STRATEGIC EQUITY CAPITAL PLC: Half-yearly Report
Strategic Equity Capital plc
Half Yearly Report & Financial Statements
for the six months to 31 December 2012
The investment objective of the Company is to achieve absolute returns (i.e. growth in the value of investments) rather than relative returns (i.e. attempting to outperform selected indices) over a medium-term period, principally through capital growth.
The Company's investment policy can be found below.
INVESTMENT MANAGER'S STRATEGY
The Investment Manager, SVG Investment Managers Limited ("SVGIM"), employs a strategy to invest in publicly quoted companies which will create value through strategic, operational and management change. SVGIM follows a practice of constructive corporate engagement and aims to work with management teams in order to enhance shareholder value.
A more detailed explanation can be found in the Investment Manager's report below.
Company's year-end 30 June
Annual results announced September
Annual General Meeting November
Company's half-year 31 December
Half yearly results February announced
The Company's Ordinary shares are listed on the London Stock Exchange. The midmarket price is quoted daily in the Financial Times under `Investment Companies'.
Shares can be traded through your usual stockbroker.
Share register enquires
The register for the Ordinary shares is maintained by Computershare Investor Services plc ("Registrar").In the event of queries regarding your holding, please contact the Registrar on 0870 707 1285. Changes of name and/or address must be notified in writing to the Registrar whose address is shown below.
The Company's net asset value is announced weekly to the London Stock Exchange.
Further information on the Company can be accessed via the Company's website
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.
At At At % 31 December 30 June 31 December Change
2012 2012 2011 Performance
Total return* 11.29%
Net asset value per 111.97p 101.96p 93.55p 9.82% Ordinary share
Ordinary share price 91.75p 82.00p 74.25p 11.89% (mid-market)
Discount of Ordinary 18.06% 19.58% 20.63% share price to net asset value
Average discount of 18.51% 17.65% 17.57% Ordinary share price to net asset value for the period ended
Total assets (£'000) 72,599 69,074 65,770 5.10%
Equity shareholders' 72,360 68,639 65,601 5.42% funds (£'000)
Ongoing charges** 1.16% 1.15% 1.01%
Revenue return per 0.68p 1.61p 0.76p Ordinary share
Dividend yield 1.62% 0.63% 0.63%
Proposed final n/a 1.50p n/a n/a
dividend for year
Ordinary shares in 64,624,655 67,317,324 70,122,203 (4.00%) issue with voting rights***
Interim period's Highs/ High Low Lows
Net asset value per 115.17p 100.57p Ordinary share
Ordinary share price 94.00p 81.25p
* Total return is the increase per share in net asset value plus dividends paid.
** The ongoing charges figure has been calculated using the Association of Investment Companies' ("AIC's") recommended methodology and relates to the ongoing costs of running the Company. Non-recurring fees are therefore excluded from the calculation.
*** The second semi-annual tender offer took place in November 2012. 2,692,669 shares were boughtback for cancellation at a cost of £2,748,000. Further information on the tender offer process can be found in the Chairman's report below.
The Company invests primarily in equity and equity-linked securities quoted on markets operated by the London Stock Exchange where the Investment Manager believes the securities are undervalued and could benefit from strategic, operational and management initiatives. The Company also has the flexibility to invest up to 20% of the Company's gross assets at the time of investment in securities quoted on other recognised exchanges.
The Company may invest up to 20% of its gross assets at the time of investment in unquoted securities, provided that, for the purpose of calculating this limit, any undrawn commitment to Vintage 1 which may still be called shall be deemed to be an unquoted security.
The maximum investment in any single investee company will be no more than 15% of the Company's investments at the time of investment.
The Company will not invest more than 10%, in aggregate, of the value of its total assets at the time the investment is made in other listed closed-end investment funds provided that this restriction does not apply to investments in any such funds which themselves have published investment policies to invest no more than 15% of their total assets in other listed closed-end investment funds.
Other than as set out above, there are no specific restrictions on concentration and diversification. The Board does expect the portfolio to be relatively concentrated, with the majority of the value of investments typically concentrated in the securities of 10 to 15 issuers across a range of industries. There is also no specific restriction on the market capitalisation of issues into which the Company will invest, although it is expected that the majority of the investments by value will be invested in companies with a market capitalisation of less than £300 million.
The Company's Articles of Association permit the Board to take on borrowings of up to 25% of the net asset value at the time the borrowings are incurred for investment purposes.
The Company made sound progress in the six months to the end of December 2012, delivering solid growth of 9.8% in net assets per share, albeit less than the comparable Smaller Companies Index.
The Manager's consistent focus on high quality smaller companies with strong competitive positions in growing niche markets has delivered significant progress over the last four years. It has also benefitted from its bias towards companies with a high proportion of overseas earnings and the ability to generate high levels of free cash flow through operations and the sale of noncore assets. Given the uncertainties in the world today the arguments for maintaining this strategy remain compelling.
As at 31 December 2012 the Company had net assets of £72.4 million (112.0p per share). This represented an increase of 9.8% over the period. Including dividends the Company delivered a total return to shareholders of 11.3% over the 6 months. The Company's performance was weaker than that of comparable markets; it underperformed the FTSE Smaller Companies ex Investment Trust index by 8.9%.
The result was driven by the Company's holdings not participating in a year-end rally of a very small number of large, highly leveraged members of the small cap index, typically with considerable exposure to UK consumer discretionary spending.
The Company's net asset value ("NAV") per share has cumulatively outperformed the comparable index over 3 years by 37.3%, and over 5 years by 14.4%.
The discount to NAV at which the Company's shares trade widened marginally to an average of 18.5% over the period, ending the period at 18.1%.
Periodic Tender Offer
In May 2012, shareholders passed a resolution introducing periodic tender offers in May and November each year, with each tender offer being for up to 4% of the issued share capital at a price equivalent to a 10% discount to the net asset value (including current period revenue and deducting the estimated tender offer costs) per share.
Accordingly, in November 2012, the Company's second semi-annual tender offer took place. As a result 2,692,669 shares, representing 4% of the Company's issued share capital, were bought back for cancellation at a price of 101.55p per share.
The Company expects to post a circular to shareholders in April 2013, regarding a further tender offer for up to 4% of the issued share capital at a discount of 10% to net asset value to take place in May 2013.
The various improvements made to the investment process since the financial crisis has led to a clear improvement in the Company's performance and consistency of returns. I am confident that the Manager's approach to investment can create value for shareholders over the long term.
The Company continues to operate without a banking facility.
The Directors continue to expect that returns for shareholders will derive primarily from the capital appreciation of the shares rather than from dividends. In line with previous years the Board does not intend to propose an interim dividend.
The Manager and the Company's broker continue to work together to broaden the shareholder base and are stepping up marketing activities to the regional private client broker community. We were pleased to welcome a significant new discretionary wealth manager to the register during the period.
