Harbourvest Sl Regulatory News (HSLE)

5 October 2011

 

FOR IMMEDIATE RELEASE

 

RELEASED BY BNP PARIBAS FUND SERVICES (GUERNSEY) LIMITED

RESULTS ANNOUNCEMENT

 

THE BOARD OF DIRECTORS OF HARBOURVEST SENIOR LOANS EUROPE LIMITED ANNOUNCES REPORT AND AUDITED CONSOLIDATED RESULTS FOR THE PERIOD FROM INCORPORATION ON 7 APRIL 2010 TO 30 JUNE 2011

 

A copy of the Company's Full Year Report and Audited Consolidated Financial Statements is available via the following link: http://www.hvsle.com/download/HarbourVest_Annual_Report_Oct2011.pdf

 

Key Highlights at 30 June 2011

 

Ordinary shares	C shares
£100,359,872 Net Asset Value           ·  Calculated after the payment of two interim dividends of 1.00 pence per share ·    99.28 pence per share	£26,093,057 Net Asset Value ·    Calculated after the payment of issue costs ·    97.77 pence per share
87% Committed to or invested in senior secured loans ·    15 loans ·    Diverse and defensive industries in six European countries	12% Committed to or invested in senior secured loans ·    Two loans ·    Domiciled in Germany and the Netherlands
£2 million Interim dividends paid ·    Final interim dividend of 1.00 pence per share paid on 30 September 2011 ·    Future payments expected at Libor + 300 to 350 basis points	Special Dividend Payable ·    Income accrued on the C Share Portfolio for the period from             admission to the calculation date will be paid to C shareholders
47% NAV exposure to euros ·    53% NAV exposure to sterling ·    Exposure to six European countries	7% NAV exposure to euros ·    93% NAV exposure to sterling ·    Exposure to two European countries
Libor +448 basis points Weighted-average coupon of purchased loans ·    Primary loan coupons mid-target range ·    10 loans paying coupons of Libor +450 basis points or more	Libor  +440 basis points Weighted-average coupon of purchased loans ·    Two primary loans in portfolio

 

Key Features

 

HarbourVest Senior Loans Europe Limited invests in the senior secured loans of private equity-backed mid-market companies in Europe including the UK.

 

·    Pays dividends twice annually

·    Interest rate protection from floating rates

·    Secured asset class at the top of a company's capital structure

·    Zero gearing

·    Returns capital after June 2012

·    Ordinary and C shares listed on the main market of the London Stock Exchange

·    C shares will convert to ordinary shares on the basis of the respective net assets of both classes of shares calculated on 4 November 2011 at the latest

 

About the Company

 

The Company's objective is to provide income and capital growth through investment in existing or new senior secured loans of private equity-backed European mid-market companies.

 

The portfolio comprises senior secured loans issued by companies diversified by industry and geography.  All of the loans in which the Group invests are in the senior secured tier of the debt capital structure of a borrower's holding company (i.e. loans with first ranking security over the borrower's assets, and/or its shares). The Company does not invest in distressed loans.

 

Returns to shareholders will be in the form of dividends paid twice annually and, following the investment period which ends on 30 June 2012, capital distributions.  During the investment period capital realised through loan redemption or refinancing together with loan amortisation may be reinvested. 

 

On 4 May 2011 the Company listed C shares on the London Stock Exchange's main market following a Placing and Offer for Subscription (the "Placing").  It is the intention of the Directors, subject to market conditions, that the net proceeds of that Placing be substantially invested or committed in accordance with its investment policy as soon as possible in the context of a rapidly changing market environment.

 

During the period from admission of the C shares to 30 June 2011 the C shares generally traded above the 100 pence issue price and at a consistent premium to NAV.  The C share price closed at 100 pence on 30 June 2011, representing a premium of 2.4% to NAV.

 

During the period from admission of the ordinary shares to 30 June 2011, the ordinary shares have traded in a range of 94.88 pence to 102.5 pence and at a median premium to NAV of 3.1% within a range of (2.9%) to 5.7%. The ordinary shares closed at 100.5 pence on  30 June 2011, representing a premium of 1.2% to NAV.

 

Company Overview

 

HarbourVest Senior Loans Europe Limited (the "Company" or "HSLE") was incorporated with limited liability in Guernsey under the Companies Laws (Guernsey) 2008, as amended, on 7 April 2010. It is registered as a closed-ended investment scheme in accordance with the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, and the Registered Collective Investment Scheme Rules 2008 issued by the Guernsey Financial Services Commission (the "Commission").

 

HarbourVest Senior Loans Europe is managed by Harbourvest Senior Loan Advisers L.P. (the "investment manager") a limited partnership organised under the laws of the State of Delaware and which is an affiliate of HarbourVest Partners, LLC ("HarbourVest"), a private equity firm based in Boston, U.S.A, whose history dates back to 1982.

 

The Company issued 101,090,000 ordinary shares at 100 pence per share in May 2010 and these were admitted to the Official List of the UK Listing Authority and to trading on the Main Market of the London Stock Exchange on 26 May 2010.

 

The Company announced on 4 May 2011 that it had issued 26,688,900 C shares listed on the premium segment of the official list of the UKLA and admitted to trading on the London Stock Exchange's main market for listed securities. The total number of voting rights at 4 May 2011 increased to 127,778,900.

 

The Company is regulated by the Commission and is not regulated or authorised by the Financial Services Authority, but is subject to the Listing Rules applicable to closed-ended investment companies.

 

The registered office and principal place of business of the Company is BNP Paribas House, St Julian's Avenue, St Peter Port, Guernsey, GY1 1WA, Channel Islands.

 

For the purposes of efficient portfolio management, the Company has established one wholly-owned, Luxembourg incorporated subsidiary, Orange Senior Loans 1 S.à.r.l. which in turn itself has two wholly-owned, Luxembourg incorporated subsidiaries, Orange Senior Loans 2 S.à.r.l., and Orange Senior Loans 3 S.à.r.l.. Together, the Company and its subsidiaries, which have been incorporated for the purpose of holding primary and secondary loans respectively, form the Group.  All references to the Group in this document refer to the Company and its wholly-owned Luxembourg subsidiaries.

 

Where Libor is referenced in this document, it is used as a generic benchmark term. In regard to the sterling loans in the Company's portfolio, the benchmark is generally sterling Libor and for euro loans the benchmark is generally Euribor.

 

Chairman's Statement

 

I am delighted to present the first Annual Report of HarbourVest Senior Loans Europe Limited ("HSLE" or "the Company") for the period to 30 June 2011. On behalf of the Board, I would like to thank shareholders for their support during the Company's initial year.

 

Your Company was formed on 7 April 2010 to take advantage of opportunities to invest in senior secured loans of private equity-backed European mid-market companies. The Company raised gross proceeds of £101 million at launch and its ordinary shares were admitted to trading on the London Stock Exchange ('LSE') on 26 May 2010 with an opening net asset value ('NAV') per share of approximately 98.00 pence.

 

The Company has paid two interim dividends to holders of ordinary shares, each of 1.00 pence per share, on 30 September 2010 and 25 March 2011. It intends to pay a third interim dividend, also of 1.00 pence per share to holders of ordinary shares, on 30 September 2011. At 30 June 2011 the NAV per ordinary share was 99.28 pence and the share price was 100.5 pence.

 

Having substantially invested or committed its initial capital by the end of February 2011 in a high quality diversified portfolio, the Company raised further capital through an issue of C shares in April 2011. The gross proceeds of this issue amounted to £26.7 million; the C shares were admitted to trading on the LSE on 4 May 2011 with an opening NAV of approximately 97.75 pence per share. At 30 June 2011 the NAV per C share was 97.77 pence and the share price was 100 pence.

 

The terms of the C share issue provide that the assets attributable to the C shares will be invested and held in a separate pool from those attributable to the ordinary shares until a calculation time, which will be the earlier of the date at which at least 80% of these assets have been invested or committed in accordance with the Company's investment policy, or 4 November 2011, being six months from the date of admission of the C shares to the LSE. Within 30 business days of the calculation time the net assets attributable to the C shares will be merged with those attributable to the ordinary shares, and holders of C shares will receive ordinary shares at a conversion ratio pro rata to the NAV of the respective share classes.

 

Both the ordinary and C shares have for the most part traded at a modest premium to NAV since issue. Since the period end significant volatility has returned to stalk global markets. The Company's ordinary shares have not been immune, closing at the time of writing at 93.25 pence per ordinary share, while the C shares have remained higher at 99.25 pence. Whilst this is not surprising given the surrounding turbulence, the Board of Directors is monitoring the performance closely.

 

At 30 June 2011 the Company had completed or committed to transactions with a book value representing approximately 87% of the net proceeds of the ordinary shares ("the Ordinary Share Portfolio") and 12% of the net proceeds of the C shares ("the C Share Portfolio"). Until the conversion date, new investments are being allocated between the ordinary and C shares pro rata to the value of their respective asset pools.

 

The Company has been investing against a changeable background in which small and medium European businesses continue to demonstrate substantial demand for capital while banks remain under pressure to improve their capital ratios and continue to restructure their loan books. As a consequence, investment terms for new loans have generally remained attractive; the investment manager has invested the Ordinary Share Portfolio at a weighted-average coupon of Libor +448 basis points and the C Share Portfolio at a weighted-average of Libor +440 basis points. The portfolio has benefited from a rising trend in short-term interest rates.

 

The Company invests in a mix of primary and secondary loans and at the end of June 2011 the Ordinary Share Portfolio was invested and committed in the ratio of 45% to secondary loans and 55% to primary loans, as measured by the book value of the loans.

 

The Company invests in a mix of sterling and euro-denominated loans. At the end of June 2011 the Ordinary Share Portfolio was exposed 52% to sterling-denominated loans and 48% to euro-denominated loans, as measured by the book value of the loans, whilst the C Share Portfolio was comprised entirely of euro-denominated loans.

 

The Ordinary Share Portfolio is well diversified both by industry exposure and by geography. Full details of the portfolio's characteristics are provided regularly by the investment manager in monthly factsheets for investors, and the analysis at 30 June 2011 is included in the Investment Manager's Report on pages xx to xx.

 

I remain confident in the outlook for the Company. At the time of writing, the global markets have re-entered a particularly volatile phase with widespread falls in equity markets and yields on the government bonds of Italy and Spain remaining around 5.5% having spiked over 6% earlier in the summer. Short term interest rate rises currently look unlikely. However the steady increase in the three-month Libor and Euribor benchmarks during the period has benefited the Company with its focus on investing in senior secured floating rate loans. The Company invests defensively and avoids cyclical sectors. It has only one loan exposure to the southern Eurozone in its portfolio. The Company's investment manager has maintained its disciplined and cautious investment stance. It has avoided committing capital during the later spring and early summer period when transaction terms, combined with the deteriorating economic environment, provided unfavourable investment conditions. This approach has helped to protect the Company's NAV.  

 

In December 2010 the Company appointed a new corporate broker, Liberum Capital, and your Board is grateful for their support in broadening investor awareness and in sponsoring the C share issue.

 

I look forward to seeing shareholders at the Company's Annual General Meeting in Guernsey on 15 November 2011. I can be contacted through either the Company Secretary or the investment manager, both of whose details can be found at the back of this report.

 

 

 

 

Colin Maltby

Chairman

4 October 2011

 

Investment Manager's Report

 

Net Asset Value Performance

 

At 30 June 2011 HSLE's Net Asset Value ("NAV") for the ordinary shares was £100.36 million, or 99.28 pence per ordinary share.  This represents an increase of 1.28 pence per share, excluding interim dividends paid, or 1.3% from the opening estimated NAV of 98.00 pence per share as reported at 31 May 2010, based on the Company's net proceeds following admission.  It also represents an increase of 2.3 pence per share, or 2.4% from the NAV of 96.97 pence per share reported in the Company's Interim Report for the period ending 31 December 2010. 

 

At 30 June 2011, HSLE's NAV for the C shares was £26.09 million, or 97.77 pence per C share. This represents a 0.02% increase from the opening NAV at 31 May 2011 of 97.75 pence per share.

 

The combined net assets of ordinary shares and C shares for the period to 30 June 2011 were £126.45 million.

 

The NAV performance during the period reflects the payment of two interim dividends each of 1.00 pence per ordinary share on 30 September 2010 and 25 March 2011 as well as the initial investment of the Company's net proceeds. It also reflects the volatility of the euro, the Company's operating expenses, many of which are fixed, and the lag during the period between investments being settled and coupon payments flowing.

 

During the period the investment manager has focussed on sourcing and analysing transactions with an objective of investing the Company's assets. In view of the renewed economic turbulence within the Eurozone and the dynamic market trends in the leveraged loans market, the manager remains extremely cautious and vigilant in its investment selection. Particular emphasis is put on the required yield and the quality of the borrower. This is drawing out negotiations on terms and consequently slowing down the overall investment pace.  

 

Portfolio Overview

The Company invests in secondary and primary senior secured loans of private equity-backed mid-market companies.  The Company's portfolio is intended to comprise senior secured loans issued by companies across Europe including the UK, which have an enterprise value of up to €1 billion and which are diversified by industry.

 

The loans benefit from first ranking - known as first lien - security over the assets of the borrower and/or shares of the borrower's holding company.  Senior secured loans rank higher in seniority than all other loans, bonds or debt securities issued by companies and as a consequence have a higher level of recovery in the event of default.  The Company does not invest in distressed loans.

 

Secondary loans are generally purchased from motivated or distressed sellers, and often at a discount to their par value.  Primary loans may also occasionally offer a small original issue discount ("OID") which is the difference between the redemption price at maturity and the issue price, and may also offer arrangement fees.  An OID is typically used as an enhancement to interest payments. 

 

HSLE's ordinary share net proceeds were 87% committed or invested in 15 senior secured loans, as measured by their book value, at 30 June 2011. 

 

The Ordinary Share Portfolio has been committed or invested in a ratio of 45% to secondary loans and 55% to primary loans, as measured by their book value.  The weighted-average coupon of the ordinary invested and committed portfolio is Libor +448 basis points.  Since the Company reported to shareholders on 31 December 2010 coupons on primary deals have fallen from the top end of the Libor + 450 to 500 basis points range that had been seen prior to the Company's IPO.

 

The C Share Portfolio has committed to and invested in two primary loans at 30 June 2011, representing approximately 12% of its net proceeds. The weighted-average coupon of the C share committed and invested portfolio is Libor +440 basis points. 

 

The majority of the Company's portfolio is expected to be denominated in sterling and euros.  At 30 June 2011 the ordinary shares' NAV exposure to euros was approximately 47%. The C shares' NAV exposure to euros was approximately 7% at 30 June 2011, as the majority of cash and treasuries are held in sterling.

 

As explained in its Interim Report for the period ending 31 December 2010 the investment manager had two priorities immediately following admission: the first was to establish HSLE's availability, credentials and partnership ethos amongst senior lenders and private equity sponsors in order to develop the Company's market coverage and relationships; the second was to build a portfolio which met the investment policy and provided shareholders with a solid and defensive income stream with the opportunity for capital growth.

 

The investment manager concentrated initially on investing capital into newly issued, or primary, senior loans.  Negotiations over primary transactions generally take place over a shorter timeframe than that for secondary deals, which usually require more complex due diligence and may take longer to complete.  Since 31 December 2010 conditions in the secondary market have continued to be changeable. Lenders have continued to defer decisions to rebalance their loan books while those that have taken action have tended to sell off significant blocks of their loan books to a single investor.

