Final Results - Part 1

18th Mar 2008 07:02

HG Capital Trust PLC18 March 2008 HgCapital Trust plc Preliminary Results for the year ended 31 December 2007 London, 18 March 2007: HgCapital Trust plc (or "the Trust"), the Private EquityInvestment Trust managed by HgCapital, the European sector-focused privateequity investor, today announces preliminary results for the 12 months ended 31December 2007. Financial highlights • Total return (NAV plus dividend) increased by 30%. • One year total return share price performance of 8% against FTSE All-share of 5%. • Ten year total return of 18% per annum versus 6% per annum from the FTSE All-Share Index. • NAV increased by 28% to £238.8 million (2006: £187.1 million). • An investment of £1,000 ten years ago, with dividends reinvested, would now be worth £5,183 based on the Company's share price at 31 December 2007 compared with £1,824 for the FTSE All-Share Index. • Dividend of 25p per share (2006: 14p per share). • The NAV per share at 31 January 2008 was 979.5p and at 29 February 2008 it was 1,002.1p. Operational Highlights • Another record year for realisations with proceeds of £106.3 million (2006: £62.3 million), principally from the sale of Schenck, Hirschmann and the combined sale of IRIS Software and CS Group. • European focus and sector expertise resulted in investing a record £50.8 million (2006: £45.3 million) in eight new investments including Fabory (Netherlands, €345 million EV), Mondo Minerals (Finland, €230 million EV), SLV (Germany, €320 million EV) and Americana (UK, £186 million EV). • The Trust won the private equity investment trust of the year for an unprecedented third consecutive year at the Investment Week Awards, again demonstrating the consistent strong performance of the company. • A further €3.5 million out of its €21 million commitment invested in the €300 million Hg Renewable Power Partners fund. • Since the year-end, one new investment made in Casa Reha (Germany, €327 million EV) and three realisations with the sales of Hofmann Menu, The Sanctuary Spa and Clarion Events. Roger Mountford, the Chairman, commented: "In 2007, we saw the beginning of the credit crisis, which has had a severeimpact on the financial services industry. Despite this, the Trust has continuedto perform well, thanks to the Manager's mid market focus and ability to createstrong returns across all market cycles. It is this strength that allows us toremain confident about the outlook for the Trust in 2008. The asset classretains its attractive long-term prospects for growth." For further details: HgCapitalIan Armitage +44 (0)20 7089 7888 MaitlandPeter Ogden +44 (0)20 7379 5151 About HgCapital HgCapital is a sector focused private equity investor in the Europeanmid-market. We focus on investments with an enterprise value in the range of£50-£500 million. Our business model combines sector specialisation withdedicated, pro-active support to our portfolio companies as well as thecorresponding management expertise across all phases of the investment process.HgCapital manages more than €2.3 billion for some of the world's leadinginstitutional and private investors. Our goal is to achieve outstanding resultsfor our investors, management team and intermediaries. For further details, see www.hgcapital.com HgCapital Trust plc Private equity investment trust of the yearInvestment Week Awards 2005, 2006 & 2007 Annual report and accounts31 December 2007 Contents Investment objectiveFinancial highlightsChairman's statementTen year track recordInvesting in private equityManager's strategyManager's reviewInvestmentsRealisationsReview of principal investmentsRenewable energyInvestment portfolio Income statementBalance sheetCash flow statementReconciliation of movements in shareholders' fundsNotes to the financial statements Top ten investmentsAnalysis of registered shareholders Board of DirectorsDirectors' report and business review (including investment policy)Directors' remuneration reportCorporate governance and Directors' responsibilitiesReport of the independent auditorShareholder informationGlossaryNotice of Annual General MeetingManagement and administration Investment objective 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 Company provides investors with exposure to a diversified portfolio ofprivate equity investments primarily in the UK and Continental Europe. Financial highlights +30% Strong growth in net assets (including dividend) +8% Share price and dividend (total return) versus the FTSE All-Share Indextotal return of 5% +18% Ten year total return per annum versus 6% per annum from the FTSE All-ShareIndex >5x Growth in value of shares over 10 years £106m Another record year for realisations £51m Record year for new investments, which deep sector knowledge helped us toidentify 25p Dividend per share declared on 17 March 2008 The NAV per share at 31 January 2008 was 979.5p and at 29 February 2008 it was1002.1p. Chairman's statement The Board believes the Company is well placed to continue growing while takingadvantage of improved market conditions for the acquisition of good businessesat reasonable prices Performance I am pleased to report that over the year to 31 December 2007 the Company againcreated value for shareholders through strong growth in net asset value. Thetotal return (NAV plus dividend) was 30.0%, which compares well against thetotal return of 5.3% of the FTSE All-Share Index and a decrease of 10.5% in theFTSE Small-Cap Index. The Company's net asset value at year-end was 948.2 penceper share. Two successful realisations that completed shortly after theyear-end, The Sanctuary and Clarion Events, have added 47 pence per share. TheNAV per share at the end of February was 1,002.1 pence. 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 17.9% p.a.,some 11.7% p.a. above the total return on the FTSE All-Share Index. The stronglong-term performance delivered by HgCapital as Manager was recognised when theCompany was chosen, for the third consecutive year, as Private Equity InvestmentTrust of the Year in the Investment Week awards. We congratulate the Manager andits staff for their hard and dedicated work in achieving this consistently highlevel of performance. During the year, the Company received £106.4 million from the realisation ofinvestments (2006: £62.3 million) and invested £50.8 million (2006: £45.3million) in new and follow-on investments. Both are new records. The Company's share price at the end of the year was 775.0 pence, an increase of6% over the year. Total return (share price growth plus dividend) was 8%, whichalso represented a substantial out-performance of the relevant FTSE indicesdespite the trend of widening discounts against NAV that was observed across thewhole sector of private equity investment trusts and investment trusts ingeneral. At year-end the market capitalisation of the Company had grown to £195million. Revenue return was 29.6 pence per share, compared with 17.9 pence in theprevious year. The Company's revenue varies from year to year in accordance withthe structure of the underlying investments and the Company's holding of liquidfunds available for reinvestment. Each year the Board recommends a dividendbased on the revenue return that year, to maintain its status as an investmenttrust; this year the Board recommends a final dividend of 25.0 pence per share(2006: 14.0 pence). Performance record Year ended 31 December Net assets Net aseet Revenue Earnings Dividends attributable value per Ordinary available per per to ordinary ordinary share Gross for ordinary ordinary ordinary shareholders share price revenue shareholders share share £'000 p p £'000 £'000 p p 1998 66,851 257.8 208.0 2,495 1,359 5.2 4.951999 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 238,817 948.2 775.0 12,129 7,446 29.6 14.00* * Final dividend for the year ended 31 December 2006, declared on 23 March 2007, paid on 1 May 2007.** Change in accounting standards relating to recognition of dividends Realisations Our Manager made six major realisations during the year: Doc Morris, HirschmannElectronics, IRIS and CS Group in the first half and Schenck and Hofmann Menu(cash received in early January 2008) in the second half. The process of sellingThe Sanctuary and Clarion Events began before year-end and these sales werecompleted in January and February respectively. All of these realisations havebeen achieved for proceeds above the values at which they were held in theCompany's balance sheet. Brief descriptions of these investments can be found inthe Manager's review. As I noted in the Interim statement, in current market conditions, valuecreation will rely all the more on organic growth and margin enhancement, ratherthan on arbitrage between entry and exit multiples. The Board is reassured thatHgCapital's investment style, which has always been to take a controllingposition and then work actively with management to define and deliver strategiesthat add value to the underlying business, is well suited to more uncertaintimes. Investments The first half of the year, during most of which equity markets were at peaklevels, did not provide good conditions for acquiring sound businesses atreasonable prices. Some owners of businesses are only adjusting theirexpectations slowly to changed market conditions; however, HgCapital hascompleted a number of suitable acquisitions in the second half, especially inContinental Europe, leading to an increased rate of investment. £23.8 millionhas been invested by the Company in three businesses in Continental Europealongside the Manager's Hg5 fund. As I have reported before, the Manager hascontinued to seek buyout and development capital opportunities that fall outsidethe investment parameters of Hg5 but which offer the Company attractive returnsthrough co-investment with other clients of HgCapital. £12.4m has been investedin two UK businesses that offer potential for successful roll-out, alongsideother investors including (on the same terms as the Company) some members of theManager's staff. Further information on all new investments can be found in theManager's report and on the Company's web-site at www.hgcapitaltrust.com. The Company's portfolio is well diversified, both geographically and by sector.The portfolio contains a wide range of businesses with potential for organicgrowth and value creation over coming years: following recent realisations, 74%by value of the portfolio (excluding liquid funds) is in investments acquired inthe last three years and 48% is still valued by the Board at cost. With £79.8 million in liquid funds at year-end available for reinvestment and a£25 million borrowing facility, the Company is well positioned to take upopportunities to invest on attractive terms. Board and AGM In last year's report the Board stated that as part of its long-term successionplanning it intended to identify an additional Director. After a formal processin which the Board employed a specialist recruitment agency we invited RichardBrooman to join the Board. He is a chartered accountant with long experience asa finance director and on the board of another investment trust. Mr Brooman hasbeen appointed chairman of the Company's Audit and Valuation Committee witheffect from 1 July 2008, in succession to Tim Amies who has made a hugecontribution to the Company's progress through his leadership of the Committee.Mr Brooman's election as a Director of the Company will be proposed at thisyear's AGM. The Board will also ask shareholders to renew the power to purchase shares inthe market for cancellation, which the Board may use to return capital toshareholders if conditions for new investment are unfavourable and the Companyappears to have surplus capital. Resolutions will also be proposed to amend theArticles to take account of those provisions of the Companies Act 2006 that arecoming into effect, and to increase the total available for payment ofdirectors' fees, to take account of increases in fees and the enlargement of theBoard. Walker Report It has been the Board's consistent policy to publish reports that aretransparent and comprehensive in describing the portfolio, the sources of valuecreation and risk. In November 2007 Sir David Walker published his report"Guidelines for Disclosure and Transparency in Private