The Board shares the Manager's belief that the prospects for the Company remain good. The valuation of the portfolio remains very attractive by historical standards and the underlying companies are performing well. Recent months have seen an increase in investor interest in smaller companies investing after many years of consistent outflows of funds.
18 February 2013
INVESTMENT MANAGER'S REPORT
Our strategy is to invest in publicly quoted companies which will create value through strategic, operational or management change. We follow a practice of constructive corporate engagement and aim to work with management teams in order to enhance shareholder value. We aim to build a consensus with other stakeholders, and prefer to work alongside like-minded co-investors as leaders, followers or supporters. We try to avoid confrontation with investee companies as we believe that there is strong evidence that overtly hostile activism generally generates poor returns for investors.
We are long-term investors; we typically aim to hold companies for the duration of three year investment plans that include an entry and exit strategy and a clearly identified route to value creation. The duration of these plans can be shortened by transactional activity or lengthened by adverse economic conditions. Before investing we undertake an extensive due diligence process, assessing market conditions, management and stakeholders. Our investments are underpinned by valuations, which we derive using private equity-based techniques. These include a focus on cash flows, the potential value of the company to trade or financial buyers and potentially beneficial changes in capital structure over the investment period.
Our typical investee company has a market capitalisation of under £150 million at the time of initial investment. We believe that smaller companies provide the greatest opportunity for our investment style as they are relatively under-researched, often have more limited resources, and frequently can be more attractively valued.
We believe that this approach, if properly executed, will generate favourable risk adjusted returns for shareholders over the long term.
Stock markets were strong over the financial period as investors' appetite for risk returned. The ever present macro concerns in Europe were brushed aside. Other than on a few isolated days, markets were ambivalent to the Fiscal Cliff negotiations in the USA. Even slowing growth in China was largely ignored.
The period began with a broad rally, despite some overall weakening earnings growth data. Highly indebted stocks, which had rallied strongly in the first weeks of 2012, were subject to profit taking and in some cases, further bad news leading to downgrades. During this period, the Company's NAV performed well - typically in line or ahead of the market.
After a mini-sell off at the start of November, UK equities staged an aggressive rally in the last six weeks of the year. This was similar to the rally in the first weeks of 2012, but more extreme. Highly risky assets benefitted the most as investors decided to go "risk on".
Very large relief rallies were experienced by a very small number of highly indebted smaller companies, with ratios of debt to EBITDA well in excess of the market average and extremely poor returns on capital. As an example, Thomas Cook, a highly indebted, structurally challenged travel company, but one of the largest constituents of the Small Cap Index, rallied 169% over the quarter.
Over the six months, FTSE Smaller Companies Index ex Investment trusts outperformed the FTSE 100 index by 11.5%, rising by 20.2%. Smaller Companies also outperformed the FTSE 250 Index, which rose by 15.9%.
Following a strong start to the year, M&A among small and mid cap companies was more muted over the period. There were however notable transactions, including the disposal by Invensys of its Rail Systems division for a significant premium rating to where the whole company traded. This reminds us that many public companies continued to trade at multiples significantly lower than precedent M& A transactions in their relevant sectors.
Performance over the period in absolute terms was pleasing, and continued to be driven by stock specific factors. Generally, the portfolio continues to trade well, with the majority of companies meeting or exceeding consensus earnings forecasts.
The tactic of investing in highly cash generative, niche market leaders, with a high proportion of overseas earnings and avoiding companies with exposure to UK public or consumer spending, which has served us well for the last three years, was less successful in the latter part of 2012. The portfolio did not participate in the year end "risk on rally", with the NAV falling marginally.
Although the quantum of underperformance in the period was significant, it is worth noting that the Company outperformed by similar equivalent amounts in quarters during 2010 and 2011. It serves as a reminder of the unconstrained nature of our portfolio, the differentiated strategy, and that comparison to any one specific index over the short term should be regarded as a comparison, not a benchmark. We also regard the performance of the FTSE Small Cap ex Investment trusts index as anomalous during 2012 - with a handful of very large, highly indebted UK consumer companies typically driving the index: the median small cap stock rose "only" 15.7% during 2012, compared with the 36.2% index return.
Top 5 contributors to performance
Company Valuation at Period
period end Attribution £'000 (basis points)
Tyman* 8,178 266
Lavendon Group 5,904 222
4imprint Group 6,698 195
Wilmington Group 2,195 148
CVS Group 3,991 137
*Previously named Lupus Capital
A number of holdings performed exceptionally well during the period. The most significant contributors to performance were Tyman, Lavendon, 4imprint, Wilmington and CVS which delivered market beating returns of 21.1%, 27.0%, 24.9%, 81.8% and 32.1% over the period, materially outperforming the 20.2% rise in the Small Cap index. Tyman continued its strong run, with the shares re-rating as trading conditions improved in its key end market - North American residential construction. We continue to believe this market is in the foothills of a multi year recovery, and that the operational gearing in its business model has the potential to drive several years of exciting profit growth. Lavendon has benefitted from a recovery in its highly profitable Middle East markets. Self help is also improving returns in its UK and European markets, where demand is less buoyant. There have been continued earnings upgrades over the period, and the rating remains below mid cycle levels.
4imprint's US division, which accounts for more than 90% of reported profits, continued to generate organic revenue growth in the low teens. As a clear market leader with less than 2% share of its addressable market, we believe there are many years of high growth ahead. Its shares have re-rated over the period, but the valuation does not look expensive given the growth profile and the high continuing dividend yield of 4.2%. Wilmington staged a spectacular recovery over the period. Its strong cash generation has paid down debt, as well as maintaining a generous dividend. Earnings growth had disappointed over the past two years with a long anticipated recovery not crystallising. Since June, there has been evidence that earnings momentum is improving. The shares have re-rated on this, and some excitement around the appointment of Tony Foye as finance director. Foye was formerly the longstanding and highly regarded finance director at Informa. He purchased c.£500k worth of shares, which was taken extremely positively by the market.
CVS Group's recent results have been well received by the market, showing both a return to underlying sales growth across its practices, further growth of the nascent online business, and inorganic growth funded by the company's strong cash flows. The company also announced initiatives to materially enhance its corporate governance practices, which were well received by shareholders.
Another strong performer over the period was Brewin Dolphin. We had been in the process of building a stake when the shares ran hard leaving us with a modest position built at attractive prices.
Bottom 5 contributors to performance
Company Valuation at Period
period end Attribution £'000 (basis points)
E2V Technologies 6,999 (99)
Journey Group 878 (56)
Optos Sold (16)
Kewill Sold 0
Psion Sold 0
E2V disappointed over the period and acted as a drag on the Company's NAV per share. Following a strong year to March 2012, trading in the six months that followed was more challenging. This has been driven by some weakness in end markets, as well as delays on some deliveries of products to its space customers. Despite the lower sales, profit margins have been defended effectively. This has been made possible by a recalibration of the company's cost base since 2009 to switch fixed costs to variable costs. We believe the market reaction has been too severe, to what we perceive to be short term issues, and re-built some of the position at highly attractive price levels. Significant medium term and long term growth opportunities exist, which is not reflected in the company's rating. In addition, the rating is at a considerable discount to precedent M&A, including the multiple achieved by the sale of the company's own non-core assets in May 2012. With the balance sheet now largely ungeared, the company has several options to enhance value.