 

Investment momentum entered a quieter phase in the late spring as the investment manager felt that a growing disconnect between more aggressive lending terms (i.e. diminishing margins, higher leverage levels and lower or absence of primary fees) and the global economic prospects was likely to trigger a significant market adjustment in the future. This adjustment happened faster than anticipated and led to more favourable lending conditions emerging during the summer. The investment manager has taken full advantage of these improved conditions, in particular during the months of August and September.

 

Portfolio Overview at 30 June 2011

 

	Margin (basis points)	Primary/ Secondary Market	Net Total Leverage1	Net Senior Leverage1	Country	Price Structure	Currency	Maturity	Average life (years)2	Repayment
Loan A	500	Secondary	3.7x	2.7x	UK	Lower risk	£	2017	5.6	Bullet
Loan B	508	Secondary	3.8x	2.5x	UK	Par	£	2015 2016	4.5	Bullet and amortising
Loan C	500	Secondary	2.3x	2.3x	UK	Lower risk	£	2017	6	Bullet
Loan D	500	Secondary	3.8x	2.9x	UK	Lower risk	£	2017	5.5	Bullet
Loan E	525	Secondary	2.7x	2.7x	UK	Lower risk	£	2016	5.4	Bullet
Loan F³	425	Primary	4.7x	4.7x	Netherlands	Par	€	2018	7	Bullet
Loan G	500	Primary	4.6x	3.5x	Italy	Primary fees	€	2017	6.3	Bullet
Loan H	500	Primary	4.6x	4.6x	Netherlands	Primary fees	€	2017	6	Bullet
Loan I	375	Primary	4.2x	2.9x	France	Primary fees	€	2017	6.3	Bullet
Loan J	250	Secondary	6.6x	4.2x	Sweden	Discounted secondary	€	2015	4	Bullet
Loan K	275	Secondary	5.9x	4.7x	UK	Discounted secondary	£	2015	4.51	Bullet
Loan L	475	Primary	5.6x	4.2x	Netherlands	Par	€	2018	6.6	Bullet
Loan M	475	Primary	4.6x	4.6x	UK	Primary fees	£	2018	6.6	Bullet
Loan N	400	Primary	2.9x	2.9x	Germany	Primary fees	€	2016	3.4	Amortising
Loan O³	450	Primary	4.9x	4.9x	Germany	Par	€	2018	6.9	Bullet

 

Note: Average life (years) means the weighted-average period in years required to repay a loan's outstanding principal through scheduled principal payments.

 

 

¹ represents the amount of leverage to EBITDA at 31 December 2010 or at the time of   investment for 2011 loans.

²  is represented at 30 June 2011

³ Loans F and O are in the Company's C Share Portfolio

 

Primary Loan Investments

 

There are eight primary loans in the Company's Ordinary Share Portfolio at 30 June 2011, representing a book value of £47.5 million and a current value of £48.1 million.

 

The first loan to be completed, representing at the time of investment in August 2010 approximately 2.1% of the Company's net proceeds, was to a leading provider of nurseries and pre/after-school care services in the Dutch childcare market.  This borrower was acquired by a prominent private equity sponsor with experience and a track record in the industry.  The structure and pricing are both favourable, a reflection of the primary market conditions at the time. The Group invested €2.5 million in the term loan B tranche of the senior loan package.

 

The second loan to be completed, representing at the time of investment in November 2010 approximately 8.6% of net proceeds, was made to the dominant local provider of business applications for professional accountants and small and medium enterprises (SMEs) in Italy.  The borrower delivers a range of business-critical software products to a diversified base of customers.  This business was also acquired recently by a leading and renowned private equity sponsor with considerable experience and a track record in the sector.  Leverage and pricing were favourable.  The Group invested €10 million in the term loan B tranche of the senior loan package.

 

The third loan, representing approximately 6.1% of net proceeds at the time of investment in March 2011, was made to a Netherlands-based leading specialty chemicals distributor to Europe and the Asia Pacific region. The Group invested €7 million in the term loan B tranche of the senior loan package.

 

The fourth loan, representing approximately 10.1% of net proceeds at the time of investment in March 2011, was made to a UK-based leading provider of specialty healthcare services. The Group invested £10 million in the term loan B tranche of the senior loan package.

 

The fifth loan, representing approximately 4.4% of net proceeds at the time of investment in March 2011, was made to a German specialised retail company. The Group invested €5 million in the term loan A tranche of the senior loan package.

 

The sixth loan, representing approximately 4.5% of the Company's net proceeds at the time of investment in April 2011, was made to a French-based specialist provider of calibration services to industries including aeronautics and aerospace, defence, automotive and transport, electronics and microelectronics, utilities, and life sciences.  As with the first two primary loans, this business is backed by a well-known and long-established private equity sponsor.  The Group invested €5 million in the term loan B tranche of the senior loan package.

 

During May the Group committed to its seventh primary investment. The Group has invested €10 million in the Term Loan B tranche of the senior loan package of a German industrial company. This investment is shared pro rata by the Ordinary Share Portfolio and the C Share Portfolio and represents 7.1% and 7.2% of their portfolios at the time of investment respectively.

 

One secondary loan in the Ordinary Share Portfolio was refinanced during the period. The Group committed to the new loan being arranged by the same issuer although with a slightly smaller exposure (€7 million vs. €8.7 million previously). This commitment is shared pro rata by the Ordinary Share Portfolio and the C Share Portfolio and settled after the period end during July. As a consequence of this transaction, the loan has been reclassified as a primary loan and represents the eighth loan in the Company's Ordinary Share Portfolio and the second loan in the Company's C Share Portfolio.

 

Secondary Loan Investments

 

At 30 June 2011 the Group had invested in seven senior loans on the secondary market, representing a book value of £39.1 million and a current value of £39.6 million. This takes into account the reclassification of one secondary loan following the refinancing that was completed after the period end, as described above.

 

Sourcing and acquiring loans on the secondary market remains a time-consuming process, generally requiring multiple contact points within a lender.  In some instances the Company has acquired loans from groups within lenders that have not previously sold mid-market loans from their books, and this has required processes and procedures to be established, slowing down both negotiation and settlement.

 

The investment manager continues to focus on expanding its network of lenders in order to identify a broader and more diverse spread of attractive opportunities on the secondary market. Nonetheless the conditions remain changeable in the secondary market as discussed earlier.

 

The first secondary loan investment, representing approximately 7.7% of the Company's net proceeds at the time of investment in November 2010, was made to a leading independent global provider of fiduciary services based in the Netherlands. The Group invested €8.7 million in the term loan B and term loan C tranches of the senior loan package on terms that could yield a return in excess of that available in the primary market in the event that that loan refinanced ahead of its maturity. This loan was refinanced in June 2011 and is now allocated to the Company's primary loan portfolio.

 

The second investment was made in a small portfolio of four loans on the secondary market sourced from a single lender. The Group invested approximately £19.7 million in aggregate, representing approximately 19.9% of the Company's net proceeds at the time of investment in November 2010. These loans were purchased at a slight discount to par but offer compelling risk-return profiles. They are moderately leveraged and benefit from tightly drafted and conservative legal documentation and structures. These loans are to firms operating in diverse industries, all based in the UK:

 

·    A global market leader in the provision of intellectual property and trademark management services to law firms and corporations worldwide, with a core focus on patent and trademark renewal services;

·    A gaming, leisure and entertainment company;

·    A dominant auto auction firm operating throughout Europe; and

·    A mid-size provider of pension outsourcing services to trustees, private companies and public organisations

 

These four investments had a weighted-average net senior debt to EBITDA ratio of 3.2x at the time of acquisition by the Group.

 

The sixth loan was made to a leading global provider of information services to the energy, metals and mining industries. The Group invested £9.9 million, representing approximately 10% of the Company's net proceeds at the time of investment in November 2010 and in January 2011, in the term loan A and term loan B tranches of the senior loan package. The leverage on this loan is light.

 

The seventh loan was to a UK market leader in software solutions for small and medium sized accounting and legal businesses. The Group invested £6.3 million in the term loan B tranche of the senior loan package on terms that could yield a return in excess of that available in the primary market in the event that that it is refinanced ahead of its maturity. This transaction represents approximately 6.4% of the Company's net proceeds at the time of investment in December 2010.

 

The eighth loan is to a leading global provider of kidney dialysis services based in Sweden. The Group invested €4.6 million in the term loan B tranche of the senior loan package on terms that could yield a return in excess of that available in the primary market in the event that that loan is refinanced ahead of its maturity. This transaction represents approximately 3.9% of the Company's net proceeds at the time of investment in December 2010.

 

Geographical and Currency Exposure

 

The Company's invested and committed portfolio had exposure to six European countries at 30 June 2011: the UK, the Netherlands, Germany, Italy, France and Sweden.

 

The currency exposure of committed and completed loans, as measured by the loans' par (or nominal) values, was split 52% to sterling and 48% to euros across the Ordinary Share Portfolio at 30 June 2011 while the C Share Portfolio provided 100% exposure to euros.  The currency exposure of the Net Asset Value, which includes cash balances and all other assets and liabilities, was split 53% to sterling and 47% to euros across the Ordinary Share Portfolio at 30 June 2011 while the C Share Portfolio was split 93% to sterling and 7% to euros.

 

HSLE does not engage in currency hedging owing to the illiquid nature of the portfolio.  During the year to 30 June 2011 the Company recorded a total gain of £1,590,817 due to currency movements and the euro-sterling exchange rate in particular.  This gain was split between £79,908 of realised gains and £1,510,909 of unrealised gains. On the day of the Company's admission, the exchange rate between the sterling and euro closed at approximately €1.17. On 30 June 2011 the exchange rate closed at approximately €1.11.

 

The Company does not make use of credit default swaps, interest rate futures, synthetic indices, interest rate swaps, or interest rate options.

 

Primary Market Environment

 

The investment manager's objective is to minimise the Company's exposure to cyclical sectors.  It maintains a preference for defensive credits which offer reasonable leverage and robust cash flows, operating within resilient sectors.

 

The Company's portfolio of loans is focussed on borrowers based in Northern European countries and it has made just one investment in Southern Europe. That loan is to the dominant local provider of business applications for professional accountants and small and medium enterprises (SMEs) in Italy.  The borrower delivers a range of business-critical software products to a diversified base of customers. The Company does not invest in distressed situations, but in performing credits and this investment was made after due consideration of the economic status of, and outlook for Italy, and the borrower's ability to withstand both macro domestic pressures and any resultant impact on its revenues.

 

Since the Company's Interim Report for the period ending 31 December 2010 the pressure on Eurozone and US economies and budgets has gathered momentum.  As the Company completed its first full year of trading protracted political wrangling over the urgent need to raise the US debt ceiling to avert default shocked global markets and triggered widespread volatility.  Investors sought protection in high grade corporate bonds, the Swiss franc and gold.

 

The European primary loan market is dominated by banks and a partnership approach is key. Competition to participate in attractive deals is high and deal flow has remained buoyant despite the global economic uncertainties as a consequence of high levels of equity investor capital, refinancing opportunities, the recovering appetite of banks for lending and revived M&A activity.

 

Deal terms for lenders remain generally attractive, with margins still within the Libor +400 to +500 basis points range that the investment manager is targeting, but down by about 25 basis points on a weighted-average basis from 31 December 2010, according to Standard & Poor's LCD European Leveraged Loan Review.  Small discounts or fees are sometimes available with resulting net entry prices at 98% to 99% of par.

 

In its Interim Report for the period ending 31 December 2010, the investment manager noted that renewed lending appetites could lead to margin pressure and/or more aggressive leverage. This has indeed been the case during the first half of 2011. Although transaction structures are generally sound there has been evidence of ad hoc deals being presented with more aggressive terms.

 

In view of the renewed economic turbulence within the Eurozone and the dynamic market trends in the leveraged loans market, the investment manager remains extremely cautious and vigilant in its investment selection.  Particular emphasis is put on the required yield and the quality of the borrower.  This is drawing out negotiations on terms and consequently slowing down the overall investment pace.

 

The investment manager is currently reviewing multiple primary deals.

 

Secondary Market Environment

 

The market characteristics in the secondary market that the investment manager highlighted in its Interim Report for the period ending 31 December 2010 have continued much unchanged. Banks' balance sheet problems remain broadly unaddressed, although there have been some ad hoc sizeable sales of loan portfolios, usually to a single purchaser. As a consequence of the narrowing of price discounts seen throughout 2010, loans on the secondary market are now rarely offered at a deep discount. The investment manager has for some time focussed instead on transactions where it perceives the opportunity for early refinancing and transactions where there is an attractive low level of leverage.

 

Loan refinancing can be triggered by a number of events which can include a borrower being sold (change of control generally requires a mandatory refinancing), a borrower raising additional debt to finance an acquisition, or a borrower increasing its covenant headroom to accommodate additional capital expenditure programmes. The Company has participated in one loan refinancing in its portfolio during the period.

 

The Company had two discounted loans in its portfolio at 30 June 2011, representing 12% of the completed and committed transactions by purchase price. The third discounted loan has been refinanced at par during June 2011. The Company has made five investments in lower risk secondary loans, representing 33.9% of the completed and committed transactions by purchase price.

 

The investment manager is currently in discussions with lenders on multiple transactions on the secondary market which it is optimistic may develop into investment opportunities.

 

Post Period Update

 

Since the end of the period the Company has committed to or invested in six additional transactions. The first transaction is a £4.2 million increase of the Company's existing exposure to a discounted secondary loan (Loan K in the table on page xx). The second transaction is a £2.2 million increase of the Company's existing exposure to a lower risk secondary loan (Loan E in the table on page xx). The third transaction is a £4.0 million increase of the Company's exposure to a lower risk secondary loan (Loan A in the table on page xx).  The fourth transaction is a £2.0 million increase of the Company's exposure to a lower risk secondary (Loan B in the table on page xx). The last two loans are both primary transactions.  The Company has committed €1 million to an operator of private hospitals in France and €12 million to a Dutch business process outsourcing company. Based on these six transactions, we expect that the Ordinary Share Portfolio will be fully invested and the commitment level of the C Share Portfolio will increase substantially to approximately 60% in the near-term.

 

Conditions have been volatile with spreads falling until the summer and then rising again in recent weeks. The Company's most recent primary commitments have been made at Euribor +475 basis points, which marks an improvement from the levels observed in late spring where transactions were priced typically at or about Libor or Euribor +425 basis points.       

 

At the time of writing, in addition to the transactions noted above the investment manager is actively negotiating and reviewing five primary transactions and five secondary transactions.

 

European Leveraged Loan Market Commentary

 

Private equity-backed new issue loan activity remains on a steady upward trajectory, continuing the pattern set during 2010. According to Standard & Poor's LCD European Leveraged Loan Review ("S&P") for the first half of 2011, new issuance of European leveraged loans, which surged to €42.4 billion during 2010, amounted to €20.5 billion during the first half of 2011.  In the second quarter S&P tracked 38 leveraged loans to private equity-backed companies, the highest level in three years.

 

Despite the renewed turbulence in Europe the first half of 2011 closed with €5.3 billion of new issuance in June alone, the highest monthly level seen since the collapse of Lehman Brothers in September 2008.  S&P notes that these figures are still well below those seen during the market peak of 2006 and the first half of 2007.

