AEFS.L Regulatory News (AEFS)

28 JUNE 2016

FOR IMMEDIATE RELEASE

THE BOARD OF DIRECTORS OF ALCENTRA EUROPEAN FLOATING RATE INCOME FUND LIMITED ANNOUNCES THE ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2016.

Strategic report

Financial Highlights and Performance Summary

Financial Highlights

Placing Programme

On the 1 April 2015, the Company announced the successful allotment of 500,000 Ordinary Shares ("Shares"), at an issue price of £1.08 per Share each fully paid under the Company's Placing Programme. The placing raised net proceeds of €724,400.The Placing Programme was closed on 21 April 2015.

Performance Summary

Ongoing Charges

The ongoing charge reflects those expenses of a type which are likely to recur in the foreseeable future and which relate to the operation of the Company. The ongoing charge is based on actual costs incurred in the year as being the best estimate of future costs excluding any non-recurring fees in accordance with the Association of Investment Companies ("AIC") methodology. The ongoing charge for the year ended 31 March 2016 was 1.04% (31 March 2015: 1.05%).

Dividend History

Please refer to note 10 for details on dividends paid during the year.

1  Source: London Stock Exchange

Chairman's Statement

Dear Shareholder,

I'm delighted to present the Annual Report of Alcentra European Floating Rate Income Fund Limited (the "Company" or the "Fund") for the year to 31st March 2016.

The Company has demonstrated robust NAV growth since its inception in March 2012, with the NAV per share rising from 98.0p to 103.04p. In its first year of investment the Company paid dividends totalling 5.46p, 5.21p in year two, 5.04p in year three and 5.36p in year four. This brings the total dividend paid per Ordinary Share to 21.07p, giving an overall return of 26.65% since IPO. With a track record of four years, we continue to be proud of the Company's robust performance derived from a highly diversified portfolio of well-managed credits, yielding stable dividends. The Board actively monitors the share price, working closely with the Company's brokers to monitor and address any significant discount to NAV.

Investor demand has slowed this year. However, going forward the plan is still to grow the Company with new share issuance with the most recent being in April 2015 with an extra 500,000 issued bringing the total issued share capital of the company to 175,975,961 Ordinary Shares.

The Company invests predominantly in senior secured loans and senior secured bonds issued by European corporates and has additional capacity to invest in mezzanine loans and other debt securities. The Company targets long term returns (net of fees and expenses) of 7% to 10% per annum and targets a dividend yield of 5.5 pence per £1.00 issue price of the initial offering of the shares in the Fund paid quarterly.

Following the Company's self-managed status under AIFMD, the Board has enhanced the risk management framework through the established Risk Committee, which has bedded in well and is effective.

The Board initiated an external board evaluation, which was completed in February 2016, and I am pleased to report that the report concluded that the Company operated at a high level of corporate governance and complied with the Code of Corporate Governance issued by the Association of Investment Companies in February 2015 (the "AIC Code").

Since the IPO of the Company, the Board has been pleased with the deployment by Alcentra Limited (the "Investment Manager") of capital. The Investment Manager believes that the loan market performance over 2015 to date, given level of financial markets volatility, demonstrates that the loan market continues to provide attractive risk adjusted returns compared to other asset classes. Your Board continues to be satisfied with the portfolio's performance to date and the strategy that is being applied by the Investment Manager. The Investment Manager will continue to update you on the Company's progress by way of the monthly performance updates.

The Board is very pleased to support the Guernsey Board Apprentice Scheme and to promote the development of skills within the non-executive director community.

As concerns the Brexit vote, it is our policy to continuously review the portfolio with the Investment Manager and our view at this time is that there is unlikely to be a material impact on the underlying borrowers in the portfolio.

On behalf of the Board, I would like to close by thanking shareholders for your commitment and I look forward to updating you on the Company's progress later on this year.

Executive Summary

This report is designed to provide information about the business and results for the year ended 31 March 2016 for Alcentra European Floating Rate Income Fund Limited (the "Company"). It should be read in conjunction with the Chairman's Statement and the Investment Manager's report which gives a detailed review of investment activities for the year and an outlook for the future.

Corporate Summary

The Company is a non-cellular company limited by shares incorporated in Guernsey on 3 November 2011 under the Companies (Guernsey) Law, 2008, as amended (the "Companies Law"). The Company has registration number 54200, and has been authorised by the Guernsey Financial Services Commission as an authorised closed-ended collective investment scheme.

The Initial Public Offering ("IPO") of the Company took place on 29 February 2012 and the Company commenced business on 6 March 2012, when its Shares were admitted to the premium segment of the UK Listing Authority's Official List and to trading on the Main Market of the London Stock Exchange. For details on the Company's share capital refer to note 9.

The issued capital during the year comprises the Company's Shares denominated in Sterling.

The Company has a wholly-owned subsidiary Alcentra European Floating Rate Income S.A. (the "Subsidiary").

The Company is a member of the Association of Investment Companies (the "AIC").

Significant Events During the Year Ended 31 March 2016

Issue of 500,000 Shares

On the 1 April 2015, the Company announced the successful allotment of 500,000 Shares, at an issue price of £1.08 per share each fully paid under the Company's Placing Programme. The placing raised net proceeds of €724,400. The newly issued 500,000 Shares were admitted to the Official List and to trading on the Main Market with effect from 7 April 2015. The Placing Programme was closed on 21 April 2015.

Investment Manager

The Investment Manager during the year was Alcentra Limited, a company incorporated in England and Wales on 4 March 2003, with registration number 2958399. The Investment Manager is regulated by the UK's Financial Conduct Authority and registered as an investment adviser with the US Securities and Exchange Commission.

Investment Objective

The investment objective of the Company is to provide its shareholders with regular quarterly dividends and the opportunity for capital growth by utilising the skills of the Investment Manager in selecting suitable investments.

The Company, together with the Subsidiary, as advised by the Investment Manager, invests either directly or, through sub-participation, indirectly in floating rate, secured loans or high-yield bonds issued by European and US corporate entities predominantly rated below investment grade or deemed by the Investment Manager to be of a corresponding credit quality.