Journey Group shares fell by 31% over the period, despite limited and mostly positive contract newsflow. The company now has significant net cash balances, good growth prospects and a meagre rating. However, with a market cap of c.£10m and a low free float, it is effectively a penny share and off the radar for many investors.
Optos was exited during the period, following the disappointments in Q2 2012, our concerns around operating cashflow performance and an inability to complete our due diligence. Psion and Kewill were also exited over the period, as they were acquired by Motorola and Francisco Partners respectively.
The level of portfolio activity picked up compared with previous periods, with disposals of £6.6m (excluding distributions from unlisted investments) in the period representing around 9.1% of the weighted average NAV. In addition £3.3m of net distributions were received from unlisted investments. £8.1m of purchases were made with four new investments made, including Brewin Dolphin and XP Power.
Proceeds came from top slicing of new investment and three full exits. Strong performances from 4imprint, Lavendon, Tyman and RPC necessitated some top slicing. In addition, the Company exited its positions in Kewill, Optos and Statpro. Kewill was subject to a successful bid from Francisco Partners and the Company exited with an acceptable return. The remaining Statpro shares were sold. The large ongoing investment in its new Revolution product suite is dampening earnings. Until this suite gains material traction, we do not believe that the market will value the group properly and capital is better invested elsewhere for now. Nevertheless, Statpro has been a highly successful investment for the Company, returning c.2.0x cash and 24% IRR over the ownership period. The Company had taken a small stake in Optos earlier in 2012, being attracted to its leading technology and growth potential. However, we were unable to complete due diligence to our satisfaction, and became concerned about an unanticipated divergence between reported profits and cash generation.
We deployed the proceeds into enlarging existing holdings and establishing small to medium weights in four new investments. Existing positions in E2V and Gooch & Housego were increased on the back of share price weakness and solid results respectively. Following the failure of the take private at Goals Soccer, led by Ontario Teachers Pension Plan, we increased the stake significantly over the quarter, and now have a 5% holding in the company. The background to these investments has been detailed in prior reporting periods. £ 2.6m was deployed in new investments, mainly XP Power (£1.3m), and Brewin Dolphin (£0.7m). All were made through market purchases, largely due to a paucity of attractive secondary equity issuance during the period.
XP Power is a leading designer, engineer and manufacturer of power supplies and converters. It focuses on the low volume/ high value market segment, where the end products tend to be business machines with multi year product life cycles, in comparison to supplying high volume/low value consumer electronics customers, typically operating on 9-12 month product life cycles. Over the past decade, it has transformed from distributor to integrated designer and manufacturer, and sells to a very broad global customer base. The company suffered from a weak start to 2012, which led to earnings downgrades and a significant de-rating. The company has a very high return on capital employed, is strongly cash generative and has good growth prospects across the cycle. Given the high operational gearing in the business, recovering end markets through 2013 should drive substantial earnings growth. A strong balance sheet and a shareholder friendly dividend policy also attracted. At our point of entry, the company was priced for negligible growth.
Brewin Dolphin is one of the largest UK private client brokers. Created from a series of mergers over many years, the company has been operating with suboptimal and expensive IT systems across its national branch network. The company is in the process of harmonising and updating to a single IT system, which should deliver returns which are much improved and closer to those of its direct peers on a steady state basis. Given its business model, there is also the prospect for additional earnings growth as equity markets recover. We believe it has prepared well for the implementation of the Retail Distribution Review, and does not deserve to trade at such a discount to its direct peers.
As ever, we remain highly selective when making new investments. The shrinking nature of the FTSE Smaller Companies Index is leading us to increasingly look to the higher quality stocks quoted on AIM. Since 2000, the number of companies making up the FTSE Small Cap ex Investment Trusts index has fallen from close to 438 to 135 as at the end of 2012 - a fall of some 69%.
Companies quoted on AIM now account for a similar proportion of the direct portfolio as companies in the FTSE Small Cap index. AIM companies have a reputation for poor returns and governance. In some cases, this is justified. However, there are a good number of high quality companies, with good governance on AIM which we find fit our investment criteria. Given our highly selective investment criteria, we have the benefit of being able to pick and choose what we perceive to be the best opportunities to generate an attractive risk adjusted return for our clients.
As in recent reporting periods, secondary fundraisings were very rare.
The portfolio remained highly focused, with a total of 18 direct holdings and with the top 10 holdings accounting for 8 1.7% of the invested portfolio at the end of the financial period. The portfolio remains predominantly invested in quoted equities, however the percentage of the portfolio invested in unlisted securities (including Strategic Recovery Fund ("SRFII")) changed from 19.3 to 12.3% at the end of the period due to distributions from these funds. 4.9% of the portfolio was invested in cash at the period end.
Portfolio as at 31 December 2012 - Largest Investments
% of % of
Date of portfolio at portfolio at % of
Sector first Cost Valuation 31 December 30 June net
Company Classification investment £'000 £'000 2012
Strategic Unquoted Jul 2009 955* 8,431 12.3 17.2 11.7
Recovery investment Fund II
Tyman** Manufacturing Apr 2007 4,716 8,178 11.9 12.2 11.3
E2V Technology Oct 2009 3,581 6,999 10.2 10.1 9.7 Technologies
4imprint Support Feb 2006 4,759 6,698 9.7 8.4 9.3
Lavendon Support Nov 2009 2,985 5,904 8.6 8.5 8.2
KCOM Group Telecoms May 2007 2,653 5,339 7.8 7.8 7.4
Allocate Technology Dec 2009 3,157 4,127 6.0 5.7 5.7
CVS Group Retail Oct 2010 2,513 3,991 5.8 4.3 5.5
RPC Group Manufacturing Feb 2007 1,668 3,318 4.8 6.3 4.6
Goals Soccer Leisure Mar 2012 2,992 3,140 4.6 0.1 4.3
29,979 56,125 81.7 80.6 77.7
* the cost reflects £3.3m of distributions during the period
**previously named Lupus Capital
Portfolio as at 31 December 2012 - Sector split
Support services 20.1%
Unquoted Investments 14.3%
Net cash 4.9%
Portfolio as at 31 December 2012 - Size split (by market capitalisation)
£100m - £300m 37.7%
Unquoted investments 14.3%
£300m - £500m 7.4%
Net cash 4.9%
Operationally the majority of the portfolio has continued to perform well, although in many cases this has yet to be reflected in their ratings. We believe that Allocate and E2V have suffered from temporary weak trading, but remain fundamentally attractive business models. RPC has seen some patchy trading, with significant year on year variances in monthly performance, alongside some weak demand in a few end markets. As a result, it has decided to instigate a further round of restructuring, called "Fitter for the Future". If underlying demand is flat, this should underpin high single digit earnings growth over the next three years. In addition, it has decided to reduce capex back from historically high levels, which will improve the rate of debt pay down.