 

Second quarter 2011 leveraged buyout loan volume reached €11.2 billion, the highest quarterly reading since September 2008, and up from €9.3 billion in the first three months of 2011.  By contrast the European high yield bond market was subdued in June on the back of the Southern European sovereign crisis discussed above and the poor performance of several recently issued bonds.  Only €1.9 billion of high yield bonds were issued in June, a significant drop from the €6.8 billion May figure. Despite that sluggish recent performance, high yield bond volume reached €29.7 billion during the first half of 2011, up 35% on the equivalent period in 2010.  The catalysts are refinancing and M&A activity.  Private equity managers have financed five separate initial or secondary buyouts through high yield bond issuance so far during 2011 compared with three during the whole of 2010 and none during 2009.

 

Compression on new issue spreads previously reported by the investment manager continues.  Spreads have narrowed since the end of 2010.  S&P reports that weighted-average margins for Term B and Term C  Loan tranches were at Euribor + 435.4 basis points during the second quarter 2011, an increase of six basis points from March 2011 but a decrease of 25 basis points from December 2010.  The majority of the Company's investments have been made in Term Loan B tranches. 

 

According to S&P 13% of deals launched so far this year cut spreads during syndication, up from 7% in 2010.  S&P reports that spread cuts ranged from 25 basis points to 75 basis points with an average cut of 38 basis points. The current share remains far behind the peak of 42% seen in 2007, but it marks a departure from 2008 and 2009 when spreads were not cut on any of the few deals completed.

 

Average debt to EBITDA for leveraged buy-out loans fell back to 4.2x in the first half of 2011 from 4.4x last year while the average debt to EBITDA ratio rose to 3.8x from 3.5x.  Leverage levels have been one of the determining factors in deal pricing throughout 2011.  In the first half of 2011 the market has priced Term Loan B loans with a debt to EBITDA ratio of 5.0x to 5.9x at an average spread premium of 30 basis points compared to more lightly leveraged loans with a debt to EBITDA ratio of 3.0x to 3.9x.

 

Leverage

The Company does not employ structural gearing.  However the Company may use a revolving credit facility to meet its operational expenses and for efficient cash management in meeting its fluctuating cash requirements under tranches of loans in the portfolio that are themselves revolving facilities.  The amount of any credit facility will not exceed 10% of the gross proceeds of the Company at admission.  At 30 June 2011 the Company had not employed any such facility.

Valuation Policy and Methodology

The investment manager is responsible for carrying out the fair market valuation of the Group's investments which is presented to the Directors for their approval and adoption. In assessing the value of investments to be included in the financial reports of the Company, indications of value are developed in accordance with IAS 39 Financial Instruments: Recognition and Measurement (IAS 39).  IAS 39 defines fair value as "the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction."  This is taken also to mean "the price at which an orderly transaction would take place between 'market participants' at the measurement date."

 

Most assets - and all of the 15 loans in the portfolio at 30 June 2011 - in which the Company invests are those where there is unlikely to be readily observable market prices. Therefore in order to value the loans in the portfolio, the discounted cash flow ("DCF") methodology is generally the predominant valuation technique used by the Company.  The DCF methodology entails determining relevant cash flows for each loan, adjusted according to an assessment of the probability of refinancing, and discounting those cash flows by an appropriate risk-adjusted discount rate.  The risk-adjusted discount rate is an expression of what investors believe to be a fair and reasonable rate of return for holding a particular security over the relevant period given the inherent risks of ownership.  Implicit in the estimation of such a discount rate is the assumption that the seller is a willing seller and the buyer is a willing purchaser of the security. The discount rates are derived from the yields required by investors for loans with similar risk profiles and readily observable prices.

 

The Audit Committee reviews the valuations included in the valuation analysis at the interim and annual financial reporting dates.  In order to provide comfort to the Audit Committee, and ultimately the Board, the Company has engaged the services of an independent valuation consultant to report on the valuations prepared by the investment manager.

 

Having been presented with the recommendations of the Audit Committee, the Board is ultimately responsible, on behalf of the Company, for determining the fair value of the Group's investments.

 

In principle the directors will not value a loan above par given that senior loans can be repaid at par (in full or partially) by the borrower at any point in time.

 

Outlook

 

At the time of writing, the global economic outlook looks precarious. The International Monetary Fund (IMF) has warned that the global economy has entered a "dangerous new phase" of sharply lower growth, and that continuing political and economic challenges in both the US and the Eurozone could force them back into recession. The expectation of gradual recovery has been replaced by forecasts that the global economy will remain in a period of low growth for some time. Indeed, the IMF has forecast GDP growth in the 17-nation Eurozone will be 1.6% in 2011 - a reduction from its 2% forecast given in June  - with 2012 growth of 1.1%, down from a previous prediction of 1.7%. The IMF has forecast weak growth in the US "for years to come", while its forecasts for the UK are for growth of 1.1% in 2011 and 1.6% in 2012, down from previous predictions of 1.5% and 2.3% respectively.

 

As the end of September approached, the US Federal Reserve launched "Operation Twist", whereby it would sell $400 billion of short-dated Treasuries and buy an equal amount of longer-dated Treasuries with a pledge to reinvest maturing proceeds into agency and mortgage-backed securities. The intent is to flatten the US yield curve by pushing down long-dated US interest rates. The move was accompanied by a grim warning of "significant downside risks to the economic outlook". Ten-year US Treasury yields sank to 1.70% during trading after the news, a sixty-year low, with yields on the 30-year bond falling to 2.76%.

 

The stress in the peripheral Eurozone shows no sign of abating.  The borrowing costs of Italy and Spain are nudging euro-era records - peaking above 6% in early August - as investors questioned the Eurozone's capacity to withstand and respond to the returning crisis.  European Commission President Jose Manuel Barroso described the bond markets' treatment of Italy and Spain as "a cause of deep concern" and warned that the sovereign debt crisis is spreading beyond the periphery of the Eurozone.  The IMF added its own gloomy outlook for a "weak and bumpy expansion" of economies in the developed world.

 

The September minutes of the Bank of England's Monetary Policy Committee confirmed the Bank believes it will have to resort to another round of quantitative easing to boost the UK economy, preferring that option to providing clear guidance on the likely path for interest rates. All committee members voted to maintain UK interest rates at 0.5%. The Bank's quarterly report published in mid-August predicted near-term weakness to be followed by a gradual pick-up in growth so by 2014 GDP growth would be more likely to be above its historical average than below it. The Bank's governor, reluctant to follow the US Federal Reserve's lead in making a conditional commitment to maintain rates at their current level for two years, noted that markets were not pricing in a rate rise until early in 2013.

 

There have been steady rises in both three-month Libor and three-month Euribor during the period. At 30 June 2011 Libor closed at 83 basis points and Euribor at 155 basis points, from 76 basis points and 101 basis points respectively at 31 December 2010. Towards the end of September rates for both benchmarks remained little changed at 92 basis points and 154 basis points respectively.

 

Meanwhile President Nicolas Sarkozy has said that France's pledge to reduce its budget deficit from last year's 7.1% to 3% by 2013 "will be kept whatever the evolution of the economic situation". At the time of writing the French government is planning on the basis of 2% growth in 2011 and 2.25% growth in 2012 to help it achieve its deficit reduction targets.

 

The pronounced problems in Southern Europe are likely to stifle consumption, continue to put pressure on already downgraded sovereign credit ratings and stress the euro. Commentators remain divided on the capacity of the Eurozone to withstand the heavy burden of the ongoing sovereign debt restructurings. Furthermore as European Commission President Jose Manuel Barroso noted on 4 August 2011: "Markets remain to be convinced that we are taking the appropriate steps to resolve the crisis", a sentiment reiterated by the IMF which in late September stressed strong leadership would be crucial in staving off recession in the US and Eurozone. In a letter to European governments, Mr. Barroso called on them to give their "full backing" to the Eurozone and said governments should rapidly re-assess the European Financial Stability Fund (EFSF) to reduce the risk of contagion.

 

In early August the US lost its top-level triple-A credit rating for the first time since 1917 after Standard & Poor's downgraded it to an AA-plus. That action triggered high volatility and investor anxiety sending several global markets into bear territory. Shortly afterwards markets turned their attention to the possibility of France losing its triple-A credit rating.

 

Extraordinary market swings have seen the yields on UK, German and US government bonds fall to record lows. On 22 September, the UK 10-year Gilt yield stood at 2.32%, while the 10-year US Treasury yield sank to 1.70% and the 10-year German Bund traded at 1.65%. Meanwhile 10-year Italian and Spanish government bond yields remained stubbornly above 5%. At the time of writing, there is no sign of the volatility easing.

 

It is worth noting that the market volatility is driven by sovereign issues rather than fundamental company issues. Nonetheless conditions in the debt markets are unstable and the investment manager expects them to remain so until there is more certainty as to the likely recovery timeframe for global economies and the resolution of the Southern Europe sovereign debt crisis.

 

Given the uncertainty and risk-aversion that has returned to global markets, new issue leveraged loans volume in August almost dried up with just two transactions coming to market for add-on facilities valued at a total of $63 million, according to S&P LCD.  Despite the low volume in August, year-to-date new issuance had reached €34.6 billion by 31 August 2011, 51% higher than last year's comparable of €23 billion. Private equity sponsors have accounted for €27.3 billion of that 2011 volume.

 

During the period from May to late July the investment manager felt the quality of deals brought to market were unsatisfactory and did not meet the Company's investment criteria, and that pricing was unattractive.  The investment manager also concluded that the macro issues it had been highlighting in its monthly reports during the past six months were likely to result in increased demand and downward pressure on loan spreads. That proved to be the case.

 

Since late July, investment conditions in the leveraged loans market have improved.  The investment manager has taken advantage of this by increasing the Company's exposure to strong credit opportunities that have included one discounted secondary loan, three lower risk secondary positions, and two primary loans both of which offered higher margins and more favourable lending fees than had been available during the spring. Although S&P LCD commented in its August report that it is difficult to predict what kind of pricing and structure will encourage investors to participate in the coming months, pricing on recent new transactions widened by 26 basis points during June and July from the three months ended May 2011 to an average institutional spread on leveraged loans of Euribor +449.2 basis points. These spreads are approximately 50 basis points lower than the recorded high of Euribor +502.1 basis points in August 2010.

 

The investment strategy remains to avoid sectors that could see a sharp reversal as a result of further economic stress.  The investment manager endeavours to avoid investments which offer cyclical profiles, sectors or businesses that are likely to be impacted by regulatory changes in a severe austerity environment, and businesses that may suffer from any consumer-led economic contraction.

 

Although recent conditions in the leveraged loans market are more favourable, the investment manager remains highly disciplined in its deal selection and negotiation to ensure that its priorities of capital preservation, targeted yield and the quality of the borrower are not compromised.

 

The Investment Manager

 

The investment manager is HarbourVest Senior Loan Advisers L.P., which was formed as a limited partnership on 9 April 2010 under the laws of (and is domiciled in) the State of Delaware.  The investment manager is an affiliate of HarbourVest Partners, LLC, ("HarbourVest") which is a registered investment adviser under the US Investment Advisers Act of 1940.

 

HarbourVest has been registered with the Securities and Exchange Commission ("SEC") in the US since 1997 and an affiliated entity, HarbourVest Partners (U.K) Limited, is authorised and regulated by the Financial Services Authority in the UK.  HarbourVest manages investment funds which have committed more than $30 billion to investments over 29 years.  The firm is located in Boston, with wholly-owned subsidiaries in London, Hong Kong, and Tokyo.  At 30 June 2011 HarbourVest and its subsidiaries employed 236 people worldwide.

 

An independent firm

 

HarbourVest is an independent investment firm owned and controlled by its management team.  The firm has 20 managing directors with an average tenure of 17 years with the firm.  HarbourVest provides innovative private equity solutions to institutional clients worldwide.  As one of the first private equity fund-of-funds, HarbourVest has a long and distinguished history of investing in venture, buyout and mezzanine, and related credit markets including distressed debt, in the US, Europe, Asia Pacific and emerging markets through primary partnerships, secondary purchases and direct investments.  For 29 years, HarbourVest the HarbourVest team

has focused on private equity, striving for top-quartile returns, refining its industry expertise and cultivating relationships with leading global partners.

 

All investments made on behalf of HSLE are approved by the investment manager's Boston-based credit investment committee (see section below, "Credit Investment Committee"), with the assistance of advice provided by professionals based in HarbourVest's UK, Hong Kong and Tokyo subsidiaries.

 

In 2010 HarbourVest was awarded European Fund of Funds of the Year by Private Equity News, and North American Fund of Funds of the Year for 2009 by Private Equity International.

 

Secondary private equity investment experience

 

HarbourVest has built a substantial business investing in secondary private equity assets and opportunities since 1986 and has invested approximately $6.3 billion of capital in secondary investments.  HarbourVest was awarded 2009 Secondaries House of the Year by both EVCJ and BVCA/RealDeals.

 

HarbourVest has an extensive network of private equity relationships that helps it gain early (and sometimes exclusive) introductions to potential sellers of private equity assets.  HarbourVest also leverages its network as a source of reliable and proprietary information regarding the assets and managers, which it evaluates in any given secondary opportunity.  These broad and deep resources enable HarbourVest to evaluate and execute secondary transactions ranging in size, geography and asset type.  HarbourVest employs a similar approach, through leveraging and expanding the same network, to source and diligence secondary senior secured loan opportunities for the Company.

 

Direct private equity investment experience

 

HarbourVest has invested directly and co-invested in companies worldwide since 1983, when it made its first direct investment in an operating company.  Today, HarbourVest focuses on buyout co-investment opportunities, growth equity transactions and mezzanine investments.  The team comprises 19 individuals and is complemented by HarbourVest's other investment professionals who assist in the sourcing and evaluating of deal opportunities.  Since 1983, HarbourVest has invested US$4.0 billion directly into companies.  HarbourVest is one of the most active co-investors in buyout transactions in the market.  Since 2002, HarbourVest has additionally been an active supplier of mezzanine capital to private equity-backed investments.  HarbourVest leads mezzanine rounds in smaller buyout transactions and works with other mezzanine providers in middle-market and large-market deals.

 

In Europe, including both buyout co-investments and mezzanine transactions, HarbourVest has directly invested into 63 companies in partnership with 30 private equity managers over the last 20 years.

 

Investment team

 

To add to its existing expertise in the provision of credit to private equity-backed companies, HarbourVest has recruited two additional investment professionals.  Karim Flitti joined HarbourVest's UK subsidiary in 2010 as a principal in the direct investment team and focuses on credit transactions.  Karim has 12 years of leveraged finance fund management experience, most recently managing senior secured loan portfolios.  His previous position was as a senior portfolio manager, director, and co-founder of Winchester Capital's global leveraged finance platform within Deutsche Bank AG in London.  Karim helped raise, invest, and manage the business unit's leveraged finance credit fund programme assets (the Moorgate Funds Programme), totalling approximately US$2.5 billion of senior secured loans.  He also was a senior member of Winchester Capital's global leveraged finance credit committee.

 

In September 2010 Karim was joined by Arnold Berner, who was appointed a vice president in HarbourVest's UK subsidiary to focus on credit analysis.  Arnold joined from Deutsche Bank in London, where he focused on buy-side leveraged finance credit.  In addition, he analysed, recommended and monitored leveraged loans for a global credit fund programme that he helped launch.  Arnold's experience also includes leveraged finance and investment grade bond analysis at AXA Investment Managers in London and Paris. 

 

Karim and Arnold are the primary professionals within the direct investment team responsible for providing advice to HarbourVest's Boston-based credit investment committee in relation to the Company's portfolio.