Equity", which sets outguidelines regarding the disclosure of information by private equity companiesand their UK portfolio companies.The Board welcomes this report. The Manager'sreview details the relationship between the Company and the Manager, the firm'shistory and investment approach, strategy and tactics. The Investment pagesdescribe the history of the Manager's involvement with its portfolio companiesand gives details of their financial performance and any key factors that impactthis. Prospects The market for debt in very large leveraged buyouts is undoubtedly verydifficult; however, for the mid-market buyouts in which HgCapital specialises,large amounts of debt requiring wide syndication or refinancing in publicmarkets are typically not necessary. With strong liquidity, HgCapital has theflexibility to underwrite acquisitions with more equity than before andrefinance with debt at a later date. Future deals may include moremezzanine-level funding which, until recently, had been largely squeezed out byeasy bank lending. While these factors may serve to restrain prices paid forbusinesses, they do not appear to be preventing deals from being completed inthe mid-market sector. The private equity business finds opportunity in change and thrives on adaptingto it. While deal structures may evolve, the fundamental skills involved inidentifying businesses with potential, redefining their strategy, and drivingimprovement remain the same. The Board retains confidence in the Manager'sability to identify a regular flow of opportunities and to add value for thebenefit of shareholders. With a young portfolio of investments as a base for value creation in comingyears and strong liquidity, the Board believes the Company is well placed tocontinue growing while taking advantage of improved market conditions for theacquisition of good businesses at reasonable prices. The Board is confidentthat, for many investors, an allocation to a well-managed private equityportfolio remains appropriate in current market conditions, especially with theliquidity and transparency offered by an investment trust structure. HgCapitalTrust has delivered consistent value creation to shareholders for more than adecade and the Board believes it will continue to provide investors with anefficient vehicle for gaining exposure to a diversified portfolio in an assetclass that offers attractive long-term prospects for growth. Roger MountfordChairman17 March 2008 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 30.0 27.2 25.3 14.7 16.1Share price 7.9 21.7 31.9 14.8 17.9FTSE All-ShareIndex 5.3 14.5 15.4 4.6 6.2FTSE Small CapIndex (10.5) 9.7 16.0 3.4 6.6 Based on the Company's share price at 31 December 2007 and allowing fordividends to be reinvested, an investment of £1,000 ten years ago would now beworth £5,183 An equivalent FTSE All-Share Index return would be worth £1,824 * Total return assumes all dividends have been reinvested. Investment activity 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Invested (£m) 8 40 25 20 20 15 22 35 45 50 Realised (includingincome) (£m) 19 30 18 26 27 31 47 52 62 106 HgCapital Trust plc gives the investor access to a private equity portfolio runby an experienced and well-resourced Manager who makes investments in fastgrowing companies over a number of geographies and sectors. We believe our approach will continue to reward investors with superiorperformance, both relative to the public markets and its peers over the longterm. Investing in private equity Strong performance in absolute terms and relative to other asset classes Private equity Private equity describes securities issued by private and unlisted companies.The securities are loans, equity and equity-related, enjoying the full rewardsand risks of ownership. Investments can be in early-stage businesses, or provideexpansion capital for profitable growing businesses, and can be used to financemanagement or leveraged buyouts of established businesses. The objective is toachieve higher returns than public equity over a rolling period of five to tenyears. Investments are typically held for three to seven years and are realisedthrough an initial public offering, a trade sale, or a sale to another financialinstitution. Interim proceeds are sometimes possible through recapitalisations. Investment profile Private equity investments are less liquid than public equities. To compensatefor this feature they offer more control and more attractive returns. Over theten years from 1996 to 2006 UK private equity funds outperformed the FTSEAll-Share Index by 10.8% per annum and outperformed every asset class over thisperiod*. The risk profile of an individual private equity investment depends onmany factors; the principal ones are the nature of the business, the maturityand stage of the business, its size and the financial structure of the balancesheet. A diversified portfolio helps to mitigate some of these risks; more importantmitigants are the quality of company selections by the private equity managerand the quality of the management teams running the company. Advantages of private equity Compared with investment in the public markets, a private equity investor hassignificant advantages: • More investment opportunities: 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 owners and 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 • Management talent: the ability to attract high calibre management and the alignment of management's interests to the success of the investment through equity participation Private Equity Investment Trusts (PEITs) A Private Equity Investment Trust (PEIT) offers the opportunity to participatein a diversified portfolio of mainly unquoted companies that are generallyvalued at a discount to their quoted peers. By buying shares in a PEIT, whichare freely traded, the investor benefits from liquidity while participating inthe potentially superior returns of a private equity portfolio. The Company's objective is to provide shareholders with long-term capitalappreciation rather than dividend growth. To maintain its status as aninvestment trust, it distributes a proportion of its income by way of a dividendeach year. The earnings of a PEIT in any year are affected by various factors,including the structure of the underlying investments. Accordingly the revenueearnings per share and the dividend of a PEIT will tend to fluctuate from yearto year. A PEIT should not be confused with a Venture Capital Trust (VCT) whichoffers tax advantages to certain investors but is highly constrained in thecompanies that qualify for investment. Advantages of investment via an investment trust PEITs offer investors liquidity in their shares, which can be traded in variablebargain sizes and at any time. This is of significant benefit to investors whodo not wish to commit to the ten year lock-in and minimum investment requiredwhen investing in private equity via limited partnerships. Share price The major driver of a PEIT's share price is net asset value (NAV), the growth ofwhich is driven by realisations and by revaluation of the unrealised portfolio,based on the profitability of each underlying investment and market ratings. Theshare price of a PEIT usually tracks NAV but it may trade at a premium or adiscount, depending on the market's view of future realisations and newinvestments, and the investment strategy of the manager. Although not all PEITswill provide high returns, a strong manager with a carefully thought-outinvestment strategy that offers a diversified portfolio of companies across anumber of sectors and geographies can increase the likelihood of success. Publication of net asset value Unquoted investments are revalued twice each year, as at December and June, andthe NAV is adjusted to reflect these valuations in the following March andAugust respectively. The NAV per share of the Company is calculated monthly withrespect to cash, cash equivalents and listed investments in the portfolio, andto reflect any realisations since the previous valuation. The NAV is released tothe public through the London Stock Exchange's regulatory news service on thefourth day of each month. This NAV is then used as the basis for calculation ofthe discount or premium published in newspapers for the following month. * Source: BVCA Performance Measurement Survey 2006. Manager's strategy To produce a diversified portfolio of European mid-market companies by combiningdeep sector knowledge with strong operational skills OUR STRATEGY Mid-market HgCapital concentrates on mid-market buyouts with enterprise values of between£50 million and £500 million. This market comprises a high volume of companieswith proven, reliable track records and defensible market positions. Companiesin this range are small enough to provide opportunities to unlock incrementalvalue through organisational changes and operational improvements, yet largeenough to attract quality management and to offer multiple exit options. Pan-regional We focus on investments in Europe, with the majority of activity taking place inthe UK, Benelux, Germany and the Nordic countries. Our network of local offices,combined with a common culture and consistent processes, underpins our abilityto produce strong performance. Broad coverage HgCapital's dedicated sector teams continue to provide investors with exposureto the substantial majority of private equity activity within its target sizerange and across the relevant geographies. Clear investment criteria When evaluating an investment opportunity, HgCapital applies a rigorous andcommercial investment approach. Our process governs all investment decisions,with the goal of ensuring that only the most attractive investments arecompleted, irrespective of an opportunity's sector or geography. In all cases we look to earn a return on the Company's capital that rewards theinvestor for the measured risks we take. We like situations where change istaking place and where our specialist knowledge and skills will give us an edgeover others. Over the past two years we have adopted a two-pronged approach to avoidoverpaying. We have been prepared to pay competitive prices for businesses thathave strong management teams, leading market positions, high barriers to entryand that serve growth markets. Alternatively, we have bought companies at lowervaluations that serve growth markets, have clear performance improvementpotential and have a requirement for management change. OUR TACTICS Sector specialisation Our well-resourced sector teams combine the domain knowledge and expertise of atrade buyer with the flexibility of a financial investor. Our sector teams(Consumer and Leisure, Healthcare, Industrials, Services and TMT) share asimilar top-down approach to screening their respective industries. Byleveraging on our sector knowledge, we can concentrate our resources onconverting prime opportunities and avoid spending time on transactions of lessinterest or value. In addition, over the last four years we have built a specialist team toidentify businesses that will operate, construct and develop renewable energyprojects in Western Europe. Active portfolio management We undertake intensive, continuous, informed interaction with our portfoliocompanies using dedicated portfolio management executives to develop, executeand monitor value-enhancement strategies for each of our investments. HgCapitalwill typically invest as the lead controlling owner of its portfolio companiesas part of its hands-on approach to management. We appoint HgCapital executivesto our companies' boards to participate in business planning and to work withmanagement when needed, and have recently strengthened this team with a numberof senior appointments. To monitor and analyse our portfolio companiesthroughout the investment's life cycle, we operate a Portfolio Review Committeethat meets on a monthly basis to discuss our investments' performance.Particular attention is given to those that are recent, underperforming orscheduled for exit. Deep resources We invest substantially in all areas of our business to ensure that high qualityresources can be applied to each aspect of an investment opportunity. Our teamof over 70 people is well-positioned to produce high absolute returns over thelong term from a well-diversified portfolio of investments