Mecom remains the one investment exposed to significant structural headwinds. The outlook for print advertising revenue in its end markets remains poor. However, the board has committed to break up the business and is well advanced with its strategic review.
Consensus median portfolio Strategic Equity characteristics Capital Smaller Companies
Price/Earnings ratio (FY1) 11.0 9.1
Dividend yield 3.5% 3.5%
Price/ Book ratio 2.2 0.7
Price/ Sales ratio 1.0 0.3
Price/Cashflow ratio 8.5% n/a
SVG cash flow yield 14.6% n/a
Forecast earnings growth (FY1) 10.0% 9.8%
Forecast net debt to EBITDA 0.5 1.8
Source: Factset Portfolio Analysis System, Investec, Peel Hunt.
The financial and valuation characteristics of the Company's portfolio compared with the average FTSE Small er Company shows marginally higher earnings growth, at a marginally higher p/e ratio, with a higher dividend yield and a much stronger balance sheet. There are two key implications of this data set.
Firstly, on a balance sheet adjusted basis (i.e. with similar levels of net debt, achieved through a return of capital and share consolidation), the Company's portfolio would trade at a significantly lower p/e multiple with improved earnings growth. Secondly, in our opinion, properly utilised, the strong balance sheets of the portfolio companies allow their boards many more options to enhance shareholder value than the average small cap company. These options include increasing the dividend pay out ratio, making earnings enhancing acquisitions and returning capital to shareholders. In comparison, the "risky" highly geared small cap recovery stocks tend to be reliant on benign or improving end markets for earnings growth, rather than the actions of their boards.
Over the period the Company received a total of £3.3m from SRFII and £35,000 from Vintage I. The SRFII investment period ended in June 2011 and the fund is now a distributing vehicle. The outstanding commitments relating to Vintage is £1.3m and its manager has communicated that it does not expect to make any further net draw downs.
The risks dominating the headlines over the first part of 2012 appear to have been shrugged off, and global macro risks remain. The European banking system remains broken. UK corporate lending continues to be restricted by the need to shrink balance sheet exposures. Western governments remain grossly indebted and have yet to grasp the nettle and drive through the necessary structural reforms required to reduce expenditure and waste.
Newsflow from North America continues to surprise on the upside. The housing market is clearly recovering. There are reportedly shortages of construction workers. US consumers have repaired their balance sheets. Corporates have strong balance sheets. The fiscal cliff has been averted. Successful negotiation of the debt ceiling is likely; the world's largest economy is unlikely to self engineer a debt default. As in many previous recessions, we anticipate the US to lead the global economy back to growth.
UK growth remains sclerotic. However, there are mixed signals. Private sector employment hit an all-time high at the end of October, more than compensating for jobs being shed in the public sector. However, there is continued wage constraint, with real wage increases running at in excess of -1%. European growth remains challenged, but we believe that demand is bumping along the bottom.
Nevertheless, with governments, the UK included, unwilling to dispense the bitter medicine of cost cutting, the reduction in the real debt burden is most likely to be achieved by further quantitative easing and encouraging their own currencies to depreciate.
As well as public sector indebtedness, four key macro factors shape our investment thinking over the medium to long term: 1) risk of inflation 2) relative weakening of sterling, especially against the US Dollar 3) rising interest rates 4) the low likelihood of significant real wage inflation across the economy.
In spite of these concerns, we continue to believe that the medium to long term outlook for selected UK equities remains positive. Unlike governments, the vast majority of quoted companies have very strong balance sheets. Corporates are also spending less than they earn.
The four key drivers of capital returns remain present for equities - earnings growth, re-rating, corporate activity and de-gearing. We anticipate that re-rating and corporate activity will drive an increasing proportion of capital returns. Whilst markets have re-rated, valuations remain below long term averages. After a tentative start during 2012, we anticipate increased M&A activity in small and mid caps during 2013. Trading multiples still lag precedent M&A multiples by some margin.
Yield shrinkage and increasing capital risk on fixed income investments are forcing asset owners and institutions to consider reversing the trend of two decades of selling equities to buy bonds. There is increasing recognition that bond holders may suffer capital losses and are not risk free. Fund statistics are beginning to show net inflows to equity funds and outflows from fixed income products. If this trickle gathers momentum, there could be a sharp and substantial re-rating of equities.
UK Smaller Companies was a top performing asset class during 2012, and is a top five performing asset class over the past decade, according to the Investment Management Association. This is despite continued redemptions and outflows from both open and closed ended smaller companies funds since 2002. UK Smaller Company equities remains an under owned asset class by institutions and pension funds. Given the limited liquidity of the asset class, any significant inflows is likely to drive a material re-rating.
We continue to believe that UK Smaller Companies should disproportionately benefit from a recovery in M&A. Their smaller size makes financing transactions more straightforward, and there tend to be more suitors.
The positioning of the portfolio remains unchanged, with a focus towards cash generative, niche market leaders. These companies should be able to pass on price increases in the event of inflation returning, protecting real returns to shareholders. High levels of overseas earnings risks exposure to any one geographic area, and provides protection against a weakening of sterling. Modest financial gearing, or the capability to gear up is also an attraction, provided there is negligible refinancing risk and protections against rising interest rates. The lower financial gearing of the portfolio companies offers them options to enhance shareholder value, regardless of the conditions of the financial markets. They have significant financial capacity to fund acquisitions, without requiring additional equity, which would be earnings enhancing. Alternatively, they could return more capital to shareholders through increasing their dividend payout ratios, instigating special dividends, or where their shares are lowly rated, buybacks or tender offers.
We remain wary of very highly geared recovery investments, particularly those which are struggling to service their interest bills whilst simultaneously paying down debt and are reliant on some external market improvement. These companies do not have the balance sheet strength to return capital or increase dividends, or make acquisitions. The recent re-rating many of these shares have enjoyed, is driven by an anticipation of flawless recovery.
The portfolio should disproportionately benefit from a recovery in M&A given these characteristics, the absence of blocking shareholders from the shareholder registers and a small number of holdings with defined benefit pension deficits. The SVG free cash flow yield of the portfolio has increased and the aggregate valuation looks highly attractive again on most metrics.
To conclude; in our opinion there are far more reasons to expect investment in public equities to deliver above average returns over the next decade than to be fearful. We anticipate further progress in growing the Company's NAV.