The Company aims to satisfy the guideline in its investment policy that at least 80% of its investments are to be in debt obligations of corporate entities with significant operations, or which are domiciled, in Western Europe (including the United Kingdom). Investments are expected to be denominated in Euro, Sterling or US Dollars. 

Investment Policy

The Investment Manager will select, from the primary and secondary markets, investments for the Company in the following asset classes:

• secured loans, including senior loans, mezzanine loans and second lien loans;

• senior secured floating-rate notes; and

• senior secured and senior unsecured high-yield bonds,

in each case that may be considered to be non-investment grade. The Investment Manager will seek to identify investment opportunities that combine an attractive current return with a strong probability of ultimate return of capital.

Diversification

The Company expects to maintain a diversified portfolio by asset class, issuer concentration, industry concentration and geographical exposure (the "Portfolio"). The Company does not intend to include in its investment policy any exclusion of particular industry sectors. The Portfolio, once fully invested, will comply, as at each date an investment is made by the Company, with the following restrictions:

• at least 80% of the Company's NAV in senior loans, senior secured floating-rate notes and cash;

• no more than 20% of the Company's NAV in second lien loans and mezzanine loans; and

• no more than 5% cent exposure to any single obligor.

In addition, the Company will aim to satisfy the following guideline criteria for the Portfolio:

• no more than 15% of the Company's NAV in unsecured floating-rate notes, secured or unsecured fixed rate bonds or structured credit instruments;

• no more than 20% exposure to any single industry sector; and

• at least 80% exposure to corporate entities with significant operations, or which are domiciled, in Western Europe (including the United Kingdom).

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 NAV and share price of the Company. The Directors regard the Company's NAV total return as being the overall measure of value delivered to Shareholders over the long term. Total return reflects both NAV growth of the Company and also dividends paid to Shareholders. The Company is targeting a NAV total return of between 7% and 10% per annum over the longer term.

The NAV total return of the Company's Shares increased by 26.65% from inception. Please refer to the Financial Highlights and Performance Summary for NAV and share price analysis.

Discount/Premium to NAV

At each Board meeting, the Board monitors the level of the Company's discount or premium to NAV and reviews the average discount/premium for the Company's peer Company. The Company publishes a NAV per share on a daily basis through the official newswire of the London Stock Exchange. This figure is calculated in accordance with the AIC formula which includes current financial year revenue; the same basis as that calculated for the audited financial statements. Please refer to the Financial Highlights and Performance Summary for NAV and share price analysis.

Dividend Yield

The Directors examine the revenue forecast quarterly and consider the yield on the Portfolio and the amount available for distribution. The dividend yield for the year ended 31 March 2016 was 5.24% (31 March 2015: 4.52%).

Benchmark Performance

The Board considers the peer Company performance of other income funds at each quarterly Board meeting. Please refer to the Investment Manager's Report for performance summary, market review and outlook.

Key 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 key risks that 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 BNP Paribas S.C.A., Guernsey Branch (the "Administrator") monitors adherence to the limits and restrictions every month and will notify any breaches to the Board.

The Investment Manager provides the Board with management information including performance data and reports. 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. Please refer to the Investment Manager's Report for performance summary, market review and outlook.

Level of discount or premium

A discount or premium to NAV can occur for a variety of reasons, including market conditions or to the extent investors undervalue the management activities of the Investment Manager or discount their valuation methodology and judgement. While the Directors may seek to mitigate any discount to NAV per Share through the discount management mechanisms set out in the Prospectus, there can be no guarantee that they will do so or that such mechanisms will be successful and the Directors accept no responsibility for any failure of any such strategy to effect a reduction in any discount or premium.

Market price risk

The market value of the Portfolio may vary because of a number of factors, including, but not limited to, the financial condition of the underlying borrowers, the industry in which a borrower operates, general economic or political conditions, interest rates, the condition of the debt trading markets and certain other financial markets, developments or trends in any particular industry and changes in prevailing interest rates. The Investment Manager carries out extensive due diligence on each borrower which is subsequently assessed by its credit committee to mitigate this risk.

Accounting, legal and regulatory

The Company must comply with the provisions of the Companies Law and, since its shares are admitted to listing on the Official List of the UK Listing Authority and to trading on the Main Market of the London Stock Exchange, the Company is subject to the Financial Conduct Authority's ("FCA") Listing, Disclosure and Transparency Rules. A breach of the legislation could result in the Company and/or the Directors being fined or subject to criminal proceedings. A breach of the Listing 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 the FCA's rules.

The Investment Manager and the Administrator are contracted to provide investment, company secretarial, administration and accounting services through qualified professionals. The Board receives regular internal control reports from the Administrator that confirm compliance. The Company's subsidiary, which is incorporated in Luxembourg, must comply with the local regulatory and statutory rules and requirements. The Board relies on the Investment Manager and advisers of the Subsidiary to ensure adherence to Luxembourg legislation.

Operational

Disruption to, or the failure of either the Investment Manager's or the Administrator's accounting, dealings or payment systems, or the custodian's 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 and risk management section in the Directors' Report.

Key Risks Relating to an Investment in the Shares of the Company

Please refer below for details of the key risks relating to an investment in the shares of the Company.

The Company's shares may trade at a discount to NAV and Shareholders may be unable to realise their investments through the secondary market at NAV

Shares may trade at a discount to NAV per Share for a variety of reasons, including market conditions or to the extent investors undervalue the management activities of the Investment Manager or discount their valuation methodology and judgments.

Sterling Share class is exposed to currency risk

Shares in the Company are denominated in Sterling. Investments made by the Company are and will continue to be denominated in currencies other than Sterling. The Company operates in Euro as its base currency. Therefore, shareholders may be subject to foreign currency fluctuations between Sterling and the currency of the investments made by the Company.

The Company enters into forward currency contracts to manage its exposure to currency risk arising from assets denominated in currencies other than Euro and the Shares being issued in Sterling. The Company cannot give any assurance that it will in all cases be able to hedge or that the hedges will be completely effective, so while the Company will seek to minimise the exposure Shareholders may potentially be exposed to some currency risk.