which, we believe,will continue to be superior to the returns generated by comparable publicequity markets. Manager's review 2007 was another record year for realisations and investments, with the currentportfolio continuing to perform well HgCapital Trust ('the Company') invests alongside other clients of HgCapital.Typically, the Company's holding forms part of HgCapital's much largercontrolling interest in buyout investments of companies with an enterprise value(EV) of between £50 million and £500 million. The Manager's review generallyrefers to each transaction in its entirety, apart from the tables detailing theCompany's participation or where it specifically says otherwise. The Company's net asset value increased from £187.1 million to £238.8 millionduring the year. This arose largely from unrealised movements and realisedproceeds in excess of the book value as at 31 December 2006 of £12.5 million and£43.2 million respectively. This increase is the result of strong earningsgrowth and cash generation by our portfolio companies, as well as a good flow ofrealisations. During the year, the Company invested a total of £50.8 million (2006: £45.3million), participating in eight new investments. These new investments weremade in Fabory (Netherlands, €345 million EV), Atlas (UK, £25 million EV), MondoMinerals (Finland, €230 million EV), SLV (Germany, €320 million EV), CS Group(UK, £100 million EV), Americana (UK, £186 million EV), Cornish Bakehouse (UK,£9 million EV) and Wastebidco (UK). During the year, the Company invested a further €3.5 million out of its €21million commitment to the €300 million Hg Renewable Power Partners fund. Thefund's focus is on long-term investments in renewable power projects usingproven technologies, including wind, small hydro, landfill gas andwaste-to-energy in Western Europe. The Company realised record proceeds during the year (including gross incomereceived) amounting to £106.3 million (2006: £62.3 million). These proceedsarose principally from the sale of Schenck, Hirschmann and the combined sale ofIRIS Software and CS Group. Since the period end, we have made one new investment in Casa Reha (Germany,€327 million EV). We have also completed the sales of Hofmann Menu, TheSanctuary Spa and Clarion Events, with clients receiving proceeds of £58.4million, £50.0 million and £73.9 million respectively. In addition we have soldour remaining shares in Xyratex and PRA for £23.7 million and £10 millionrespectively. In aggregate these realisations have returned proceeds of £216million to clients, of which the Company received £50.3 million. Attribution analysis of current year movements in net asset value £'000 Opening net asset value as at 1 January 2007 187,135Gross revenue 12,129Expenditure (4,028)Taxation (2,418)Dividends paid (3,526)Realised proceeds in excess of 31 December 2006 book value(excludes gross revenue) 43,170Net unrealised appreciation of investments 12,544Carried interest (6,189)Closing net asset value as at 31 December 2007 238,817 Realised and unrealised movements in net asset value during 2007 Net unrealised Realised proceeds appreciation of in excess of investments £'m 31 December 2006 book value £m (excludes gross revenue) Schenck 0.3 20.5Blue Minerva 1.4 10.4Hofmann 6.1 -Guildford 0.9 4.9Sanctuary 5.5 -Addison 5.2 -Hirschmann 0.7 4.1Forex gains 3.5 -Doc Morris 0.2 2.8Clarion Events 1.9 -Other & Gilts - 0.5Hoseasons (1.0) -WET (1.2) -Clinphone (1.5) -Axiom (1.5) -Elite (3.4) -FTSA (4.6) -Subtotal 12.5 43.2 Manager's review continued A diverse portfolio that is performing well, with strong long-term growthpotential At the end of 2007, the Company held a portfolio of 45 investments (2006: 42),of which the 20 principal investments represent over 90% of the portfolio'svalue. This portfolio of small- and mid-cap stocks combines strong growth withsector and geographic diversification. With the high number of realisations and new investments made during 2006 and2007, the portfolio at year-end was relatively young. Around 54% of theportfolio by value had been acquired within the previous two years (2006: 55%).It is the Company's policy not to revalue any investment upwards until receiptof audited accounts for a full trading year following acquisition; as a result,some 48% of the portfolio by value at year-end was still held at cost (2006:49%). The Company's ten largest investments, which represent over 60% of the Company'sportfolio, are performing well, realising solid year-on-year growth in earnings.A majority of these by value continue to be held at cost. At the same time, aminority of investments performed below expectation in the year, most notablyFTSA, Elite and Axiom. Over the last three years, the focus of the portfolio has shifted towardsContinental Europe, with over half the Company's investments by value locatedoutside the UK. We believe this to be advantageous, as private equity in thesemarkets is less mature than in the UK and they therefore offer significantpotential for growth over the next decade. We look forward to exploiting new opportunities that will arise from a downwardadjustment in the capital markets and the economy. The Company benefits from strong liquidity, holding £79.8 million in liquidfunds at year-end awaiting reinvestment. It also has a £25 million borrowing facility. Asset class+Unquoted 62%Cash & other assets 35%Quoted 3% Geographic spread by value++UK 45%Germany 24%Nordic region 14%Benelux 13%Europe 2%North America 2% Valuation basis++Cost 48%Earnings 28%Third Party 10%Written down 7%Quoted 4%Net assets 3% Deal type by value++Buyout 86%Expansion 10%Renewable energy 2%Fund 1%Venture 1% Sector by value++TMT 29%Industrials 22%Consumer & Leisure 22%Services 17%Healthcare 7%Renewable energy 2%Fund 1% Vintage by value++ 2007 28%2006 26%2005 20%2004 7%2003 8%2002 1%Pre 2002 10%* *includes 7.5% relating to The Sanctuary Spa, which has been sold post period end +Percentages are based on net assets++Percentages are based on fixed assets and are shown by value Investments During 2007 HgCapital invested a total of £322 million on behalf of its clients,including £50.8 million on behalf of the Company Company Sector Activity Deal Type Cost £'000 BMFCO (t/a Fabory) Services Distributor of industrial Buyout 10,871 fastenersAtlas Energy Services E-learning products for the oil Buyout 8,153 & gas industryMondo Minerals Industrials Talc mining Buyout 7,004 SLV Electronik Industrials Lighting products Buyout 5,962Guildford (t/a CS Group) TMT Software services to the legal & Buyout 5,046 not-for-profit sectorsAmericana Consumer & Wholesaler and retailer of Buyout 4,611 Leisure fashion apparelCornish Bakehouse Consumer & Pasty retailer Expansion 4,200 LeisureWastebidco Industrials Investment vehicle for potential Buyout 309 acquisiton of Biffa plcNew investments 46,156Sporting Index Consumer & Spread betting Buyout 1,758 LeisureFTSA Industrials Crash test dummies Buyout 578Axiom TMT Telecommunications software Expansion 85Hg RPP LP Renewable Renewable energy fund Fund 2,180 energyFurther investments 4,601Total investment by the Company 50,757 Figures below refer to the total size of each acquisition, including debt raisedfrom third parties, made by HgCapital on behalf of its clients, including theCompany. New investments Fabory In October 2007, HgCapital completed the €345 million buyout of Fabory, theleading distributor of industrial fasteners in the Benelux region. Its FaboryCentres (FCs) have proved a highly successful retail format and the company ispoised for an aggressive roll-out of further FCs in the high-growth markets ofCentral and Eastern Europe. Atlas In November 2007, HgCapital completed the £25 million buyout of Atlas. Foundedin 1997, Atlas Interactive is a leading provider of interactive e-learningproducts, targeted at regulatory-driven health, safety and environmentaltraining for the oil and gas sector. Over the past 10 years the business hasseen rapid organic growth and its customers include leading companies such asBP, Shell and QatarGas. Mondo Minerals In November 2007, HgCapital completed the €230 million buyout of Mondo Minerals.Mondo is one of the world's leading companies in talc mining and processing andhas secure reserves of raw materials for the next 40 years. Mondo's customersare active in a variety of European industries including paper, paint, plastics,and ceramics. The group supplies clients in more than 50 countries. SLV In August 2007, HgCapital completed the €320 million buyout of SLV Group. SLVGroup is one of the fastest-growing manufacturers of innovative lighting systemsin Europe. It combines German design excellence, low-cost production in Asia andfirst class logistics. CS Group In April 2007, HgCapital completed the £100 million P2P buyout of CS Group, theUK's leading provider of back-office application software to the legal andnot-for-profit sectors. CS Group was sold in a combined sale with IRIS in July2007, delivering a return of 2.2x original cost, including the unrealised value.Further details are set out in Realisations. Americana In March 2007, HgCapital completed the £186 million buyout of Americana, thebranded apparel business, which owns the youth brands Bench and Hooch. Revenuesare predominantly through UK wholesale channels although the business isincreasing its wholesale revenues in Continental Europe and building a UK retailpresence. Cornish Bakehouse In July 2007, HgCapital completed the £9 million buyout of Cornish Bakehouse,the St Ives-based pasty retailer. It sells a full take-away range, predominantlyfor lunchtime trade, at a higher quality level than direct competitors. We arebacking a proven management team that previously grew and sold a very successfulspecialist retail chain. Wastebidco Wastebidco is a specially formed acquisition vehicle set up to acquire shares inBiffa plc, an integrated UK waste management company, and which now owns 2.4% ofBiffa's share capital. As announced by the target on 24 January 2008, HgCapitalwithdrew from the consortium formed with Montagu. Assuming that a transactionoccurs with the new Montagu consortium then it is intended that Wastebidco'sshares in Biffa plc will be tendered at the consortium's offer price. Realisations During 2007 HgCapital realised total proceeds of £688 million on behalf of itsclients, including £106.4 million for the Company Company Sector Exit Route Cost Proceeds + 2007 return + £'000 £'000 £'000 Schenck Industrials Financial sale 11,698 33,952 22,254Blue Minerva (t/a IRIS) TMT Financial sale 2,939 17,660 14,721Hirschmann Industrials Financial sale 2,669 14,874 12,205Guildford (t/a CS Group) TMT Financial sale 5,031 9,967 4,936Doc Morris Healthcare Trade sale 1,956 4,739 2,783Worldmark Industrials Financial sale 2,389 3,569 1,180Bertram Consumer & Trade sale 2,848 2,009 (839) LeisureEagle Rock TMT Sale to 3,856 1,618 (2,238) managementSouth Wharf plc* Industrials Quoted share 47 1,033 986 saleOther 96 366 270Full realisations 33,529 89,787 56,258 Xtx t/a Xyratex** TMT Quoted share 1,895 4,957 3,062 saleAddison TMT Recapitalisation 4,203 5,441 1,238Rolfe & Nolan TMT Recapitalisation 225 2,093 1,868Voyage (formerly Paragon) Healthcare Loan redemption 1,991 1,991 -SHL Services Loan redemption 1,046 1,127 81Other 4,501 994 (3,507)Partial realisations 13,861 16,603 2,742Total realisations 47,390 106,390 59,000by the Company + Includes gross revenue received during the year* Listed on the Dublin and London stock exchanges** Traded on NASDAQ Realisation figures below refer to the total value of each transaction,including, where appropriate, repayment of third party debt. Proceeds to clientsincluding the Company are stated net of any such repayment. Full realisations Schenck In December 2005, HgCapital completed the €205 million buyout of Schenck ProcessSA, the global market leader in high-tech applications and solutions inindustrial weighing, feeding and automation. In June 2006, Schenck completed theacquisition of Stock Equipment Company (USA) Inc. In November 2007 the businesswas sold, returning proceeds to clients of £174 million, equal to 2.9x originalcost. IRIS Software The £102 million secondary management buyout of IRIS Software Ltd was completedin July 2004. In June 2007, a deal was signed to sell IRIS to Hellman & Friedmanin a combined sale