Annual Financial Results Announcement

19th Feb 2009 07:00



Princess Private Equity Holding Limited

For Immediate Release

ANNUAL FINANCIAL RESULTS ANNOUNCEMENT 

YEAR ENDED 31 DECEMBER 2008

The Board of Princess Private Equity Holding Limited ("Princess" or the "Company") announces the Consolidated Audited Annual Financial Results of the Company for the year ended 31 December 2008.

In accordance with DTR4.1, the full Annual Financial Report will be issued to Shareholders on or about 10 March 2009. The required announcement in accordance with DTR4.1 will be made on the day of issue of the Annual Financial Report.

CHAIRMAN's REPORT

Dear valued investor

In my role as Chairman of the Board of Princess Private Equity Holding Limited I am pleased to present this Annual Report to you. I continue to have great confidence in the Princess portfolio and in its strong Investment Advisor, Partners Group, which has played a key role in the development of Princess since its inception in 1999. The quality of the portfolio is impressive and offers investors the advantages of broad diversification across various sectors, industries, geographies and vintages, which significantly helped the portfolio during 2008, a year of unprecedented challenges in the global financial market environment. 

In June 2008, Princess paid its shareholders a semi-annual dividend for the first half of 2008 of EUR 0.30 per share. In consideration of the uncertain financial market environment and based on the prudent forecasting of future portfolio cash flows by the Investment Advisor, the dividend payment for the second half of 2008 was precautionarily suspended. The decision was made independently of the stable development of the net asset value (NAV) as a measure to manage short-term working capital requirements, which the Princess' Board of Directors believes is in the best interests of shareholders.

After four years of double-digit increases, the NAV decreased by 11.4%, adjusted for the dividend payment. This decrease, however, has to be considered in the context of a period when the impact of the subprime mortgage crisis on credit markets and subsequently the real economy was unfolding. The performance of the portfolio NAV was negatively affected towards the end of the year, particularly due to revaluations of investments. Irrespective of the operational soundness of the underlying portfolio companies, "fair valuations" are required to reflect to a significant extent the price development of comparable public companies, which in the final quarter of 2008 experienced a major decline during the market downturn.

The share price of Princess closed the year down 59.3% when including the dividend payment. The share price development, which still outperformed the overall listed private equity industry as measured by the LPX 50 TR, which was down 64.3%, did not reflect the performance of Princess' underlying portfolio and was principally attributable to the record levels of uncertainty and loss of confidence which prevailed in global markets.

In order to reduce liquidity risks in a scenario with continued US dollar appreciation, Princess changed its currency hedging strategy in April 2008. Instead of rolling quarterly forward contracts, Princess purchased an option contract to limit negative effects from currency fluctuations.

With the increase in the investment level from 88% as per the end of 2007 to 96% at the end of 2008, Princess virtually reached its goal of becoming fully invested in 2008. General partners in the Princess portfolio, however, have been very selective in terms of new investments, only supporting the best transactions and business models. Broadly in line with the industry, Princess´ investment activity has thus remained somewhat below the levels seen in 2007. In the context of active investment level steering, the Investment Advisor significantly reduced Princess' commitment program at the end of 2007, and did not make significant commitments after April 2008 in order to position Princess for a softening market environment.

Despite the challenging market environment, I remain confident that 2009 will offer attractive opportunities, which Princess will be able to capitalize on, mainly due to its relative value investment approach under which the most attractive opportunities at any given point in time are selected. Princess, for instance, underweighted large-cap buyout funds early on and built up an allocation to special situations and distressed players, sectors that will benefit from plenty of opportunities in environments such as the current one. The maturity and quality of the diversified portfolio of Princess, which has led to the comparably solid NAV performance, are expected to allow Princess to clearly differentiate itself from competitors in 2009. 

I and my fellow Directors would like to take this opportunity to thank investors for the confidence they have shown in Princess Private Equity Holding Limited. Even though further valuation adjustments within the Princess portfolio cannot be ruled out in this recessionary environment, I expect Princess - with its limited exposure to expensive investment periods and access to top-quartile private equity firms - to see more moderate adjustments as compared to the private equity industry in general. The sophisticated investment process and the development of the portfolio since its launch are grounds for confidence that Princess is well equipped to weather the challenging environment of 2009.