 

Investment process

 

Investment opportunities are first evaluated relative to the Company's investment objective and policy and any guidelines set by the Board.  Due diligence is then conducted and includes (as appropriate but not limited to) equity manager and loan analysis.  The results of both of these analyses are used in the investment decision-making process.

 

The equity manager analysis focuses on the experience that the private equity manager brings to the opportunity being evaluated.  The loan analysis follows a more traditional business process, which focuses on the company and the industry in which it operates.  Information for the loan analysis may be obtained from the equity manager(s), the lenders and other independent sources, including the investment manager's network of other private equity managers and contacts with relevant sector or country expertise.

 

The loan analysis typically covers four main areas for each transaction: industry analysis, company analysis, security analysis and pricing analysis. 

 

Industry analysis: the investment manager's industry analysis examines the degree of competition within the industry, threats of substitution, threat of new entrants, supplier power and buyer power.  The investment manager also looks at the long-term valuation of businesses in the particular industry and assesses any systemic or regulatory risk that could potentially affect the industry's value chain.

 

Company analysis: the investment manager focuses on both quantitative and qualitative metrics.  On the quantitative side, the investment manager assesses and stress tests the potential borrower's business plan and, in particular, its ability to generate sufficient cash flow to service and amortise its debt.  The investment manager also assesses the value of the relevant company's assets in relation to its outstanding debt and other obligations, including in a distressed sale scenario. 

 

On the qualitative side, the investment manager appraises the company's market position and the resilience of its business model, as well as the quality and track record of its management team and private equity managers.

 

Security analysis: the investment manager reviews the credit agreement of any investment opportunity being considered to determine the risk of covenant breaches,

 

as well as the quality of the protection provided to senior lenders in terms of collateral, security and the identity and substance of the contracting parties.

 

Pricing analysis: the pricing of a transaction is assessed both in absolute terms (i.e. based on the conclusion of the due diligence performed), and relative to other opportunities in the Company's investment universe. The loan analysis also includes an assessment of the potential for early repayment.

 

Credit Investment Committee

 

The investment manager has an internal credit investment committee based in Boston that is responsible for reviewing and providing final approval to proposed investments for compatibility with the investment objective and policy of the Company, and any guidelines set by the Board.

 

Karim Flitti and Arnold Berner are assisted by other London-based members of HarbourVest's direct investment team in providing advice to HarbourVest's credit investment committee.  Within the London team, Alex Rogers and Corentin du Roy share responsibility with Karim and Arnold for originating and reviewing opportunities.

 

All investments must be approved by HarbourVest's Boston-based credit investment committee.  This committee makes all investment decisions for the Company.  Membership of the credit investment committee rotates among HarbourVest managing directors.

 

Investment opportunities generally undergo the following approval process:

 

·    Opportunities are vetted within the investment manager's London team and quickly reviewed on an informal basis with the Boston-based credit investment committee

·    The credit investment committee is required to approve or reject all investment approval requests

·    Throughout the investment decision process, the deal team conducts due diligence on the opportunity.  With each step, the due diligence performed becomes more extensive with the goal of focusing on the investment opportunities with the most potential

 

For reference, the investment manager has reviewed more than 200 deals since admission of which 15 had been approved for investment at 30 June 2011.  This equates to a rejection rate in excess of 90%.

 

Board and Committees

 

Directors

The Directors are responsible for determining the Company's investment policy and strategy and have overall responsibility for the Company's activities including the review of investment activity and performance, and the control and supervision of the investment manager.

 

All the Directors are non-executive and, with the exception of Frederick Maynard, are independent of the investment manager.

 

The Directors were all appointed on 7 April 2010, and their details are as follows:

 

Colin Maltby (Chairman) - aged 60

Mr. Maltby is chairman of BlackRock Absolute Return Strategies Limited and a director of Abingworth BioEquities Fund Limited.  He was Head of Investments at BP from August 2000 to June 2007 and was previously Chief Investment Officer of Equitas Limited from its formation in 1996.  His career in investment management began in 1975 with NM Rothschild & Sons and included 15 years with the Kleinwort Benson Group, of which he was a Group Chief Executive at the time of its acquisition by Dresdner Bank AG in 1995.  He was Chief Executive of Kleinwort Benson Investment Management from 1988 to 1995.

 

Mr. Maltby has served as a non-executive director of various public companies and agencies and as an adviser to numerous institutional investors, including pension funds and insurance companies, and to private equity and venture capital funds in both Europe and the United States.  He is currently an investment advisor to the British Coal Staff Superannuation Scheme and to Wolfson College, Oxford.

 

Rupert Dorey (Senior Independent Director) - aged 51

Mr. Dorey has over 22 years of experience in debt capital markets, specialising in credit related products, including derivative instruments.  Mr. Dorey's expertise is principally in the areas of debt distribution, origination, and trading, covering all types of debt from investment grade to high yield, and distressed debt.  He was at Credit Suisse First Boston for 17 years from 1988 until 2005.  He held a number of positions at Credit Suisse First Boston, including establishing Credit Suisse First Boston's high yield debt distribution business in Europe, fixed income credit product co-ordinator for European offices, and head of UK Credit, and Rates Sales.  Since leaving Credit Suisse First Boston, Mr Dorey has acted in a non-executive director capacity on a number of off-shore investment companies including hedge funds, fund of hedge funds, private equity funds and infrastructure funds.  Mr. Dorey shares board appointments with fellow HSLE Director Sarah Evans on CQS Diversified Fund Ltd and Celadon PCC Ltd.

 

Sarah Evans - aged 56

Ms. Evans, resident in Guernsey, is a chartered accountant, and a director of several other listed investment funds, as well as an unlisted fund of hedge funds.  She is also a member of the Institute of Directors.  She spent over six years with Barclays Bank plc Group from 1994 to 2001.  During that time she was a treasury director, and from 1996 to 1998, was the finance director of Barclays Mercantile, where she was responsible for all aspects of financial control and operational risk management.  Prior to joining Barclays she ran her own consultancy business advising financial institutions on all aspects of securitisation.  From 1982 to 1988 she was with Kleinwort Benson, latterly as head of group finance.

 

Frederick Maynard - aged 53

Mr. Maynard is a managing director of HarbourVest based in the Boston office. Prior to joining HarbourVest in 1985, he worked as a loan officer at the National Division of Manufacturers Hanover Trust Company lending to Fortune 500 companies in the United States. At HarbourVest, Mr. Maynard established the firm's secondary investment business in 1986 and has since led the development of a substantial business investing in secondary assets and opportunities with approximately $6.3 billion of capital invested around the world in the past 24 years.  Under his guidance, HarbourVest has become a leader in the private equity secondary markets pioneering a wide variety of complex transactions including so called synthetic and structured transactions. Mr. Maynard is a former member of HarbourVest's executive committee, which is responsible for the day to day management of HarbourVest, and stepped down from this position in early 2010. 

 

Michael Stoddart - aged 79

Mr. Stoddart joined Singer & Friedlander Limited in 1955.  He was responsible for opening a provincial network and thereby much involved with the financing of smaller companies.  He retired as joint chief executive in 1973.  He then joined Electra Investment Trust, one of the UK's leading providers of private equity, where he became chief executive officer in 1974 and chairman in 1986 and held that position until his retirement in April 2000.  He has held a number of non-executive chairmanships and directorships of public and private companies in the UK, and his main role is now as a senior business advisor to Fleming Family and Partners, a position he has held since 2001.   He is an Honorary Fellow of the London Business School.

Audit Committee

The Company's Audit Committee includes each of the Directors, excluding Frederick Maynard.  Sarah Evans is Chairman of the Committee.  The Committee meets formally at least twice a year for the purpose, amongst other things, of considering the appointment, independence and remuneration of the auditors and to review the Company's annual accounts and interim reports ("financial statements").  As part of its work to review the financial statements, the Audit Committee reviews the valuations of the Group's investments in order to be satisfied that they represent a reasonable estimate of the fair value of the assets held by the Company on the relevant reporting date.  The auditors and the independent valuation consultants attend the Audit Committee meetings at which the financial statements are considered. The Committee also reviews the scope, results and cost effectiveness of the audit.

 

Where non-audit services are to be provided by the auditor, full consideration of the financial and other implications on the independence of the auditors arising from any such engagement will be considered before proceeding.

 

Management Engagement and Remuneration Committee

The principal duties of the Management Engagement and Remuneration Committee are to review the performance of service providers, their appointment (including the investment manager) and their remuneration.

 

The Company's Management Engagement and Remuneration Committee meets at least annually for the purpose of reviewing the performance of, and contractual relations with, service providers (including the investment manager). The Management Engagement and Remuneration Committee comprise each of the Directors, excluding Frederick Maynard. Rupert Dorey acts as Chairman of the Management Engagement and Remuneration Committee.

Directors' Report

The Directors present the audited consolidated financial statements of the group and their report for the period from incorporation on 7 April 2010 to 30 June 2011.  The group comprises HarbourVest Senior Loans Europe Limited ('the Company') and its wholly owned subsidiary undertakings incorporated in Luxembourg as explained under 'Structure' below.

Business Review

The following review is designed to provide information primarily about the Company's business and results for the period.  It should be read in conjunction with the Chairman's Statement on pages xx to xx and with the Investment Manager's Report on pages xx to xx which give a detailed review of the investment activities for the period and an outlook on the future.

Structure

The Company is a registered closed-ended investment company, incorporated and registered with limited liability in Guernsey on 7 April 2010, with registration number 51719. The Company commenced business on 26 May 2010 when the initial 101,090,000 ordinary shares were admitted to the Official List and commenced trading on the main market of the London Stock Exchange.

 

Following a Placing and Offer for Subscription of C shares, the Company issued 26,688,900 C shares which were admitted to the Official List, and commenced trading on the main market of the London Stock Exchange on 4 May 2011.  Further details are provided in note 10 of the financial statements.

 

The Company is a Guernsey Registered Closed-ended Investment Scheme pursuant to the Protection of Investors (Bailiwick of Guernsey) Law 1987, as amended, and the Registered Closed-Ended Investment Scheme Rules 2008 issued by the Guernsey Financial Services Commission.

 

The Company is a member of the Association of Investment Companies (the 'AIC') and is classified within the Global High Income Category.

 

For the purposes of efficient portfolio management, the Company has established one wholly-owned, Luxembourg incorporated subsidiary, Orange Senior Loans 1 S.à.r.l. which in turn itself has two wholly-owned, Luxembourg incorporated subsidiaries, Orange Senior Loans 2 S.à.r.l., and Orange Senior Loans 3 S.à.r.l., which are incorporated for the purpose of holding primary and secondary loans respectively.

Investment Policy and Objective

The Company's investment objective is to provide shareholders with a combination of a high level of income and capital growth over time, whilst preserving capital.

The Company invests in senior secured loans of private equity-backed European mid-market companies. These loans may include amortising debt (i.e. loans that are repaid over the life of the loan) as well as term debt (i.e. loans that are repaid at maturity) and other forms of credit facility (e.g. loans drawn over time and repaid over the life of the loan or at maturity).  All of the loans in which the Company invests will be in the senior secured tier of a borrower's debt capital structure (i.e. loans with first ranking security over the borrower's assets and/or its shares).  The Company does not buy distressed loans.

The Company has an investment period of two years ending on 30 June 2012.  Capital realised during the period may be reinvested.  The investment manager does not manage the portfolio by reference to any benchmark, but instead aims to deliver a total return to shareholders in excess of the 8% hurdle on its performance fee.

The Company's portfolio is intended to comprise loans issued by 20 to 30 companies across Europe including the UK, diversified by industry.  The majority of the portfolio will be denominated in sterling or euros.

The following investment restrictions apply to the Company, calculated at the time of investment: 

·    the Company and any of its subsidiaries must not conduct a trading activity which is significant in the context of the Group as a whole.  This does not prevent the businesses forming part of the portfolio from conducting trading activities themselves;

·    not more than 10% in aggregate of the value of the total assets of the Company at the time of admission may be invested in other listed closed-ended investment funds except that this restriction shall not apply to investments in closed-ended investment funds which themselves have published investment policies to invest no more than 15% of their total assets in other listed closed-ended investment funds;

·    loans to any borrower will not represent more than 10% of the aggregate gross proceeds of the placing under the IPO and the C Share issue;

·    loans to any borrower will not represent more than one third of that company's total senior secured debt.

There is no limit on the proportion of the Company's portfolio that may consist of secondary loans or primary loans.

Financial Review

The results for the period are set out on pages xx to xx.

At 30 June 2011 the combined net assets of the ordinary shares and C shares amounted to £126,452,929.  The Net Asset Value (NAV) per ordinary share was 99.28 pence and the Net Asset Value (NAV) per C share was 97.77 pence.  The total return for the period was £3,301,909, of which £3,430 related to C shares. The Company's investment income and other revenue totalled £4,785,203. After deducting expenses the revenue profit before taxation for the year was £3,301,909.

 

C Share classification

In accordance with paragraph 11 of IAS 32 (Financial Instruments: Presentation), the C shares have been classified as liabilities due to the inherent variability in the number of ordinary shares attributable to C share holders on conversion.

 

Gearing

The Company will not use structural gearing.  However, the Company may use a revolving credit facility to meet its operational expenses and for efficient cash management in meeting its fluctuating cash requirement under tranches of loans in the portfolio, which are themselves revolving facilities.  In any event, the amount of the credit facility would not exceed 10% of the gross proceeds.  As at 30 June 2011 the Company had no outstanding borrowings.

 

 

Dividends

The Company intends to make distributions of the net cash income on the portfolio to shareholders by way of semi-annual interim dividends, payable in March and September of each year in respect of the financial period ending 30 June of that year.

 

For the period from admission to 30 June 2011 the Company has declared and paid the following interim dividends to its ordinary shareholders:

 

Date declared                         Date Paid                                Rate

31 August 2010                        30 September 2010                  1.00 pence per share

21 February 2011                    25 March 2011                         1.00 pence per share

 

A further dividend was declared on 23 August 2011 and paid on 30 September 2011 for 1.00 pence per share.

 

Payment of suppliers

It is the payment policy of the Company to obtain the best possible terms for all business for each relevant market in which it operates and, therefore, there is no single policy as to the terms used.  In general the Company agrees with its suppliers the terms on which business will take place and it is the Company's policy to abide by such terms.  There were no trade creditors at 30 June 2011.

 

Future Developments

While the future performance of the Company is dependent, to a large degree, on the performance of international financial markets, which, in turn, are subject to many external factors, the Board's intention is that the Company will continue to pursue its stated investment objective in accordance with the strategy outlined above.  Further comments on the outlook for the Company for the next twelve months are set out in both the Chairman's Statement (on pages xx to xx) and the Managers' Report (on pages xx to xx).]

 

Going Concern

In the opinion of the Directors, the Company is able to meet its liabilities as they fall due because it has adequate cash resources.  Therefore these financial statements have been prepared on a going concern basis.  Given the nature of the Company's business, the Directors are confident that the Company has adequate financial resources to continue operating for the foreseeable future.

Life of the Company

The Company does not have a fixed life.  However, under Article 53 of the Articles of Incorporation, the Directors will present to Members a resolution for the Company to continue in its present form at the annual general meeting following the seventh anniversary of Admission and every year thereafter.  If any such resolutions are defeated, the Directors will then, as soon as reasonably practicable, bring forward proposals that are intended to afford an opportunity for those ordinary shareholders who so wish to realise their investment in the Company (whether by liquidation, share redemptions, share repurchases or otherwise).