The Investment Manager seeks to engage in currency hedging between Euros and any other currency in which the assets of the Company and the Subsidiary are denominated.

For further details refer to note 12.

Viability Statement

Under the AIC Code, the Directors are required to make a "viability statement" which explains how they have assessed the prospects of the Company, over what period they have done so and why they consider that period to be appropriate, taking into account the Company's current position and principal risks.

The Directors have conducted a robust assessment of the viability of the Company over a five year period, taking account of the Company's current position and the potential impact of the principal risks outlined above. This statement is made on the assumption that continuation votes will be passed throughout the period under assessment.

In making this statement, the Directors have considered the resilience of the Company, taking into account its current position, the principal risks facing the Company in severe but reasonable scenarios and the effectiveness of any mitigating actions. This assessment has considered the potential impacts of these risks on the business model, future performance, solvency and liquidity over the period.

The Directors have determined that a five year period is an appropriate period over which to provide its viability statement as this best suits the average weighted life of the portfolio.

In making their assessment, factors taken into consideration by the Directors included the Company's NAV, net incomes, resulting cash flows and dividend cover over the period. These factors were subjected to stress tests which involved sensitivity analysis of the key assumptions underlying the forecast. Where appropriate, this analysis was carried out to evaluate the potential impact of the Company's principal risks actually occurring, primarily, severe changes to macro-economic conditions, increased defaults and counterparty risks.

Based on this assessment, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period to 28 June 2021.

Discount Control Mechanism

As per the Articles of the Company, under the discount control mechanism, if, as at 31 March, 30 June, 30 September or 31 December in any calendar year, the Shares of any class in issue have, on average over the last twelve calendar months preceding such date (a ''Discount Calculation Period''), traded at a discount in excess of 5% of the average NAV per share of that class*, the Directors will, subject to any legal or regulatory requirements, implement a redemption offer (a ''Redemption Offer'') pursuant to which each shareholder of the relevant class shall be permitted to redeem up to 50% of his Shares of that class. No more than one Redemption Offer shall be made in respect of any class of Ordinary Share in a twelve month period.

The shares did not trade at a discount in excess of 5% of the average NAV per share over the year ended 31 March 2016.

Share Buybacks

The Directors intend to operate an active discount management policy through the use of share buy backs, if the Shares were ever to trade at a substantial discount to NAV for a significant period. The Directors seek annual authority to buy back and cancel, or hold in treasury, the Company's Shares. On 23 September 2015 the Directors were granted authority to repurchase 26,378,796 Shares (being equal to 14.99% of the aggregate number of Shares in issue as at 6 July 2015) for cancellation or to be held as treasury shares. This authority, which has not been used, will expire at the forthcoming AGM. The Directors intend to seek annual renewal of this authority from the shareholders.

Pursuant to this authority, and subject to the Companies Law and the discretion of the Directors, the Company may purchase Shares in the market on an on-going basis with a view to addressing any imbalance between the supply of and demand for Shares, thereby increasing the NAV per share and assisting in controlling the discount to NAV per share in relation to the price at which the Shares may be trading.

*Calculated by reference to the middle market quotations of the shares of that class on the Daily Official List of the London Stock Exchange on each trading day in the relevant Discount Calculation Period and the most recently published NAV per share of the relevant class for each such trading day.

Environmental and Social Issues

The Company is a closed-ended investment company which has no employees and so its own direct environmental impact is minimal. The Board notes that the companies in which the Company invests in will have a social and environmental impact over which it has no control. The Board, the majority of whom are based in Guernsey, have held all their meetings in Guernsey and therefore the Company's greenhouse gas emissions and environmental footprint are negligible.

Gender Metrics

The Board consists of one woman and two men. More information on the Board's consideration of diversity is given in the Corporate Governance Report.

Life of the Company

The Company does not have a fixed life. However, under Article 51 of the Articles of Incorporation, the Directors will convene an extraordinary general meeting of the Company on or before the third anniversary of the admission of the Shares of the Company to listing on the Official List of the Financial Conduct Authority and to trading in the London Stock Exchange ("Admission") and at such a meeting shall propose an Ordinary Resolution that the Company continues its business as a closed-ended investment company.

The Directors are next required to convene an extraordinary general meeting to propose a further Continuation Resolution on or before the sixth anniversary of Admission, being 6 March 2018. The Directors shall convene a general meeting to propose a further Continuation Resolution every year thereafter.

If a Continuation Resolution is not passed, the Directors shall put proposals to shareholders for the reconstruction or reorganisation of the Company.

Future Strategy

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. Further comments on the outlook for the Company for the next twelve months are set out in both the Chairman's Statement and the Investment Manager's Report.

Going Concern

Under the Code of Corporate Governance issued by the AIC in February 2015 and applicable regulations, the Directors are required to satisfy themselves that it is reasonable to assume that the Company is a going concern from the date of approval of the audited financial statements.

After analysing the following, the Directors believe that it is appropriate to adopt the going concern basis in preparing these audited financial statements:

1. Working capital - As at 31 March 2016, there was no working capital surplus in the Company, however, the Company has the ability to sell bonds in the Subsidiary and/or request repayment of accrued interest. The Subsidiary has a working capital surplus of approximately €7.0m. The Directors noted that as at 31 March 2016 the Company had no borrowings, as such it has sufficient capital in hand to cover all expenses (which mainly consist of Investment Manager's fees, administration fees and professional fees) and to meet all of its obligations as they fall due.

2. Closed-ended Company - The Company has been registered with the Guernsey Financial Services Commission as a Registered Closed-ended Collective Investment Scheme, as such shareholders have no right to have their Shares redeemed, and therefore no cash flows out of the Company in this respect.

3. In accordance with the Articles of Association a Continuation Resolution was passed at the Annual General Meeting on 25 September 2014. The next Continuation Resolution will be considered at the September 2017 AGM and the Directors' going concern assessment assumes that the continuation vote will be passed.