Colin Maltby

Chairman 

Guernsey, 18 February 2009

Consolidated audited balance sheet

as at 31 December 2008

Assets Non-current assets Designated financial assets at fair value through profit or loss Investments in limited partnerships	Notes		31.12.2008EUR		31.12.2007EUR
and directly held investments	2 & 9		550'382'124		565'123'026
Financial assets at fair value through profit or loss held for trading
Investment in listed private equity	2 & 10	6'829'765		31'283'850
Hedging assets	2 & 9	12'558'606		6'095'015
			19'388'371		37'378'865
Current assets
Other short-term receivables	12	784'545		616'560
Cash and cash equivalents	13	13'707'132		80'258'529
			14'491'677		80'875'089
Total assets			584'262'172		683'376'980
Equity
Capital and reserves
Issued capital	14	70'100		70'100
Distributable reserve	14	668'881'890		689'911'890
Accumulated loss		(89'293'248)		(13'775'481)
Total equity			579'658'742		676'206'509
Liabilities falling due within one year
Other short-term liabilities
Other short-term payables	15	4'603'430		7'170'471
			4'603'430		7'170'471
Total equity and liabilities			584'262'172		683'376'980

Consolidated audited income statement

for the year from 1 January 2008 to 31 December 2008

Net income from designated financial assets	Notes	01.01.2008 - 31.12.2008EUR	01.01.2007-31.12.2007EUR
at fair value through profit or loss		(46'486'946)	93'123'630
Net income from investments in limited partnerships and directly held investments
- Dividend and interest income	9 & 16	4'438'750	6'103'572
- Revaluation	9 & 18	(83'839'577)	103'667'915
- Foreign exchange gains and (losses)	9 & 17	32'913'881	(16'647'857)
Net income from financial assets at fair value through profit or loss held for trading
Net income from listed private equity		(14'655'475)	(5'779'986)
- Gains and (losses)	10	(14'655'475)	(5'779'986)
Net income from short-term investments		-	301'065
- Gains and (losses)	11	-	950'535
- Interest on short-term investments	11 & 16	-	240'388
- Foreign exchange gains and (losses)	11 & 17	-	(889'858)
Net income from cash & cash equivalents		1'939'616	3'783'945
- Interest income	13 & 16	2'107'894	4'784'610
- Foreign exchange gains and (losses)	17	(168'278)	(1'000'665)
Operating income		(59'202'805)	91 '428'654
Operating expenses		(16'175'971)	(16'143'182)
- Management fee	5	(14'214'475)	(13'609'628)
- Administration fee	5	(361'558)	(334'772)
- Incentive fee	5	(280'180)	(292'762)
- Audit fee		(64'365)	(57'967)
- Tax exemption fee	6	(761)	(1'707)
- Restructuring costs		32'590	(1'195'779)
- Other foreign exchange gains and (losses)	17	(435'312)	193'306
- Other operating expenses		(851'910)	(843'873)
Financing cost		(138'991)	(141 '505)
- Non utilization fee - credit facility	16 & 21	(138'991)	(141'505)
Surplus / (loss) for the financial year		(75'517'767)	75'143'967

01.01.2008 - 01.01.2007-

31.12.2008 31.12.2007

Earnings per share
- Weighted average number of shares outstanding	4	70'100'000	70'100'000
- Basic surplus / (loss) per share for the financial year	4	(1.08)	1.07
- Diluted surplus / (loss) per share for the financial year	4	(1.08)	1.07

Consolidated audited statement of changes in equity for the year from 1 January 2008 to 31 December 2008 (all amounts in EUR)

		Share capital	Distributable reserve	Accumulated surplus/(loss)	Total
Equity at beginning of reporting year		70'100	689'911'890	(13'775'481)	676'206'509
Dividend payment		-	(21'030'000)	-	(21'030'000)
Surplus / (loss) for the financial year		-	-	(75'517'767)	(75'517'767)
Equity at end of reporting year		70'100	668'881'890	(89'293'248)	579'658'742

Consolidated audited statement of changes in equity for the year from 1 January 2007 to 31 December 2007 (all amounts in EUR)