with CS Group. On completion this delivered £105.1 million toclients. Of this amount, £92.5 million has been received as cash and £12.6million as equity in the newly combined IRIS-CSG, delivering a 3.6x return,including the unrealised value. Hirschmann In March 2004, HgCapital completed the €115 million buyout of HirschmannElectronics. Hirschmann is the market-leading global supplier of electronicsequipment, components and related accessories. It has manufacturing plants inGermany and Hungary as well as sales and service operations in Europe, the USA,the Far East and South America. The business was sold in March 2007, withproceeds of €113 million received for clients. Further proceeds of €25 millionwere received in April 2007, with the potential of a further €15 million overthe next 2-3 years, subject to any warranty claims. This investment has returned5.8x original cost, including the unrealised value of potential future payments. CS Group In April 2007 HgCapital completed the £100 million P2P buyout of CS Group, theUK's leading provider of back-office application software to the legal andnot-for-profit sectors. CS Group was sold in a combined sale with IRIS in July2007, delivering £87 million to clients. As with IRIS, of this amount, £76.6million has been received in cash and £7.4 million as equity in the newlycombined IRIS-CSG. This has delivered a 2.2x return, including the unrealisedvalue. DocMorris Founded in 2000 as a mail order business, DocMorris has grown to become thelargest pharmacy serving the German market. It offers prescription drugs atattractive prices by sourcing direct from the pharmaceutical manufacturers. InApril 2007 HgCapital, together with 3i and Neuhaus Partners, sold their stakesto Celsio AG, Europe's largest pharmaceutical distributor. This investmentreturned 2.5x original cost, including the unrealised value of future escrowpayments. Worldmark Worldmark is a supplier of labels to the electronics industry. We bought thebusiness in 2000, then its market deteriorated rapidly. We changed its focus andboard leadership, and the business recovered. The business was sold in January 2007. Clients received proceeds amounting to£29.2 million, representing a 1.5x multiple of cost. Bertram Bertram is a book wholesaler and distributor of books, games and audio-visualtitles to public libraries. Following the acqusition of Bertram in 1999, thebusiness made mistakes in the execution of its strategy. We changed themanagement team, trading improved and eventually in February 2007, the businesswas sold to Woolworths plc. Proceeds of £13.1 million were received for clients,representing an overall return of 0.7x original cost. Eagle Rock Eagle Rock creates and acquires audio and audio-visual entertainment productionswith a strong focus on rock music by mature and established internationalartists. It exploits these intellectual property rights through DVD, TVlicensing and CD. All manufacturing and distribution are outsourced, as is mostof the production. In April 2007, the company was sold to management and aninvestment consortium. Proceeds of £7.5 million were received for clients,representing a return of 0.4x original cost. South Wharf Following the demerger of the glass business, South Wharf became a propertycompany, owning 26 acres of long-leasehold land and a small glass tradingactivity. Title to the land was improved significantly so that it could be sold.We sold our quoted shares for proceeds of £49.8 million. Over its life, thisinvestment has returned a multiple of 7.3x original cost. Partial realisations Xyratex Xyratex has been a world leader in the hard disk and network storage technologymarket for over 20 years. It completed its IPO on NASDAQ on 24 June 2004 at aprice of $14 per share, realising £10.2 million for HgCapital clients at thetime. HgCapital has since selectively sold stock with a total value ofapproximately £80 million from the time when our lock-up period expired in early2005 until July 2007. Since the period end, the residual stake was sold for £23.7 million, resultingin a total return of 2.25x original cost. Addison Addison is a leading German applications software company that providesbusiness-critical solutions to two related markets - tax accountancy and smallto medium enterprises (SMEs). It develops, licenses and manages standard andsector-specific software for bookkeeping, accounts production, tax, costaccounting, payroll administration and financial planning. Addison is the clearnumber two player in the German market and the fastest-growing. The business wasrecapitalised in October 2007, returning £28 million to clients. Rolfe & Nolan Rolfe & Nolan is the number two global supplier of back-office processingsoftware to the exchange traded derivatives industry. It supports over 250 bank,brokerage and exchange clients in 20 countries. Customers include Deutsche Bank,Goldman Sachs, HSBC, Lehman Brothers and MAN Financial. The business has been recapitalised a number of times, most recently in June2007, which returned £12 million to clients. Over its lifetime this investmenthas returned 2.2x original cost, including the unrealised value. Loan redemptions During the period, partial redemptions of loan stock from Voyage and SHLreturned proceeds of £13 million and £9 million respectively. Other realisations Other realisations received during the period include deferred considerationsfrom earn-outs on PBR and Mednova and cash distributions received from residualoverseas fund investments. The restructuring of Pulse Staffing Limited (formerlyMatch) resulted in the original loan stock being cancelled and the remaininginvestment is now held in an equity instrument. Review of principal investments 1 VISMA Sector: TMTLocation: Nordic regionYear of investment: 2006www.visma.com In May 2006, HgCapital completed the £382 million buyout of Visma, the numberone provider of business software in the Nordic region. HgCapital's clients holda 57% stake in this business. Headquartered in Oslo, with significant revenues throughout the Nordic region,the company provides its customer base of over 200,000 enterprises withaccounting, resource planning and payroll software, outsourced book-keeping andpayroll services, in addition to debt collection and procurement. 2 The Sanctuary Spa Sector: Consumer and LeisureLocation: UKYear of investment: 1995www.thesanctuary.co.uk In July 2005, our original investment in the Sanctuary Spa Group was acquired bythe newly incorporated The Sanctuary Spa Holdings Limited (SSHL).Simultaneously, SSHL acquired the licence to sell beauty products branded TheSanctuary Spa, the rights to which had previously been held by a third partylicensee. HgCapital's clients took a 78% stake in the business. The Sanctuary Spa operates the women's day spa 'The Sanctuary', based in CoventGarden, and also owns a range of beauty products distributed through the spa andBoots the Chemist. In 2006, we received £9 million from loan stock repaid. Post year-end, The Sanctuary Spa has been sold to PZ Cussons for £75 million,returning £50 million to clients. 3 Fabory Sector: ServicesLocation: BeneluxYear of investment: 2007www.fabory.comIn October 2007, HgCapital acquired Fabory from AAC Capital Partners for aconsideration of €345 million. HgCapital's clients hold a 79% stake in thisbusiness. Fabory is a full-line wholesale distributor of industrial fasteners with amarket-leading position in the Benelux markets. Key features of Fabory'sbusiness model are its well-invested infrastructure and very high service andavailability levels, enabling it to charge premium prices to a relativelyprice-insensitive customer base. Fabory delivers fasteners direct to customersor through its B2B retail concept ('Fabory Centres'). The company plans to rollout the Fabory Centre concept in the high growth economies of Central & EasternEurope. 4 Hofmann Sector: IndustrialsLocation: GermanyYear of investment: 2005www.hofmann-menue.de In November 2005, HgCapital successfully completed the €138 million buyout ofHofmann Menu for a 78% equity stake in the business. Hofmann is a market-leading provider of frozen food products as well as relatedon-site catering for small business canteens and social organisations such ascare homes, hospitals and schools in Germany. Hofmann differentiates itself fromits competition by focusing on quality and a wide choice of healthy, tastymenus. The company's centralised production also allows for significant costadvantages over traditional catering firms. Since the year-end the sale of the business to Gilde Buy Out Partners hascompleted, returning £58.4 million to clients. Cost and valuation of the Company's holdings Company Deal type Residual Valuation Valuation Portfolio cost £'000 basis value £'000 % VISMA Holdings * Buyout 13,268 13,812 Cost 8.9The Sanctuary Spa Holdings Ltd Expansion 631 11,628 Earnings 7.5BMFCO UA (t/a Fabory) * Buyout 10,871 11,428 Cost 7.4Hofmann M.M. SA Buyout 4,747 10,774 Third Party 7.0 * The difference between cost and valuation is due to foreign exchange rate movements 5 Voyage Group Sector: HealthcareLocation: UKYear of investment: 2006www.milburycare.com In April 2006, HgCapital completed the £322 million buyout of Voyage Group(formally known as Paragon Healthcare). HgCapital's clients have a 52% stake inthis business. Voyage owns and operates small community-based homes for adults with learningdisabilities and associated physical disabilities, autistic spectrum disorders,complex needs and acquired brain injury. The company uses a variety oftechniques as therapy, including working with animals. The company currently operates 1,750 places in 242 homes across England andScotland. 6 Atlas Sector: ServicesLocation: UKYear of investment: 2007www.atlasinteractive.co.uk In November 2007, HgCapital completed the £25 million acquisition of PetrolearnLimited, also known as Atlas Interactive. HgCapital's clients have a 57% stakein the business. Atlas Interactive is a leading provider of interactive e-learning products,targeted at regulatory-driven health, safety and environmental training for theoil and gas sector. Atlas Interactive has a global market share of around1-1.25% (25% to 38% UK market share), making it a relatively large player inthis fragmented space. It benefits from deep-rooted customer relationships withmajor companies such as BP, Shell and QatarGas, and maintains a high level ofrepeat business. In addition, it has amassed over 1,000 hours of standardisedintellectual property-protected e-learning content that it resells to itscustomer base. 7 Clarion Events Sector: TMTLocation: UKYear of investment: 2004www.clarionevents.co.uk The £50 million buyout of Clarion Events, the largest independent exhibition andevents business in the UK, completed in October 2004, with HgCapital's clientstaking a 65% equity stake in the business. The company has a portfolio of fifty business and consumer shows, including the'Top Drawer' giftware trade shows, 'Fine Art & Antiques', 'Baby', 'Caravan &Outdoor' and 'House & Garden'. Clarion's subsidiary ATE, acquired in June 2005,runs the leading international show for the amusements and gaming sector, andrelated conference and publishing services. Since the year-end the business hasbeen sold, returning £73.9 million to clients. 8 Addison Sector: TMTLocation: GermanyYear of investment: 2005www.addison.de The €78 million buyout of Addison was completed in June 2005. HgCapital'sclients have a 93% equity stake in the business. Addison is a leading German applications software company that providesbusiness-critical solutions for tax accountants and SMEs. It develops, licencesand manages standard and sector-specific software for bookkeeping, accountsproduction, tax, cost accounting, payroll administration and corporate planning. In December 2005, HgCapital made a further investment in Addison of €14 millionto fund the acquisition of its competitor PBSG, and in November 2007 arecapitalisation of the business was completed to enable the company to pursueits growth strategy, returning £28 million to clients. Cost and valuation of the Company's holdings Company Deal type Residual Valuation Valuation Portfolio cost £'000 basis value £'000 %Voyage Group Ltd (formerlyParagon) Buyout 8,755 8,755 Cost 5.7Atlas Energy Group Ltd Buyout 8,153 8,153 Cost 5.3Clarion Events Holdings Ltd Buyout 4,965 7,594 Earnings 4.9Addison Luxembourg SA Buyout 2,296 7,547 Earnings 4.9 9 Mondo Minerals Sector: IndustrialsLocation: Nordic regionYear of investment: 2007www.mondominerals.com In November 2007, HgCapital completed the €230 million acquisition of MondoMinerals OY. HgCapital's clients have a 91% stake in the business. Mondo is the world number two in talc mining and processing with 2007 revenuesof €134 million. The core markets for Mondo are the paper and paint industries,where it holds a market share of 65% and 40% respectively in Europe. Mondosupplies the majority of the talc demand for paper producers in Finland, ahighly regional market. Talc is a base chemical with multiple provenapplications and Mondo has secure raw material reserves of more than 40 years. 