 

Performance Measurement and Key Performance Indicators

In order to measure the success of the Company in meeting its objectives and to evaluate the performance of the investment manager the Directors take into account the following performance indicators:

 

·  Returns and NAV - The Board reviews and compares at each meeting the performance of the portfolio as well as the NAV, income and share price of the Company; and 

 

·  Discount/premium to NAV - at each Board meeting, the Board monitors the level of the Company's discount or premium to NAV.

 

Management, Administration and Custody arrangements

Investment management services are provided to the Company by HarbourVest Senior Loan Advisers L.P. 

 

The management fee is calculated and paid quarterly in arrears at the rate of 0.25 per cent. of the net invested assets.  From such time as a cash distribution causes the Company, in aggregate, to have made cash distributions (by way of dividend and/or capital return) representing the Gross Proceeds and such amounts representing an 8 per cent. IRR on the Gross Proceeds, the investment manager will be entitled to a 15% performance fee on all distributions above this 8 per cent. return.

 

For the period under review, no performance fee is payable.

 

The Investment Management Agreement may be terminated by either party, but in certain circumstances the Company would be required to pay compensation to the investment manager of six months management charges.  No compensation is payable if notice of termination of more than six months is given.

 

Administration, Custodian and Company Secretarial services are provided to the Company by BNP Paribas Fund Services (Guernsey) Limited.  Registrar services are provided by Capita Registrars (Guernsey) Limited.

Related party transactions

The contracts with HarbourVest Senior Loan Advisers L.P. and the BNP Paribas companies are the only related party transactions currently in place.  Other than fees payable in the ordinary course of business, there have been no material transactions with these related parties which have affected the financial position or performance of the Company in the financial year.

 

Principal risks and uncertainties

The Board is responsible for the Company's system of internal controls and for reviewing its effectiveness. The Board also monitors the investment limits and restrictions set out in the Company's investment objective and policy.

 

The principal risks which have been identified and the steps taken by the Board to mitigate these are as follows:

 

Investment activity and performance

An inappropriate investment strategy may result in under performance against the Company's objectives.  The Board manages these risks by ensuring a diversification of investments.  The investment manager operates in accordance with the investment limits and restrictions policy determined by the Board.  The Directors review the limits and restrictions on a regular basis and the investment manager confirms adherence to them every month.  The investment manager provides the board with management information including performance data and reports, and shareholder analyses.  The Directors monitor the implementation and results of the investment process with the investment manager at each Board meeting and monitor risk factors in respect of the portfolio.  Investment strategy is reviewed at each meeting.

 

The discount or premium to NAV at which shares trade in the market is continually monitored.

 

Market

Market risk arises from uncertainty about the future progress of the Company's investments.  This is discussed in note 12 to the consolidated financial statements.

 

Accounting, legal and regulatory

The Company must comply with the provisions of the Companies (Guernsey) Law, 2008 (as amended) and, since its shares are listed on the London Stock Exchange, the UKLA's Listing and Disclosure Rules.  A breach of the Guernsey legislation could result in the Company and/or the Directors being fined or subject to criminal proceedings.  A breach of the UKLA Rules could result in the suspension of the Company's shares.  The Board relies on its company secretary and advisers to ensure adherence to the Guernsey legislation and UKLA Rules.  The investment manager and the administrator, BNP Paribas Fund Services (Guernsey) Limited are contracted  to provide investment, company secretarial, administration and accounting services through qualified professionals.  The Board receives regular internal control reports which confirm compliance.

 

Operational

Disruption to, or the failure of either the investment manager's or the administrator's accounting, dealings or payment systems, or the custodians' records could prevent the accurate reporting or monitoring of the Company's financial position.

Details of how the Board monitors the services provided by the investment manager and the administrator, and the key elements designed to provide effective internal control are explained further in the internal controls section of the Corporate Governance Statement which is set out below.

 

Gearing

The Company will not use structural gearing.  However the Company may use a revolving credit facility to meet its operational expenses and for efficient cash management in meeting its fluctuating cash requirement under tranches of loans in the portfolio, which are themselves revolving facilities.  In any event, the amount of the credit facility would not exceed 10% of the gross proceeds. As at 30 June 2011 the Company had no outstanding borrowings.

 

Corporate Governance Statement

 

1.   Applicable corporate governance codes

The Company is not required by Guernsey law to comply with any corporate governance code. The Company complies with the "Guidance on Corporate Governance in the Finance Sector in Guernsey", issued by the Guernsey Financial Services Commission.

The Financial Reporting Council (the "FRC") has confirmed that by following the AIC Code of Corporate Governance (the "AIC Code") produced by the Association of Investment Companies in 2009, boards of investment companies should fully meet their obligations in relation to the 2008 Combined Code, and paragraph 9.8.6 of the Listing Rules.  The 2009 AIC Guide addresses all the principles set out in section 1 of the 2008 Combined Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to investment companies.

 

The Board of HarbourVest Senior Loans Europe Limited has considered the principles and recommendations of the AIC Code by reference to the AIC Corporate Governance Guide for investment companies (the "AIC Guide"). The AIC Code, as explained by the AIC Guide, addresses all the principles set out in the 2008 Combined Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to HarbourVest Senior Loans Europe Limited. 

 

The Board considers that reporting against the principles and recommendations of the AIC Code, and by reference to the AIC Guide (which incorporates the 2008 Combined Code), will provide better information to shareholders.  Copies of the AIC Code and the AIC Guide can be found at www.theaic.co.uk

 

In May 2010 the FRC published the new UK Corporate Governance Code which applies to accounting periods commencing on or after 29 June 2010 and will therefore be applicable to the Company for the year ended 30 June 2012. The revised AIC Code was published in October 2010 and will be reported against in the next annual report.

 

a) Statement of compliance

The AIC Code comprises of 21 principles.  The Directors believe that during the period under review they have complied with the provisions of the AIC Code insofar as they apply to the Company's business and with the provisions of the UK Code of Corporate Governance except as noted below.

 

The role of the chief executive

Since all the Directors are non-executive and day-to-day management responsibilities are sub-contracted to the Manager, the Company does not have a Chief Executive Officer.

 

Executive directors' remuneration

As the Board has no executive directors, it is not required to comply with the principles of the Code in respect of executive directors' remuneration.  Directors' fees are detailed in the Directors' Remuneration Report on page xx.

 

Internal audit function

As the Company delegates to third parties its day-to-day operations and has no employees, the Board has determined that there is no requirement for an internal audit function.  The Directors review annually whether a function equivalent to an internal audit is needed and will continue to monitor its systems of internal controls in order to provide assurance that they operate as intended.

 

b)  Directors and their interests

 

Board independence and composition

The Board of the Company currently consists of five non-executive Directors.  The names and biographies of the Directors holding office at the date of this report are listed on page xx.  All Directors have served since incorporation of the Company.  Frederick Maynard is a managing director of HarbourVest Partners, LLC based in the Boston office, and is therefore not considered independent of the Manager.  The Chairman and all other Directors are considered independent.  No Director other than Mr Maynard has a material interest in any other contract which is significant to the Company's business.

 

No Director has a service contract with the Company.  Directors have agreed letters of appointment with the Company, copies of which are available for review by shareholders.

 

The Directors consider that there are no factors which compromise the independent Directors' independence and that they all contribute to the affairs of the Company in an adequate manner.

 

Rupert Dorey has been appointed senior independent director.

 

A report on Directors' Remuneration is on page xx.

 

In accordance with the AIC Code all Directors were re-elected by shareholders at the inaugural Annual General Meeting held on 17 May 2011, being the first Annual General Meeting following their appointment.  All of the independent Directors will be subject to re-election at intervals of no more than three years.  Frederick Maynard as an employee of the Manager will be subject to annual re-election. 

 

The Directors are conscious of the need to maintain continuity of the Board, particularly given the nature of some of the markets in which the Company invests.  The Board believes that retaining Directors with sufficient experience of both the Company and its markets is of great benefit to shareholders and that the Directors have different qualities and areas of expertise on which they may lead where issues arise.  Their biographies, set out on pages xx and xx demonstrate a breadth of investment, commercial and professional experience with an international perspective.

 

The Directors' interests in the Company's share capital at the beginning and end of the period ended 30 June 2011, all of which were beneficial, are stated below:

 

Director	30 June 2011	At Admission on 26 May 2010
Colin Maltby	30,000 ordinary shares 20,000 C shares	30,000 ordinary shares
Rupert Dorey	340,000 ordinary shares	270,000 ordinary shares
Sarah Evans	-	-
Frederick Maynard	-	-
Michael Stoddart	100,000 ordinary shares	100,000 ordinary shares

 

There have been no changes in the interests of the Directors since the year end. 

 

Conflicts of Interest

Directors are required to disclose all actual and potential conflicts of interest to the Board as they arise for consideration and the Board may impose restrictions or refuse to authorise conflicts if deemed appropriate.

 

Induction and Training

Directors are provided, on a regular basis, with key information on the Company's policies, regulatory requirements and its internal controls.  Regulatory and legislative changes affecting Directors' responsibilities are advised to the Board as they arise along with changes to best practice.  Advisers to the Company also prepare reports for the Board from time to time.  In addition, Directors attend relevant seminars and events to allow them to continually refresh their skills and knowledge and keep up with changes within the investment company industry.

 

Directors' Indemnity

During the period the Company has maintained insurance cover for its Directors and Officers under a Directors' and Officers liability insurance policy. 

 

To the extent permitted by Guernsey Law, The Company's Articles of Incorporation provide an indemnity for the Directors out of the assets and profits of the Company from and against all actions, expenses and liabilities which they or their respective heirs or executors may incur by reason of any contract entered into or any act in or about the execution of their respective offices or trust.

 

Directors'appointment

In accordance with the Company's Articles of Incorporation, all Directors stood for election at the first AGM following their appointment. The names and biographies of the Directors holding office at the date of this report are listed on pages xx and xx.  All Directors have served since incorporation of the Company.

 

Each Director has entered into a letter of appointment with the Company whereby they are appointed for a limited duration, but will be subject to re-election in accordance with the AIC Code.  Copies of the Directors' letters of appointment are available for viewing by shareholders.  The Board considers that there is a balance of skills and experience within the Board, and that each of the Directors contributes effectively.

 

c)  The Board

 

Responsibilities

The Board meets at least four times each year and deals with the important aspects of the Company's affairs including the setting and monitoring of investment strategy, and the review of investment performance. HarbourVest's credit investment committee takes decisions as to the purchase and sale of individual investments, in line with the investment policy and strategy set by the Board.  The investment manager together with the Company Secretary also ensures that all Directors receive, in a timely manner, all relevant management, regulatory and financial information relating to the Company and its portfolio of investments.  Representatives of the Investment Manager attend each Board meeting, enabling Directors to question any matters of concern or seek clarification on certain issues.  Matters specifically reserved for decision by the full Board have been defined and a procedure adopted for Directors in the furtherance of their duties to take independent professional advice at the expense of the Company. 

 

Tenure

The Board has adopted a policy on tenure that is considered appropriate for an investment company.  The Board does not believe that length of service, by itself, leads to a closer relationship with the investment manager or necessarily affects a Directors' independence.  The Board's tenure and succession policy seeks to ensure that the Board is well-balanced and will be refreshed from time to time by the appointment of new Directors with the skills and experience necessary to replace those lost by Directors' retirements.  Directors must be able to demonstrate their commitment to the Company.  The Board seeks to encompass relevant past and current experience of various areas relevant to the Company's business.

 

Board Committees

The Board has established an Audit Committee and Management Engagement and Remuneration Committee with defined terms of reference and duties.

 

A Nomination Committee has not been established as the Board as a whole will nominate candidates for the Board.  It is considered for the Company's size that it would be unnecessarily burdensome to establish a separate nomination committee.

 

Audit Committee

The Company's Audit Committee meets formally at least twice a year for the purpose, amongst other things, of considering the appointment, independence and remuneration of the auditors and to review the Company's annual accounts and interim reports. Where non audit services are to be provided by the auditor, full consideration of the financial and other implications on the independence of the auditors arising from any such engagement will be considered before proceeding. The Audit Committee comprises each of the Directors, excluding Frederick Maynard. Sarah Evans acts as Chairman of the Audit Committee.

The principal duties of the Audit Committee are to consider the appointment of external auditors, to discuss and agree with the external auditors the nature and scope of the audit, to keep under review the scope, results and cost effectiveness of the audit and the independence and objectivity of the auditors. The Audit Committee is also involved in the valuation process of assets in the portfolio.

The Audit Committee has satisfied itself that Ernst & Young LLP, the Company's auditor is independent.

Management Engagement and Remuneration Committee

The Company's Management Engagement and Remuneration Committee meets at least annually for the purpose of reviewing the performance of, and contractual relations with service providers (including the Manager). The Management Engagement and Remuneration Committee comprises each of the Directors, excluding Frederick Maynard. Rupert Dorey acts as Chairman of the Management Engagement and Remuneration Committee.

 

The principal duties of the Management Engagement and Remuneration Committee are to review the performance of service providers, their appointment (including the Manager) and their remuneration.

 

Meeting attendance

The number of formal meetings during the year of the Board, Audit Committee and Management Engagement and Remuneration Committee, and the attendance of individual Directors at those meetings, is shown in the following table:

 

	Board	Audit Committee	Management Engagement and Remuneration Committee
Number of meetings in period	4	1	1
Colin Maltby	4	1	1
Rupert Dorey	4	1	1
Sarah Evans	4	1	1
Frederick Maynard	3	-	-
Michael Stoddart	4	1	1

 

In addition, a number of ad hoc Board meetings were held during the period.

 

Board Evaluation

The Board has adopted a formal and rigorous annual evaluation of its own performance and that of its Committees and individual Directors.  The last evaluation took place in May 2011.  The evaluation takes place in two stages.  First, the evaluation of individual Directors is led by the Chairman, and the evaluation of the Chairman's performance is led by the Senior Independent Director.  Secondly, the Board evaluates its own performance and that of its Committees.  The Directors meet at least once a year without the Chairman present and the Senior Independent Director chairs this meeting.

 

Evaluation is conducted utilising a questionnaire combined with one to one meetings.  The Board has developed criteria for use at the evaluation, which focuses on the individual contribution to the Board and its Committees made by each Director, each Directors' independence and the responsibilities, composition and agenda of the Committees and of the Board itself.

 

A review of Board composition and balance, including succession planning for appointments to the Board, is included as part of the annual performance evaluation.

 

Following the annual board evaluation in May 2011, it was concluded that all Directors with the exception of Mr Maynard were independent and that the Chairman and all Directors were contributing satisfactorily to the efficient running of the Company, and that the Board had a good range of skills and competency.

 

d) Internal controls

 

The Board has established a process for identifying, evaluating and managing any major risks faced by the Company.  The process is subject to regular review by the Board and accords with the Internal Control Guidance for Directors on the Combined Code published in September 1999 ("the Turnbull Guidance") which was revised by the Financial Reporting Council in October 2005. 

The Board is responsible overall for the Company's system of internal control and for reviewing its effectiveness.  However, such a system is designed to manage rather than eliminate risks of failure to achieve the Company's business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.

The Board, assisted by the investment manager, has undertaken a full review of the Company's business risks which have been analysed and recorded in a risk report which is reviewed and updated regularly.  The Board receives each quarter from the investment manager a formal report which details the steps taken to monitor the areas of risk including those that are not directly the responsibility of the investment manager and which reports the details of any known internal control failures.  The Board receives each year from the investment manager a report on its internal controls which includes a report from the investment manager's auditors on the control policies and procedures in operation. Steps will continue to be taken to embed the system of internal control and risk management into the operation and culture of the Company and its key suppliers.