	Share capital	Share premium	Distributable reserve	Accumulated surplus/(loss)	Total
Equity at beginning of reporting year	70'100	730'149'287	-	(88'919'448)	641'299'939
Transfer share premium to distributable reserve	-	(730'149'287)	730'149'287	-	-
Dividend payment	-	-	(40'237'397)	-	(40'237'397)
Surplus / (loss) for the financial year	-	-	-	75'143'967	75'143'967
Equity at end of reporting year	70'100	-	689'911'890	(13'775'481)	676'206'509

Consolidated audited cash flow statement
for the year from 1 January 2008 to 31 December 2008
			01.01.2008 -	01.01.2007-
			31.12.2008	31.12.2007
	Notes		EUR	EUR
Cash flow from operating activities
- Management fee		5	(14'214'475)	(13'609'628)
- Administration fee		5	(361'558)	(334'772)
- Incentive fee		5	(280'180)	(292'762)
- Audit fee			(64'365)	(57'967)
- Tax exemption fee		6	(761)	(1 '707)
- Restructuring costs			32'590	(1 '195'778)
- Other operating expenses			(851'910)	(843'873)
- Proceeds from / (costs of) hedging activities		9	23'224'508	12'475'305
- Premium of hedging option			(12'378'234)	-
- Redemption of hedging option			795'592	-
- (Increase) / decrease in other short-term receivables			(603'297)	(211'506)
- Increase / (decrease) in other short-term payables			(2'567'041)	5'175'550
- Dividend income from limited partnerships and directly held investments		9	2'601'398	2'874'253
- Withholding tax from limited partnerships and directly held investments		9	(373'658)	-
- Interest income from limited partnerships and directly held investments		9	1'343'690	2'217'059
- Purchase of limited partnerships and directly held investments		9	(123'807'873)	(234'695'249)
- Distributions from limited partnerships and directly held investments		9	70'384'942	167'743'226
- Purchase of listed private equity		10	-	(37'063'836)
- Redemption of listed private equity		10	9'798'610	-
- Redemption of short-term investments		11	-	197'302'644
- Net purchase of short-term investments		11	-	(150'790'113)
- Interest on short-term investments		11	-	240'388
- Interest from cash and cash equivalents		13 & 16	2'107'894	4'784'610
- Financing cost / credit line charges		21	(138'991)	(141'505)
Net cash from / (used in) operating activities			(43'353'119)	(46'425'661)
Cash flow from financing activities Dividend payment
- Dividend payment		14	(21'030'000)	(40'237'397) 397
Net increase / (decrease) in cash and cash equivalents			(66'383'119)	(88'663'058)
Cash and cash equivalents at beginning of reporting year		13	80'258'529	167'922'252
Effects on cash and cash equivalents  - Movement in exchange rates		17	(168'278)	(1'000'665)
Cash and cash equivalents at end of reporting year		13	13'707'132	80'258'529

Investment Review:

Performance of the Princess Portfolio

Against the backdrop of sharply correcting equity markets, volatilities reaching record levels and a slump in consumer confidence, the net asset value (NAV) of Princess was largely resistant and it was only at the very end of the year when valuation adjustments reflecting the downturn in the financial markets severely hit the NAV. Irrespective of this development, the Princess share price dropped significantly, being affected by the market dislocations, resulting in an unprecedented and disproportionate discount to the NAV by the end of the year. 

2008 - a truly challenging year

Based on year-end valuations prepared under International Financial Reporting Standards (IFRS), the audited NAV declined from EUR 676 million at the end of December 2007 to EUR 580 million at the end of December 2008. After four years of double-digit increases, this translates into a decrease of 11.4%, adjusted for the dividend paid in June 2008. This decrease, however, has to be considered in the context of a period when the impact of the subprime mortgage crisis on credit markets and subsequently the real economy was unfolding. The MSCI World TR Index, as a benchmark for global equity markets, was down 35.4% in the reporting period and GDP forecasts were revised downwards on a global scale.