Based on the above assessments, the Directors are of the opinion that the Company is able to meet its liabilities as they fall due for payment because it has and is expected to maintain adequate cash resources. Given the nature of the Company's business, the Directors have a reasonable expectation that the Company has adequate financial resources to continue in operational existence for the foreseeable future. Accordingly, these audited financial statements have been prepared on a going concern basis.

INVESTMENT MANAGER'S REPORT

Summary

The Investment Manager remains pleased with the performance of the Company for the period to 31 March 2016.

As at 31 March 2016 the NAV was 103.04 pence per ordinary share.

Portfolio

As at 31 March 2016, the portfolio was invested in line with the Company's investment policy and was diversified by obligor and industry with 91 issuers/borrowers across 27 different industry sectors and no individual borrower representing an exposure of more than 5 per cent. of the portfolio. Against a challenging market backdrop, the Company's performance has been strong, outperforming both US and European loan indices.

Portfolio Statistics (as at 31 March 2016):

Total return of AEFS versus the indices

The Weighted Average Yield on the portfolio has increased over the course of the year. The Company believes that this was due to the attractive returns available on new issue loans which have been added to the portfolio over the year. The Weighted Average Yield to Maturity remains within the target range.

Below are tables highlighting key aspects of the portfolio as of 31 March 2016:

Performance

Since inception the portfolio has evolved as follows:

· Increased the number of assets from 47 to 110 improving further diversity within the portfolio.

· Maintained the high UK exposure to take advantage of the better margins available for Sterling loans.

· Reduced exposure to France, in light of the weaker economic outlook.

· Not significantly increased US exposure, given better total return on non-US Dollar tranches on cross-border deals.

Geographical Region (31 March 2016)

Geographical Region (as at completion of initial investment - 30 April 2012)

Market Outlook

Key attractions of Floating Rate Secured Loans and Bonds: 

· Last year the average new issue spread was 4.30%1.

· Senior secured, so lower risk of loss in the event of default than unsecured asset classes.

· Low market default rates (0.60% in 2015)2.

· Active new issue market with €57.2 billion issued through to end of Q3 20153 and a liquid secondary market with over €14.8 billion traded in Q4 20154.

· Low secondary market price volatility compared to other asset classes.

· Floating rate income benefiting from a future interest rate rise.

1Standard & Poor's LCD Global Leveraged Lending Review 4Q2015;

2Credit Suisse Leveraged Finance Default Review, 22 January 2016;

3Credit Suisse Leveraged Finance New Issue Review, 21 October 2015;

4Markit European Loan Volume Survey 4Q2015, based on Leveraged Par.

Europe versus the United States:

· Reduced leverage and increased equity commitments.

o Total Debt/EBITDA multiple in Europe is 5.3x compared to 5.8x for the US15.

o Average amount of equity has risen from 33% in 2007 to 41% in 2014 in Europe versus 31% to 37% over the same period in the US6.

· More stable supply/demand dynamics in Europe.

o Less affected by volatile retail investor capital flows which have impacted US issue spreads.

o Strong institutional and retail demand has additional impact on US margins.

o Balance expected to remain in investor's favour as European banks continue to pull back from lending.

· Availability of private information.

o Private nature of European deals allows greater transparency of borrower performance.

· Returns7

o In 2013, the Western European Index Total Return was 8.73% versus 6.15% for the US Index.

o In 2014, the Western European Index Total Return was 1.96% versus 2.06% for the US Index.

· Diversity

o The US offers better diversity that the European market, which has started to grow again in 2014.

o 2014 European loan issuance was up 17% on prior year end, and the highest reading since 2007.

· Yields

o Following outflows from US loan funds, the yields on the two markets now look more aligned.

Historical Defaults and Outlook:

· The European default rate has increased since 2011, and we believe that this rise has been driven largely by defaults in pre-crisis loans in distressed sectors (such as "yellow pages" businesses) and distressed geographies (such as Spain).

· Furthermore the less homogeneous restructuring process in Europe resulted in a number of pre-2008 transactions taking time to finalise the required debt write down and in certain cases defaulting multiple times.

· The default rate for post-crisis new issue loans is far lower.

· Credit Suisse has predicted 2015 default rate of 0%-2% for the US market and of 1%-3% for the European market.

5Standard & Poor's LCD Global Leveraged Lending Review 4Q2015, based on EBITDA of euro/$50 million or more;

6Standard & Poor's LCD Global Leveraged Lending Review 4Q2015;

7Credit Suisse Western European Leveraged Loan Index, & Credit Suisse (US) Leveraged Loan Index Excel Data, December 2015.

DIRECTORS' REPORT

The Directors present the Annual Report and Audited Financial Statements of the Company for the year ended 31 March 2016. The results for the year are set out in these financial statements.

Board of Directors

The Directors of the Company who served during the year are listed under Directors' biographies.

Directors' Interests

None of the Directors had a material interest in any contract, which is significant to the Company's business. Ian Fitzgerald, Jonathan Bridel and Anne Ewing each held a minor interest in the Company's share capital during the year ended 31 March 2016 as below:

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

Statement as to Disclosure of Information to the Auditor

The Directors who held office at the date of approval of this Directors' Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's auditors are unaware and that they have taken the steps that they ought to have taken as Directors to make themselves aware of any relevant audit information and to establish that the Company's auditors are aware of that information.

Internal Controls and Risk Management

The Risk Committee 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 AIC Code.

The Risk Committee is responsible in ensuring that all risks affecting the Company are identified through a robust assessment and that a policy is implemented to mitigate, monitor and manage these risks which should include:

· Market risk;

· Liquidity risk;

· Counterparty risk;

· Operational risk; and

· Conflicts of interest.

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 receives reports from the Investment Manager on the Company's risk evaluation process and reviews changes to significant risks identified. The Board 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 Administrator a report on its internal controls which includes a report from the Administrator's auditors on the control policies and procedures in operation.

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 an on-going basis. The Investment Manager's controls processes have also been outlined to the Board.

The Management Engagement Committee conducted a review of the Investment Manager and the Administrator during the year ended 31 March 2016 and had concluded that the performance of both had been satisfactory and no internal control issues were noted.

