also designated as held at fair value and are valued using the following guidelines:
(i) initially, investments are valued at cost including fees and transaction costs, unless (iv) is required;
(ii) after the receipt of the first audited financial statements following initial investment, companies are valued based on the level of maintainable earnings, an appropriate earnings multiple and the application of a marketability discount, unless (iv) is required;
(iii) where more appropriate, investments are valued with reference to their net assets rather than to their earnings; and
(iv) appropriate provisions are made against all individual valuations where necessary to reflect unsatisfactory financial performance or a fall in comparable ratings, leading to an impairment in value.
Derivative financial instruments: Derivative financial instruments are held at fair value and are valued using quoted market prices or dealer price quotations for financial instruments traded in active markets.
Both realised and unrealised gains and losses arising on investments are taken to capital reserves.
Capital reservesCapital reserve - realised
The following are accounted for in this reserve:
(i) gains and losses on the realisation of investments;
(ii) losses on investments within the portfolio where there is little prospect of realisation or recovering any value;
(iii) realised exchange differences of a capital nature; and
(iv) expenses, together with the related taxation effect, charged to this reserve in accordance with the above policies.
Capital reserve - unrealised
The following are accounted for in this reserve:
(i) increases and decreases in the valuation of investments held at the year end; and
(ii) unrealised exchange differences of a capital nature.
2. Income 2008 2007 £'000 £'000Income from investmentsUK unquoted investment income 4,387 4,748Foreign unquoted investment income 2,728 3,557UK dividends 11 41Gilt interest 4,704 3,650 11,830 11,996Other incomeDeposit interest 119 133Other interest income 119 - 238 133Total income 12,068 12,129Total income comprises:Dividends 11 41Interest 12,057 12,088 12,068 12,129
3 (a) Investment management fee
Revenue return Capital return Total return 2008 2007 2008 2007 2008 2007 £'000 £'000 £'000 £'000 £'000 £'000Investment management fee 935 745 2,805 2,235 3,740 2,980VAT (recovered)/charged (292) 95 (875) 284 (1,167) 379 643 840 1,930 2,519 2,573 3,359Details of the investment management, custodian and administration contractsare disclosed in the Directors' Report below. The investment management fee islevied quarterly in arrears. Investment management fees are charged 75% tocapital and 25% to revenue. For details regarding the VAT recovery, see Note19.3 (b) Carried interest 2008 2007 £'000 £'000Carried interest 5,132 6,189
The carried interest payable ranks as a first distribution of capital gains onthe investments held in HGT LP, a limited partnership established solely tohold the Company's investments, and is deducted prior to such gains being paidto the Company in its capacity as Limited Partner. The gross amount of capitalgains of HGT LP during the period is shown on the Income Statement. Details ofthe carried interest contract are disclosed in the Directors' Report below.
4. Other expenses (a) Operating expenses 2008 2007 £'000 £'000Custodian and administration fees 260
249
Directors' remuneration (note 5) 170
138
Current Auditors' remuneration - audit services 32 -- taxation and interim review 6 -Previous Auditors' remuneration - audit services -
32
- taxation and interim review 5 7Legal and other administration costs 459
243
932
669
The Company's total expense ratio (`TER') calculated 1.06% 1.32% as a percentage of
average net assets and including expenses, afterrelief for taxation, was:(b) Reconciliation of net return before taxation to net cash flow from operatingactivities 2008 2007 £'000 £'000Total return before taxation 4,072 57,626Gains on investments held at fair value (641) (55,714)Movement on carried interest (1,057) 1,452Increase in accrued income (1,904) (5,237)Decrease in debtors 5 15Increase/(decrease) in creditors 1,076
(397)
Tax on investment income included within gross income (1) (4)Net cash inflow/(outflow) from operating activities 1,550 (2,259)5. Directors' remunerationThe aggregate remuneration of the Directors, excluding VAT where applicable,for the year to 31 December 2008 was £170,000 (2007: £133,000). Furtherinformation on the Directors' remuneration is disclosed in the Annual Reportand Accounts.
6. Taxation on ordinary activities
(a) Analysis of charge in the year
Revenue return Capital return Total return 2008 2007 2008 2007 2008 2007 £'000 £`000 £'000 £`000 £'000 £`000Current tax:UK corporation tax 2,988 3,174 (550) (756) 2,438 2,418Prior year adjustment 60 - - - 60 -
Total current tax (note 6(b)) 3,048 3,174 (550) (756) 2,498 2,418
(b) Factors affecting current tax charge for the year
The tax assessed for the year is higher than the standard rate of corporation tax in the UK for a large company (28%; 30% to 31 March 2008).
The differences are explained below:
2008 2007 £'000 £'000Revenue return on ordinary activities before taxation 10,493 10,620UK corporation tax at 28% thereon (30% to 31 March 2,991 3,1862008)Effects of:Non taxable UK dividends (3) (12)Tax deductible expenses in capital (550)
(756)
Tax relief to the capital account 550
756
Tax in relation to the prior year 60 - 57
(12)
Current revenue tax charge for the period (note 6(a)) 3,048 3,174
In the opinion of the Directors, the Company has complied with the requirements of Section 842 ICTA 1988 and will therefore be exempt from corporation tax on any capital gains made in the year.
7. Return and net asset value per ordinary share
2008
2007
Revenue and capital returns per share are shown below and have been calculated using the following:
£7,445,000
£7,446,000
Net revenue attributable to equity shareholders after taxation Net capital (deficit)/gains for the year
(£5,871,000) £47,762,000Total return £1,574,000 £55,208,000Number of shares in issue 25,186,755 25,186,755 Revenue return Capital return Total return 2008 2007 2008 2007 2008 2007Return per ordinary share 29.56p 29.56p (23.31p) 189.63p 6.25p 219.19p
The net asset value per share of 929.4p (2007: 948.2p) was calculated by dividing equity shareholders' funds of £234,094,000 (2007: £238,817,000) by the number of shares in issue at the year-end of 25,186,755 (2007: 25,186,755).
8. Dividends on ordinary sharesCompany Register Payment date 2008 2007 date £'000 £'000
Final dividend (14.0p) for the year 23 March 1 May 2007 - 3,526 ended 31 December 2006
2007
Final dividend (25.0p) for the year 27 March 11 May 2008 6,297
-ended 31 December 2007 2008 6,297 3,526
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.
The total dividends payable in respect of the financial year, which form the basis of the retention test as set out in section 842 of the Income and Corporation Taxes Act 1988, are set out below:
2008 £'000Revenue available for distribution by way of dividend for the year 7,445Proposed final dividend of 25.0p for the year ended 31 December 2008 (6,297)(based on 25,186,755 ordinary shares in issue at 31 December 2008)Undistributed revenue for section 842 purposes *
1,148
* Undistributed revenue comprises 9.7% of income from qualifying investments of £11,830,000 (see note 2).
9. Fixed assets investments 2008 2007 £'000 £'000
Investments held at fair value through profit and loss Investments held by HGT LP Investments quoted on the London or Dublin Stock
-
2,761
Exchanges
Investments traded on NASDAQ -
3,721
Unquoted investments 90,413
144,330
Other investments held by the CompanyUnquoted investments 4,319 3,555 94,732 154,367Equity shares 19,501 48,982Non-equity shares 7,569 8,673Convertible securities - 200Fixed income securities 70,463 96,512Derivative instruments (2,801) - 94,732 154,367 Quoted Unquoted Total £'000 £'000 £'000Opening valuation as at 1 January 2008 6,482 147,885
154,367
Opening unrealised appreciation (33) (5,792) (5,825)Opening book cost 6,449 142,093 148,542Movements in the year:Additions at cost 312 25,675 25,987Disposals - proceeds (8,162) (77,865) (86,027)- realised gains on sales 1,401 46,428 47,829Closing book cost of investments - 136,331
136,331
Closing unrealised depreciation - - (38,798) (
38,798)
investments
- financial derivative instruments - (2,801) (
2,801)
Closing valuation of investments as at 31 - 94,732
94,732
December 2008
Investments included in the above are indirectly held by the Company through its investment in HGT LP, as set out in Note 1.