10 Sporting Index Sector: Consumer and LeisureLocation: UKYear of investment: 2005www.sportingindex.com The £75.8 million buyout of Sporting Index was completed in November 2005.HgCapital's clients acquired a 70% equity stake in the business. Founded in 1992, Sporting Index is the recognised leader in sports spreadbetting, with a market share of approximately 70% in the UK. It offers a greatervariety of bets (approximately 23,000) and more choice than any other sportsspread betting company. It is also the only sports spread betting company tooffer continuous 24-hour betting and sports spread betting on Sky TV. It isregulated by the FSA and does not have a US presence. 11 SHL Sector: ServicesLocation: UKYear of investment: 2006www.shl.com In November 2006, HgCapital completed the £100 million buyout of SHL, taking astake of 72%. SHL is the UK market leader in objective psychometric testing and has a globalpresence. The core business consists of the development and sale of 300psychometric tests to corporate clients, covering areas such as numericalability, verbal reasoning and personality fit. SHL also provides psychologistsfor the administration and interpretation of tests. 12 SLV Sector: IndustrialsLocation: GermanyYear of investment: 2007www.slv.de In August 2007, HgCapital completed the €320 million acquisition of SLV Group.HgCapital's clients have a 67% stake in the business. SLV is a fast-growing and highly profitable German provider of innovativelighting systems. Since 2000, the company has established a unique businessmodel focused on B2B. SLV has a competitive advantage in the areas of productdevelopment and design, production, warehousing, and logistics and distribution.SLV is positioned at the lower end of the premium market, providing superiorquality at attractive prices. Today SLV generates 45% of sales abroad.Manufacturing is outsourced predominately to China, providing a considerablecost advantage. The company also benefits from long-established relationshipswith suppliers. Cost and valuation of the Company's holdings Company Deal type Residual Valuation Valuation Portfolio cost £'000 basis value £'000 % Mondo Minerals Co-op * Buyout 7,004 7,358 Cost 4.8Sporting Index Group Ltd Buyout 7,186 7,186 Cost 4.7SHL Group Holdings 1 Ltd Buyout 6,489 6,489 Cost 4.2SLV Electronic SARL * Buyout 5,962 6,438 Cost 4.2 * The difference between cost and valuation is due to foreign exchange rate movements 13 Sitel Semiconductor Sector: TMTLocation: BeneluxYear of investment: 2005www.sitelsemi.com The $74 million buyout of the digital cordless business unit of NationalSemiconductor Corporation completed in June 2005. HgCapital's clients acquiredan 81% equity stake in the business. Elite creates products and systems to support wireless voice and dataapplications for the home. These include: baseband and radio transceivers forcordless DECT (Digital Enhanced Cordless Telephony); telephones and basestations for VoIP (Voice over Internet Protocol); and cordless game pads andvoice modules. The company, which was formerly part of National SemiconductorCorporation, is based in Den Bosch and Hengelo, Netherlands, and employsapproximately seventy people. 14 W.E.T. Sector: IndustrialsLocation: GermanyYear of investment: 2003www.wet.de The €169 million public-to-private transaction to acquire W.E.T. AutomotiveSystems AG was declared unconditional in September 2003, with acceptances ofover 76.3%. HgCapital's clients acquired a 70% equity stake in the business. W.E.T. Automotive Systems is the world market leader for seat-heating systems,supplying most of the major European and North American passenger car seatmanufacturers as well as Asia from its Chinese facility. The weak US dollar and a slow North American market have both had an impact onprofitability, although within Europe and China the business is performing well.A profit-improvement programme has been implemented and the sensors business hasbeen divested. 15 Schleich Sector: Consumer and LeisureLocation: GermanyYear of investment: 2006www.schleich-s.de In December 2006, HgCapital completed the €165 million buyout of Schleichacquiring an 80% stake in the business. Schleich is the leading producer of plastic toy figurines, such as farm andwildlife animals, historical characters and The Smurfs. Its products, tradingunder the highly recognised name Schleich-S, are sold in over thirty countries,including Germany, the US, the UK and France. Growth drivers are productinnovation and internationalisation. Toy figurines provide an attractive productoffering for retailers as they are purchased on different occasions throughoutthe year in contrast to traditional toy sales patterns, where typically 50% ofsales happen in the two months before Christmas. 16 Americana Sector: Consumer and LeisureLocation: UKYear of investment: 2007www.bench.co.uk In March 2007, HgCapital completed the £186 million buyout of Americana.HgCapital's clients have a 43% stake in the business.Americana is a branded apparel business, manufacturing and marketing two brandstargeted at the youth market, Bench and Hooch. The Bench brand is aimed at bothmen and women in the 16 to 25 age group. Hooch is a fashion clothing brandtargeted at the female 13 to 17 age group. Revenues are predominantly through UKwholesale channels, though the business is increasing its wholesale revenues inContinental Europe and building a UK retail presence. A significant upgrade of Americana's management team has recently beencompleted. Further opportunities are being explored in international wholesaleexpansion beyond Continental Europe and in product range extension. Cost and valuation of the Company's holdings Company Deal type Residual Valuation Valuation Portfolio cost £'000 basis value £'000 %Elite Holding SA (t/a Sitel Semiconductor) Buyout 5,749 6,103 Earnings 4.0W.E.T. Holding Luxembourg SA Buyout 7,590 5,417 Written down 3.5Schleich Luxembourg SA * Buyout 4,634 5,059 Cost 3.3Americana International Holdings Ltd Buyout 4,611 4,611 Cost 3.0 * The difference between cost and valuation is due to foreign exchange ratemovements 17 Cornish Bakehouse Sector: Consumer and LeisureLocation: UKYear of investment: 2007www.cornishbakehouse.com In July 2007, HgCapital completed the £9 million buyout of Cornish Bakehouse(shortly to be renamed Cornish Kitchen). HgCapital's clients have a 57% stake inthe business. Cornish Bakehouse is a pasty retailer founded in 1993 by a St Ives basedentrepreneur. It sells a full take-away offer, predominately for lunchtimetrade, including pasties, sandwiches, baguettes, cakes, pizza, snacks anddrinks. All bakery products are delivered frozen and cooked on site. A rapid roll-out of outlets is planned under the direction of the high calibreand experienced management team led by Phillip Newton, former CEO of theMerchant Retail Group plc, which owns The Perfume Shop, the highest densityretail format in the UK. 18 Xyratex Sector: TMTLocation: UKTicker: XRTX:USYear of investment: 2003www.xyratex.com In September 2003, HgCapital completed the £50 million buyout of Xyratex for afully-diluted stake of 45%. Xyratex is a global provider of enterprise-class data storage subsystems andstorage process technology. Storage technology provides the means by whichbusiness and personal IT data can be captured, processed, stored and retrievedin a digital form. Since our investment the company has been trading ahead ofplan and, in June 2004, completed an initial public offering on NASDAQ. Total proceeds to December 2007 were £89.9 million. Since the year-end, theresidual stake has been sold for £23.7 million, resulting in a total return of2.25x original cost. 19 Hg Renewable Power Partners LP Sector: Renewable energyLocation: EuropeYear of investment: 2006www.hgcapital.com/en/energy The first closing of the fund at €147.1 million took place in June 2006. A finalclosing in December 2006 took the fund up to €303 million, including a 1%co-investment by HgCapital and its employees. The fund was 26% called as at 31 December 2007. It has made investments to datevalued at €60.0 million including accrued loan stock interest as at 31 December2007. 20 IRIS Software Sector: TMTLocation: UKYear of investment: 2004www.iris.co.uk The £102 million buyout of IRIS Software completed in July 2004, withHgCapital's clients holding a 63% stake in the business. IRIS is the UK's leading provider of financial, practice management and taxsoftware to accountancy practices and has an outstanding reputation within itssector. Under HgCapital's ownership, IRIS acquired four companies for a totalconsideration of £31 million and the core business grew revenue by 12-13%. In July 2007 IRIS was sold to Hellman & Friedman in a combined sale with CSGroup, returning £150 million to clients over the life of the investment,including the residual unrealised value, resulting in a return of 3.6x originalcost. Cost and valuation of the Company's holdings Company Deal type Residual Valuation Valuation Portfolio cost £'000 basis value £'000 % Cornish Bakehouse Investments Ltd Expansion 4,200 4,200 Cost 2.7Xtx Ltd (t/a Xyratex) Buyout 1,277 3,721 Quoted 2.4Hg Renewable Power Partners LP Renewable energy 3,803 3,555 Net Assets 2.3Software (Cayman) LP - re IRIS Buyout 17 1,999 Third Party 1.3 Hg Renewable Power Partners LP In June 2006 the Company made a commitment of €21 million to Hg Renewable PowerPartners LP, a dedicated renewable energy fund managed by HgCapital. The €303million fund is the largest raised to date for renewable energy investments inEurope. The fund's focus is on long-term investments in renewable power projectsusing proven technologies, including wind, small hydro, landfill gas andwaste-to-energy in Western Europe. Renewable energy benefits from a highly favourable regulatory and policyenvironment with climate change solidly on the political agenda. The investmentin the fund will give the Company exposure to a diversified portfolio of assetsoffering both income and capital appreciation in a rapidly growing sector. The fund has investments in eight wind projects in construction or operationtotalling 125 MW and four biogas projects that are in construction totalling 1.4MW, and has made investments in companies that develop wind and biogas projectsgiving it the right to acquire a further 400+ MW of wind projects and 75+ MW ofbiogas projects. The fund's investments are in France, Germany, Ireland, Italyand 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 madein November 2004, with construction completed in October 2005. The wind farm hasnow been operating for over two years. Sorne Wind A 32 MW operating wind farm in Donegal, Ireland. This investment was made inJuly 2005, with the farm entering operation in November 2006. Picardy Wind A portfolio of four wind farms in Northern France in operation or underconstruction with a total capacity of 47.5 MW. This investment commenced in July2006 with the first operational wind farm located near Bougainville. All fourprojects sell or will sell power to Electricite de France (EdF) under 15 yearpower sales contracts. Wind Direct A business that installs, owns and operates wind turbines on UK industrialsites, providing its customers with low cost, direct energy supplies. Theinvestment was made in 2006 and includes one site in operation and one enteringconstruction, with 35 sites in development. Aufwind Schmack Neue Energien A company that develops and operates biogas plants in Germany. Biogas plantsferment