By means of the procedures set out above, the Board confirms that it has reviewed the effectiveness of the Company's system of internal controls for the year ended 31 March 2016 and to the date of approval of this Annual Report and that no issues have been noted. 

Share Capital

The share capital of the Company consists of an unlimited number of shares which upon issue the Directors may classify as Ordinary Shares, B Shares, or C Shares of such classes denominated in such currencies as the Directors may determine.

Information on the Discount Control Mechanism and share buybacks are detailed in the Strategic Report.

Notifications of Shareholdings

As at 31 March 2016, 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 shareholders that had an interest of greater than 5% in the Company's issued share capital.

Between 1 April 2016 and 17 June 2016, no additional notifications were received.

Borrowing Limits

The Company does not and will not utilise leverage to achieve its investment objective, save that it is anticipated that the Company may seek access to a revolving credit facility to allow it to take advantage of opportunities to purchase whole portfolios of assets should these become available. Any such borrowing would be intended to be short term until such time as it could be repaid through the issuance by the Company of new Shares and will at all times be subject to a maximum leverage level equal to 20% of the Company's NAV at the time of drawdown of any such borrowing.

There were no borrowings as at 31 March 2016 (31 March 2015: Nil).

Global Greenhouse Gas Emissions

The Company has no greenhouse gas emissions to report from its operations for the year to 31 March 2016 (2015 - none), nor does it have responsibility for any other emissions producing sources. 

Independent Auditor

KPMG Channel Islands Limited ("KPMG"), have indicated their willingness to continue in office as auditor and a resolution proposing their re-appointment and to authorise the Directors to determine their remuneration will be proposed at the forthcoming Annual General Meeting.

Events After the Reporting Date

The Directors are not aware of any developments that might have a significant effect on the operations of the Company in subsequent financial periods not already disclosed in this report or the attached audited financial statements.

DIRECTORS' BIOGRAPHIES

Ian Fitzgerald (Non-Executive Chairman and Chairman of the Risk Committee)

Ian is currently a Director and Chief Executive Officer of Loans Specialist Advisory Services Limited, a company established to provide specialist loan product business services. Ian held senior management positions within Lloyds Bank Capital Markets from 1997 to 2011. From 2004 he was managing Director and Head of Loan Markets, responsible for the bank's primary and secondary loan market businesses globally, including all corporate, acquisition, leveraged, project, infrastructure and property-related loan finance.

Ian joined Lloyds from Hill Samuel as Head of Loan Syndication and Distribution, upon Lloyds' merger with Hill Samuel TSB Bank plc in 1997. Prior to joining Hill Samuel in 1992, Ian held senior lending and syndicate roles at Chemical Bank, Manufacturers Hanover Limited, Bankers Trust International Limited, and other financial institutions. Ian commenced his banking career with Barclays Bank International in 1975. Ian was chairman of the Loan Market Association (''LMA'') from 2009 to 2011, having been appointed as a non-executive Director of the LMA in 2006.

Jonathan Bridel (Non-Executive Director and Chairman of the Audit Committee)

Jonathan is a Guernsey resident and is currently a non-Executive Director of Starwood European Real Estate Finance Limited, The Renewables Infrastructure Group Limited, Funding Circle SME Income Fund Limited and Sequoia Economic Infrastructure Income Fund Limited which are listed on the Main Market of the London Stock Exchange. Other companies include DP Aircraft I Limited and Fair Oaks Income Fund Limited. Jonathan was previously Managing Director of Royal Bank of Canada's investment businesses in the Channel Islands and served as a Director on other RBC companies including RBC Regent Fund Managers Limited. Prior to joining RBC, Jonathan served in a number of senior management positions in banking, specialising in credit and corporate finance and private businesses as Chief Financial Officer in London, Australia and Guernsey having previously worked at Price Waterhouse Corporate Finance in London.

Jonathan graduated from the University of Durham with a degree of Master of Business Administration, holds qualifications from the Institute of Chartered Accountants in England and Wales (1987) where he is a Fellow, the Chartered Institute of Marketing and the Australian Institute of Company Directors. Jonathan is a Chartered Marketer and a member of the Chartered Institute of Marketing and the Institute of Directors and a Chartered Fellow of the Chartered Institute for Securities and Investment.

Anne Ewing (Non-Executive Senior Independent Director, Chairman of the Remuneration and Nomination Committee and Chairman of the Management Engagement Committee)

Anne serves as a Non-Executive Director of Global Mena Financial Assets Limited, CDC Holdings Limited, Kleinwort Benson Bank Limited, Kleinwort Benson Bank (CI) Limited and Silverfleet Capital (Guernsey) Limited and Silverfleet Capital II (Guernsey) Limited. Anne was previously an Executive Director and Licensee of Imperium Trust Company Limited and has held senior positions with Dexion Capital (Guernsey) Limited, Dominion Fund Management Limited, KPMG Channel Islands Limited, Rothschild Bank CI Limited and Asset Management, Old Mutual and Citibank NA.

Anne holds an ACCA Certified Diploma in Accounting & Finance, graduated from Bournemouth University with Masters of Science Degree in Corporate Governance & Administration/Grad ICSA, is a Chartered Fellow of the Chartered Institute of Securities & Investment, a Fellow of the Institute of Chartered Secretaries and Administrators, an Associate Member of the Association of Corporate Treasurers, a Member of the Institute of Directors and past Guernsey Branch Chairman. Anne is a member of the Guernsey Investment Fund Association and is a PRA/FCA Approved Person under the Senior Manager Regime SMF12 and SMF13.

CORPORATE GOVERNANCE REPORT

Introduction

The Board is committed to high standards of corporate governance and has put in place a framework for corporate governance which it believes is appropriate for the Company.

Applicable Corporate Governance Codes

The AIC Code requires listed companies to disclose how they have applied the principles and complied with the provisions of the UK Corporate Governance Code (UK Code) as issued by the Financial Reporting Council ("FRC"). It provides specific corporate governance guidelines to investment companies.