The Company has indirect equity holdings of 10% or more of the equity shares in the companies listed below:
Company Country of Number of equity shares Effective incorporation equity %Atlas Energy Group Ltd UK 4,706,450 47.1%
Cornish Bakehouse Investments UK 382,170
38.2%
Ltd
Elite Holding SA (t/a SiTel) The Netherlands 4,884
15.6%FTSA Holdings Ltd UK 1,129,815 19.5%Hoseasons Group Ltd UK 267,358 12.2%Mondo Minerals Co-op Finland 1,252,217 11.4%Pulse Staffing Ltd UK 31,229,096 41.8%SGI (Holdings) Ltd UK 3,432,784 16.2%Sporting Index Group Ltd UK 136,751 13.4%
Further information on those investments which, in the opinion of the Directors, have a significant effect on the Company's financial statements, is contained in the Review of principal investments.
10. Gains on investments and government securities
2008 2007 £'000 £'000Realised gains on sales 47,266 53,017
Change in unrealised (depreciation)/appreciation (43,824) 2,697 - investments and government securities - financial derivative instruments
(2,801) - 641 55,71411. Debtors 2008 2007 £'000 £'000Taxation recoverable 453 -Prepayments and other accrued income 1,609 1,264Accrued income on fixed assets 14,196 12,637Other debtors - 5 16,258 13,90612. Government securities 2008 2007 £'000 £'000Investments held at fair value through profit and lossOpening valuation 79,723 34,284Purchases at cost 185,679 181,486Sales and redemptions (141,624) (134,731)Movement in unrealised capital gains 799 239Realised capital losses (563) (1,555)Closing valuation 124,014 79,72313. Movement in net funds
(a) Reconciliation of net cash flow to movement in net funds
2008 2007 £'000 £'000Change in net funds 5,724 (2,151)Net funds at 1 January 117 2,268Net funds at 31 December 5,841 117
(b) Analysis of changes in net funds At 1 Jan Cash At 31 Dec
2008 flows 2008 £'000 £'000 £'000Cash 117 5,724 5,841
14. Creditors - amounts falling due within one year
2008 2007 £'000 £'000Carried interest 5,132 6,189Corporation taxation payable - 2,564Sundry creditors 1,619 543 6,751 9,29615. Risk
The following disclosures relating to the risks faced by the Company are provided in accordance with Financial Reporting Standard 29, "Financial instruments: disclosures". The reference to investments in this note is in relation to the Company's direct investments and the underlying investments in HGT LP as detailed in Note 1.
Financial instruments and risk profile
As a private equity investment trust, the Company's primary investmentobjective is to achieve long-term capital appreciation by investing inunquoted companies, mostly in the UK and Europe. Additionally, the Companyholds Government gilts and cash and items such as debtors and creditorsarising directly from its operations. In pursuing its investment objective,the Company is exposed to a variety of risks that could result in either areduction of the Company's net assets or a reduction in the profits availablefor distribution by way of dividends. These risks, valuation risk, market risk(comprising currency risk and interest rate risk) and liquidity risk and theDirectors' approach to the management of them, are set out below.
The Board and the Manager coordinate the Company's risk management. The objectives, policies and processes for managing the risks, and the methods used to manage the risks, that are set out below, have not changed from the previous accounting period.
Valuation risk
The Company's exposure to valuation risk comprises mainly movements in the value of its underlying investments, the majority of which are unquoted. A breakdown of the Company's portfolio is given above. In accordance with the Company's accounting policies, all underlying unquoted investments are valued by the Directors following the IPEVC. The Company does not hedge against movements in the value of these investments, apart from foreign exchange movements as explained below. The Company has exposure to interest rate movements, through cash and gilt holdings.
In the opinion of the Directors, the diversified nature of the Company's portfolio significantly reduces the risks of investing in unquoted companies.
Market risk
The fair value of future cash flows of a financial instrument held by the Company may fluctuate due to changes in market prices. This market risk comprises: currency risk ,interest rate risk and equity price risk (see below). The Board of Directors reviews and agrees policies for managing these risks. The Manager assesses the exposure to market risk when making each investment decision, and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis.
Currency risk and sensitivity
The Company is exposed to currency risk as a result of investing in funds andcompanies in foreign currencies. The sterling value, being the Company'sfunctional currency, of these assets can be significantly influenced bymovements in foreign exchange rates. The Company is partially hedged againstEuro currency movements affecting the value of its investments, as explainedbelow. The Manager monitors the Company's exposure to foreign currencies andreports to the board on a regular basis. The following table illustrates thesensitivity of the Revenue and Capital return for the year in relation to theCompany's year-end financial exposure to movements in foreign exchange ratesagainst the Company's functional currency. The rates represent the high andlow positions during the year for the currencies listed. Revenue return Capital return NAV per NAV per ordinary ordinary share share £'000 (pence) £'000 (pence)LowSwiss Franc (1.5120) - - 17 -Euro (1.0195) 38 0.1 528 2.1Euro forward contract (1.0195) - - (530) (2.1)Euro option contract (1.0195) - - (41) (0.2)Norwegian Kroner (9.8175) 45 0.2 322 1.3US Dollar (1.4377) - - - - 83 0.3 296 1.1HighSwiss Franc (2.2624) - - (462) (1.8)Euro (1.3659) (634) (2.5) (8,830) (35.1)Euro forward contract (1.3659) - - 5,105 20.3Euro option contract (1.3659) - - 709 2.8Norwegian Kroner (11.6204) (234) (0.9) (1,689) (6.7)US Dollar (2.0397) (508) (2.0) (1,030) (4.1) (1,376) (5.4) (6,197) (24.6)In the opinion of the Directors, the above sensitivity analysis is notrepresentative of the year as a whole, since the level of exposure changes asthe portfolio changes through the purchase and realisation of investments tomeet the Company's objectives.
Portfolio hedging
The Company uses derivative financial instruments such as forward foreigncurrency contracts and option contracts to manage the currency risksassociated with its underlying investment activities. The contracts enteredinto by the Company are denominated in the foreign currency of the geographicareas in which the Company has significant exposure against its reportingcurrency. The contracts are designated as a hedge and the fair value thereofis recorded in the balance sheet as investments held at fair value. Unrealisedgains and losses are taken to capital reserves. At the balance sheet date, thenotional amount and value of outstanding forward foreign exchange contractsand option contracts are as follows: 2008 2007 Currency No. `000 £'000 No. `000 £'000
Forward foreign currency Euro 25,040 (3,186) - - contracts Currency option
Euro 12,520 385 - -
The Company does not trade in derivatives, as they are held for hedge specific exposures and have maturities designed to match the exposures they are hedging. It is the intention to hold both the financial investments giving rise to the exposure and the derivatives hedging them until maturity and therefore no net gain or loss is expected to be realised.
The derivatives are held at fair value which represents the replacement costof the instruments at the balance sheet date. Movements in the fair value ofderivatives are included in the income statement.
Interest rate risk and sensitivity
The Company has exposure to interest rate movements as this may affect thefair value of funds awaiting investment, interest receivable on liquid assetsand short-dated government securities and interest payable on borrowings. TheCompany has little immediate direct exposure to interest rates on its fixedassets as the majority of these are fixed rate assets and equity shares thatdo not pay interest. Therefore, and given that the Company has no borrowingsand maintains low cash levels, the Company's revenue return is not materiallyaffected by changes in interest rates.However, funds awaiting investment are invested in Government securities andas stated above, the valuation is affected by movements in interest rates. Thesensitivity of the capital return of the Company to movements on interestrates has been based on the UK base rate. With all other variables constant, a0.5% decrease in the above should increase the capital return in a full yearby £617,000, with a corresponding decrease if the UK base rate were toincrease by 0.5%. In the opinion of the Directors, the above sensitivityanalyses are not representative of the year as a whole, since the level ofexposure changes as investments are made and repaid throughout the year.