The performance of the portfolio NAV, which had been positive for the year until November, was negatively affected towards the end of the year, particularly due to revaluations of investments, which overall in 2008 resulted in a decrease of 12.4% in the NAV. Thereof, valuation adjustments as reported by the general partners (GPs) had a negative impact of 5.0%, while adjustments made by Princess' Investment Advisor Partners Group according to "fair value" principles, including unrealized losses relating to mark-to-market adjustments of public positions, accounted for a 7.4% decrease in the NAV. Irrespective of the operational soundness of the underlying portfolio companies, "fair valuations" are required to reflect to a significant extent the price development of comparable public companies, which - in particular in less recession resilient sectors - in the final quarter of 2008 experienced a major decline during the market downturn. With a certain delay this resulted in corrections in the private market as well. In this sense, the "fair valuations" made by the Investment Advisor already anticipate some of the GP revaluations, which are typically received with a delay of one quarter.

The development of the listed private equity investments in the portfolio also had an unfavorable impact of -2.2% on the NAV during this period. The reasons for the poor performance of the listed private equity segment were primarily investors' uncertainty about the future development of NAVs, concerns about the leverage applied by the private equity firms as well as constrained liquidity in the market. 

In order to reduce liquidity risks in a scenario with continued US dollar appreciation, Princess changed its currency hedging strategy in April 2008. Instead of rolling quarterly forward contracts, Princess purchased an option contract to limit negative effects from currency fluctuations. This allowed Princess to benefit fully from the appreciation of the US dollar in the second half of the year, with the total impact of foreign exchange accounting for a positive 4.8% in 2008.

Share price development

Princess' share price closed the year down 59.3% when including the June dividend payment. The share price fall was largely attributable to the record levels of uncertainty and loss of confidence which prevailed in global markets. 

In addition to that, many distressed sellers were active in the market, having to adjust allocations and dispose of assets at any price. However, it should be noted that the share price development of Princess, which outperformed the overall listed private equity industry as measured by the LPX 50 TR, being down 64.3%, did not reflect the performance of Princess' underlying portfolio. From the Investment Advisor's point of view, the discount to the NAV, which widened from 17.6% at the end of 2007 to 62.5% as per the end of 2008, does not reflect the high quality of the Princess portfolio, which is broadly diversified across industries, types and stages and has an allocation to large-cap buyout funds with the more expensive vintage years 2006-2007 of only 13%.

Dividend payment 

On 20 June 2008, Princess paid its shareholders a semi-annual dividend for the first half of 2008 of EUR 0.30 per share. In consideration of the uncertain financial market environment and based on the prudent forecasting of future portfolio cash flows by the Investment Advisor, the dividend payment for the second half of 2008 was precautionarily suspended. The decision was made independently of the stable development of the NAV and is to be considered a measure to manage short-term working capital requirements, which the Princess' Board of Directors believes is in the best interests of shareholders. Princess however retains its long-term dividend policy which targets an annual dividend yield of 5-8% on the NAV. 

INVESTMENT ACTIVITY

Investment activity cautious in 2008

With sellers' price expectations still in the adjustment phase and funding conditions having become ever more stringent given the rising uncertainty about the development of the global economy as the year progressed, deal volume throughout the entire industry remained well below the levels seen in 2007.

Broadly in line with the industry, Princess funded EUR 124 million in capital calls from existing partnerships for new and follow-on investments and invested EUR 6 million in the direct portfolio in 2008, compared to a total of EUR 181 million in 2007. General partners in the Princess portfolio have been very selective in terms of new investments, only supporting the best transactions and business models. Such investments in promising opportunities included: Doughty Hanson V's acquisition of TMF, a global management and accounting outsourcing services business, and the acquisition of Bodycote Testing Group, one of the world's leading independent testing organizations, by Clayton Dubilier & Rice VII.

Challenging exit environment

From the high level of distributions of EUR 174 million received in 2007, proceeds from limited partnerships and directly held investments in the reporting period decreased substantially to EUR 75 million, reflecting the market's generally smaller appetite for takeovers and initial public offerings (IPOs) and the wait-and-see attitude in 2008. Prime examples of realizations in the Princess portfolio in 2008 were: Graphite Capital's sale of medical firm Summit Medical, Ltd., generating a return of more than three times the cost of its original investment; GMT Communications Partners III's exit of portfolio company Asiakastieto, achieving an internal rate of return (IRR) of approximately 70% over a holding period of less than two years; and the sale of Intelsat Holdings by Apax Europe V and Permira Europe III, resulting in an IRR of more than 100%. These transactions impressively illustrate that excellent returns can be made even in a persistently unstable environment. 