The Board considers that reporting against the principles and recommendations of the AIC Code and by reference to the AIC Guide (which incorporates the UK Code), will enable Shareholders to make a comprehensive assessment of the Company's governance principles.

The FRC has confirmed that AIC member companies who report against the AIC Code and who follow the AIC Guide will be meeting obligations in relation to the UK Code, paragraph 9.8.6 of the Listing Rules and associated disclosure requirements of the FCA's Disclosure and Transparency Rules ("DTR").

Copies of the AIC Code, the AIC Guide and the UK Code can be found on the respective organisations' web sites www.theaic.co.uk and www.frc.org.uk.

Corporate Governance Statement

The AIC Code comprises 21 principles and the Directors believe that during the period under review they have complied with all the recommendations of the AIC Code and the relevant provisions of the UK Code insofar as they apply to the Company's business except as set out below:

· the role of the chief executive;

· executive Directors' remuneration; and

· internal audit function.

For the reasons set out in the AIC Guide, and as explained in the UK Code, the Board considers these provisions are not relevant to the position of the Company, being an externally managed investment company. In particular, all of the Company's day-to-day management and administrative functions are outsourced to third parties. As a result, the Company has no executive Directors, employees or internal operations. The Company has therefore not reported further in respect of these provisions.

The Company complies with the corporate governance statement requirements pursuant to the DTR by virtue of the information included in the Corporate Governance section of the Annual Report together with information contained in the Strategic Report and Directors' Report.

The Board, Independence and Composition

The Board consists of three Directors, all of whom are independent of the Investment Manager and demonstrate a breadth of investment, accounting and professional experience. The Directors are listed in the section Director's Biographies with a biography of each Director, demonstrating their professional knowledge and experience. Jonathan Bridel and Anne Ewing are resident in Guernsey, Ian Fitzgerald is resident in the UK.

The Board considers that all the Directors have different qualities and areas of expertise on which they may lead where issues arise and to whom concerns can be conveyed. The balance and independence of our Board is kept under review by the Remuneration and Nomination Committee.

The Directors consider that there are no factors, as set out in principle 1 or 2 of the AIC Code, which compromise the Chairman's or other Directors' independence and that they all contribute to the affairs of the Company in an adequate manner. The Board reviews the independence of all Directors annually.

Anne Ewing was appointed by the Committee as Senior Independent Director with effect from 1 December 2015, which put in place an agreed protocol that Anne Ewing would act as chairman if the Chairman was unable to attend a Board meeting.

Directors' Duties and Responsibilities

The Chairman's responsibilities include the leadership, operation and governance of the Board, ensuring effectiveness, and setting the agenda for the Board.

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. The Investment Manager 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 all relevant management, regulatory and financial information relating to the Company and its Portfolio of investments in a timely manner. 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.

The Company Secretary, BNP Paribas Securities Services S.C.A., Guernsey Branch through its representative acts as Secretary to the Board and Committees and in doing so it:

· assists the Chairman in ensuring that all Directors have full and timely access to all relevant documentation;

· organises induction of new Directors; and

· is responsible for ensuring that the correct Board procedures are followed and advises the Board on corporate governance matters.

Board and Committees

The Board has established four committees: the Audit Committee, the Remuneration and Nomination Committee, the Management Engagement Committee and the Risk Committee. Each committee membership comprises all Directors and operate within clearly defined terms of reference and duties. The terms of reference for each committee are available on the Company's website, www.aefrif.com.

Audit Committee

The Audit Committee is responsible for the provision of effective governance over the appropriateness of the Company's financial reporting including the adequacy of related disclosures, the performance of the external auditor and the management of the Company's systems of internal controls and business risks. Meetings of the Audit Committee are to be held at least three times a year at appropriate times in the reporting and audit cycle and otherwise as required.

The report on the role and activities of this Committee and its relationship with the external auditors is set out in the Audit Committee Report.

Remuneration and Nomination Committee

The Remuneration and Nomination Committee is responsible for ensuring that the Board comprises individuals with the necessary skills, knowledge and experience to ensure that it is effective in discharging its responsibilities and oversight of all matters relating to corporate governance and to review the on-going appropriateness and relevance of the remuneration policy.

During the year ended 31 March 2016, Optimus Group Limited ("Optimus") was appointed by the Committee to produce a report on the Directors' remuneration and conduct an external evaluation of the Board and produce a report (the "External Board Evaluation Report").

The External Board Evaluation Report contained recommendations for changes to Directors' remuneration and details can be found in the Directors' Remuneration Report.

Performance Evaluation

The Nomination and Remuneration Committee undertakes an evaluation of the Board on an annual basis. The performance of each Director is considered as part of a formal review by the Nomination and Remuneration Committee. The Directors also meet without the Chairman present in order to review his performance.

The external Board evaluation conducted by Optimus had found that the Company operated at a high level of corporate governance and complied with the AIC Code.

The Committee reviewed the External Board Evaluation Report and in its opinion the evaluation process had been thorough and constructive. The recommendations made in the External Board Evaluation Report presented by Optimus were adopted by the Company on 3 February 2016.

The Committee reviewed the performance of the Chairman in his role and agreed that Mr Fitzgerald was very experienced and his performance and leadership were an asset to the Company. The Chairman also reviews each individual Director's contribution.

As a result of the recommendations made in this year's Board performance evaluation, the Board has agreed:

· that all Directors are considered independent; and

· Anne Ewing should be proposed for reappointment at the 2016 AGM.

The Remuneration and Nomination Committee considers that while the Board is small in number, it is very well balanced, works well together and has diversity through thought, experience, skills, qualifications, gender and age. As part of the review it was determined that all Directors remained independent.

A further Board review will take place in 2017.

Management Engagement Committee

The Management Engagement Committee is responsible for reviewing the performance of all service providers (including the Investment Manager).

The Board reviews the performance of the Company's third-party service providers together with their anti-bribery and corruption policies to ensure that they comply with the Bribery Act 2010 and the Prevention of Corruption (Bailiwick of Guernsey) Law 2003, and ensure their continued competitiveness and effectiveness.