Liquidity risk
Investments in unquoted companies, which form the majority of the Company'sinvestments, may not be as readily realisable as investments in quotedcompanies, which might result in the Company having difficulty in meetingobligations associated with financial liabilities. Liquidity risk is currentlynot significant as more than 55% of the Company's net assets at the year-endare invested in liquid funds. The Board gives guidance to the Manager as tothe maximum amount of the Company's resources that should be invested in anyone company. For details refer to the Investment Policy section below.
Equity price risk
Equity price risk is the risk that the fair values of equities (includingloans) decrease as a result of changes in the values of underlying businesses.The Board manages the risks inherent in the investment portfolio by ensuringfull and timely access to relevant information from the Manager.The Board meets regularly and at each meeting reviews investment performance.The Board monitors the Manager's compliance with the Company's objectives, andis responsible for investment strategy. The Manager's best estimate of theeffect on the net assets and total return due to a reasonably possible changein the value of unquoted securities, with all other variables held constant,is as follows: % NAV per ordinary change £'000 share (pence) Unquoted 10% 9,473 37.6
Financial assets of the Company
2008 2007 Fixed Floating Non Fixed Floating Non interest- interest- rate rate bearing Total rate rate bearing Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000Sterling 164,415 5,841 10,672 180,928 134,673 117 21,223 156,013Euro 31,348 - 7,708 39,056 40,136 - 20,734 60,870Euro hedge - - (2,801) (2,801) - - - -Norwegian 7,838 - 6,553 14,391 8,887 - 7,553 16,440kronerSwiss franc 1,428 - - 1,428 - - - -US dollar 5,211 - 2,137 7,348 6,635 - 8,145 14,780Total 210,240 5,841 24,269 240,350 190,331 117 57,655 248,103The fixed rate assets comprise gilts and fixed rate lendings to investeecompanies. Fixed rate lendings relating to fixed assets investments have aweighted average interest rate of 11.4% per annum (2007: 10.9%) and a weightedaverage life to maturity of 6.0 years (2007: 7.9 years). Fixed rate lendingsrelating to gilts have an interest rate of 4.0% per annum and matures on 7March 2009. At the time of maturity, it is the intention to re-invest theproceeds in a gilt with a similar short dated liquidity profile. The floatingrate assets consist of cash.
The non interest-bearing assets represent the equity content of the investment portfolio and the financial derivative instruments.
The Company did not have any outstanding borrowings at the year end (2007: £nil). The numerical disclosures above, exclude short-term debtors and creditors.
Currency exposure
The currency denomination of the Company's financial assets is shown above. Short-term debtors and creditors, which are excluded, are predominantly denominated in sterling, the functional currency of the Company.
Capital management policies and procedures
The Company's capital management objectives are to ensure that it will be ableto finance its business as a going concern and to maximise the revenue andcapital return to its equity shareholders, through an appropriate balance ofequity capital and debt.
The Company's capital at 31 December comprises:
2008 2007 £'000 £'000EquityEquity share capital 6,296 6,296Share premium 14,123 14,123Capital redemption reserve 1,248 1,248Retained earnings and other reserves 212,427 217,150Total capital 234,094 238,817
As stated above, the Company did not have any outstanding borrowings at the year-end. The Board with the assistance of the Manager monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review covers:
- the planned level of gearing, which takes into account the Manager's projections of cash flow;
- the desirability of buying back equity shares, either for cancellation or tohold in treasury, balancing the effect (if any) this may have on the discountat which shares in the Company are trading against the advantages of retainingcash for investment;
- the need to raise funds by an issue of equity shares, including issues from treasury; and
- the extent to which revenue in excess of that which is required to be distributed should be retained, whilst maintaining its Section 842 status.
The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period.
16. Share capital 2008 2007 Nominal Nominal No.'000 £'000 No.'000 £'000Authorised:
40,000,000 ordinary shares of 25p each 40,000 10,000 40,000 10,000
Allotted, called up and fully paid:Ordinary sharesAt 1 January & 31 December 25,187 6,296 25,187 6,296
17. Share premium account and reserves
Share Capital Capital Capital redemption premium reserve reserve reserve Revenue account £'000 realised unrealised reserve £'000 £'000 £'000 £'000As at 1 January 2008 14,123 1,248 197,852 5,682 13,616Transfer on disposal of - - 11,511 (11,511) -investmentsLosses on sale of - - (563) - -government securitiesNet gain on sale of - - 36,318 - -investmentsNet movement in unrealised - - - (35,114) -depreciation of investmentsDividends paid - - - - (6,297)Net revenue for the year - - - - 7,445after taxCarried interest - - (5,132) - -Management fee charged to - - (1,380) - -capital, after taxationAs at 31 December 2008 14,123 1,248 238,606 (40,943) 14,76418. Contingent liabilitiesAs at 31 December 2008, investment purchases of £14,760,000 (31 December 2007:£11,900,000) had been authorised and contractually committed, including theuncalled commitment to Hg Renewable Power Partners LP. In addition, theCompany's derivative financial instruments held through HGT LP expire on 29August 2012. In order to meet any potential liability arising on this date, anamount of £6,260,000 million, has been reserved for this purpose. This amountis therefore callable from the Company at this or any earlier date.
19. VAT recoverable
On 28 June 2007, the European Court of Justice announced that it had found infavour of the Association of Investment Companies and JPMorgan ClaverhouseTrust plc in declaring that management expenses of investment trusts should beexempt from VAT. Her Majesty's Revenue and Customs ("HMRC") has sinceannounced that it has accepted that fund management services are exempt fromVAT and it has withdrawn from the appeal in the JPMorgan Claverhouse Trustcase. The Company will therefore no longer be charged VAT on managementexpenses and it is able to recover some or all of the VAT previously chargedon management fees. In September 2008, the Company, through its Manager,recovered £1,167,000 of VAT (see Note 3(a)) on management expenses charged bythe current Manager during the period May 2003 to September 2007. BetweenFebruary 2001 and April 2003, the Company paid approximately £590,000 of VATon its management expenses to a previous Manager. No recovery of VAT has beenrecognised in these financial statements in respect of this £590,000, asnegotiations with the previous Manager are not sufficiently advanced. Recoveryof VAT¢â‚¬Ë†suffered prior to February 2001 remains uncertain and has similarlynot been recognised in these Financial Statements.
20. HgCapital Trust commitment to invest alongside the HgCapital 6 Fund
The Company has committed to invest £250 million alongside the Manager'slatest buyout fund, HgCapital 6, increasing to a maximum of £300 million ifthe size of the funds raised for HgCapital 6, including the Company'scommitment, reaches £2 billion. The Company has agreed to pay fees on itscommitment. The Company will be entitled, without penalty, to opt out of anyinvestment which could cause the Company to lose its status as an investmenttrust, result in the Company not having the cash resources to meet any of itsprojected liabilities or expenses, or result in it not being able to paydividends or undertake any intended share buy-back.Top ten investments % of total income share accrued capital held by Accounting Turnover PBIT* 2007 the % of % of date Currency (millions) (millions) company total total £'m 2008 2007 Achilles Group Apr-08 £ 24.1 3.0 - 7.9 4.8 -HoldingsLimitedAmericana Jun-08 £ 84.0 18.7 1.3 5.7 5.3 3.0InternationalHoldingsLimitedCasa Reha SARL Dec-07 € 152.7 25* - 6.4 7.2 -Elite Holding Dec-07 $ 147.1 21.5 1.7 15.6 4.8 4.0SA Dec-07Mondo Minerals Dec-07 € 136.5 26.4* 1.3 11.4 9.0 4.8Co-opPulse Staffing Dec-07 £ 96.7 1.0 - 41.8 11.8 0.1LimitedSchleich GmbH Dec-07 € 81.6 21.7 1.3 9.5 8.0 3.3Sporting Index May-08 £ 25.8 9.5* 2.2 13.4 6.1 4.7Visma Holdings Dec-07 NOK 2,723.2 457.7 1.8 8.5 13.2 8.9Voyage Group Mar-08 £ 116.3 19.2 2.3 7.9 5.9 5.7Ltd
* Profit Before Interest and Taxation and, where applicable, before amortisation of goodwill and depreciation
This table does not form part of the financial statements.