Princess almost fully invested in 2008

With the increase in the investment level from 88% as per the end of 2007 to 96% at the end of 2008, Princess virtually reached its goal of becoming fully invested in 2008. At year-end, cash equivalents stood at EUR 22 million, against EUR 80 million at the end of 2007. Princess currently has net cash and liquid assets of 5% of NAV and its USD 50 million credit facility, which is committed until the end of 2009, remains fully undrawn. 

Commitments adjusted to reflect market sentiment

Princess' Investment Advisor is continuously adapting its cash flow modeling and commitment planning based on various market scenarios. In this context, the Investment Advisor significantly reduced Princess' commitment program at the end of 2007, and did not make significant commitments after April 2008 in order to position Princess for a softening market environment. Consequently, the EUR 86 million in new commitments made to six primary, one secondary and two direct investments in 2008 was dwarfed by the EUR 361 million in the previous year. The new commitments made during the year were primarily to 2008 vintage funds in North America across all segments. Following the relative value investment approach, under which the most attractive opportunities at any given point in time are selected, Princess made commitments to several funds focusing on distressed opportunities, such as the Ares Corporate Opportunities Fund which invests in undercapitalized middle-market companies that are either overleveraged, distressed or generally capital constrained. A commitment was made to the Partners Group Distressed 2008 fund, for which no additional fees were incurred and has been established to build a diversified portfolio of distressed, turnaround and special situations investments, increasing the special situations allocation of the Princess portfolio.

Portfolio allocation

The goal of the relative value investment strategy is to systematically identify and invest in private equity and private debt investments which the Investment Advisor believes are particularly attractive at a given point in time. By following this approach, Princess benefits from the global presence, the size and experience of the Investment Advisor's investment team, its relationships with many of the world's leading private equity firms across all financing stages and its experience in primary, secondary and direct investing.

Listed private equity allocation reduced 

The listed private equity asset class took significant hits in the market downturn and the Investment Advisor decided to reduce the allocation from 5% as per the end of 2007 to 1% at the end of 2008. For this reason, and due to the majority of capital calls having stemmed from primary partnerships, the primary allocation increased proportionally and accounted for 84% at the end of 2008. The portion of direct investments (13%) and secondary investments (2%) remained virtually unchanged. 

Decrease in venture capital allocation 

The portion of venture capital investments within the portfolio decreased significantly from 28% as per the end of 2007 to 24% as per year-end 2008, reflecting the focus on buyout and special situation investments, including the ramp-up of the distressed portfolio under the relative value approach, in the previous years. Correspondingly, the special situations allocation increased by 2% to 14%, while the buyout portion grew by 2% to 62% at the end of the reporting period. 

Regional allocation virtually unchanged 

The current value of investments can be divided into: a 36% European exposure (41% in 2007); a 57% North American exposure, up from 52% in 2007, and due also to the US dollar appreciation during 2008; and an unchanged 7% Asia & Rest of World exposure.

Well-balanced industry allocation 

Princess is well diversified across a range of different industries. The allocation to recession resilient industries, such as life sciences/healthcare and communications, should contribute to the portfolio's stability amid a recessionary market environment. The portfolio includes healthcare companies such as Lantheus Medical Imaging, which is a worldwide leader in medical imaging, and ConvaTec, a world leader in the development of wound therapeutics and ostomy care products, to name but two. The financial services exposure, accounting for only 7% of the portfolio, is also invested in asset management and insurance businesses with a low specific exposure to the banking sector, as it is not a typical private equity industry. The industry classification retail also includes non-discretionary retail such as food and beverages.

Majority of investments made in "low price" environment 

Around 64% of the investments were made between 2001 and 2005 and in the second half of 2007 and thereafter, namely at quite favorable prices; only 23% of the portfolio was invested in the more expensive period between 2006 and the first half of 2007. Princess' healthy diversification across different investment years underlines the maturity of the portfolio. It ensures that Princess does not face a risk of receiving all distributions at the same point in time, but instead having inflows to the product well distributed given a specific holding period after which a portfolio company is usually exited. A significant proportion of the 2007 vintage investments is explained by the ramp-up of the direct investment allocation.