Top 10 Investee Company Review
4imprint Group is the fourth largest distributor of promotional products in the world with an international network of companies in the UK, USA, Hong Kong and Europe. We have been involved with the company since a change of management in 2003. The company has benefitted recently from material upgrades to forecast earnings. Following the disposal of Brand Addition, virtually all of the profits of the group are generated by the fast growing US business. The company has a significant net cash balance. Funds managed by SVGIM currently hold approximately 11% of the company's equity.
Allocate Software is the leading workforce optimisation software applications provider for global organisations with large, multiskilled workforces. It is the clear European market leader in the healthcare vertical market, where the compelling return on investment for clients is driving significant growth. It is also the clear lead provider of optimisation software for the global offshore and defence markets. A strong management team is focused on delivering continued profitable growth, maximising the commercial potential of the product suite. SVG became a major shareholder as part of a placing to fund the acquisition of its Nordic equivalent, Timecare AB, in December 2009. The company has subsequently made four further acquisitions of complementary businesses - Dynamic Change, Real Time Health and Zircadian in the UK and RosterOn in Australia. The quality and visibility of earnings is set to improve significantly as early contracts renew. Funds managed by SVGIM currently hold approximately 8% of the company's equity.
CVS Group is the UK's leading operator of veterinary practices, with a market share of c.12%, several times the size of its nearest competitor. CVS has followed a strategy of consolidating the market through the acquisition of single and small chains of practices, largely funded by debt. Given the economics of scale in vetinary drug and products purchasing, the roll up economics are compelling. SVG became a shareholder following a period of disappointing trading. The shares de-rated significantly as disappointed growth investors exited and other investors concerned about the level of borrowings reduced their holdings. With limited ongoing capex requirement, we believed that the company could degear rapidly and still continue its roll up strategy. The entry valuation was undemanding on a cash flow basis and demand for its services is less discretionary than for many other retailers. Funds managed by SVGIM currently hold approximately 4% of the company's equity.
E2V Technologies is a global market leader in the design and manufacture of specialist electronic components and low volume, high value, high reliability semiconductors, predominately for the medical, aerospace, defence and industrial markets. An ill-timed acquisition in September 2008 funded by debt left the balance sheet of the business over-stretched as the economic downturn began. A new finance director, well known to SVGIM, was appointed in May 2009. The management team acted, raising new equity to pay down debt as well as restructure the UK and French cost base, a process which is now largely complete. The Company made its initial investment during October 2009 via a placing and a deeply discounted rights issue to refinance the balance sheet. The restructuring has been executed flawlessly. The final phase was disposal of non-core assets in 2012, which has virtually eliminated debt. The group remains materially undervalued compared to precedent M&A multiples in its sector. Funds managed by SVGIM currently hold approximately 9% of the company's equity.
Goals Soccer is a developer and operator of 5-a-side soccer centres in the UK, trading from 42 centres. In early 2012, the company announced that it would significantly reduce the speed of rolling out new sites for 12-18 months. Given that the roll out of sites requires significant capital, the impact of this change was to increase the free cash generation of the business and drive a large degearing of its balance sheet. The entry valuation was a significant discount to precedent M&A - specifically the acquisition of its only major competitor, Powerleague, by Patron Capital in 2009. Funds managed by SVGIM currently hold approximately 5% of the company's equity.
Gooch & Housego is a global market leader in the design and manufacture of specialist optical components and subsystems. SVGIM previously invested in the company during 2010 and knows the business and management team well. The company's shares de-rated significantly at the end of 2011 and early 2012, driven by concerns over slowing activity in their industrial division. SVGIM took advantage of this weakness in the share price to rebuild a stake at a significantly lower level than its exit price in late 2010. We believe that trading patterns will re turn to normal this year. The new product development pipeline, and ramping up of volumes on existing contracts has the potential to deliver significant growth over the medium term. A strong balance sheet will enable the company to augment this organic growth with acquisitions. Funds managed by SVGIM currently hold approximately 3% of the company's equity.
KCOM Group is a provider of communications solutions to businesses and the public sector in the UK. It also has a very strong regional consumer-based business based around Hull in East Yorkshire. Following discussions instigated by shareholders the company announced major changes to its management team in November 2008. Following further consultation with shareholders the company has implemented an innovative remuneration package that closely aligns shareholders and management. Since then, the company has undergone a strategic review and announced an important network sharing deal with BT Group. The positive impact of these changes and the company's growth potential has taken time to be translated into headline sales growth and many potential shareholders are sceptical that the growth will emerge. However, the proportion of recurring revenues, and therefore quality of earnings continue to increase, the cash and dividend returns remain strong. Given the strong cash generation over the past four years, we believe that the company could support significantly higher levels of financial gearing. Funds managed by SVGIM currently hold approximately 4% of the company's equity.
Lavendon Group is the market leader in the rental of powered aerial work platforms in both Western Europe and the Gulf States. The group entered the current downturn having over-spent on equipment, and with an overstretched balance sheet. The nature of powered access equipment is such that capital expenditures can be reduced materially for a significant amount of time without detriment to the fleet. We believed that the company would generate significant surplus cash flow over the two years following investment which would be used to pay down debt and thus create value for equity shareholders. We invested in the company via a fundraising in late 2009 which brought the company's debt down to high but manageable levels, and have been actively engaged with the board to help drive improved returns. Since 2009, the company has met its debt reduction targets, announced an operational and strategy review and executive board changes. A new group CEO was appointed in Q4 2011. Trading has been stronger in 2012 than many anticipated, with a notable recovery in the highly profitable Middle Eastern business unit. Funds managed by SVGIM currently hold approximately 8% of the company's equity
Tyman is a leading international supplier of building products to the door and window industry, and was the world's leading manufacturer of marine breakaway couplings. The company has significant operations in nine separate countries across Europe, the Americas, Asia and Australasia. The building products division enjoys clear market leadership in a number of niches, with a highly diversified customer base, serving both the new build and RMI (repair and maintenance) markets. The building products division has been adversely impacted by the significant fall in residential construction activity experienced since 2007, which, combined with a geared balance sheet, led to a material fall in the share price through 2008. We began building our stake in the company in late 2009 following the appointment of a new chairman, who has subsequently reconstituted the executive management and non-executive board. Since then, strong cash flows and a disposal of the non-core marine couplings business have reduced the debt burden substantially. We believe that there is substantial upside from a medium term recovery in the end markets of the building products division in North America. In addition, it has management capability and balance sheet capacity to act as a consolidator which should enhance returns further. Funds managed by SVGIM currently hold approximately 6% of the company's equity.
RPC Group is Europe's leading manufacturer of rigid plastic packaging. Following lobbying from SVGIM and another shareholder acting in concert the group has initiated a strategic and operational review and made substantial changes to its board. The management team has performed well against RPC's new objectives, leading to a significant reduction in group debt and ongoing focus on improving return on invested capital. As the restructuring ended, RPC acquired its smaller Scandinavian competitor, Superfos, funded by a mixture of debt and new equity. It is clear that this acquisition has created value through substantial cost synergies, although it is too early to judge whether sales synergies will be delivered. Although the Company has been an investor for some five years, we believe that good upside still exists as the market continues to digest the improved focus on shareholder returns. Funds managed by SVGIM currently hold approximately 2% of the company's equity.