Analysis of registered shareholdersas at 31 December 2008 By type of holder Number of % of total Number of % of total shares holders 31 Dec 31 Dec 31 Dec 31 Dec 2008 2007 2008 2007
Nominee companies 22,997,660 91.3 90.8 351 55.1 55.0
Direct private 1,154,740 4.6 4.4 235 36.9 37.0 investors Others 1,034,355 4.1 4.8 51 8.0 8.0 Total 25,186,755 100.0 100.0 637 100.0 100.0 By size of holding Number of % of total Number of % of total shares holders 31 Dec 31 Dec 31 Dec 31 Dec 2008 2007 2008 2007 1 - 5,000 583,774 2.3 2.7 434 68.1 68.5
5,001 - 50,000 2,224,052 8.8 9.7 132 20.7 20.2
50,001 - 100,000 2,004,072 8.0 8.3 27 4.3 4.3 Over 100,000 20,374,857 80.9 79.3 44 6.9 7.0 Total 25,186,755 100.0 100.0 637 100.0 100.0
This table does not form part of the financial statements.
Board of DirectorsRoger Mountford (Chairman)Aged 60, Roger Mountford was appointed to the Board in 2004 and becameChairman in April 2005. He spent 30 years as a merchant banker in the City ofLondon and in the Far East, latterly as Managing Director in the CorporateFinance Department of SG Hambros, leading the Bank's practice in the privateequity market. He now serves on several boards, including the Civil AviationAuthority, where he is chairman of the CAA Pension Scheme, and the Port ofDover. He is Chairman of The Housing Finance Corporation and of Enterprise LSELimited, the commercial subsidiary of the London School of Economics.
Timothy Amies
Aged 70, Timothy Amies was appointed to the Board in 1991. He is a chartered accountant with over 30 years' experience of working in the City. He was a partner at Laurie Milbank & Co, stockbrokers for 16 years prior to its acquisition by Chase Manhattan Bank. He then became a director of Chase Investment Bank involved in mergers and acquisitions.
Piers Brooke
Aged 68, Piers Brooke was appointed to the Board in 2001. He worked for 38 years in both commercial and merchant banking, holding a variety of general management positions in the UK, Continental Europe, the Far East and North America. Most recently he was Director of Financial Strategy at National Westminster Bank. He has been a director of a number of companies. He is currently a non-executive director of Lothbury Property Trust plc.
Richard Brooman
Aged 53, Richard Brooman was appointed to the Board in 2007. He is a charteredaccountant and is Deputy Chairman and Chairman of the Audit Committee ofInvesco Perpetual UK Smaller Companies Investment Trust plc, and anon-executive Director of the Camden & Islington NHS Foundation Trust. He wasformerly Chief Financial Officer of Sherwood International plc and GroupFinance Director of VCI plc. Prior to this, he served as CFO of the globalConsumer Healthcare business of SmithKline Beecham and held senior financialand operational positions at Mars after qualifying with Price Waterhouse. Heis Chairman of the Audit and Valuation Committee of the Company.
Peter Gale
Aged 53, Peter Gale was appointed to the Board in 1991 and is Deputy Chairmanof the Company. He has worked in many divisions of National Westminster Bank,specialising in investment management. In 1990 he became responsible for theinvestment management of National Westminster Bank Group Pension Funds, whichsubsequently became RBS Pension Trustee Ltd. Upon the purchase of GartmoreInvestment Management plc in 1996, he became a principal of the enlarged fundmanagement company and in 2003 became Managing Director of Gartmore PrivateEquity. He is a non-executive director of Lothbury Property Trust plc.
Andrew Murison
Aged 60, Andrew Murison was appointed to the Board in 2004. He was SeniorBursar of Peterhouse, Cambridge for nine years and spent the previous twelveyears as a principal in private equity partnerships in the USA. Prior to thathe was a fund manager, financial journalist and investment banker in the Cityof London. He now serves on the boards of Aberdeen Growth OpportunitiesVenture Capital Trust plc, Brandeaux Student Accommodation Fund Limited andBrandeaux US Dollar Fund Limited and is Chairman of JPMorgan EuropeanInvestment Trust plc.
All Directors are members of the Audit and Valuation, Nomination, Directors' Remuneration and Management Engagement Committees.
All Directors are non-executive.
Directors' report
The Chairman's Statement on pages 4-6 forms part of this Directors' Report
The Directors present the annual report and financial statements of the Company for the year ended 31 December 2008.
BUSINESS REVIEW
Background
The purpose of the Business Review is to provide an overview of the business of the Company by:
- Analysing development and performance using appropriate key performance indicators (`KPIs')
- Outlining the principal risks and uncertainties affecting the Company
- Describing how the Company manages these risks
- Explaining the future business plans of the Company
- Setting out the Company's environmental, social and ethical policy
- Providing information about persons with whom the Company has contractual or other arrangements which are essential to the business of the Company
- Outlining the main trends and factors likely to affect the future development, performance and position of the Company's business.
Principal activity and business review
The principal activity of the Company is to operate as an investment trustproviding access to a diversified portfolio of private equity investments. Areview of the business for the year is given in the Chairman's Statementabove, which forms part of this Directors' report, and in the Manager's report(also above).Status of the CompanyHMRC has accepted the Company as an investment trust for the purposes ofsection 842 of the Income and Corporation Taxes Act 1988 (ICTA) for the yearended 31 December 2007. In the opinion of the Directors, the Company hasconducted its affairs so as to enable it to continue to maintain acceptance asan investment trust since that date. It is the Company's intention to continueto seek authorisation under section 842 of ICTA.
The Company is not a close company within the meaning of the provisions of ICTA.
The Company is an investment company within the meaning of section 833 of the Companies Act 2006.
The Company's shares are eligible investments within the stocks and shares component of an Individual Savings Account (ISA).
Going concern
The Company's business activities, together with the factors likely to affectits future development, performance and position are described in theChairman's Statement (above) and in the Manager's report. The financialposition of the Company, its cash flows, liquidity position and borrowingfacilities are described in the Directors' report below. In addition note 15to the financial statements includes the group's objectives, policies andprocesses for managing its capital; its financial risk management objectives;details of its financial instruments and hedging activities; and its exposuresto credit risk and liquidity risk. The Company has considerable financialresources and as a consequence, the Directors believe that the group is wellplaced to manage its business risks successfully despite the current uncertaineconomic outlook. After making enquiries, the Directors have a reasonableexpectation that the Company will have adequate resources to continue inoperational existence for the foreseeable future. Accordingly, they continueto adopt the going concern basis in preparing the annual report and accounts.
Business and strategy
The objective of the Company is to provide shareholders with long-term capitalappreciation in excess of the FTSE All-Share Index by investing in unquotedcompanies. The strategy of the Manager is to maximise returns from mid-marketprivate equity investments through sector specialisation and proactive workwith portfolio companies. It concentrates on buyouts in Europe with enterprisevalues between £50 million and £500 million.
No material change will be made to the investment policy without shareholder approval.
Investment PolicyInvestments
- The principal policy of the Company is to invest in a portfolio of unlisted companies that are expected to grow organically or by acquisition.
- The Company's maximum exposure to unlisted investments is therefore 100% of gross assets. At the time of acquisition no single investment will exceed a maximum of 15% of gross assets.
- The Company may invest in assets other than companies where the Manager believes that its expertise in private equity investment can be profitably applied.
- The Company may invest in unlisted funds, whether managed by the Company's Manager or not, up to a maximum at the time of acquisition of 15% of gross assets.
- The Company may invest in other listed investment companies, including investment trusts, up to a maximum at the time of acquisition of 15% of gross assets.
- The Company invests its liquid funds in government or corporate securities, or in bank deposits, in each case with an investment grade rating, or in managed funds with a similar investment policy.
Range and diversification
- The Company invests primarily in companies whose operations are headquartered or substantially based in or which serve markets in Europe.