OUTLOOK FOR PRINCESS

Private equity is typically less dependent on the short-term fluctuations of the global financial markets but rather is linked to developments in the real economy. As the effects of the financial crisis have also now hit the macroeconomic environment, this, however, is likely to further impact the private equity market. As already laid out in the review for 2008, the IFRS revaluations to reflect the "fair value" of Princess conducted by the Investment Advisor to a certain extent already factor in potential future adjustments that will likely be reported by the general partners given the current macroeconomic environment. Nevertheless, further valuation adjustments within the Princess portfolio cannot be ruled out in this recessionary environment: the Investment Advisor expects further revaluations of the broader private equity industry in the order of 15-20% in 2009. With around 64% of the underlying portfolio investments having been made during the period 2001 to 2005 and then after the first half of 2007, Princess, however, has limited exposure to expensive investment periods where valuation adjustments are more likely and therefore the Investment Advisor expects Princess to see more moderate adjustments as compared to the private equity industry in general. 

While fair value accounting and valuation principles applied to individual public investments can be appropriate to measure a company's value when normal market conditions apply, the "fair value" for the private equity portfolio companies may be less appropriate when those markets have become severely illiquid. This is because private equity investments are held for the purpose of long-term appreciation. The portfolio companies are still in the process of executing their business plans and do not have to, or are not supposed to, be exited today or in the near future. Until the point of exit, valuation adjustments therefore represent unrealized losses. 

Following the relative value investment approach, large-cap buyout funds were underweighted early on and an allocation to special situations and distressed players has been built up, sectors that will benefit from plenty of opportunities in environments such as the current one. 

Even anticipating a further drop in distributions to the Princess portfolio, and which are only expected to recover in 2011, the Investment Advisor has high confidence in Princess' portfolio, with quality investments and high levels of diversification, managed by top-quartile private equity firms which the Investment Advisor believes are well equipped to weather the challenging environment of 2009. These general partners will capitalize on the opportunities in the market, benefiting from steadily decreasing entry multiples and sellers in distressed situations. While capital calls are expected to slow down as well, the effect is not expected to be of the same magnitude as for distributions. 

AUDITORS' REPORT - EMPHASIS OF MATTER

Without qualification of the Auditors' Report, an emphasis of matter is referred in respect of inherent uncertainty associated with the valuation of unquoted investments and the absence of a liquid market where fair values may differ from the realisable value and differences could be material.

About Princess

Princess is an investment holding company founded in 1999 and domiciled in Guernsey that invests in private equity and private debt investments. The Company is advised in its investment activities by Partners Group AG, a global alternative asset management firm listed on the SWX Swiss Exchange (ticker symbol: PGHN) with over CHF 24 billion assets under management in private equity, private debt, private real estate, private infrastructure, absolute return strategies and listed alternatives. Princess aims to provide shareholders with long-term capital growth and an attractive dividend yield. Princess is traded on the Frankfurt Stock Exchange (ticker symbol: PEY1) and on the London Stock Exchange (ticker symbol: PEY). Further information: www.princess-privateequity.net

Contacts 

Princess Private Equity Holding Limited:

princess@princess-privateequity.net

www.princess-privateequity.net

Registered Number: 35241

Media enquiries:

Partners Group AG

Dr. Cyrill Wipfli

Head Communications

Tel.: +41 41 768 85 71

[email protected]

www.partnersgroup.net

This document does not constitute an offer to sell or a solicitation of an offer to buy or subscribe for any securities and neither is it intended to be an investment advertisement or sales instrument of Princess Private Equity Holding Limited. The distribution of this document may be restricted by law in certain jurisdictions. Persons into whose possession this document comes must inform themselves about, and observe any such restrictions on the distribution of this document. In particular, this document and the information contained therein is not for distribution or publication, neither directly nor indirectly, in or into the United States of America, Canada, Australia or Japan. 

Approved by Partners Group (UK) Ltd., authorised and regulated by the Financial Services Authority in the United Kingdom.

ENDFR GGGMZGRFGLZZ

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