As part of the Board's ongoing evaluation of third party service providers, it considers and reviews on a periodic basis contractual arrangements with the major service providers of the Company. A review of the major service providers was conducted on 3 February 2016 and the Committee had concluded the performance of all the providers had been satisfactory.

The Committee will also perform periodic reviews of the Investment Manager's procedures for undertaking investment decisions to ensure decisions are consistent with the approved investment policy and strategies of the Company.

The Directors have adopted a procedure whereby they are required to report any potential acts of bribery and corruption in respect of the Company to the Company's Compliance Officer.

Risk Committee

The main roles of the Risk Committee are identifying and assessing the key risks and uncertainties facing the Company, recording and monitoring the position of such risks on a periodic basis and assessing any mitigating factors of such risks and the controls implemented by the Committee to mitigate such risks. This analysis is performed as part of the Business Risk Assessment.

The Committee is also responsible for the oversight of the operational activity including working capital, corporate governance of the Company and monitoring the regulatory requirements applicable to the Company under the Alternative Investment Fund Manager Directive ("AIFMD"). The Committee will also examine the valuation of the Company investments periodically throughout the year.

Attendance at scheduled meetings of the Board and its committees for the year ended 31 March 2016:

* Ian Fitzgerald is resident in the UK and prevented by the Company's Articles from attending Board meetings from the UK. It is not deemed cost effective for the Company for him to travel to Guernsey for the regular meetings to approve dividends in line with the Company's dividend policy; he does however attend all quarterly Board meetings.

The Committees report to the Board as part of a separate agenda item on the activity of the Committee and matters of particular relevance to the Board in the conduct of their work.

In addition to the four quarterly Board meetings, an additional full Board meeting and three ad-hoc Board meetings were held during the year for various matters including, but not limited to, issues of shares.

Directors unable to attend a Board meeting are provided with the board papers and can discuss issues arising in the meeting with the Chairman or another non-executive Director.

Directors' Appointment, Retirement and Rotation

The AIC guide states that all Non-Executive Directors should be submitted for re-election by shareholders at regular intervals and that nomination for re-election should not be assumed but be based on disclosed procedures and continued satisfactory performance. The Articles of Incorporation require that all Directors submit themselves for election by shareholders at the first opportunity following their appointment and shall not remain in office longer than three years since their last election or re-election without submitting themselves for re-election. Based on the above and reflecting best practice, the Directors have adopted a policy whereby a Director will stand for re-election at each AGM. 

Mr Jonathan Bridel and Mrs Anne Ewing were both appointed on 3 November 2011, and Mr Ian Fitzgerald was appointed on 3 January 2012. Mrs Ewing was re-elected as a Director at the Annual General Meeting of the Company (the "AGM") held on 25 September 2013, Mr Fitzgerald was re-elected as a Director at the AGM held on 25 September 2014 and Mr Bridel was re-elected as a Director at the AGM held on 23 September 2015.

The Remuneration and Nomination Committee reviewed the independence, contributions and performance of all Directors during the 2016 Board Evaluation and have determined that it is in the best interests of the Company to propose that Mrs Ewing will stand for re-election at the AGM on 21 September 2016.

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 at the Registered Office and will be available at the Annual General Meeting. Any Director may resign in writing to the Board at any time by proving the required notice.

Tenure of Non-Executive Directors

The Board has adopted a policy on tenure that is considered appropriate for an investment company. The Board considers that length of service does not, by itself, lead to a closer relationship with the Investment Manager or necessarily affects a Directors' independence.

The Board's tenure 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 or to complement those of the existing Directors. The achievement of a sensible balance is the most important objective for the Board. 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. The Board will further consider succession planning and the possibility of appointing an additional Director to aid succession planning as the Company grows.

Conflict of Interests

The Directors have a duty to avoid situations where they have, or could have, a direct or indirect interest that conflicts, or possibly could conflict, with the Company's interests. Directors are required to disclose all actual and potential conflicts of interest to the Chairman in advance of any proposed external appointment. Only Directors who have no material interest in the matter being considered will be able to participate in the Board approval process. In deciding whether to approve an individual Director's participation, the other Directors will act in a way they consider to be in good faith in assessing the materiality of the conflict in accordance with the Company's Articles of Incorporation.

The Board believes that its powers of authorisation of conflicts of interest have operated effectively. The Board also confirms that its procedure for the approval of conflicts of interest has been followed by the Directors.

Board Diversity

The Board supports the recommendations of the Davies Report and believes in and values the importance of diversity, including gender, to the effective functioning of the Board.

However, the Board does not consider it appropriate or in the interest of the Company and its shareholders to set prescriptive targets for gender or nationality on the Board. Any future appointments would be primarily based on merit of skills, experience and knowledge.

Induction/Information and Professional Development

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 from, amongst others, the Company Secretary and the Auditor. Advisers to the Company also prepare reports for the Board from time to time on relevant topics and issues. In addition, Directors attend relevant seminars and events to allow them to continually refresh their skills and knowledge and monitor changes within the investment industry. The Chairman reviewed the training and development needs of each Director during the annual Board evaluation process. He confirmed that all Directors actively kept up to date with industry developments and issues. Seminars and events attended include those provided by the AIC.

When a new Director is appointed to the Board, they will be provided with all relevant information regarding the Company and their duties and responsibilities as a Director. In addition, a new Director will also spend time with representatives of the Investment Manager in order to learn more about their processes and procedures.

Director's Remuneration and Annual Evaluation of the Board and that of its Audit Committee and Individual Directors

The Remuneration and Nomination Committee periodically reviews the fees paid to the Directors and compares these with the fees paid by listed companies generally.

An annual evaluation of the Board, the Committee and Directors is undertaken considering the balance of skills, experience, independence and knowledge, its diversity, including gender, how the Board works together as a unit, and other factors relevant to its effectiveness.

It is intended that the Board shall, at least once every three years, engage a third-party to perform an external review of the Board's performance, constitution and terms of reference to ensure that it is operating effectively and to recommend any changes it considers necessary.

Details of the remuneration arrangements for the Board and Audit Committee can be found in the Directors' Remuneration Report.