- The Company invests in companies operating in a range of countries, but there is no policy of making allocations to specific countries or markets.
- The Company invests across a range of sectors, but there is no policy of making allocations to sectors.
Gearing
- Underlying investments or funds are typically leveraged to enhance value creation, but it is impractical to set a maximum for such gearing.
- The Company may over-commit to invest in underlying assets in order to maintain the proportion of gross assets that are invested at any time.
- The Company may borrow against its portfolio.
Hedging
- The Company may use derivatives to hedge its exposure to interest rates, currencies, equity markets or specific investments. Borrowing facility
The Company had no borrowing facility at the end of the year. The Board regularly reviews cash flow and the use of gearing.
Performance
In the year to 31 December 2008, the Company's net asset value per share (including dividends re-invested) increased by 0.5%. This compares with a decrease in the FTSE All-Share Index (total return) of 29.9%. The Company's ordinary share price decreased by 12.0% on a total return basis.
Results and dividend
The total return for the Company is set out in the Income Statement above. Thetotal return for the year, after taxation, was £1,574,000 (2007: £55,208,000)of which £7,445,000 is revenue return (2007: £7,446,000).The Directors recommend the payment of a final dividend of 25.0p per ordinaryshare for the year ended 31 December 2008 (2007: 25.0p). Subject to approvalof this dividend at the forthcoming Annual General Meeting (AGM), it will bepaid on 11 May 2009 to shareholders on the register of members at the close ofbusiness on 3 April 2009.
Key performance indicators
Each Board meeting conducts a detailed review of the portfolio and reviews anumber of indices and ratios to understand the impact on the Company'sperformance of the individual portfolio holdings. The KPIs used to measure theprogress and performance of the Company over time and which are comparable tothose reported by other investment trusts include net asset value per share,share price, earnings per share, average monthly trading volumes and cashflow. The Directors recognise that it is in the long-term interest ofshareholders that shares do not trade at a significant discount to theprevailing NAV and they also monitor the Company's discount or premiumregularly.
Principal risks
The key risks faced by the Company are set out below. The Board regularly reviews and agrees policies for managing each risk, as summarised below.
Performance risk
The Board is responsible for deciding the investment strategy to fulfil theCompany's objectives and for monitoring the performance of the Manager. Aninappropriate strategy may lead to poor performance. To manage this risk theManager provides an explanation of all investment decisions and the rationalefor the composition of the investment portfolio. The Manager monitors andmaintains an adequate spread of investments, based on the diversificationrequirements inherent in the Company's investment policy, in order to minimisethe risks associated with particular countries or factors specific toparticular sectors.
Income/dividend risk
The amount of dividends and future dividend levels will depend on the income received and receivable from the Company's underlying portfolio.
Regulatory risk
The Company operates as an investment trust in accordance with section 842 ofICTA. As such, the Company is exempt from corporation tax on any capital gainsrealised from the sale of its investments. The Manager monitors investmentmovements, the level and type of forecast income and expenditure, and theamount of retained income (if any) to ensure that the provisions of section842 are not breached. The results are reported to the Board at each meeting.
Operational risk
In common with most other investment trust companies, the Company has noemployees. The Company therefore relies upon the services provided by thirdparties and is dependent upon the control systems of the Manager and theCompany's other service providers. The security, for example, of the Company'sassets, dealing procedures, accounting records and maintenance of regulatoryand legal requirements, depend on the effective operation of these systems.These are regularly tested and monitored and an internal control report, whichincludes an assessment of risks together with procedures to mitigate suchrisks, is prepared by the Manager and reviewed by the Audit and ValuationCommittee twice a year.
Financial risks
The Company's investment activities expose it to a variety of financial risksthat include valuation risk, liquidity risk, market price risk, foreignexchange risk and interest rate risk. Further details are disclosed in Note 15to the Financial Statements, together with a summary of the policies formanaging these risks.
Liquidity risk
The Company, by the very nature of its investment objective, invests in unquoted companies, and liquidity in their securities can be constrained, potentially making the investments difficult to realise at, or near, the Directors' published valuation at any one point in time. The Manager has regard to the liquidity of the portfolio when making investment decisions, and the Company manages its liquid resources to ensure sufficient cash is available to meet its contractual commitments.
Social, environmental and ethical policy
HgCapital Trust seeks to invest in companies that are well managed, with highstandards of corporate governance. The Directors believe this creates theproper conditions to enhance long-term shareholder value. In aiming to achievea high level of corporate performance, the Company adopts a positive approachto corporate governance and engagement with companies.
Socially responsible investment
The Company has committed to invest in the Hg Renewable Power Partners fund, which the Board believes offers a profitable route for the Company to participate in efforts to combat climate change.
The Manager addresses other investment opportunities on a sector basis. The sectors chosen do not generally raise ethical issues.
FUTURE PROSPECTS
The Board's main focus is on the achievement of capital growth and the futureof the Company is dependent upon the success of the investment strategy. Theoutlook for the Company is discussed in the Chairman's statement and theManager's report at the beginning of this document.
DERIVATIVE TRANSACTIONS
On 27 August 2008, the Manager, on behalf of the Company entered into a €25million forward foreign exchange contract and a €12.5 million option contractwith a duration of 4 years, in order to partially offset the effect ofsterling exchange rate movements on euro currency exposure. The contractsecures a sterling/euro exchange rate of €1.24 on the forward contact and astrike price of €1.40 on the option contract compared with an average exchangerate of €1.42 at which euro-denominated assets in HgCapital 5 were acquired.The current write-down of £2.8 million is more than offset by unrealisedforeign exchange gains on the euro-denominated assets.The contract requires no cash funding until expiry, by which time the Managerexpects to be in a position to cover any funding requirement from europroceeds from the sale of investments. Further details are provided in Note
15of the financial statements.DIRECTORS
The Directors in office during the year and at the date of this report are listed in the Board of Directors section above.
The Board undertook a review of committee membership and the resultant position is detailed in the Corporate Governance and Directors' responsibilities report below.
The Board has noted the recommendation in the AIC Code of Corporate Governance that non-executive directors serving longer than nine years since election should be subject to annual re-election. Accordingly, Mr Amies and Mr Gale will offer themselves for re-election at this year's Annual General Meeting.
The Board has considered the retiring Directors' performance as part of its evaluation process and recommends that both be proposed for re-election, based on the following assessment of their contribution to the operation of the Board.
Mr Tim Amies
A chartered accountant, he has over thirty years' experience in financial markets. The Board believes that Mr Amies will continue to be an effective member of the Board and Audit & Valuation Committee, and his re-election is recommended to shareholders.
Mr Peter Gale
Peter Gale is professionally responsible for the selection and monitoring of awide range of private equity managers on behalf of a major institutionalinvestor. His extensive knowledge of the private equity industry and of trendsin this market is of great value to the Board, especially when considering thestrategy of the Company and of the Manager. The Board recommends that Mr PGale be re-elected.
None of the Directors has a service contract with the Company.
Directors' interests
The interests of those persons who were Directors at the end of the year in the ordinary shares of the Company were as follows (all holdings are beneficial unless stated otherwise):
31 December 1 January 2008 2008T J Amies 15,000 30,000P L Brooke 2,000 2,000R J Brooman 1,200 1,200P Gale 9,996 9,996R P Mountford 10,289 10,000A H Murison 8,000 1,281Substantial interests
The Company is aware that the following shareholders had an interest in 3% or more of the voting rights of the Company on 18 March 2009, being the latest practical date prior to publication of this report:
Ordinary % of voting shares rightsOxfordshire County Council 1,782,500 7.1Hg Investment Managers Ltd* 1,725,803 6.9East Riding Pension Fund 1,300,000 5.2The Scottish Investment Trust plc 1,200,000 4.8Hg Pooled Management Ltd** 1,019,619 4.0Legal & General Investment Managers Ltd 1,003,177 4.0
* Held by HgCapital staff
** Managed on behalf of RW SPLP LP, where the beneficial owner is the BBC Pension Trust Limited Fund RW
The Company is not aware that any other shareholder had an interest of 3% or more in the Company's ordinary share capital as at 18 March 2009.