agricultural, household and industrial residues, or purpose-grown energycrops, producing biogas, which is used to generate electricity and heat or whichmay be used directly in other gas-dependent processes. This investment was madein January 2007. Four biogas projects are under construction with a combinedcapacity of 1.4 MW. Schmack Biogas Framework Agreement The rights to acquire 10 German biogas projects totalling 30 MW from the leadingbiogas equipment supplier. This agreement was entered into in December 2007. Bagmoor Wind Farm A 16 MW wind farm in construction in Lincolnshire, England. Construction is dueto start in March 2008 with commercial operation expected to begin in 2009. RidgeWind A United Kingdom wind farm developer with over 200 MW of wind farms indevelopment, including a 28 MW project that has secured planning permission. Rewind An investment of €2.1 million provided in August 2006 in return for the optionto acquire a 120 MW portfolio of wind farms in Sicily. Cost and valuation of the Company's holdings Company Deal type Residual Valuation Valuation Portfolio cost £'000 basis value £'000 % Hg Renewable Power Partners LP Renewable energy 3,803 3,555 Net assets 2.3 The difference between cost and valuation is due to establishment and runningcosts, fees, foreign exchange movements in the fund and the revaluation ofinvestments Investment portfolio Company Sector Principal Residual Year of Portfolio Cum Location cost Valuation investment value Value £'000 £'000 % % 1 VISMA TMT Nordic 13,268 13,812 2006 8.9% 8.9% Holdings + region 2 The Sanctuary Consumer & UK 631 11,628 1995 7.5% 16.4% Spa Holdings Leisure Ltd + 3 BMFCO UA (t/a Services Benelux 10,871 11,428 2007 7.4% 23.8% Fabory) + 4 Hofmann M.M. Industrials Germany 4,747 10,774 2005 7.0% 30.8% SA + 5 Voyage Group Healthcare UK 8,755 8,755 2006 5.7% 36.5% Ltd (formerly Paragon) + 6 Atlas Energy Services UK 8,153 8,153 2007 5.3% 41.8% Group Ltd + 7 Clarion TMT UK 4,965 7,594 2004 4.9% 46.7% Events Holdings Ltd + 8 Addison TMT Germany 2,296 7,547 2005 4.9% 51.6% Luxembourg SA + 9 Mondo Industrials Nordic 7,004 7,358 2007 4.8% 56.4% Minerals region Co-op +10 Sporting Consumer & UK 7,186 7,186 2005 4.7% 61.1% Index Group Leisure Ltd +11 SHL Group Services UK 6,489 6,489 2006 4.2% 65.3% Holdings 1 Ltd +12 SLV Industrials Germany 5,962 6,438 2007 4.2% 69.5% Electronik SARL +13 Elite Holding TMT Benelux 5,749 6,103 2005 4.0% 73.5% SA +14 W.E.T Holding Industrials Germany 7,590 5,417 2003 3.5% 77.0% Luxembourg SA +15 Schleich Consumer & Germany 4,634 5,059 2006 3.3% 80.3% Luxembourg SA Leisure +16 Americana Consumer & UK 4,611 4,611 2007 3.0% 83.3% International Leisure Holdings Ltd17 Cornish Consumer & UK 4,200 4,200 2007 2.7% 86.0% Bakehouse Leisure Investments Ltd +18 Xtx Ltd (t/a TMT UK 1,277 3,721 2003 2.4% 88.4% Xyratex) **19 Hg Renewable Renewable Europe 3,803 3,555 2006 2.3% 90.7% Power energy Partners LP20 Software TMT UK 17 1,999 2006 1.3% 92.0% (Cayman) LP - re IRIS21 FTSA Holdings Industrials North 6,813 1,961 2004 1.3% 93.3% Ltd + America22 PRA Healthcare Benelux 1,478 1,789 2002 1.2% 94.5% International Inc **23 Classic TMT UK 6,033 1,486 2003 1.0% 95.5% Copyright (Holdings) Ltd (t/a Boosey & Hawkes) +24 Weston Fund North 1,733 1,181 1998 0.8% 96.3% Presidio America Capital III, LP25 Hoseasons Consumer & UK 2,197 965 2003 0.6% 96.9% Group Ltd + Leisure26 Software TMT UK 15 927 2007 0.6% 97.5% (Cayman) LP - re Guildford27 Rolfe & Nolan TMT UK 14 836 2003 0.5% 98.0% Holdings plc +28 Hirschmann Industrials Germany - 718 2004 0.5% 98.5% Electronics Holdings SA +29 Orbiscom TMT Ireland 2,981 584 2001 0.4% 98.9% Ltd30 Clinphone plc Healthcare UK 7 499 1996 0.3% 99.2% *31 Wastebidco Industrials UK 309 473 2007 0.3% 99.5% Ltd ^32 Axiom TMT UK 1,888 413 2001 0.2% 99.7% Holdings Ltd33 Schenck Industrials Germany - 258 2005 0.1% 99.8% Process SA +34 Pulse Healthcare UK 400 207 1999 0.1% 99.9% Staffing Ltd35 Doc M SARL Healthcare Germany - 206 2004 0.1% 100.0%36 ACT Venture Fund Ireland - 36 1994 - 100.0% Capital Ltd37 Euroknights Fund Europe 968 1 1996 - 100.0% III LP38 Orbis plc * Services UK 3,378 - 1997 - 100.0%39 Burns TMT UK 3,245 - 2001 - 100.0% e-Commerce Solutions40 SGI Services UK 1,721 - 1999 - 100.0% (Holdings) Ltd +41 Profiad Ltd Healthcare UK 1,653 - 1999 - 100.0% +42 Newchurch Healthcare UK 1,297 - 2000 - 100.0% Ltd43 Azinger Ltd Services Ireland 204 - 1993 - 100.0%44 Lantor plc Industrials Ireland - - 1992 - 100.0% (formerly South Wharf plc)45 Weston Fund North - - 1995 - 100.0% Presidio America Capital II, LP Total 148,542 154,367 100.0% * Listed on the London Stock Exchange ** Traded on NASDAQ ^ Underlying investment listed on the London Stock Exchange+ HgCapital controls more than 50% of the voting equity shares through its management of the Company and other funds Income statement for the year ended 31 December 2007 Note Revenue return Capital return Total return 2007 2006 2007 2006 2007 2006 £'000 £'000 £'000 £'000 £'000 £'000Gains on investmentsand government securities 10 - - 55,714 34,919 55,714 34,919Carried interest 3(b) - - (6,189) (4,737) ( 6,189) (4,737)Income 2 12,129 7,769 - - 12,129 7,769Investment management fee 3(a) (840) (730) (2,519) (2,191) (3,359) (2,921)Other expenses 4(a) (669) (636) - - (669) (636)Return on ordinary activities before taxation 10,620 6,403 47,006 27,991 57,626 34,394Taxation on ordinaryactivities 6 (3,174) (1,884) 756 657 (2,418) (1,227)Transfer to reserves 7,446 4,519 47,762 28,648 55,208 33,167Return per ordinary share 7 29.56p 17.94p 189.63p 113.74p 219.19p 131.68p The 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 continuingoperations. No operations were acquired or discontinued during the year. The notes on the following pages form part of these financial statements. Balance sheetas at 31 December 2007 Note 2007 2006 £'000 £'000Fixed assetsInvestments held at fair valueQuoted at market valuation 6,482 14,255Unquoted at Directors' valuation 147,885 134,287 9 154,367 148,542Current assetsDebtors 11 13,906 10,005Government securities 12 79,723 34,284Cash 13(a) 117 2,268 93,746 46,557Creditors - amounts falling due within one year 14 (9,296) (7,964)Net current assets 84,450 38,593Net assets 238,817 187,135 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 17 197,852 152,787Capital reserve - unrealised 17 5,682 2,985Revenue reserve 17 13,616 9,696Total equity shareholders' funds 238,817 187,135Net asset value per ordinary share 7 948.2p 743.0p The financial statements were approved and authorised for issue by the Board ofDirectors on 17 March 2008 and signed on its behalf by: Roger Mountford, ChairmanTimothy Amies, Director The following notes form part of these financial statements. Cash flow statementfor the year ended 31 December 2007 Note 2007 2006 £'000 £'000Net cash outflow from operating activities 4(b) (2,259) (2,273)Taxation (paid)/recovered (2,137) 2,666Capital expenditure and financial investmentPurchase of fixed asset investments (50,757) (45,266)Proceeds from the sale of fixed assetinvestments 103,283 59,805Net cash inflow from capital expenditure andfinancial investment 52,526 14,539Equity dividends paid (3,526) (2,519)Net cash inflow before management of liquidresources 44,604 12,413Management of liquid resourcesPurchase of government securities (181,486) (111,342)Sale/redemption of government securities 134,731 100,334Net cash outflow from management of liquidresources (46,755) (11,008)(Decrease)/increase in cash in the period 13 (2,151) 1,405 Reconciliation of movements in shareholders' fundsfor the year ended 31 December 2007 Note Called Share Capital Capital Revenue Total up premium redemp reserves reserve share Accout tion capital reserve £'000 £'000 £'000 £'000 £'000 £'000 At 31 December 2006 6,296 14,123 1,248 155,772 9,696 187,135Net return from ordinaryactivities after tax - - - 47,762 7,446 55,208Dividends paid 8 - - - - (3,526) (3,526)At 31 December 2007 16,17 6,296 14,123 1,248 203,534 13,616 238,817 At 31 December 2005 6,296 14,123 1,248 127,124 7,696 156,487Net return from ordinaryactivities after tax - - - 28,648 4,519 33,167Dividends paid 8 - - - - (2,519) (2,519)At 31 December 2006 16,17 6,296 14,123 1,248 155,772 9,696 187,135 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 company withinthe meaning of section 266 of the Companies Act 1985 and section 842 of theIncome and Corporations Taxes Act 1988. Basis of preparation The accounts have been prepared in accordance with applicable UK law andAccounting Standards (GAAP) and with the Statement of Recommended Practice'Financial Statements of Investment Trust Companies' (SORP), dated January 2003and revised in December 2005. All of the Company's operations are of acontinuing nature. Associated undertakings Certain investments deemed to be associated undertakings are carried at fairvalue in accordance with the Company's Investments accounting policy andFinancial Reporting Standard (FRS) 9. Investment income and interest receivable Income from equity investments, including taxes deducted at source, is includedin 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 is recognisedin Capital reserve - realised. Interest income is accounted for on an accrualsbasis. Dividends receivable on equity shares where there is no ex-dividend dateand on non-equity shares are brought into account when the Company's right toreceive payment is established. Management fee and finance costs The annual investment management fee and finance costs are charged 75% toCapital 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 portfolio ofthe Company. Expenses All expenses are accounted for on an accruals basis. All administrativeexpenses, excluding the management fee, are charged wholly to the revenueaccount. Expenses that are incidental to the purchase or sale of an investmentare included within the cost or deducted from the proceeds of the investment. Foreign currency All transactions in foreign currencies are translated into sterling at the ratesof exchange ruling at the dates of such transactions. Foreign currency assetsand liabilities at the balance sheet date are translated into sterling at theexchange rates ruling at that date. Exchange differences arising on thetranslation of foreign currency assets and liabilities are taken to Capitalreserve - realised. Taxation 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 the rightto 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 stated inthe financial statements, which are capable of reversal in one or more suitableperiods. Investments The general principle applied is that investments should be reported at "fairvalue" in accordance with FRS26 and the International Private Equity and VentureCapital Association (IPEVCA) valuation guidelines issued jointly by the BritishVenture Capital Association (BVCA) and the European Venture Capital Association(EVCA) in February 2005. Quoted: Quoted investments are designated as held at fair value, which is deemedto be bid market prices. Unquoted: Unquoted investments are also designated as held at fair value and arevalued using the following guidelines: (i) initially, investments are valued at cost, including fees and transactioncosts; (ii) after the receipt of the first audited financial statements followinginitial investment, companies are valued on the level of maintainable earningsand an appropriate earnings multiple. A marketability discount is applied to thevalue attributable to shareholders, ranging from 20% to 30%. (iii) where more appropriate, investments are valued with reference to their netassets rather than earnings; and (iv) appropriate provisions are made against all individual valuations wherenecessary to reflect unsatisfactory financial performance leading to diminutionin value. Both realised and unrealised gains and losses arising on investments are takento capital reserves. Capital reserves Capital reserve - realised The following are accounted for in this reserve: (i) gains and losses on the realisation of investments (ii) losses on investments within the portfolio where there is little prospectof realisation or recovering any value; (iii) realised exchange differences of a capital nature; and (iv) expenses, together with the related taxation effect, charged to thisreserve 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 yearend; and (ii) unrealised exchange differences of a capital nature. 