SVG Investment Managers Limited
18 February 2013
All statements of opinion and/or belief contained in this Investment Manager's report and all views expressed and all projections, forecasts or statements relating to expectations regarding future events or the possible future performance of the Company represent SVG Investment Managers Limited's own assessment and interpretation of information available to it at the date of this report. As a result of various risks and uncertainties, actual events or results may differ materially from such statements, views, projections or forecasts. No representation is made or assurance given that such statements, views, projections or forecasts are correct or that the objectives of the Company will be achieved.
INTERIM MANAGEMENT REPORT
The important events that have occurred during the period under review are set out in the Chairman's report and Investment Manager's report, which also include the key factors influencing the financial statements.
The Directors do not consider that the principal risks and uncertainties have changed since the publication of the annual report for the year ended 30 June 2012. The principal risks are set out in the annual report which is available at www.strategicequitycapital.com.
In summary these risks are:
• General risk;
• Market risk;
• Regulatory risks;
• Financial risks; and
• Financial instruments.
The Directors believe, bearing in mind the nature of the Company's business and assets, that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts.
The Directors confirm that to the best of their knowledge:
• the condensed set of financial statements has been prepared in accordance with the Statement on Half Yearly Financial Reports issued by the International Accounting Standards Board and gives a true and fair view of the assets, liabilities, financial position and profit/(loss) of the Company.
• the interim management report includes a fair review of the information required by:
(a) DTR 4.2.7 of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and
(b) DTR 4.2.8 of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Company during that period; and any changes in the related party transactions described in the last annual report that could do so.
This Half Yearly Report was approved by the Board of Directors on 18 February 2013 and the above responsibility statement was signed on its behalf by John Hodson, Chairman.
STATEMENT OF COMPREHENSIVE INCOME
for the 6 month period ended 31 December 2012
6 month period ended Year ended 6 month period ended
31 December 2012 30 June 2012 31 December 2011
unaudited audited unaudited
Revenue Capital Revenue Capital Revenue Capital
return return Total return return Total return return Total
Note £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Gains/ 7,087 7,087 - (1,818) (1,818) - (7,091) (7,091) (losses) on
7,087 7,087 - (1,818) (1,818) - (7,091) (7,091)
Dividends 2 858 897
Interest 2 15 9
- 9 873 - 873 1,921 - 1,921 906 - 906
Investment 8 (249) - (249) (442) - (442) (212)
- (212) Manager's
Other 3 (171) (61) (232) (305) (129) (434) (138)
- (138) expenses
Total (420) (61) (481) (747) (129) (876) (350)
- (350) expenses
Net return/ 453 7,026 7,479 1,174 (1,947) (773) 556 (7,091) (6,535) (loss)
Interest - - - (48) - (48) (25)
- (25) payable
Total - - - (48) - (48) (25)
- (25) finance
Net return/ 453 7,026 7,479 1,126 (1,947) (821) 531 (7,091) (6,560) (loss)
Taxation - - - - - - -
Net return/ 453 7,026 7,479 1,126 (1,947) (821) 531 (7,091) (6,560) (loss) after
Returns per pence pence pence pence pence pence pence pence pence Ordinary
- Basic 5 0.68 10.56 11.24 1.61 (2.79) (1.18) 0.76 (10.12) (9.36)
The total column of this statement is the Statement of comprehensive income of the Company. All items in the above statement derive from continuing operations. These accounts are unaudited and have not been reviewed by the Company's auditors. These are not the Company's statutory accounts. These accounts have been prepared under International Financial Reporting Standards, and in accordance with the accounting policies applied in the annual report which is available at www.strategicequitycapital.com. STATEMENT OF CHANGES IN EQUITY for the 6 month period ended 31 December 2012 Share Capital Share premium Special Capital redemption Revenue
capital account reserve reserve reserve reserve Total
Note £'000 £'000 £'000 £'000 £'000 £'000 £'000
For the 6 month period ended 31 December 2012
1 July 2012 6,731 5,246 51,734 2,170 1,250 1,508 68,639
Net return and - - - 7,087 - 453 7,540 total comprehensive
income for the period
Dividend paid 4 - - - - - (1,010) (1,010)
31 December 2012 6,462 5,246 48,986 9,196 1,519 951 72,360
For the year to 30 June 2012
1 July 2011 7,011 5,246 54,435 4,117 970 691 72,470
Net (loss)/return - - - (1,818) - 1,126 (692) and total
comprehensive income for the year
Dividend paid 4 - - - - - (309) (309)
Tender offer - - - (129) - - (129) expenses
Shares bought back (280) - (2,701) - 280 - (2,701) for cancellation
30 June 2012 6,731 5,246 51,734 2,170 1,250 1,508 68,639
For the 6 month period ended 31 December 2011
1 July 2011 7,011 5,246 54,435 4,117 970 691 72,470
Comprehensive - - - (7,091) - 531 (6,560) income for the
Dividend paid 4 - - - - - (309) (309)
31 December 2011 7,011 5,246 54,435 (2,974) 970 913 65,601
These accounts have been prepared under International Financial Reporting Standards, and in accordance with the accounting policies.