Investment management and administration
Throughout 2008, the Company's assets were managed by Hg Pooled Management Ltd (HgCapital), under management arrangements implemented in May 2003. A management fee of 1.5% per annum of NAV, excluding investments in other collective investment funds, was payable to HgCapital.
The Company's shareholders agreed, at an Extraordinary General Meeting held on14 January 2009, to amend these arrangements. Consequently, with effect from 1January 2009, the Company will pay no management fees to HgCapital in respectof its holdings of cash or liquid assets. The Company will continue to pay afee of 1.5% per annum on the current value of its existing private equityportfolio, excluding investments in other collective investment funds.The Company will also pay charges in respect of its commitment to investalongside HgCapital's new buyout fund, HgCapital 6. These charges will be thesame as those payable by all institutional investors in the new fund. A chargeof 1.75% per annum will be payable on the commitment during the investmentperiod of the fund, which is expected to last for between four and five years.The charge will then reduce to 1.5% per annum calculated on the basis of theoriginal cost of the assets, less the original cost of any assets which havebeen realised or written off.The incentive scheme introduced in May 2003 will remain in place for theCompany's existing investments. Under this scheme, the Manager is entitled toa carried interest, in which the executives of HgCapital participate, in orderto provide an incentive to deliver good performance. This arrangement allowsfor a carried interest of 20% of the excess annual growth in average NAV overan 8% preferred return, based on a three-year rolling average NAV, calculatedhalf-yearly and aggregated with any dividends declared by the Company inrespect of that financial year. In respect of the Company's investmentalongside HgCapital 6, this incentive scheme will be replaced by a carriedinterest arrangement identical to that which applies to all other investors inHgCapital 6. Under this arrangement, HgCapital will receive 20% of aggregateprofits after the repayment to the Company of its invested capital and thepayment of a preferred return thereon of 8% per annum.HgCapital has been appointed as Secretary and administrator of the Company fora fee equal to 0.1% of NAV. Hg Investment Managers Limited is the custodian ofthe Company's assets and its fees and expenses are met by HgCapital.
VAT recovery
In common with other investment trusts, the Company has, through its Managerpursued the recovery of VAT previously charged on investment management fees.During the year the Company received £1,167,000; further recoveries are beingsought as described in Note 19 to the Financial Statements above.
Continued appointment of the Manager
The Board has concluded that it is in shareholders' interests that HgCapital should continue as Manager of the Company on the existing terms. The Board considers the arrangements for the provision of investment management and other services to the Company on an ongoing basis and a formal review is conducted annually.
As part of this review, the Board considered the quality and continuity of theManager's personnel, succession planning, sector and geographic coverage,investment process and the results achieved to date. The Board also consideredthe Manager's ongoing commitment to the promotion of the Company's shares.The principal contents of the agreement with the Manager have been set out inthe previous section. Having considered the terms of this agreement and thoseof other private equity investment trust companies, the Board considers thatthe terms of the agreement represent an appropriate balance between cost andincentivisation of the Manager.
Voting policy
The exercise of voting rights attached to the Company's portfolio has been delegated to HgCapital, whose policy is to participate actively as a shareholder, reviewing each case separately.
Donations
The Company made no political or charitable donations during the period.
Payment of suppliers
It is the policy of the Company to pay for the supply of goods and services within the terms agreed with the supplier.
The Company has no trade creditors.
Annual General Meeting
The AGM of the Company, which will include a presentation by the Manager, willbe held at the offices of HgCapital, 2 More London Riverside, London SE1 2APon Thursday 7 May 2009 at 12 noon. Light refreshments will be available at theconclusion of the AGM. Notice of the Annual General Meeting is given in theAnnual Report and Accounts.
Authority to buy back shares
The Directors' authority to buy back shares was renewed at last year's AGM andwill expire on 24 October 2009. Although no shares were bought back during theyear, the Directors are proposing to renew the authority at the forthcomingAGM, and are seeking authority to purchase up to 3,775,494 ordinary shares(being 14.99% of the issued share capital) as set out in Resolution 8. Thisauthority, unless renewed, will expire on 6 November 2010. The Authority willbe used where the Directors consider it to be in the best interest ofshareholders.Purchases of ordinary shares will only be made through the market for cash atprices below the prevailing NAV per ordinary share. Under the Listing Rules ofthe Financial Services Authority, the maximum price that can be paid is 5%above the average of the market values of the ordinary shares for the fivebusiness days before the purchase is made. The minimum price that may be paidwill be 25.0p per share (being the nominal value of a share). Any sharespurchased under this authority will be cancelled. In making purchases, theCompany will deal only with member firms of the London Stock Exchange.
Authority of Directors to allot shares
Resolutions 9 and 10 to be proposed at the AGM are similar to the authoritiesgiven to the Directors at last year's AGM. By law, directors are not permittedto allot new shares (or to grant rights over shares) unless authorised to doso by shareholders.Resolution 9 gives the Directors, for the period until the conclusion of theAGM in 2010, the necessary authority to allot securities up to an aggregatenominal amount of £314,825, which is equivalent to 1,259,300 ordinary sharesof 25.0p each, or approximately 5% of the issued ordinary share capital. Thereare no shares held in treasury. The Authority will be used where the Directorsconsider it to be in the best interest of shareholders.Resolution 10 empowers the Directors until the conclusion of the AGM in 2010or, if earlier, the expiry of fifteen months from the date on which theresolution is passed, to allot securities for cash, otherwise than to existingshareholders on a pro rata basis, up to an aggregate nominal amount of£314,825, which is equivalent to 1,259,300 ordinary shares or approximately 5%of the issued share capital. In no circumstances would the Directors use thisauthority to dilute the interests of existing shareholders by issuing sharesat a price that is less than the NAV attributable to the shares at the time
ofissue.Auditor
Each of the persons who is a director at the date of approval of this report confirms that:
- so far as the director is aware, there is no relevant audit information of which the Company's auditors are unaware; and
- the director has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the Company's auditors are aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of s234ZA of the Companies Act 1985.
During the year Ernst & Young LLP resigned as auditor to the Company. On 2 December 2008, Deloitte LLP was appointed as independent auditor and has indicated its willingness to continue in office. Resolutions proposing its re-appointment and authorising the Directors to determine its remuneration will be submitted at the AGM.
By order of the BoardHg Pooled Management LtdSecretary19 March 2009
Corporate governance and Directors' responsibilities
The Board of HgCapital Trust plc has considered the principles andrecommendations of the AIC Code of Corporate Governance ("AIC Code") byreference to the AIC Corporate Governance Guide for Investment Companies ("AICGuide"). The AIC Code, as explained by the AIC Guide, addresses all theprinciples set out in Section 1 of the Combined Code, as well as setting outadditional principles and recommendations on issues that are of specificrelevance to HgCapital Trust plc.The Board considers that reporting against the principles and recommendationsof the AIC¢â‚¬Ë†Code, and by any reference to the AIC Guide (which incorporatesthe Combined Code), will provide better information to shareholders.
The Company has complied with the recommendations of the AIC Code and the relevant provisions of Section 1 of the Combined Code, except as set out below.
The Combined Code includes provisions relating to:
- the role of the chief executive
- executive directors' remuneration
- the need for an internal audit function.
For the reasons set out in the AIC Guide, and in the preamble to the CombinedCode, the Board considers these provisions are not relevant to the position ofHgCapital Trust plc, being an externally managed investment company. TheCompany has therefore not reported further in respect of these provisions.
The Board
The Board consists of six non-executive Directors, all of whom the Company deems to be independent of the Company's Manager.
In the Board's opinion Mr Amies continues to qualify as an independent Director despite his length of service, as he is independent of the Manager and free from any business or other relationships that could materially interfere with the exercise of his judgment.