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 all fixed assetinvestments are now held through HGT LP. Note 9 and the Investment portfoliopresent the underlying investments held in HGT LP. The income and capitalaccruals relating to the investments held in HGT LP are shown in notes 11 and14. Carried interest paid to the Founder Partner is shown on the face of theIncome Statement as it is the first charge on investment 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, Cash FlowStatement and the related notes. 2. Income 2007 2006 £'000 £'000Income from investmentsUK unquoted investment income 8,305 5,370UK dividends 41 82 8,346 5,452Other incomeGilt interest 3,650 2,056Deposit interest 133 95Other interest income - 166 3,783 2,317Total income 12,129 7,769Total income comprises:Dividends 41 82Interest 12,088 7,687 12,129 7,769 3 (a) Investment management fee Revenue return Capital return Total return 2007 2006 2007 2006 2007 2006 £'000 £'000 £'000 £'000 £'000 £'000Investmentmanagement fee 745 621 2,235 1,865 2,980 2,486IrrecoverableVAT thereon 95 109 284 326 379 435 840 730 2,519 2,191 3,359 2,921 Details of the investment management, custodian and administration contracts aredisclosed in the Directors' report. The investment management fee is levied quarterly in arrears. Investmentmanagement fees are charged 75% to capital and 25% to revenue. 3 (b) Carried interest Revenue return Capital return Total return 2007 2006 2007 2006 2007 2006 £'000 £'000 £'000 £'000 £'000 £'000Carriedinterest - - 6,189 4,737 6,189 4,737 The carried interest payable ranks as a first distribution of capital gains onthe investments held in HGT LP, a limited partnership established solely to holdthe Company's investments, and is deducted prior to such gains being paid to theCompany in its capacity as Limited Partner. The gross amount of capital gains ofHGT LP during the period is shown on the Income Statement. Details of thecarried interest contract are disclosed in the Directors' report. 4. Other expenses (a) Operating expenses 2007 2006 £'000 £'000 Custodian and administration fees 249 197Directors' remuneration (note 5) 138 104Auditors' remuneration - audit services 32 27- taxation and interim review 7 4Other administration costs 243 304The Company's total expense ratio (TER) calculated asa percentage of average net assets and including expenses, after relief for taxation, was: 1.32% 1.45% (b) Reconciliation of net return before taxation to net cash flow from operating activities 2007 2006 £'000 £'000 Total return before taxation 57,626 34,394Gains on investments held at fair value (55,714) (34,919)Movement on carried interest 1,452 1,761Increase in accrued income (5,237) (3,613)Decrease/(increase) in debtors 15 (20)(Decrease)/increase in creditors (397) 385Tax on investment income included within gross income (4) (261)Net cash outflow from operating activities (2,259) (2,273) 5. Directors' remuneration The aggregate remuneration of the Directors, excluding VAT where applicable, forthe year to 31 December 2007 was £133,000 (2006: £103,500). Further informationon the Directors' remuneration is disclosed in the Directors' remunerationreport. 6. Taxation on ordinary activities (a) Analysis of charge in the year Revenue return Capital return Total return 2007 2006 2007 2006 2007 2006 £'000 £'000 £'000 £'000 £'000 £'000 Current tax:UK corporation tax 3,174 1,896 (756) (657) 2,418 1,239Prior year adjustment - (12) - - - (12)Total current tax (note 6(b)) 3,174 1,884 (756) (657) 2,418 1,227 (b) Factors affecting current tax charge for the period The tax assessed for the period is lower than the standard rate of corporationtax in the UK for a large company (30%). The differences are explained below: 2007 2006 £'000 £'000 Revenue return on ordinary activities before taxation 10,620 6,403UK corporation tax at 30% thereon 3,186 1,921Effects of:Non taxable UK dividends (12) (25)Tax deductible expenses in capital (756) (657)Tax relief to the capital account 756 657Tax in relation to the prior year - (12) (12) (37)Current revenue tax charge for the period (note 6(a)) 3,174 1,884 In the opinion of the Directors the Company has complied with the requirementsof Section 842 ICTA 1988 and will therefore be exempt from corporation tax onany capital gains made in the year. 7. Return and net asset value per ordinary share 2007 2006Revenue and capital returns per share are shownbelow and have been calculated using the following: Net revenue attributable to equity shareholdersafter taxation £7,446,000 £4,519,000Net capital gains for the year £47,762,000 £28,648,000Total return £55,208,000 £33,167,000Number of shares in issue 25,186,755 25,186,755 Revenue return Capital return Total return 2007 2006 2007 2006 2007 2006Return perordinary share 29.56p 17.94p 189.63p 113.74p 219.19p 131.68p The net asset value per share of 948.2p (2006: 743.0p) was calculated bydividing equity shareholders' funds of £238,817,000 (2006: £187,135,000) by thenumber of shares in issue at the year end of 25,186,755 (2006: 25,186,755). 8. Dividends on ordinary shares Company Register date Payment date 2007 2006 £'000 £'000Final dividend (10.00p) for the year ended 31 December 2005 24 March 2006 2 May 2006 - 2,519Final dividend (14.00p)for the year ended 31December 2006 23 March 2007 1 May 2007 3,526 - 3,526 2,519 The proposed final dividend is subject to approval by shareholders at the AnnualGeneral Meeting and has not been included as a liability in these financialstatements. The total dividends payable in respect of the financial year, which form thebasis of the retention test as set out in section 842 of the Income andCorporation Taxes Act 1988, are set out below: 2007 £'000 Revenue available for distribution by way of dividend for the year 7,446Proposed final dividend of 25.00p for the year ended 31 December 2007 (6,297)(based on 25,186,755 ordinary shares in issue at 31 December 2007)Undistributed revenue for section 842 purposes * 1,149 * Undistributed revenue comprises 9.6% of income from investments of £11,996,000 (see note 2). 9. Investments held at fair value 2007 2006 £'000 £'000Investments held at fair value through profit and lossInvestments quoted on the London or Dublin Stock Exchanges 2,761 3,034Investments traded on NASDAQ 3,721 11,221Unquoted investments 147,885 134,287 154,367 148,542Equity shares 57,655 85,803Convertible securities 200 1,401Fixed income securities 96,512 61,338 154,367 148,542 Quoted Unquoted Total £'000 £'000 £'000 Opening valuation as at 1 January 2007 14,255 134,287 148,542Opening unrealised(appreciation)/depreciation (6,173) 2,806 (3,367)Opening book cost 8,082 137,093 145,175Movements in the year:Additions at cost 309 50,448 50,757Disposals - proceeds (5,991) (95,971) (101,962)- realised gains on sales 4,049 50,523 54,572Closing book cost of investments 6,449 142,093 148,542Closing unrealised appreciation 33 5,792 5,825Closing valuation of investments asat 31 December 2007 6,482 147,885 154,367 The Company has equity holdings of 10% or more of the following classes of sharein the companies listed below: Company Country of Shareholding % of class* incorporation Addison Luxembourg SA Germany Class A Shares 19.5%Atlas Energy Group Ltd UK Ordinary Shares 58.8%BMFCO UA The Netherlands Membership Rights 10.2%Clarion Events Holdings Ltd UK A Ordinary Shares 17.0%Classic Copyright (Holdings) Ltd UK A Ordinary Shares 15.8%Cornish BakehouseInvestments Ltd UK Ordinary Shares 38.2%Doc M SARL Germany Ordinary Shares 17.0%Elite Holding SA The Netherlands Ordinary Shares 19.3%FTSA Holdings Ltd UK Ordinary Shares 19.5%Hirschmann Electronics Germany A Redeemable Shares 12.6%Holdings SA Hirschmann Electronics Germany C Redeemable Shares 12.6%Holdings SAHofmann M.M. SA Germany Ordinary Shares 15.1%Hoseasons Group LTD UK Ordinary Shares 12.0%Mondo Minerals Co-op Finland Registered Shares 11.4%Newchurch Ltd UK Subordinated £1 shares 11.6%Orbiscom Ltd UK Non - Convertible 23.0% Redeemable PrefsProfiad Ltd UK B Ordinary Shares 13.9%Rolfe and NolanHoldings Ltd UK Hg Preferred Ordinary 17.2% SharesSchenck Process SA Germany Ordinary Shares 16.6%SGI (Holdings) Ltd UK A Ordinary Shares 14.8%Sporting Index Group Ltd UK Ordinary Shares 13.7%The Sanctuary SpaHoldings Ltd UK Ordinary Shares 29.4%W.E.T Holding Luxembourg SA Germany Ordinary Shares 14.5% * Investee companies may issue a number of different classes of share. Thepercentage of the total issued ordinary share capital of the ten largestinvestments held by the Company is shown in the table entitled 'top teninvestments'. Further information on those investments which, in the opinion of the Directors,have a significant effect on the Company's financial statements, is contained inthe Review of principal investments. 10. Gains on investments and government securities 2007 2006 £'000 £'000 Realised gains on sales 53,017 20,516Foreign exchange losses - (4)Change in unrealised appreciation 2,697 14,407 55,714 34,91911. Debtors 2007 2006 £'000 £'000 Sales for future settlement - 1,321Prepayments and accrued income 13,901 8,664Other debtors 5 20 13,906 10,005 12. Government securities 2007 2006 £'000 £'000Investments held at fair value through profit and lossOpening valuation 34,284 24,515Purchases at cost 181,486 111,342Sales and redemptions (134,731) (100,334)Movement in unrealised capital gains/(losses) 239 (65)Realised capital losses (1,555) (1,174)Closing valuation 79,723 34,284 13. Movement in net funds (a) Reconciliation of net cash flow to movement in net funds 2007 2006 £'000 £'000 Change in net funds (2,151) 1,405Exchange movements - (4)Net funds at 1 January 2,268 867Net funds at 31 December 117 2,268 (b) Analysis of changes in net funds At 1 Cash Exchange At 31 Jan flows movements Dec 2007 2007 2007 £'000 £'000 £'000 £'000 Cash 2,268 (2,151) - 117 14. Creditors - amounts falling due within one year 2007 2006 £'000 £'000 Carried interest 6,189 4,737Corporation taxation payable 2,564 2,287Sundry creditors 543 940 9,296 7,964 15. Risk The following disclosures relating to the risks faced by the Company areprovided in accordance with Financial Reporting Standard 29, "Financialinstruments: disclosures". Financial instruments and risk profile As a private equity investment trust, the Company's primary investment objectiveis to achieve long-term capital appreciation by investing in unquoted companies,mostly in the UK and Europe. Additionally, the Company holds Government giltsand cash and items such as debtors and creditors arising directly from itsoperations. In pursuing its investment objective, the Company is exposed to avariety of risks that could result in either a reduction of the Company's netassets or a reduction in the profits available for distribution by way ofdividends. These risks, valuation risk, market risk (comprising currency riskand interest rate risk) and liquidity risk and and the directors' approach tothe management of them, are set out below. The Company Secretary, in closecooperation with the board of directors and the Manager, coordinates theCompany's risk management. The objectives, policies and processes for managingthe 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 valueof its underlying investments, the majority of which are unquoted. In accordancewith the Company's accounting policies, all underlying unquoted investments arevalued by the Directors with regard to the current guidelines issued by theInternational Private Equity and Venture Capital Association. The Company doesnot hedge against movements in the value of these investments. The Company hasexposure to interest rate movements, through cash and gilt holdings. In the opinion of the Directors, the diversified nature of the Company'sportfolio significantly reduces the risks of investing in unquoted companies. Market risk The fair value of future cash flows of a financial instrument held by theCompany may fluctuate due to changes in market prices. This market riskcomprises: currency risk (see below), interest rate risk (see following page)and equity price risk (see following page). The Board of Directors reviews andagrees policies for managing these risks. The Manager assesses the exposure tomarket risk when making each investment decision, and