The investment manager has established an internal control framework to provide reasonable but not absolute assurance on the effectiveness of the internal controls operated on behalf of its clients.  The effectiveness of the internal controls is assessed by the investment manager's compliance and risk department on a continuing basis.

 

By means of the procedures set out above the Board confirms that it has reviewed the effectiveness of the Company's system of internal control for the period ended 30 June 2011 and to the date of approval of this Annual Report and consolidated financial statements.

Relationship with the Investment Manager and the Administrator

The Board has delegated various duties to external parties including the management of the investment portfolio, the custodial services (including the safeguarding of assets), the registration services and the day-to-day company secretarial, administration and accounting services.  Each of these contracts was entered into after full and proper consideration by the Board of the quality and cost of services offered, including the control systems in operation in so far as they relate to the affairs of the Company.

 

The Board receives and considers reports regularly from the investment manager and ad hoc reports and information are supplied to the Board as required.  The investment manager takes decisions as to the purchase and sale of individual investments.  The investment manager and administrator also ensure that all Directors receive, in a timely manner, all relevant management, regulatory and financial information.  Representatives of the investment manager and administrator attend each Board meeting enabling the Directors to probe further on matters of concern.  A formal schedule of matters specifically reserved for decision by the full Board has been defined and a procedure adopted for Directors, in the furtherance of their duties, to take independent professional advice at the expense of the Company within certain parameters.  The Directors have access to the advice and service of the corporate Company Secretary through its appointed representative who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with.  The Board, the investment manager and the administrator operate in a supportive, co-operative and open environment.

 

Continued appointment of the Investment Manager

The Board reviews investment performance at each Board meeting and a formal review of all service providers is conducted annually by the Management Engagement and Remuneration Committee.

 

As a result of the annual review, it is the opinion of the Directors that the continued appointment of the current investment manager on the terms agreed is in the interest of the Company's shareholders as a whole.  The investment manager has extensive investment management resources and wide experience in managing investment companies.

 

Share Capital

 

The Company's share capital comprises the following:

 

Ordinary shares

The ordinary shares are entitled to receive and participate in any dividends or other distribution out of profits of the Company available for dividend. On a show of hands, holders of ordinary shares are entitled to one vote irrespective of the number of shares  held. On a poll, each ordinary share carries one vote. On a winding up, the ordinary shareholders shall be entitled to the surplus assets remaining after payment of all creditors of the Company.  Specifically, the net assets of the Company less those attributable to C shareholders (see below) shall be divided amongst the holders of each ordinary share according to their respective rights.

The number of ordinary shares in issue at 30 June 2011 was 101,090,000.

 

Redeemable B shares

The redeemable B shares will be issued to the existing ordinary shareholders after 30 June 2012. These may be redeemed at a date decided by the articles of the Company. The redeemable B shares do not carry any rights to any dividend or other distribution out of the profits of the Company or any voting rights and are not transferable. There were no redeemable B shares in issue at 30 June 2011.

 

C shares

The C shares were admitted to the Official List, and commenced trading on the main market of the London Stock Exchange on 4 May 2011.  The longstop date for calculation of the conversion ratio of these shares into ordinary shares is 4 November 2011, although it is expected that this calculation time will be before this date, as set out in pages 55-56 of the prospectus which may be found at www.hvsle.com.  The ordinary shares arising on conversion of the C shares will rank pari passu with the ordinary shares then in issue.  Fractions of ordinary shares arising on conversion will not be allocated to holders of C shares but will be aggregated and sold for the benefit of the Company. 

 

The C shares shall have the same rights as to voting as ordinary shares. In particular, holders of C shares are entitled to receive notice of and to attend and vote at general meetings of the Company.  On a show of hands, holders of C shares are entitled to one vote irrespective of the number of shares held.  On a poll, each C share carries one vote.

 

On winding up, the net assets attributable to each relevant C share class shall be divided amongst the C shareholders of such class pro rata according to their holdings of the relevant C share class.  There were 26,688,900 C shares in issue at 30 June 2011.

 

Substantial Share Interests

 

Based upon information deemed to be reliable as provided by the Company's registrar, as at 26 September 2011, the following shareholders owned 3% or more of the issued shares of the Company.

 

	Number of Ordinary shares	Number of C shares	Percentage (%)
Anson Registrars Limited	10,000,000	-	10.06
BNY Clearing Nominees Limited	7,509,546	-	7.55
BNY Mellon Nominees Limited a/c BSDTANG	10,100,000	3,000,000	13.18
City of Bradford Metropol District Council	7,134,233	2,500,000	9.69
HSBC Global Custody Nominee Limited a/c 707770	10,000,000	-	10.06
HSBC Global Custody Nominee Limited a/c 813764	4,921,849	-	4.95
HSBC Global Custody Nominee Limited a/c 977761	5,985,000	1,800,000	7.83
Nortrust Nominees Limited	4,673,757	-	4.70
Nortrust Nominees Limited a/c SLEND	10,000,000	2,540,000	12.61
Nortrust Nominees Limited a/c NTGSLEND	5,050,000	3,000,000	8.10

 

Notifications of Shareholdings

In the period to 30 June 2011 the Company had been notified in accordance with chapter 5 of the Disclosure and Transparency Rules (which covers the acquisition and disposal of major shareholdings and voting rights), of the following voting rights as a shareholder of the Company.  When more than one notification has been received from any shareholder only the latest notification is shown.

 

	Number of Ordinary shares	Percentage of total voting rights
Co-operative Insurance Society Limited	13,100,000	10.25
Harbourvest Global Private Equity Limited	10,000,000	9.90
CCLA Investment Management Limited	10,000,000	9.89
City and County of Swansea Pension Fund	10,000,000	9.89
City of Edinburgh Council as Administrative Authority of the Lothian Pension Fund	10,000,000	9.89
Insight Investment Management [Global] Limited	10,529,534	8.24
City of Bradford Metropolitan District Council	10,000,000	7.83
Hermes Equity Ownership Services Limited	10,000,000	7.83
East Riding of Yorkshire Council	8,050,000	6.30
Reliance Mutual Insurance Society Limited	5,985,000	5.92

 

Communications with Shareholders

 

The Board believes that the maintenance of good relations with shareholders is important for the long-term prospects of the Company.  It has, since admission, sought engagement with investors.  Where appropriate the Chairman, and other Directors, are available for discussion about governance and strategy with major shareholders and the Chairman ensures communication of shareholders' views to the Board.  The Board receives feedback on the views of shareholders from its Corporate Broker and the investment manager.

 

The Board believes that the Annual General Meeting provides an appropriate forum for investors to communicate with the Board, and encourages participation.  The Annual Report and Accounts is, when possible, sent to shareholders at least 20 business days before the Annual General Meeting.  The Annual General Meeting is attended by the Directors.  There is an opportunity for individual shareholders to question the Chairmen of the Board, Audit Committee and Management Engagement and Remuneration Committees at the Annual General Meeting.  Details of proxy votes received in respect of each resolution are made available to shareholders at the meeting and are posted on the Company's website following the meeting.

 

The notice for the Annual General Meeting on page xx sets out the business of the meeting.

 

Auditors

Our auditors, Ernst and Young LLP, have indicated their willingness to remain in office.  The Directors will place a Resolution before the Annual General Meeting to re-appoint them as independent auditors for the ensuing year, and to authorise the Directors to determine their remuneration.

 

Directors

Colin Maltby (appointed 7 April 2010)

Sarah Evans (appointed 7 April 2010)

Rupert Dorey (appointed 7 April 2010)

Michael Stoddart (appointed 7 April 2010)

Frederick Maynard III (appointed 7 April 2010)

 

Directors' Responsibilities

The Directors are responsible for preparing financial statements for each financial period which give a true and fair view of the state of affairs of the Company and of the profit and loss for the period and are in accordance with applicable laws. In preparing those financial statements the Directors are required to:

 

·    Select suitable accounting policies and apply them consistently;

 

·    Make judgements and estimates that are reasonable and prudent;

 

·    State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

 

·    Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

 

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies (Guernsey) Law, 2008 and The Protection of Investors (Bailiwick of Guernsey) Law, 1987.  The Directors are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

The Directors confirm to the best of their knowledge that:

 

·    The consolidated financial statements which have been prepared in accordance with IFRS as adopted by the European Union give a true and fair view of the assets, liabilities, financial position and profit of the Company, and the undertakings included in the consolidation taken as a whole as required by DTR 4.2.4R;

 

·    the Investment Manager's Report includes a fair review of the information required by DTR 4.2.7R, which provides an indication of important events and a description of principal risks and uncertainties during the period; and 

 

·    the Investment Manager's Report includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions, and changes therein).

 

·    So far as each of the Directors is aware, there is no relevant audit information of which the Company's auditor is unaware, and each has taken steps they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

 

By order of the Board

 

Rupert Dorey                                                    Sarah Evans

Director                                                             Director

4 October 2011                                                4 October 2011                              

 

Directors' Remuneration Report

 

The determination of the Directors' fees is a matter dealt with by the Management Engagement and Remuneration Committee and the Board.  The Board has not sought the advice or services by any outside person in respect of its consideration of the Directors' remuneration, although the Directors will review the fees paid to the Boards of Directors of similar investment companies.

 

The Board consists entirely of non-executive Directors who meet regularly to deal with the important aspects of the Company's affairs.  Directors are appointed with the expectation that they will initially serve for a period of three years, and will stand for re-election every three years.  Directors' appointments will be reviewed during the annual board evaluation.  Each of the Directors has a letter of appointment and a Director may resign by giving notice in writing to the Board at any time; there are no set notice periods.  The terms of appointment are available for inspection at the Company's Registered Office during normal business hours and at the Annual General Meeting.

 

The Company's policy is for the Directors to be remunerated in the form of fees, payable quarterly in arrears.  No Director has any entitlement to a pension, and the Company has not awarded any share options or long-term performance incentives to any of the Directors.  No element of the Directors' remuneration is performance related.

 

The Company's policy is that the fees payable to the Directors should reflect the time spent by the Board on the Company's affairs and the responsibilities borne by the Directors and should be sufficient to enable high calibre candidates to be recruited.  The policy is for the Chairman of the Board and Chairman of the Audit Committee to be paid a higher fee than the other Directors in recognition of their more onerous roles and more time spent. 

 

The Company's Articles of Incorporation limit the aggregate fees payable to the Board of Directors to a total of £250,000 per annum.  In the period under review the Directors' fees were paid at the following annual rates:  the Chairman £55,000; the Chairman of the Audit Committee £33,000; the other Directors £28,000.  Frederick Maynard has agreed to waive his Director's fee.

 

Remuneration

The following fees were paid by the Company to the Directors for the period from incorporation on 7 April 2010 to 30 June 2011.

                                                                                                    £

Colin Maltby (Chairman)                                                          66,452

Sarah Evans (Audit Committee Chairman)                                 39,871           

Rupert Dorey                                                                           33,830           

Michael Stoddart                                                                      33,830

Frederick Maynard                                                                            -    

Total                                                                                        173,983

 

Mrs Evans also receives £15,000 annual fees as a Manager of the three Luxembourg subsidiaries (£14,990 for the period, of which £3,740 was outstanding at 30 June 2011).

 

No other remuneration or compensation was paid or payable by the Company during the period to any of the Directors, other than travel expenses of £15,748.

 

 

 

For and on behalf of the Board

 

 

 

Sarah Evans

Director

4 October 2011

 

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF HARBOURVEST SENIOR LOANS EUROPE LIMITED

 

We have audited the financial statements of HarbourVest Senior Loans Europe Limited for the period ended 30 June 2011 which comprise the Consolidated Statement of Financial Position, the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Cash Flows, the Consolidated Statement of Changes in Equity and the related notes 1 to 13. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

This report is made solely to the Company's members, as a body, in accordance with Section 262 of the Companies (Guernsey) Law, 2008.  Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed. 

 

Respective responsibilities of directors and auditor

As explained more fully in the Directors' Responsibilities Statement set out on page xx, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

 

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements.  In addition, we read all the financial and non-financial information in the Key Highlights, Chairman's Statement, Investment Manager's Report and Directors' Report to identify material inconsistencies with the audited financial statements.  If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on financial statements

In our opinion the financial statements:

" give a true and fair view of the state of the Company's affairs as at 30 June 2011 and of its profit for the period then ended;

" have been properly prepared in accordance with IFRSs as adopted by the European Union; and

" have been prepared in accordance with the requirements of the Companies (Guernsey) Law, 2008.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters:

Under the Companies (Guernsey) Law, 2008 we are required to report to you if, in our opinion:

" proper accounting records have not been kept; or

" the financial statements are not in agreement with the accounting records; or

" we have not received all the information and explanations we require for our audit.

 

Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the Company's compliance with the nine provisions of the June 2008 Combined Code specified for our review.

 

 

 

Michael Bane

Recognised Auditor

for and on behalf of Ernst & Young LLP

4 October 2011

 

Consolidated Statement of Comprehensive Income

For the period from incorporation on 7 April 2010 to 30 June 2011

 

					7 April 2010 to 30 June 2011
				Notes			Total
							£
Income
Income from investments				7			2,822,721
Unrealised gain on revaluation of investments							1,149,678
Realised gains on sale of loans							435,541
Realised gains on sale of cash equivalents							132,767
Dividends from cash equivalents							196,913
Interest from cash and cash equivalents							28,192
Net foreign exchange gain or (loss)							19,391
Total operating income							4,785,203
Expenses
Investment management fees				4 (a)			417,292
Directors' fees and travel expenses							219,711
Legal and professional fees							210,821
Administration and company secretarial fees				4 (b)			147,014
Other expenses							89,239
Independent valuation consultant fees				4 (d)			80,870
Loan administration and custody fees				4 (b)			68,313
Audit fees				4 (f)			59,500
Finance cost							38,760
Brokerage fees				4 (e)			30,814
Transaction costs							28,750
Directors & Officers' liability insurance							25,325
Registrar's fees				4 (c)			19,781
Formation expenses				3 (j)			18,306
Manager travel expenses							16,000
Luxembourg taxation expenses							12,798
Total operating expenses							1,483,294
Gain for the period							3,301,909
Other comprehensive income							-
Total comprehensive income for the period							3,301,909
Total comprehensive income attributable to C shares							(3,430)
Total comprehensive income attributable to ordinary shares							3,298,479
Earnings per ordinary share				5			3.26p
Earnings per C share				5			0.01p

 

Consolidated Statement of Financial Position

As at 30 June 2011

 

	Notes			30 June 2011
				£
Non-current assets
Investments designated as fair value through profit or loss	6			84,636,321
Current assets
Dividends receivable				33,881
Interest receivable				379,546
Other receivables and prepayments				27,299
Cash and cash equivalents	8			41,846,948
				42,287,674
Total assets				126,923,995
Current liabilities
C shares	10			26,093,057
Other payables and accrued expenses	9			471,066
				26,564,123
Net assets				100,359,872
Equity
Ordinary shares	10			99,083,193
Reserves				1,276,679
				100,359,872
Number of ordinary shares	10			101,090,000
Number of C shares	10			26,688,900
Net asset value per ordinary share	5			99.28p
Net asset value per C share	5			97.77p

 

These financial statements were approved and authorised for issue by the Board of Directors on

4 October 2011, and signed on its behalf by:

 

 

 

Rupert Dorey                                                               Sarah Evans