For the same reasons and having considered Mr Gale's position as a senioremployee of Gartmore, a shareholder of the Company, the Board considers him tobe independent. Both Mr Gale and Mr Brooke are non-executive directors ofLothbury Property Trust plc. Their fellow Directors consider that eachdemonstrates that they are independent in character and judgment and that thiscommon directorship of another company does not impede their independence.
The Directors' biographies above highlight their wide range of business experience. The Board does not feel that it would be appropriate to adopt a policy on tenure whereby Directors serve for a limited period, as, with a private equity portfolio, historical knowledge is useful. The structure of the Board is such that it is considered unnecessary to identify a senior non-executive Director other than the Deputy Chairman.
The Board is supplied in a timely manner with information in a form and of aquality appropriate to enable it to discharge its duties. Strategic issues andall operational matters of a material nature are determined by the Board.The Directors retire by rotation at every third Annual General Meeting (AGM),except for Directors who have served for longer than nine years, who stand forre-election annually. Any Directors appointed to the Board since the previousAGM also retire and stand for election.
Messers Gale and Amies were both appointed on 1 May 1991. The AIC Code of Corporate Governance recommends that any non-executive director serving for longer than nine years be subject to annual re-election. Therefore Mr Gale and Mr Amies will stand for annual re-election at this year's AGM. The Board's recommendations that both should be re-elected are set out in the Directors section of the Directors' Report above.
The Board meets at least five times a year and there is regular contact withHgCapital between these meetings. The Directors also have access to the adviceand services of the Secretary, who is responsible to the Board for ensuringthat Board procedures are followed and that applicable rules and regulationsare complied with. Where necessary, in the furtherance of their duties, theDirectors may seek independent professional advice at the expense of theCompany.The Board has responsibility for ensuring that the Company keeps properaccounting records which disclose with reasonable accuracy at any time thefinancial position of the Company and enable it to ensure that the financialstatements comply with UK Company Law. The Board is also responsible forsafeguarding the assets of the Company and for taking reasonable steps for theprevention and detection of fraud and other irregularities. Finally, it is theBoard's responsibility to present a balanced and understandable assessment ofthe Company's position in all public communications.
The Company has maintained appropriate directors' liability insurance cover throughout the year.
Board and Audit and Valuation Committee
Directors' evaluation
The Board formally reviews its performance on a regular basis, together with that of the Audit and Valuation Committee.
An appraisal system has been agreed by the Board for evaluation on a regularbasis of the Board, the Audit and Valuation Committee, the Chairman and theindividual Directors. The evaluation for the year ended 31 December 2008 hasbeen carried out. This took the form of a detailed questionnaire followed bydiscussions to identify how the effectiveness of the Board's activities,including its committees, policies or processes might be improved. The resultsof the evaluation process were presented to and discussed by the Board and itwas agreed that the current composition of the Board and its committeesreflects a suitable mix of skills and experience and that the Board wasfunctioning effectively. The Board is satisfied that collectively the membersof the Audit and Valuation Committee have a sufficient level of recent andrelevant financial experience.
Delegation of responsibilities
The Board has delegated a number of areas of responsibility, outlined below.
Management and administration
The management of the investment portfolio has been delegated to HgCapital.HgCapital has also been appointed as Secretary and administrator to theCompany: certain of its corporate secretarial duties have been delegated toCapita Company Secretarial Services Limited (CCSS) and certain of its fundadministration duties have been delegated to Capita Financial Group Limited(CFG) who have teams specialising in providing secretarial and accountingservices to investment trusts. Custody and settlement services are undertakenby Hg Investment Managers Limited (authorised and regulated by the FinancialServices Authority), which in turn has appointed The Bank of New York EuropeLimited (BNYE), a subsidiary of The Bank of New York Mellon, as sub-custodian.
The Board has delegated the exercise of voting rights attaching to the securities held in the portfolio to HgCapital. HgCapital does not operate a fixed policy when voting but reviews each case separately.
All other matters are reserved for the approval of the Board.
Board committees
All the Directors of the Company are non-executive and serve on the NominationCommittee, which meets when necessary to select and propose suitablecandidates for appointment. When looking for a new Director, the Boardassesses the skills of the Board as a whole, to identify any areas that needstrengthening. External search consultants are also used.
Separate Audit & Valuation and Management Engagement Committees have been established. These committees consist of all six Directors, each of whom has no previous or current connection with the investment management of the Company other than in their capacity as a Director of the Company.
The Audit and Valuation Committee, which has written terms of referencedetailing its scope and duties and which meets at least four times per year,examines the effectiveness of the control systems. All the Directors of theCompany, including the Chairman, are members of this committee to enable themto be kept fully informed of any issues that may arise and to participatefully in discussions on portfolio valuation. The committee reviews thehalf-yearly and annual reports and also receives information from the relevantcorporate audit and compliance departments. The committee reviews the scope,results, cost effectiveness, independence and objectivity of the externalauditor. Semi-annually, at each balance sheet date, the committee reviews indetail the valuation of the unquoted investments within the portfolio.Non-audit fees of £5,000 were paid to Ernst & Young LLP for reviewing thehalf-yearly financial statements. During their appointment, Ernst & Young LLPprovided details of any other relationship with the Manager and confirmed tothe Board that in its opinion it was independent of the Manager. Non-auditfees of £4,000 were paid to Deloitte LLP for a review of the new HgCapital 6commitment terms. Deloitte LLP has provided details of any other relationshipwith the Manager and confirmed to the Board that in its opinion it isindependent of the Manager. Based on the review of non-audit services providedby Ernst & Young LLP and Deloitte LLP, the Board has concluded that both firmsare independent of the Company.The Board has considered the independence and objectivity of the Auditors andhas conducted a review of non-audit services which the Auditors have provided.It is satisfied in these respects that Deloitte LLP has fulfilled itsobligations to the Company and its Shareholders.
The external auditor is invited to attend the Audit and Valuation Committee meeting at which the annual accounts are considered and has the opportunity to meet with the committee without representatives of the Manager being present.
The Management Engagement Committee, which also has written terms of referencedetailing its scope and duties, regularly reviews the terms of the investmentmanagement and administration contracts.The Directors' Remuneration Committee, which is made up of all the Directors,meets when necessary to consider any change to the Directors' remuneration.The remuneration of the Chairman and Directors is reviewed against the feespaid to directors of other specialist investment trusts and investment trustsof a comparable size, as well as taking account of published data.
The terms of reference of all the committees are available on request and will also be available at each Annual General Meeting.
Membership of the Board Committees
Mr Mountford is Chairman of the Directors' Remuneration Committee, the Management Engagement Committee and the Nomination Committee. Mr Brooman is the Chairman of the Audit & Valuation Committee.
The composition of the Board's standing committees was considered at the year-end and it was felt appropriate that every non-executive Director should be a member of all committees.
With a relatively small Board, it was deemed both proportionate and practical to involve all the independent Directors in each committee.
Attendance record
The following table summarises the Directors' attendance at meetings of the Board and Audit and Valuation Committee, held in the year to 31 December 2008, compared with the number they were eligible to attend.
Director Number of meetings attended/eligible to attend Board A&VCTim Amies 6/6 5/5Piers Brooke 6/6 4/5Richard Brooman 6/6 5/5Peter Gale 5/6 4/5Roger Mountford 6/6 5/5Andrew Murison 6/6 5/5
The Management Engagement Committee and Remuneration Committee met on at least one occasion during the year.
Internal controlsThe Board is responsible for the internal controls of the Company and forreviewing their effectiveness, for ensuring that financial informationpublished or used within the business is reliable, and for regularlymonitoring compliance with regulations governing the operation of investmenttrusts. The Board continually reviews the effectiveness of the internalcontrol system. The processes indicated below have been put in place to ensurethat the Company fully complied with the AIC Code of Corporate Governance forthe year ended 31 December 2008 and up to the date of this report, and willcontinue to do so for the year ending 31 December 2009.As part of the Board's responsibility for the internal control system, anongoing process has been established in conjunction with HgCapital, CCSS andCFG for identifying, evaluating and managing the Company's significant risks.Controls relating to the risks identified, covering financial, operational,compliance and risk management, are embedded in the operations of HgCapital,CCSS, CFG, BNYE and other outsourced service providers. There is a monitoringand reporting process to review controls put in place to track risks identified, carried out by the compliance function within HgCapital and the auditors of the other organisations.This accords with the guidance in theTurnbull Report. HgCapital, CCSS and CFG report to the Company on their reviewof internal controls (which for HgCapital includes checks on thesub-custodian) formally on a semi-annual basis and orally at each Board andAudit and Valuation Committee meeting.