BALANCE SHEET as at 31 December 2012
As at As at As at 31 December 30 June 31 December 2012 2012 2011 unaudited audited Unaudited
Note £'000 £'000 £'000
Investments held at fair value 6 68,804 66,648 63,989 through profit or loss
Receivables 70 222 200
Cash and cash equivalents 3,725 2,204 1,581
3,795 2,426 1,781 1,781
Total assets 72,599 69,074 65,770
Payables 239 435 169
Net assets 72,360 68,639 65,601
Capital and reserves:
Share capital 7 6,462 6,731 7,011
Share premium account 5,246 5,246 5,246
Special reserve 48,986 51,734 54,435
Capital reserve 9,196 2,170 (2,974)
Capital redemption reserve 1,519 1,250 970
Revenue reserve 951 1,508 913
Total shareholders' equity 72,360 68,639 65,601
Net asset value per share pence pence pence
Basic 111.97 101.96 93.55
Shares in issue number number number
Ordinary shares 7 64,624,655 67,317,324 70,122,303
These accounts have been prepared under International Financial Reporting Standards and in accordance with the accounting policies. STATEMENT OF CASH FLOWS for the 6 month period ended 31 December 2012 6 month 6 month period ended Year ended period ended 31 December 30 June 31 December 2012 2012 2011 unaudited audited unaudited
Note £'000 £'000 £'000
Net return/(loss) before 7,479 (773) (6,535) finance costs and taxation
Adjustment for (gains)/losses (7,087) 1,818 7,091 on investments
Tender offer expenses 61 129 -
Interest paid - (48) (25)
Operating cash flows before 453 1,126 531 movements in working capital
Decrease/(increase) in 152 (5) 24 receivables
Increase/(decrease) in 8 (9) (826) payables
Purchases of portfolio (8,299) (6,932) (4,123) investments
Sales of portfolio investments 13,026 9,612 3,960
Net cash flow from operating 5,340 3,792 (434) activities
Equity dividend paid 4 (1,010) (309) (309)
Shares bought back in the (2,748) (3,474) - period
Tender offer expenses (61) (129) -
Net cash flow from financing (3,819) (3,912) (309) activities
Increase/(decrease) in cash 1,521 (120) (743) and cash equivalents for period
Cash and cash equivalents at 2,204 2,324 2,324 start of period
Cash and cash equivalents at 3,725 2,204 1,581
31 December 2012
These accounts have been prepared under International Financial Reporting Standards and in accordance with the accounting policies. NOTES TO THE HALF YEARLY REPORT FOR THE 6 MONTH PERIOD ENDED 31 DECEMBER 2012 1.1 Corporate information Strategic Equity Capital plc is a public limited company incorporated and domiciled in the United Kingdom, registered in England and Wales whose shares have a premium listing on the London Stock Exchange. The Company is registered as a public limited company and is an investment company as defined by Section 833 of the Companies Act 2006. The Company carries on business as an investment trust within the meaning of Sections 1158/1159 of the Corporation Tax Act 2010. 1.2 Basis of preparation/statement of compliance The condensed interim financial statements of the Company have been prepared on a going concern basis and in accordance with International Accounting Standard ("IAS") 34, `Interim financial reporting' issued by the International Accounting Standards Board ("IASB") (as adopted by the EU). They do not include all the information required for a full report and financial statements and should be read in conjunction with the report and financial statements of the Company for the year ended 30 June 2012, which have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the EU. Where presentational guidance set out in the Statement of Recommended Practice ("SORP") for investment trusts issued by the Association of Investment Companies ("AIC") (as revised in 2009) is consistent with the requirements of IFRS the Directors have sought to prepare financial statements on a basis compliant with the recommendations of the SORP. The condensed interim financial statements do not comprise Statutory Accounts within the meaning of Section 434 of the Companies Act 2006. Statutory Accounts for the year ended 30 June 2012 were approved by the Board of Directors on 26 September 2012 and delivered to the Registrar of Companies. The report of the Auditors on those Financial Statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498 of the Companies Act 2006. Convention The financial statements are presented in Sterling, being the currency of the primary environment in which the Company operates, rounded to the nearest thousand. Segmental reporting The Directors are of the opinion that the Company is engaged in a single segment of business, being investment business. 1.3 Accounting policies The accounting policies, presentation and method of computation used in these condensed financial statements are consistent with those used in the preparation of the financial statements for the year ended 30 June 2011. 1.4 New standards and interpretations not applied Implementation of changes and accounting standards in the financial period, as outlined in the 30 June 2012 Statutory Accounts, had no significant effect on the accounting or reporting of the Company. 2. Income 6 month Year 6 month Period ended Ended period ended 31 December 2012 30 June 2012 31 December 2011 £'000 £'000 £'000
Income from investments:
UK dividend income 841 1905 897
Overseas dividend 17 - - income
Liquidity fund income 15 11 5
873 1,916 902
Other income: - 5 4
Other interest income - 5 4
873 1,921 906
Total income comprises:
Dividends 858 1,905 897
Interest 15 16 9
873 1,921 906
Income from investments:
Listed UK 841 1,905 897
Listed overseas 32 11 5
873 1,916 902 3. Other expenses
6 month period ended 6 month period ended
31 December 2012 Year ended 30 June 2010 31 December 2011 (unaudited) (audited) (unaudited) Revenue Capital Revenue Capital Revenue Capital
return return Total return return Total return return Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Secretarial 38 - 38 50 - 50 10 - 10 services*
audit 14 - 14 26 - 26 14 - 14 services
Directors' 52 - 52 95 - 95 49 - 49 remuneration
Other 67 61† 128 134 129† 263 65 -
171 61 232 305 129 434 138 - 138
* included within this amount is a receipt of £Nil (30 June 2012: £27,000; 31 December 2011: £27,000) representing a refund from HMRC of
VAT on administration fees.
† Expenses incurred in relation to the tender offer process.
For the year to 30 June 2012, the Company paid a final dividend of 1.50p (30 June 2011: 0.44p) per Ordinary share on, 67,317,324 shares, amounting to £ 1,009,760 (30 June 2011: £308,538). The dividend was paid on 16 November 2012 to shareholders on the register at 19 October 2012.
5. Return per Ordinary share
6 month period ended Year ended 6 month period ended 31 December 2012 30 June 2012 31 December 2011 Revenue Capital Revenue Capital Revenue Capital return return Total return return Total return return Total pence pence pence pence pence pence pence pence pence
Return per 0.68 10.56 11.24 1.61 (2.79) (1.18) 0.76 (10.12) (9.36) Ordinary share
Returns per Ordinary share are calculated based on 66,527,084 (30 June 2012: 69,723,696 and 31 December 2011: 70,122,203) being the weighted average number of Ordinary shares, excluding shares held in treasury, in issue throughout the period. 6. Investments 31 December 2012 £'000
Investment portfolio summary:
Listed investments at fair value through profit 58,460 or loss
Unlisted investments at fair value through 10,344 profit or loss
Listed Unlisted 31 December 2012
£'000 £'000 £'000
Analysis of investment portfolio movement
Opening book cost 50,522 4,569 55,121
Opening investment holding gains 2,822 8,705 11,527
Opening valuation 53,374 13,274 66,648
Movements in the period:
Purchases at cost 8,095 - 8,095
Sales - proceeds (9,692) (3,334) (13,026)
- realised gains on sales 2,542 28 2,570
Decrease in unrealised appreciation 4,141 376 4,517
Closing valuation 58,460 10,344 68,804
Closing book cost 51,497 1,263 52,760
Closing investment holding gains 6,963 9,081 16,044
58,460 10,344 68,804
Investments in unquoted investment funds are generally held at the valuations provided by the managers of those funds. The valuations for SRF II and Vintage 1 are as at 31 December 2012 and 30 November 2012 respectively.
A list of the top ten portfolio holdings by their aggregate market values is given in the Investment manager's report.