Director                                                                       Director

 

 

Consolidated Statement of Changes in Equity

For the period from incorporation on 7 April 2010 to 30 June 2011

 

 

	Notes		Number of shares	Share capital	Reserves	Total equity
				£	£	£
Gain for the period			-	-	3,298,479	3,298,479
Other comprehensive income			-	-	-	-
Total comprehensive income for the period			-	-	3,298,479	3,298,479
Payment of interim dividends to ordinary shareholders	11		-	-	(2,021,800)	(2,021,800)
Issue of ordinary shares	10		101,090,000	99,083,193	-	99,083,193
Total transactions with owners			101,090,000	99,083,193	(2,021,800)	97,061,393
Balance at 30 June 2011			101,090,000	99,083,193	1,276,679	100,359,872

 

Consolidated Statement of Cash Flows

For the period from incorporation on 7 April 2010 to 30 June 2011

 

	-			7 April 2010 to 30 June 2011
				£
Operating activities:
Gain for the period				3,301,909
Adjustments for:
Unrealised gain on revaluation of investments				(1,149,678)
Effect of foreign exchange movements				(19,391)
Increase in interest receivable				(379,546)
Increase in dividend receivable				(33,881)
Increase in other receivables and prepayments				(27,299)
Increase in other payables and accrued expenses				471,066
Purchases of investments				(100,541,648)
Proceeds from sales of investments				17,490,546
Realised gain on investments				(435,541)
Net cash outflow from operating activities				(81,323,463)
Cash flow from investing activities
Proceeds from issue of ordinary shares (net of issue costs of £2,006,807)				99,083,193
Proceeds from issue of C shares (net of issue costs of £599,273)				26,089,627
Dividends paid to ordinary shareholders				(2,021,800)
Net cash flows provided by financing activities				123,151,020
Net increase in cash and cash equivalents				41,827,557
Effect of exchange rate changes on cash and cash equivalents				19,391
Cash and cash equivalents at end of the period				41,846,948

 

Notes to the Consolidated Financial Statements

For the period from incorporation on 7 April 2010 to 30 June 2011

 

1.  General information

The Company was incorporated with limited liability in Guernsey under the Companies (Guernsey) Law 2008 (as amended) on 7 April 2010 with registered number 51719 as a closed-ended investment company.  The registered office and principal place of business of the Company is BNP Paribas House, St Julian's Avenue, St Peter Port, Guernsey, GY1 1WA.

 

For the purposes of efficient portfolio management, the Company has established one wholly-owned, Luxembourg incorporated subsidiary, Orange Senior Loans 1 S.à.r.l. which in turn itself has two wholly-owned, Luxembourg incorporated subsidiaries, Orange Senior Loans 2 S.à.r.l., and Orange Senior Loans 3 S.à.r.l., which are incorporated for the purpose of holding primary and secondary loans respectively of the Group.

 

The Group invests in senior secured loans of private equity-backed European mid-market companies.  These loans may include amortising debt (i.e. loans that are repaid over the life of the loan) as well as term debt (i.e. loans that are repaid at maturity) and other forms of credit facility (e.g. loans drawn over time and repaid over the life of the loan or at maturity).  All of the loans in which the Group invests will be in the senior secured tier of a borrower's debt capital structure (i.e. loans with first ranking security over the borrower's assets and/or its shares).

 

The Company has an investment period of two years ending on 30 June 2012 during which period capital realised through loan redemption or refinancing, together with loan amortisation, may be reinvested.

 

Although the Company does not have a fixed life, a resolution for the Company to continue in its current form will be proposed at the annual general meeting following the seventh anniversary of the admission, and every year thereafter.

 

The investment activities of the Company are managed by HarbourVest Senior Loan Advisers L.P. ("the Investment Manager"), and the administration of the Company is delegated to BNP Paribas Fund Services (Guernsey) Limited ("the administrator").

 

2. Going Concern

The Directors believe that it is appropriate to adopt the going concern basis in preparing these financial statements. The Directors are confident that the Company has adequate financial resources to continue operating for the foreseeable future.

3. Principal accounting policies

The principal accounting policies applied in the preparation of these financial statements are set out below.  These policies have been consistently applied to the period presented, unless otherwise stated.

 

(a) Statement of Compliance

The Company produces consolidated annual financial statements in accordance with The Companies (Guernsey) Law, 2008 (as amended) and International Financial Reporting Standards ("IFRS") as adopted by the European Union which comprise standards and interpretations approved by the International Accounting Standards Board ('IASB') together with the interpretations of the International Accounting Standards and Standing Interpretations Committee as approved by the International Accounting Standards Committee ("IASC") which remain in effect.

 

These audited consolidated financial statements have been prepared in accordance with IFRS, as adopted by the European Union.

Standards and Interpretations in issue and not yet effective:

 

New Standards		Effective dates
IFRS 9	Financial Instruments - Classifications and Measurement (November 2009)*	1 January 2013
Revised and amended standards
IFRS 3	Business Combinations, revised May 2010.	1 July 2010
IFRS 7	Financial Instruments - disclosures, amendments regarding transfers of financial assets.	1 January 2011; 1 July 2011
IAS 24	Related party disclosures	1 January 2011
Interpretations		Effective dates
IFRIC 14	IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction*	1 January 2011
IFRIC 19	Extinguishing Financial Liabilities with Equity Instruments*	1 July 2010

 

* Still to be endorsed by the EU

 

The Directors have not yet undertaken an assessment of the extent to which these standards and interpretations will impact the consolidated financial statements of the Company, but are not currently aware any such impact at this stage.

 

(b) Basis of preparation

The consolidated financial statements have been prepared under the historical cost basis, except for the revaluation of investments designated as fair value through profit or loss.

 

Where consistent with IFRS the consolidated financial statements have also been prepared in accordance with guidance set out in the Statement of Recommended Practice ('SORP') for Investment Companies issued by the Association of Investment Companies ('AIC') as revised in January 2009.

 

c) Basis of consolidation

The consolidated financial statements comprise the financial statements of the Company and its wholly owned subsidiary undertakings as at 30 June 2011.  The results of the subsidiary undertakings are included in the Consolidated Statement of Comprehensive Income. 

All intra-group balances, transactions, income, and expenses are eliminated in full.

 

d) Critical accounting judgements and key sources of estimation uncertainty

The preparation of consolidated financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates.

 

At 30 June 2011 estimates were used for the valuation of the investments designated as fair value through profit and loss (please refer to note 6 and note 3(g)). The key accounting judgements are firstly on the discount rates applied in the discount cash flow analysis and secondly on the assumption on whether the loans are being held to maturity or held to refinancing.

 

In principle the directors will not value a loan above par given that senior loans can be repaid at par (in full or partially) by the borrower at any point in time.

 

e) Operating Segments

The Directors are of the opinion that the Company and its subsidiaries are engaged in a single segment of business, being investments in senior loans. The Directors manage the business in this way.

 

f) Foreign currency translation

The functional and presentation currency of the Company and its subsidiaries is sterling.  Transactions in currencies other than the functional currency are recorded using the exchange rate prevailing at the transaction date. Foreign exchange gains and losses resulting from the settlement of such transactions, and those from the translation at period end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Consolidated Statement of Comprehensive Income. 

Foreign currency gains and losses attributable to investments designated as fair value through profit and loss are included in the gains and losses recognised in the Consolidated Statement of Comprehensive Income. 

 

g) Investments designated as fair value through profit and loss

 

Classification

All investments of the Group are designated as financial assets at fair value through profit or loss.  The investments are purchased principally for capital growth and income generation and the portfolio is managed, and performance evaluated, on a fair value basis in accordance with the Company's documented investment strategy.  Therefore the Directors consider that this is the most appropriate classification.

This category comprises financial instruments designated as financial assets at fair value through profit or loss upon initial recognition - these include financial assets that are not held for trading purposes, but which may be sold.

 

Measurement

Fair value measurement should be determined based on assumptions that market participants would use in pricing an asset or liability.  As a basis for considering market participant assumptions IFRS 7 establishes a fair value hierarchy as follows: 

 

Level 1: Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

Level 2: Inputs reflect quoted prices of similar assets and liabilities in active markets, and quoted prices of identical assets and liabilities in markets that are considered to be inactive as well as inputs other than quoted prices that are observable for the asset or liability either directly or indirectly.

 

Level 3: Inputs that are unobservable for the asset or liability and reflect the investment manager's own assumptions (in accordance with the accounting policies disclosed within note 3 to the consolidated financial statements).

 

All investments of the Group are classified as Level 3 assets, defined under IFRS 7 as those assets whose fair valuation relies primarily on inputs that are not based on observable market data.

 

In assessing the value represented in the Consolidated Statement of Financial Position of the Company, the discounted cash flow (DCF) methodology has been adopted as the principal valuation approach.  The DCF methodology entails determining relevant cash flows for each loan, adjusted according to an assessment of the probability of refinancing, and discounting those cash flows by an appropriate risk-adjusted discount rate.  The risk-adjusted discount rate is an expression of what investors believe to be a fair and reasonable rate of return for holding a particular security over the relevant period given the inherent risks of ownership. Implicit in the estimation of such a discount rate is the assumption that the seller is a willing seller and the buyer is a willing purchaser of the security.

 

The Company has engaged an independent valuation consultant to provide third party valuation consultancy services to the Company and to assist in the determination of the fair value of the Group's investments and reviewing the valuation processes in relation to thereto. 

 

 

h) Realised and unrealised gains and losses

Investment transactions are recorded on the trade date.  Realised gains and losses arising on the disposal of investments are calculated by reference to the weighted average cost attributable to those investments and the sale proceeds (exclusive of interest income) and are included in the Consolidated Statement of Comprehensive Income.  Unrealised gains and losses arising on investments held at the Consolidated Statement of Financial Position date are also included in the Consolidated Statement of Comprehensive Income. 

 

i) Income

Interest income in the Consolidated Statement of Comprehensive Income includes amortisation of market discount and premium as calculated using the effective interest method.

 

j) Expenses

All expenses are recognised in the Consolidated Statement of Comprehensive Income on an accruals basis except for costs incurred on share issues which are netted off against the share issue proceeds. Other costs in relation to the formation of the Company are recognised when incurred.

 

k) Cash and cash equivalents

Cash comprises cash in hand, overdrafts and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant changes in value.

 

l) Taxes

The Company is exempt from Guernsey taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 for which it pays an annual fee of £600.

 

The Luxembourg direct and indirect subsidiaries of HSLE are subject in Luxembourg to the applicable general tax regulations.  As such there is a tax liability of £12,798 calculated based on specialist local tax advice.

m) Dividends

In any financial year, the Company makes distributions to shareholders of not more than the cash income it receives less its running costs paid in that year.  Cash income comprises cash received by the Company attributable to the running yield of the portfolio and the income arising from cash held by the Company pending investment or distribution.  In addition, it also includes all fees generated from the portfolio including, for example, arrangement fees from primary loans.  Cash income excludes market discounts and premiums that are accounted for as part of interest income.  Such distributions are made by way of semi-annual interim dividends, payable in March and September of each year in respect of the financial period ending 30 June of that year.

 

n) Capital distributions

Following the investment period, which ends on 30 June 2012, the Company expects to make distributions of capital returns comprising repayments of invested capital and capital gains resulting from the realisation of the discounts to par at which secondary loans are purchased. Capital returns will be made from cash arising from borrower loan repayment or refinancing together with ongoing loan amortisation.  The Directors currently expect that the mechanism for making capital returns will be by way of a bonus issue and redemption of redeemable B shares on a pro rata basis.

 

The Board will establish a 'bonus issue pool' and will apply all capital returns received by the Company to the bonus issue pool.  Subject to retaining an amount equivalent to 10% of the gross issue proceeds until liquidation, if at any time the value of the bonus issue pool exceeds 10% of the gross issue proceeds, the Board may at its discretion make a bonus issue. 

 

Immediately following a bonus issue the B shares will compulsorily be redeemed and the cash proceeds of such redemption will be paid to the shareholders.  

 

o) Capital management

 

The Company's objectives for managing capital are:

 

·    To invest the capital in investments meeting the description, risk exposure and expected return indicated in its prospectus.

·    To achieve consistent returns while safeguarding capital by investing in a diversified portfolio.

·    To maintain sufficient liquidity to meet the expenses of the Company.

·    To maintain sufficient size to make the operation of the Company cost-efficient.

 

The risk management policies and procedures section (Note 12) details the policies and processes applied by the Company in managing its capital.

 

p) C Share classification

 

In accordance with paragraph 11 of IAS 32 (Financial Instruments: Presentation), the C shares have been classified as liabilities due to the inherent variability in the number of ordinary shares attributable to C shareholders on conversion.

 

4. Material Agreements

 

(a) Investment Management Agreement

The Company is managed by HarbourVest Senior Loan Advisers L.P. under the terms of the investment management agreement dated 27 April 2010, the Company appointed the investment manager to provide management services to the Company. The investment manager receives in return a base fee calculated as follows:

 

·    The base fee is equal to 0.25% per calendar quarter of the net invested assets and is paid quarterly in arrears by the Company or at its discretion by any member of the Group to the investment manager within 14 days of receipt from the administrator of the calculation of the base fee, unless within such period the Company has given notice in writing to the investment manager of any error in relation to the calculation, in which case the due date for payment shall be delayed until 14 days after such error is resolved.

 

For the purposes of the base fee, the net invested assets mean the aggregate of:

 

·    for secondary loans the aggregate value on the first day of each month of the calendar quarter of all outstanding loans at their purchase price plus the aggregate value on the last day of the calendar quarter of all outstanding loans at their purchase price, divided by four; and

 

·    for primary loans the aggregate value on the first day of each month of the calendar quarter of all outstanding loans at their subscription price inclusive of any fees paid by the borrower in connection with a new financing and any original issue discount plus the aggregate value on the last day of the calendar quarter of all outstanding loans at their subscription price inclusive of any fees paid by the borrower company in connection with a new financing and any original issue discount, as the case may be, divided by four.

 

The net invested assets exclude loans which have been repaid (in whole or in part) or permanently written-off (in whole or in part) and include committed credit lines including undrawn amounts. In respect of a period that is less than a full calendar quarter, any base fee which may be payable is pro-rated based on the net invested assets. The first calendar quarter period commenced on the date of admission and ended on 30 June 2010.  The base fee payable for the first calendar quarter period was adjusted pro rata.

 

From such time as a cash distribution causes the Company, in aggregate, to have made cash distributions (by way of dividend and/or capital return) representing the Gross Proceeds and such amounts representing an 8 per cent. IRR on the Gross Proceeds, the investment manager will be entitled to a 15% performance fee on all distributions above this 8 per cent. return.

 

(b) Administration and Custodian Agreement

The Company has engaged the services of BNP Paribas Fund Services (Guernsey) Limited (the "administrator"), a private limited company incorporated in Guernsey on 27 October 2000, to provide administration and custodian services for a fee. Under the terms of the administration and custodian agreement dated 27 April 2010 an accounting and administration fee calculated as 0.035% of the net asset value from time to time, subject to a minimum of £74,000 per annum, and an annual corporate secretarial fee of £36,000, are both accrued monthly and payable quarterly in arrears.

The administrator is entitled to a loan administration fee calculated as 0.04% of the net asset value from time to time, subject to a minimum of £60,000 per annum, accrued monthly and payable quarterly in arrears. The administrator is entitled to charge a loan sale and purchase transaction fee of £100 per transaction and an ad hoc fee of £2,500 per additional board meeting and any other ad hoc services fee on a time cost basis.  The Company also pays BNP Securities Services, Luxembourg Branch a fee of £28,000 per annum for secretarial services rendered to the Company's subsidiaries.