monitors the overall levelof 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 does not normally hedge againstforeign currency movements affecting the value of its investments, but takesaccount of this risk when making investment decisions. The Manager monitors theCompany's exposure to foreign currencies and reports to the board on a regularbasis. The following table illustrates the sensitivity of the Revenue andCapital return for the year in relation to the Company's year-end financialassets for movements in foreign exchange rates against the Company's functionalcurrency. The rates represent the high and low positions during the year for thecurrencies listed. Revenue return Capital return £'000 NAV per £'000 NAV per ordinary ordinary share share (pence) (pence)Low Euro (1.3532) 9 - 364 1.4Norwegian Kroner (10.8223) (1) - (17) (0.1)US Dollar (1.9180) 64 0.3 559 2.2 72 0.3 906 3.5High Euro (1.5296) (168) (0.7) (6,525) (25.9)Norwegian Kroner (12.7668) (148) (0.6) (2,118) (8.4)US Dollar (2.1161) (100) (0.4) (875) (3.5) (416) (1.7) (9,518) (37.8) In the opinion of the Directors, the above sensitivity analyses are notrepresentative of the year as a whole, since the level of exposure changesfrequently as part of the currency risk management process used to meet theCompany's objectives. Interest rate risk and sensitivity The Company has exposure to interest rate movements as this may affect the fairvalue of funds awaiting investment, interest receivable on cash and interestpayable on borrowings. The Company has little immediate direct exposure tointerest rates on its fixed assets as the majority of these are fixed rateassets and equity shares that do not pay interest. Therefore, and given that theCompany has no borrowings and maintains low cash levels, the Company's revenuereturn is not materially affected by changes in interest rates. However, funds awaiting investment are invested in Government securities and asstated above, the valuation is affected by movements in interest rates. Thesensitivity of the capital return of the Company to movements on interest rateshas been based on the UK base rate. With all other variables constant, a 0.5%decrease in the above should increase the capital return for the year by£400,000, with a corresponding decrease if the UK base rate were to increase by0.5%. In the opinion of the Directors, the above sensitivity analyses are notrepresentative of the year as a whole, since the level of exposure changes asinvestments 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 33% of the Company's net assets at the year-end areinvested in liquid funds. The Board gives guidance to the Manager as to themaximum amount of the Company's resources that should be invested in any onecompany. For details refer to the investment policy. Equity price risk Equity price risk is the risk that the fair values of equities (including loans)decrease as a result of changes in the values of individual assets. The Board ofDirectors manages the risks inherent in the investment portfolios by ensuringfull and timely access to relevant information from the Manager. The Board meetsregularly and at each meeting reviews investment performance. The Board monitorsthe Manager's compliance with the Company's objectives, and is responsible forinvestment strategy and asset allocation. The Manager's best estimate of theeffect on the net assets and total return due to a reasonably possible change inquoted indices and the value of unquoted securities, with all other variablesheld constant, is as follows: NAV per ordinary % share Change £'000 (pence) Quoted 10% 648 2.6Unquoted 10% 14,789 58.7 15,437 61.3 Financial assets of the Company 2007 2006 Non Non Fixed Floating interest Fixed Floating interest rate rate bearing Total rate rate bearing Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Sterling 124,958 117 21,223 146,298 72,996 2,268 28,524 103,788Euro 38,607 - 20,734 59,341 19,000 - 39,138 58,138Norwegian Kroner 7,203 - 7,553 14,756 5,027 - 16,940 21,967US dollar 5,667 - 8,145 13,812 - - 1,201 1,201Total 176,435 117 57,655 234,207 97,023 2,268 85,803 185,094 The fixed rate assets comprise gilts and fixed rate lendings to investeecompanies. Fixed rate lendings have a weighted average interest rate of 10.9%per annum (2006: 11.3%) and a weighted average life to maturity of 7.9 years(2006: 6.8 years). The floating rate assets consist of cash. The non interest-bearing assets represent the equity content of the investmentportfolio. The Company did not have any outstanding borrowings at the year end (2006:£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 insterling, 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: 2007 £'000EquityEquity share capital 6,296Share premium 14,123Capital redemption reserve 1,248Retained earnings and other reserves 217,150Total capital 238,817 As stated above, the Company did not have any outstanding borrowings at the yearend. The Board with the assistance of the Manager monitors and reviews the broadstructure of the Company's capital on an ongoing basis. This review includes: • the planned level of gearing, which takes into account the Manager's view on the market; • the need to buy back equity shares, either for cancellation or to hold in treasury, which takes account of the difference between the net asset value per share and the share price (ie the level of share price discount or premium); • the need for new issues 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 areunchanged from the preceding accounting period. 16. Share capital 2007 2006 Nominal £'000 Nominal £'000 No.'000 No.'000Authorised: 40,000,000 ordinary shares of 25p each 40,000 10,000 40,000 10,000Allotted, 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 premium redemp Capital Capital account tion reserve reserve Revenue reserve realised unrealised Reserve £'000 £'000 £'000 £'000 £'000 As at 1 January 2007 14,123 1,248 152,787 2,985 9,696Transfer on disposal ofinvestments - - 9,847 (9,847) -Losses on sale of governmentsecurities - - (1,555) - -Net gain on sale ofinvestments - - 44,725 - -Net movement in unrealisedappreciation of investments - - - 12,544 -Dividends paid - - - - (3,526)Net revenue for the yearafter tax - - - - 7,446Carried interest - - (6,189) - -Management fee charged tocapital, after taxation - - (1,763) - -As at 31 December 2007 14,123 1,248 197,852 5,682 13,616 18. Contingent liabilities As at 31 December 2007, investment purchases of £11,900,000 (31 December 2006:£12,941,000) had been authorised and contractually committed, including uncalledcommitment to Hg Renewable Power Partners LP. 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 Claverhouse Trustplc in declaring that management expenses of investment trusts should be exemptfrom VAT. Her Majesty's Revenue and Customs ("HMRC") has recently announced thatit has accepted that fund management services are exempt from VAT and it haswithdrawn from the appeal in the JPMorgan Claverhouse Trust case. The Companywill therefore no longer be charged VAT on management expenses and it isexpected that it will be able to recover some or all of the VAT previouslycharged on management fees. Clarification as to how claims will be processed isawaited from HMRC. Between February 2001 and September 2007 the Company paidapproximately £2,310,000 of VAT on its management expenses. No recovery of VAThas been recognised in respect of this or any other period in these financialstatements. The extent of any recovery will be determined by negotiation, takinginto account the VAT position of the Company's managers over the period. Top ten investments % of total % of share total income capital Net accrued held Accounting assets/ 2007 by the date Currency Turnover PBIT* (liabilities) £'000 company 2007 2006 Addison Luxembourg SA Dec-06 •'m 37.7 11.2 19.5 36 18.1% 4.9% 4.5% Atlas Energy Group Ltd Sep-07 £'m 5.1 2.5 2.0 69 47.1% 5.3% -BMFCO UA (t/a Fabory) Dec-06 •'m 248.9 29.2 5.7 270 10.2% 7.4% -Clarion Events Holdings Ltd Jan-07 £'m 47.8 6.7 (6.1) 1,740 11.0% 4.9% 3.8%Hofmann M.M. SA Sep-07 •'m 102.8 21.5 7.2 347 15.1% 7.0% 3.1%Mondo Minerals Co-op Oct-07 •'m 134.1 19.8 79.3 133 11.4% 4.8% -Sporting Index Group Ltd May-07 £'m 24.3 7.8 (15.1) 2,245 13.7% 4.7% 3.7% The Sanctuary Spa Holdings Ltd Aug-07 £'m 26.3 6.0 5.2 - 29.4% 7.5% 4.1% Visma Holdings Dec-06 NOK'm 2,305.6 316.0 591.0 968 9.2% 8.9% 8.2% Voyage Group Ltd Mar-07 £'m 107.4 24.0 (20.7) 2,866 7.9% 5.7% 7.2%(formerly Paragon) * Profit Before Interest and Taxation and, where applicable, before amortisation of goodwill This table does not form part of the financial statements. Analysis of registered shareholdersas at 27 February 2008 By type of holder % of total % of total Number of 27 Feb 31 Dec Number of 27 Feb 31 Dec shares 2008 2006 holders 2008 2006 Nominee companies 23,599,389 93.7 80.4 373 56.2 54.2Direct private investors 1,112,008 4.4 7.5 241 36.3 38.2others 475,358 1.9 12.1 50 7.5 7.6 25,186,755 100.0 100.0 664 100.0 100.0 By size of holding % of total % of total Number of 27 Feb 31 Dec Number of 27 Feb 31 Dec shares 2008 2006 holders 2008 2006 1 - 5,000 678,805 2.7 2.9 465 70.0 67.55,001 - 50,000 2,277,447 9.0 10.6 128 19.3 22.250,001 - 100,000 1,963,355 7.8 7.1 27 4.0 3.5over 100,000 20,267,148 80.5 79.4 44 6.7 6.8 25,186,755 100.0 100.0 664 100.0 100.0 This table does not form part of the financial statements. Board of Directors Roger Mountford (Chairman) Aged 59, Roger Mountford was appointed to the Board in 2004 and became Chairmanin April 2005. He spent 30 years as a merchant banker in the City of London andin the Far East, latterly as Managing Director in the Corporate FinanceDepartment of SG Hambros, leading the Bank's practice in the private equitymarket. He now serves on several boards, including the Civil Aviation Authority,where he is chairman of the CAA Pension Scheme, and the Port of Dover. He isChairman of The Housing Finance Corporation and of Enterprise LSE Limited, thecommercial subsidiary of the London School of Economics. Timothy Amies Aged 69, Timothy Amies was appointed to the Board in 1991. He is a charteredaccountant with over 30 years' experience of working in the City. He was apartner at Laurie Milbank & Co, stockbrokers for 16 years prior to itsacquisition by Chase Manhattan Bank. He then became a director of ChaseInvestment Bank involved in mergers and acquisitions. He is Chairman of theAudit and Valuation Committee of the Company. Piers Brooke Aged 67, Piers Brooke was appointed to the Board in 2001. He worked for 38 yearsin both commercial and merchant banking, holding a variety of general managementpositions in the UK, Continental Europe, the Far East and North America. Mostrecently he was Director of Financial Strategy at National Westminster Bank. Heis a non-executive director of Focus Solutions Group plc and Lothbury PropertyTrust. Richard Brooman Aged 52, Richard Brooman was appointed to the Board on 11 October 2007. He is achartered accountant and is Deputy Chairman and Chairman of the Audit Committeeof Invesco Perpetual UK Smaller Companies Investment Trust plc. He was formerlyChief Financial Officer of Sherwood International plc and Group Finance Directorof VCI plc. Prior to this, he served as CFO of the global Consumer Healthcarebusiness of SmithKline Beecham and held senior financial and operationalpositions at Mars after qualifying with Price Waterhouse. Peter Gale Aged 52, Peter Gale was appointed to the Board in 1991 and is Deputy Chairman ofthe 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 59, Andrew Murison was appointed to the Board in 2004. He was Senior Bursarof Peterhouse, Cambridge for nine years and spent the previous twelve years as aprincipal in private equity partnerships in the USA. Prior to that he was a fundmanager, financial journalist and investment banker in the City of London. Henow serves on the board of Aberdeen Growth Opportunities Venture Capital Trustplc and is Chairman of the JPMorgan European Investment Trust plc. All Directors are members of the Audit and Valuation, Nomination, Directors'Remuneration and Management Engagement Committees. All Directors are non-executive. This information is provided by RNS The company news service from the London Stock Exchange

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