31 December 2012 Total £'000
Analysis of capital gains:
Gains on sale of investments 2,569
Foreign exchange gains 1
Movement in investment holding gains 4,517
7,087 The Company is required to classify fair value measurements using a fair value hierarchy that reflects the subjectivity of the inputs used in measuring the fair value of each asset. The fair value hierarchy has the following levels: • Quoted prices (unadjusted) in active markets for identical assets or liabilities ("level 1"). • Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) ("level 2"). • Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) ("level 3"). The level in the fair value hierarchy within which the fair value measurement is categorised is determined on the basis of the lowest level input that is significant to the fair value of the investment. The following table analyses within the fair value hierarchy the Company's financial assets and liabilities (by class) measured at fair value at 31 December 2011. Financial instruments at fair value through profit and loss Level 1 Level 2 Level 3 Total £'000 £'000 £'000 £'000
Equity investments and 58,460 8,431 1,913 68,804 limited partnership interests
Liquidity funds - 2,850 - 2,850
Total 58,460 11,281 1,913 71,654
Investments whose values are based on quoted market prices in active markets are classified within level 1, include active listed equities. The Company does not adjust the quoted price for these instruments.
Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within level 2. As level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information.
Level 3 instruments include private equity, as observable prices are not available for these securities the Company has used valuation techniques to derive the fair value. In respect of unquoted instruments, or where the market for a financial instrument is not active, fair value is established by using recognised valuation methodologies, in accordance with International Private Equity and Venture Capital ("IPEVC") Valuation Guidelines.
There were no transfers between levels for the period ended 31 December 2012.
The following table presents the movement in level 3 instruments for the period ended 31 December 2012 by class of financial instrument.
Equity investments £'000
Opening balance 1,827
Disposals during the period (6)
Total gains for the period included in the 92 Statement of comprehensive income
Closing balance 1,913
7. Share capital
31 December 2012 Number £'000
Allotted, called up and fully paid Ordinary 64,624,655 6,462 shares of 10p each:
During the period ended 31 December 2012 2,692,669 shares were repurchased by the Company for cancellation. At 31 December 2012 the Company held Nil (30 June 2012: Nil; 31 December 2011: nil) shares in treasury.
8. Investment Manager's fee
A basic management fee is payable to the Investment Manager at the lower of the annual rate of (i) the annual rate of 1% of the adjusted NAV of the Company or (ii) 1% per annum of the market capitalisation of the Company. In order to avoid double charging of basic management fees payable to the Investment Manager by the Company, the NAV of the Company is reduced by the aggregate of the value of the Company's Limited Partnership Interest in SRF II and the amount of the Company's undrawn loan commitment to SRF II. The basic management fee accrues weekly and is payable quarterly in arrears.
The Investment Manager is also entitled to a performance fee, details of which are set out below. No performance fee has been payable in the period.
9. Investment Manager's performance fee
The Investment Manager is entitled to a performance fee on the following terms:
● the Company's performance is measured over rolling three year periods ending on 30 June in each year, with the first performance period having commenced on 1 July 2008 and ended on 30 June 2011 and the current Performance Period having commenced on 1 July 2010 and ending on 30 June 2013;
● the Company's performance is measured by comparing the NAV total return per share over a performance period against the total return performance of the FTSE SmallCap ex Investment Companies Index, being the index against which the Board has historically compared the Company's investment performance;
● if the NAV total return per share (calculated before any accrual for any performance fee to be paid in respect of the relevant performance period) at the end of the relevant performance period exceeds both:
(i) the NAV per share at the beginning of the relevant performance period as adjusted by the aggregate amount of (a) the total return on the FTSE SmallCap ex. Investment Companies Index (expressed as a percentage) and (b) 2.0% per annum over the relevant performance period (`Benchmark NAV'); and
(ii) the high watermark (which is the highest NAV per share by reference to which a performance fee was previously paid) .
Currently the Investment Manager is entitled to 15% of any excess over the higher of the Benchmark NAV per share and the high watermark.
Payment of a performance fee that has been earned will be deferred to the extent that the amount payable exceeds 1.75% per annum of the Company's NAV at the end of the relevant performance period (amounts deferred will be payable when, and to the extent that, following any later performance period(s) with respect to which a performance fee is payable, it is possible to pay the deferred amounts without causing that cap to be exceeded or the relevant NAV total return per share to fall below the relevant Benchmark NAV per share and the relevant High Watermark).
The tax charge for the half year is £Nil (30 June 2012: £Nil and 31 December 2011: £Nil) based on an estimated effective tax rate of 0% for the year ended 30 June 2012. The estimated effective tax rate is 0% as investment gains are exempt from tax owing to the Company's status as an Investment Company and there is expected to be an excess of management expenses over taxable income.
11. Capital commitments and contingent liabilities
The Company has a commitment to invest €1,560,000 in Vintage 1 and an outstanding commitment of £Nil in SRF II. The manager of Vintage 1 has indicated it is unlikely to make any further net draw downs.
12. Related party transactions
SVGIM is regarded as a related party of the Company. The Investment Manager may draw upon advice from the Industry Advisory Panel ("IAP") of which Sir Clive Thompson, a Director of the Company, is a member. The IAP was established to provide advice to SVGIM in relation to the strategy, operations and management of potential investee companies.
The amounts payable to SVGIM, in respect of management fees, during the period to 31 December 2012 was £249,000 (30 June 2012: £442,000; 31 December 2011: £ 212,000), of which £135,000 (30 June 2012: £115,000; 31 December 2011: £ 101,000) was outstanding at 31 December 2012.
SVGIM has entered into Commission Sharing Arrangements with a number of executing brokers. Under this arrangement the amount of commission received by SVGIM in relation to trading activities carried out on behalf of the Company for the period to 31 December 2011 was £4,500 (30 June 2012: £4,000; 31 December 2011: £2,000) of which £3,000 (30 June 2012: £1,000; 31 December 2011: £Nil) was outstanding at 31 December 2012.
Directors & advisors
J Hodson* J E Cornish* I Dighé* M C Phillips* Sir Clive M Thompson * Independent of the Investment Manager Investment Manager
SVG Investment Managers Limited 61 Aldwych London WC2B 4AE Tel: 020 7010 8900
Secretary and registered office
Capita Sinclair Henderson Limited Beaufort House 51 New North Road Exeter EX4 4EP Enquiries: 01392 477513
Registrar and transfer office
Computershare Investor Services plc The Pavilions Bridgwater Road Bristol BS99 6ZY Tel: 0870 707 1285 Website: www.computershare.com
Canaccord Genuity Limited 88 Wood Street London EC2V 7QR
The Northern Trust Company 50 Bank Street Canary Wharf London E14 5NT
Ernst & Young LLP 1 More London Place London SE1 2AF
Stephenson Harwood LLP 1 Finsbury Circus London EC2M 7SH
The Half Yearly Financial Report will be posted to shareholders shortly. The Report will also be available for download from the following website: www.strategicequitycapital.com or on request from the Company Secretary.
NATIONAL STORAGE MECHANISM
A copy of the Half Yearly Financial Report will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: http://www.morningstar.co.uk/uk/nsm
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of this announcement.
-0- Feb/18/2013 16:43 GMT