(c) Registrar's Agreement

Capita Registrars (Guernsey) Limited has been appointed as registrar of the Company pursuant to the registrar agreement dated 27 April 2010.  The fee is charged at a rate of £2.00 per holder of ordinary shares appearing on the register during the fee year, with a minimum charge per annum of £10,000.

(d) Independent Valuation Consultancy Agreement

The Company has engaged the services of Houlihan Lokey (Europe) Limited (the "valuation consultant") to provide advisory services to the Company in relation to the Audit Committee and valuation of current and possible future assets of the Group, when required. 

 

(e) Broking Engagement Letter

The Company had engaged the services of Collins Stewart Europe to provide financial advisory and corporate broking services to the Company under the terms of the broking engagement letter dated 21 April 2010.  The Company paid Collins Stewart a retainer fee of £30,000 per annum (payable half yearly in advance on 1 January and 1 June).  Collins Stewart Europe Limited resigned as the Company's broker on 14 March 2011, with an immediate effect.

 

The Company appointed Liberum Capital Limited as a joint broker (the "broker") under the terms and conditions of the broking engagement letter dated 9 December 2010. On completion of the fundraising for the C shares, an annual retainer became payable of £30,000 per annum (payable half yearly in advance on 1 January and 1 June).

 

(f) Non audit services

During the period Ernst & Young LLP provided non audit services in respect of the reporting accountant role at the launch date of the fund and then at the incorporation of C shares to the value of £68,000. These costs are included in the share issue costs of the respective share classes.

 

5. Earnings/loss per share and net asset value per share

The calculation of basic earnings per ordinary share is based on the net return on ordinary shares of £3,298,479 and on the weighted average number of ordinary shares in issue during the period of 101,090,000 shares.

 

The calculation of net asset value per ordinary share is based on a net asset value attributable to ordinary shareholders of £100,359,872 and the number of ordinary shares in issue at 30 June 2011 of 101,090,000 shares.

 

The calculation of basic earnings per C share is based on the net return on assets attributable to C shares of £3,430 and on the weighted average number of C shares in issue during the period of 26,688,900 shares.

 

The calculation of net asset value per C share is based on a net asset value of £26,093,057 attributable to C shares and the number of C shares in issue at 30 June 2011 of 26,688,900 shares.

 

6. Investments designated as fair value through profit or loss 

The table below shows reconciliation from the starting balances to the ending balances for fair value measurements in level 3 of the fair value hierarchy:

 

Level 3 financial instruments
		30 June 2011
		£
Balance at start of the period		-
Purchases during the period		100,541,648
Proceeds on sale of investments		(17,490,546)
Realised gain on investments		435,541
Unrealised gain on revaluation		1,149,678
Balance at end of the period		84,636,321

 

7. Income from investments

The income from investments is broken down as follows:

					7 April 2010 to 30 June 2011
					£
Income received from investments					1,962,780
Income received from the processing of investments					618,575
Delayed compensation received from investment purchases					241,366
					2,822,721

 

8. Cash and cash equivalents

The breakdown of cash and cash equivalents is as follows:

 

	-			30 June 2011
				£
Investment in daily dealing money market funds				28,421,861
Cash at bank				13,425,087
				41,846,948

 

 

9. Other payables and accrued expenses

 

			30 June 2011
			£
Investment management fees			198,256
Directors' fees and travel expenses			48,438
Administration and company secretarial fees			48,367
Audit fees			48,000
Formation expenses			34,542
Other expenses			28,849
Independent valuation consultant fees			27,408
Loan administration and custody fees			15,559
Luxembourg taxation expenses			12,798
Registrar's fees			5,033
Management travel expenses			3,816
			471,066

 

The Company has financial risk management policies in place to ensure that all payables are paid within the credit time frame.  The Board of Directors considers that the carrying amount of other payables approximates to their fair value.

 

10. Share capital

 

The authorised share capital of the Company is represented by an unlimited number of ordinary shares of no par value together with 150,000,000 C shares.

 

			30 June 2011
Ordinary shares of no par value
Issued and fully paid			101,090,000
C shares of £1 par value
Issued and fully paid			26,688,900

 

Rights attached to shares

 

Ordinary shares

The holders of the ordinary shares are entitled to receive and participate in any dividends or other distribution out of profits of the Company available for dividend.  On a show of hands, holders of ordinary shares are entitled to one vote irrespective of the number of shares held.  On a poll, each ordinary share carries one vote.  On a winding up, the ordinary shareholders shall be entitled to the surplus assets remaining after payment of all creditors of the Company.

 

Redeemable B shares

The redeemable B shares will be issued to the existing ordinary shareholders after 30 June 2012. These may be redeemed at a date decided in accordance with the articles of the Company. The redeemable B shares will not carry any rights to any dividend or other distribution out of the profits of the Company or any voting rights and are not transferable.  Further detail is contained in note 3(n) to the consolidated financial statements.

 

C shares

Following a Placing and Offer for Subscription of C shares, the Company issued 26,688,900 C shares which were admitted to the Official List, and commenced trading on the main market of the London Stock Exchange on 4 May 2011. 4 November 2011 is the long stop date for calculation of the conversion ratio of these shares into ordinary shares.

 

The fair value of the C shares at 30 June 2011 was £26,688,900.

 

The ordinary shares arising on conversion of the C shares will rank pari passu with the ordinary shares then in issue.  Fractions of ordinary shares arising on conversion will not be allocated to holders of C shares but will be aggregated and sold for the benefit of the Company.

 

Further details, including an example of the conversion, can be noted in the Prospectus published in connection with this share issue.

 

Until such time as the IPO net proceeds are fully invested, any assets acquired by the Company will be allocated to the portfolios of the ordinary shares and the C shares in proportion to their respective aggregate net asset values.

 

Significant share movements

 

			7 April 2010 to 30 June 2011
Ordinary Shares		Number	£
Balance at start of the period		-	-
Ordinary shares issued during the period*		101,090,000	99,083,193
Shares redeemed		-	-
Balance at end of the period		101,090,000	99,083,193

 

* On 26 May 2010, the Company issued 101,090,000 ordinary shares of 100 pence per share, raising total proceeds of £101,090,000.  The proceeds net of issue costs of £2,006,807 (2.0% of the gross proceeds) amounted to £99,083,193. 

 

			7 April 2010 to 30 June 2011
C Shares		Number	£
Balance at start of the period		-	-
C shares issued during the period* (treated as a liability)		26,688,900	26,089,627
Shares redeemed		-	-
Balance at end of the period		26,688,900	26,089,627

 

 

*On 4 May 2011, the Company issued 26,688,900 C shares of 100 pence per share, raising total proceeds of £26,688,900.  The proceeds net of issue costs of £599,273 (2.2% of the gross proceeds) amounted to £26,089,627.

                         

11. Dividends

 

For the period from admission to 30 June 2011, the Company has declared and paid the following interim dividends to its ordinary shareholders:

 

Date declared                         Date Paid                                Rate

31 August 2010                        30 September 2010                  1.00 pence per share

21 February 2011                     25 March 2011                        1.00 pence per share

 

A further dividend was declared on 23 August 2011 and paid on 30 September 2011 for 1.00 pence per share.

 

12. Risk management policies and procedures

 

The Company through its investments in senior loans for the long term is exposed to a variety of financial risks, market risk (including market price risk, currency risk and interest rate risk), credit risk and liquidity risk.  The Company's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Company's financial performance.

 

The Company's investment manager is responsible for identifying and controlling risks.  The Board of Directors is ultimately responsible for the overall risk management approach within the Company.

 

The Board of Directors has established procedures for monitoring and controlling risk. The Company has investment guidelines that set out its overall business strategies, its tolerance for risk and its general risk management philosophy.

 

In addition, the Company monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risks type and activities.  Further details regarding these policies are set out below.

 

Market risk

The fair value of a financial instrument held by the Company may fluctuate due to changes in market prices.  Market risk comprises market price risk, currency risk and interest rate risk.  The investment manager moderates the risk through a careful selection of investments within specified limits.  The maximum risk resulting from financial assets is determined by the fair value of the financial assets.  The Company's overall market position is monitored by the investment manager and is reviewed by the Board of Directors on an ongoing basis.

 

Market price risk

The Company's investments designated as fair value through profit and loss are susceptible to market price risk arising from uncertainties about future prices of the investments.

 

The Board of Directors manages the risks inherent in the investment portfolio by ensuring full and timely reporting of the relevant information from the investment manager. Investment performance is reviewed at each Board meeting. The Board monitors the investment manager's compliance with the Company's objectives and is directly responsible for investment strategy and asset allocation including that to countries and economies.

At 30 June 2011 the overall market exposure of the Company is equivalent to the fair value of investments designated as fair value through profit or loss of £84,636,321.

 

Market price risk sensitivity

The following table illustrates the sensitivity of the return after taxation for the period and the Company's net assets to an increase or decrease of 5% in the fair values of the Company's investments at each balance sheet date.  This level of change is considered to be reasonable based on observation of current market conditions.

 

			30 June 2011
			Increase in fair value	Decrease in fair value
			£	£
Profit/(loss) for the financial period			4,231,816	(4,231,816)
Net assets			4,231,816	(4,231,816)

 

As stated in note 3(g), the discounted cash flow (DCF) methodology has been adopted as the principal valuation approach.  The risk-adjusted discount rate is an expression of what investors believe to be a fair and reasonable rate of return for holding a particular security over the relevant period given the inherent risks of ownership.

 

The following table illustrates the sensitivity of the return after taxation for the period and the Company's net assets to an increase or decrease of 1% in the discount rate.

 

The asymmetry in the following table is due to the policy of not valuing any loan at more than par.

 

			30 June 2011
			Increase in discount rate	Decrease in discount rate
			£	£
Profit/(loss) for the financial period			(3,487,376)	826,965
Net assets			(3,487,376)	826,965

 

 

Currency risk

The functional and presentational currency of the Group is sterling and, therefore, the principal exposure to foreign currency risk comprises investments priced in other currencies, principally euros.

 

The investment manager monitors the exposure to foreign currencies and reports to the Board on a regular basis.  The investment manager measures the risk of the foreign currency exposure by considering the effect on the net asset value and income of a movement in the rates of exchange to which the assets, liabilities, income and expenses are exposed.

 

Interest income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is included in the financial statements and its receipt.

 

The fair value of the financial assets and liabilities by foreign currency exposure at 30 June 2011 are shown below:

 

	Sterling	Euro	Total
	£	£	£
Investments designated as fair value through profit or loss	45,406,618	39,229,703	84,636,321
Interest receivable	259,708	119,838	379,546
Cash and cash equivalents	32,544,305	9,302,643	41,846,948
C Shares	(26,093,057)	-	(26,093,057)
Total net foreign currency exposure	52,117,574	48,652,184	100,769,758

 

Currency sensitivity analysis

Should the value of the euro against sterling increase or decrease by 5% with all other variables held constant, the net assets of the Company at 30 June 2011 would increase or decrease by £2,316,749.

 

In accordance with the Company's policy, the investment manager monitors the Company's currency position, and the Board of Directors reviews it.

 

Interest rate risk

Interest rate risk is the risk that the value of financial instruments and related income from the cash and cash equivalents will fluctuate due to changes in market interest rates.  The Company's exposure to interest rate risk relates to the investments designated as fair value through profit or loss and its cash and cash equivalents.  As a result the Company is subject to significant amounts of risk due to fluctuations in the prevailing levels of market interest rates.

 

Financial instruments at variable rates expose the Company to cash flow risk.  Financial instruments at fixed rates expose the Company to fair value interest rate risk.

The table below summarises the Company's exposure to interest rate risks.  It includes all of the Company's assets and liabilities that are interest rate sensitive.

 

 

				30 June 2011
				£
At fixed rate
Investments at fair value through profit or loss				-
At variable rate
Investments at fair value through profit or loss				84,636,321
Cash and cash equivalents				41,846,948
Total				126,483,269
Total interest sensitivity gap				126,483,269

 

If interest rates had changed by 100 basis points, with all other variables remaining constant, the effect on the net gain for the period would have been as shown on the table below.

 

				30 June  2011
				£
Increase of 100 basis points				1,264,833
Decrease of 100 basis points				(1,264,833)

 

 

Credit risk

Credit risk is the risk that a counterparty will be unable to pay amounts in full when due.

 

 

The Company's main credit risk exposure is in the loan portfolio shown as investments designated as fair value through profit and loss.  Credit risk in respect of other financial assets comprises cash and cash equivalents and accrued interest and dividend receivable.  The total exposure to credit risk arises from default of the counterparty and the carrying amounts of financial assets best represent the maximum credit risk exposure at the period end date. As at 30 June 2011, the maximum credit risk exposure was therefore £126,862,815.

 

The Board gives guidance to the investment manager as to the maximum amount of the Company's resources that should be invested in any one company to minimize credit concentration risk.

 

The investment manager has adopted procedures to reduce credit risk exposure by conducting credit analysis of the counterparties, their business and reputation which is then monitored on an ongoing basis.

 

The Company maintains its cash and cash equivalents, when held, at BNP Paribas, which is subject to the Company's credit risk monitoring policies as mentioned above.

 

The Company also holds cash equivalents in three money market funds, none of which are held at BNP Paribas.

 

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its liabilities as they fall due. 

 

Liquidity risks in respect of other financial liabilities of the Company are those due to counterparties.  However at 30 June 2011 there was sufficient liquidity in the form of cash and cash equivalents to satisfy the obligations.

 

Except for the investments at fair value through profit or loss, the Company's financial assets and financial liabilities all have maturity dates within one year.

 

An analysis of the maturity of investments at fair value through profit or loss is shown on the table below.

 

			30 June  2011
			£
Within one year			-
Between one and five years			20,035,220
After five years			64,601,101
			84,636,321

 

13. Related party transactions

 

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. Details on the relevant parties are included in note 4 to the Consolidated Financial Statements.

 

The investment manager is deemed to be a related party as Frederick Maynard is one of the Directors of the Company as well as Managing Director of HarbourVest Senior Loan Advisers LP.

 

Total investment management fees due to the Investment Manager for the period amounted to £417,504 with outstanding fees of £198,468 due at 30 June 2011. No performance fee was due to the investment manager in respect of the period.

 

The Directors of the Company and the Managers of its three Luxembourg subsidiaries are remunerated per annum as follows:

 

Chairman - £55,000

Audit Committee Chairman - £33,000

Other Directors - £28,000 per Director

Subsidiary company Managers - £5,000 per Manager per subsidiary

 

The total Directors' fees and travel expenses for the period amounted to £219,711, of which £43,479 were due to the Directors at 30 June 2011. 

 

Enquiries:

 

HSLE and HarbourVest

Corentin du Roy                                 Tel: +44 (0)20 7399 9832

                                                            Email: cduroy@harbourvest.com

 

Secretary

BNP Paribas Fund Services (Guernsey) Limited

Sara Bourne                                       Tel: +44 (0)1481 750858

                                                            Email: sara.bourne@bnpparibas.com

 

Liberum Capital Limited

Chris Bowman                                   Tel: +44 (0)20 3100 2000

                                                            Email: chris.bowman@liberumcapital.com

 

Paul Rostas                                         Tel: +44 (0)20 3100 2000

                                                            Email: paul.rostas@liberumcapital.com