The Board has taken actions to remedy any significant failings or weaknesses identified.
The Board reviews the `whistle blowing' procedures of HgCapital, CCSS and CFG to ensure that the concerns of their staff may be raised in a confidential manner.
The Company does not have its own internal audit function, as all the administration is delegated to the Manager. This matter is kept under annual review.
HgCapital prepares cash flow forecasts and management accounts, which allow the Board to assess the Company's activities and to review its performance.
The Board and HgCapital have agreed clearly-defined investment criteria,specified levels of authority and exposure limits. Reports on these issues,including performance statistics and investment valuations, are submitted tothe Board at each meeting. HgCapital's evaluation procedure and financialanalysis of the companies within the portfolio include detailed research andappraisal, and also take into account environmental policies and otherbusiness issues. The Board recognises that these control systems can only bedesigned to manage, rather than eliminate the risk of failure to achievebusiness objectives and to provide reasonable, but not absolute, assuranceagainst material misstatement or loss. It relies on the operating controlsestablished by HgCapital, CCSS, CFG and BNYE.
Financial statements
The Board is required to ensure that the financial statements give a true andfair view of the affairs of the Company as at the end of each financial yearand of the profit of the Company for that period.The Board considers that in preparing the financial statements the Company hasused appropriate accounting policies, consistently applied (except wheredisclosed) and supported by reasonable and prudent judgments and estimates andthat all accounting standards that it considers to be applicable have beenfollowed.
Relations with shareholders
All shareholders have the opportunity to attend and vote at the AGM. Thenotice of the AGM which is sent out at least twenty working days in advancesets out the business of the meeting and any item not of an entirely routinenature is explained in the Directors' report above. Separate resolutions areproposed for substantive issues.
Both the Chairman of the Board and the Chairman of the Audit and Valuation Committee, together with representatives of HgCapital, are available to answer shareholders' questions at the AGM. Proxy voting figures are announced to shareholders at the AGM.
HgCapital holds regular discussions with major shareholders, the feedback fromwhich is greatly valued by the Board. In addition, the Chairman and Directorsare available to enter into dialogue and correspondence with shareholdersregarding the progress and performance of the Company. A section of the AnnualReport and Accounts entitled "Shareholder Information" provides informationuseful to shareholders.
Report of the independent auditor to the members of HgCapital Trust plc
We have audited the financial statements of HgCapital Trust plc for the yearended 31 December 2008 which comprise the Income statement, the Balance sheet,the Cash flow statement, the Reconciliation of movements in shareholders'funds and the related notes 1 to 20. These financial statements have beenprepared under the accounting policies set out therein. We have also auditedthe information in the Directors' remuneration report that is described ashaving been audited.This report is made solely to the Company's members, as a body, in accordancewith Section 235 of the Companies Act 1985. Our audit work has been undertakenso that we might state to the Company's members those matters we are requiredto state to them in an auditors' report and for no other purpose. To thefullest extent permitted by law, we do not accept or assume responsibility toanyone other than the Company and the Company's members as a body, for ouraudit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and auditors
The Directors' responsibilities for preparing the annual report, the Directors' remuneration report and the financial statements in accordance with applicable United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Directors' responsibilities.
Our responsibility is to audit the financial statements and the part of the Directors' remuneration report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the financial statements give atrue and fair view and whether the financial statements and the part of theDirectors' remuneration report to be audited have been properly prepared inaccordance with the Companies Act 1985. We also report to you whether in ouropinion the information given in the Directors' report is consistent with thefinancial statements.
In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors' remuneration and other transactions is not disclosed.
We review whether the Corporate governance statement reflects the Company's compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board's statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Company's corporate governance procedures or its risk and control procedures.
We read other information contained in the annual report and consider whetherit is consistent with the audited financial statements. The other informationcomprises only the Investment objective, Financial highlights, Chairman'sstatement, Ten year track record, Investing in private equity, Manager'sstrategy, Manager's tactics, Manager's review, Investments, Realisations,Review of principal investments, Renewable energy, Investment portfolio, Topten investment listing, Analysis of registered shareholders, Board ofDirectors, Directors' report and business review, Statement of Directors'responsibilities, the unaudited part of the Directors' remuneration report,Corporate governance and Directors' responsibilities, Shareholder information,Glossary, Notice of Annual General Meeting and Management and administration.We consider the implications for our report if we become aware of any apparentmisstatements or material inconsistencies with the financial statements. Ourresponsibilities do not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with International Standards on Auditing(UK and Ireland) issued by the Auditing Practices Board. An audit includesexamination, on a test basis, of evidence relevant to the amounts anddisclosures in the financial statements and the part of the Directors'remuneration report to be audited. It also includes an assessment of thesignificant estimates and judgments made by the Directors in the preparationof the financial statements, and of whether the accounting policies areappropriate to the Company's circumstances, consistently applied andadequately disclosed.We planned and performed our audit so as to obtain all the information andexplanations which we considered necessary in order to provide us withsufficient evidence to give reasonable assurance that the financial statementsand the part of the Directors' remuneration report to be audited are free frommaterial misstatement, whether caused by fraud or other irregularity or error.In forming our opinion we also evaluated the overall adequacy of thepresentation of information in the financial statements and the part of theDirectors' remuneration report to be audited.
Opinion
In our opinion:
- the financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Company's affairs as at 31 December 2008 and of its profit for the year then ended;
- the financial statements and the part of the Directors' Remuneration Reportto be audited have been properly prepared in accordance with the Companies Act1985; and
- the information given in the Directors' report is consistent with the financial statements.
Deloitte LLP
Chartered Accountant and Registered Auditors
London19 March 2009Management and administrationHgCapital Trust plc2 More London RiversideLondonSE1 2APwww.hgcapitaltrust.comRegistered office(Registered in EnglandNo. 1525583)2 More London RiversideLondonSE1 2APManagerHgCapital*†2 More London RiversideLondonSE1 2APTelephone: 020 7089 7888www.hgcapital.comSecretary and administratorHgCapital*†2 More London RiversideLondonSE1 2APTelephone: 020 7089 7888www.hgcapital.comStockbrokerWinterflood Securities*The Atrium BuildingCannon Bridge25 Dowgate HillLondon EC4R 2EATelephone: 020 7621 0004www.winsresearch.co.ukCustodianHg Investment Managers Limited*2 More London RiversideLondonSE1 2APRegistrarComputershare Investor Services plc*The PavilionsBridgwater RoadBristol BS99 6ZYTelephone: 0870 702 0131www-uk.computershare.com/investorIndependent auditorDeloitte LLP2 New Street SquareLondon EC4A 3BZAICAssociation of Investment Companieswww.theaic.co.ukLPEQListed Private Equitywww.lpeq.comHgCapital Trust is a founder member of LPEQ (formerly iPEIT). LPEQ is a groupof private equity investment trusts and similar vehicles listed on the LondonStock Exchange and other major European stock markets, formed to raiseawareness and increase understanding of what listed private equity is and howit enables all investors - not just institutions - to invest in privateequity.
LPEQ provides information on private equity in general, and the listed sector in particular, undertaking and publishing research and working to improve levels of knowledge about the asset class among investors and their advisers.
*Authorised and regulated by the Financial Services Authority.
†HgCapital is the trading name of Hg Pooled Management Limited
In accordance with LR 9.6.3, copies of the above document have today been sent to the Document Viewing Facility, The Financial Services Authority, 25 The North Colonnade, London E14 5HS.
vendorRelated Shares:
HgCapital Trust plc