Independent Advice

The Board recognises that there may be occasions when one or more of the Directors feels it is necessary to take independent legal advice at the Company's expense. A procedure has been adopted to enable them to do so, which is managed by the Company Secretary.

Indemnities

To the extent permitted by Guernsey Law, the Company's Articles of Incorporation provide an indemnity for the Directors against any liability except such (if any) as they shall incur by or through their own breach of trust, breach of duty or negligence.

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

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 complies with the risk limits as determined by the Board and has systems in place, including stress testing, to monitor the liquidity risk of the Company. 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 Committee. As a result of the 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.

Shareholder Engagement

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, offered to engage with investors and liaises closely with the Company's Corporate Broker in this respect. 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, and shareholders are welcome to contact the Directors at any time via the Company Secretary.

The Board believes that the Annual General Meeting provides an appropriate forum for investors to communicate with the Board, and encourages participation. The Annual General Meeting will be attended by the Directors. There is an opportunity for individual shareholders to question the Chairman of the Board, the Audit Committee, the Management Engagement Committee, Risk Committee and the Remuneration and Nomination Committee at the Annual General Meeting. Details of proxy votes received in respect of each resolution will be made available to shareholders at the meeting and will be posted on the Company's website following the meeting.

The Annual and Interim Reports and a monthly fact sheet are available to provide shareholders with a clear understanding of the Company's activities and its results. This information is supplemented by the daily calculation and publication on the London Stock Exchange of the NAV of the Company's Shares. All documents issued by the Company can be viewed on the website, www.aefrif.com.

2016 Annual General Meeting

The 2016 Annual General Meeting ("AGM") will be held in Guernsey on 21 September 2016 at 11:00 BST. The notice for the Annual General Meeting sets out the ordinary and special resolutions to be proposed at the meeting. Separate resolutions are proposed for each substantive issue.

It is the intention of the Board that the Notice of AGM be issued to shareholders so as to provide at least twenty working days' notice of the meeting. Shareholders wishing to lodge questions in advance of the meeting and specifically related to the resolutions proposed are invited to do so by writing to the Company Secretary. At other times the Company Secretary responds to letters from shareholders on a range of issues.

Voting on all resolutions at the AGM is on a poll. The proxy votes cast, including details of votes withheld, are disclosed to those in attendance at the meeting and the results are published on our website and announced via the Regulatory News Service ("RNS").

Alternative Investment Fund Managers Directive ("AIFMD") 

AIFMD seeks to regulate alternative investment fund managers ("AIFM") and imposes obligations on managers who manage alternative investment funds ("AIF") in the EU or who market shares in such funds to EU investors. The Company is categorised as a self-managed Non EEA AIF for the purposes of the AIFM Directive. In order to maintain compliance with the AIFM Directive, the Company needs to comply with various organisational, operational and transparency obligations.

The Company has registered with the UK Financial Conduct Authority, under the relevant national private placement regime.

AUDIT COMMITTEE REPORT

The Board has appointed an Audit Committee which operates within clearly defined terms of reference.

The Audit Committee comprises all of the Directors. All of the Audit Committee's members have recent and relevant financial experience. The Chairman of the Committee is a Fellow of the Institute of Chartered Accountants in England and Wales, and has recent and relevant financial experience, as required by the AIC Code.

Role of the Audit Committee

The main roles and responsibilities of the Audit Committee are the provision of effective governance over the appropriateness of the Company's financial reporting including the adequacy of related disclosures, the performance of the external auditor and the management of the Company's systems of internal controls and business risks.

The Audit Committee's main functions are:

· reviewing the Company's financial results announcements and audited financial statements and monitoring compliance with relevant statutory and listing requirements;

· reporting to the Board on the appropriateness of the Company's accounting policies and practices including critical accounting policies and practices;

· advising the Board on whether the Committee believes the Annual Report and financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy;

· agreeing with the auditor the external audit plan including discussions on the key risk areas within the audited financial statements;

· overseeing the relationship with and appointment of the external auditor;

· considering the financial and other implications on the independence of the auditor arising from any non-audit services to be provided by the auditor;

· considering the appropriateness of appointing the auditor for non-audit services;

· scrutiny of the investment valuations, and

· compiling a report on its activities to be included in the Company's Annual Report.

Internal Controls

The Audit Committee is responsible for reviewing the effectiveness and internal control policies and procedures over financial reporting and identification, assessment and reporting of risk. The Directors have reviewed the BNP Paribas Securities Services ISAE 3402 Report (on the description of controls placed in operation, their design and operating effectiveness for the period from 1 October 2014 to 30 September 2015) on Fund Administration and Middle Office Outsourcing, and are pleased to note that no significant issues were identified.

In accordance with the Financial Reporting Council's Internal Control: Guidance to Directors, and the FRC's Guidance on Audit Committees, the Board confirms that there is an on-going process for identifying, evaluating and managing the significant internal control risks faced by the Company.

As the Company does not have any employees it does not have a "whistle blowing" policy in place, however has reviewed the whistleblowing procedures of the Investment Manager with no issues noted. The Company delegates its main administrative functions to third-party providers who report on their policies and procedures to the Board.

The Board believes that as the Company delegates its day-to-day administrative operations to third-parties (which are monitored by the Board), it does not require an internal audit function.

Committee Meetings

The Committee meets formally at least three times a year. Only members of the Audit Committee have the right to attend Audit Committee meetings. However, other Directors and representatives of the Investment Manager and Administrator will be invited to attend Audit Committee meetings

on a regular basis and other non-members may be invited to attend all or part of the meeting as and when appropriate and necessary. The Company's external auditor, KPMG Channel Islands Limited ("KPMG") is also invited to each meeting.

In the year ended 31 March 2016, the Audit Committee met on five occasions.

Significant Risks in Relation to the Audited Financial Statements

In relation to the Annual Report and Audited Financial Statements for the year ended 31 March 2016, the Audit Committee views the valuation of Company investments as a significant risk.

The Company's investment designated as fair value through profit and loss are the Profit Participating Bonds held in the Subsidiary. The fair value of the Profit Participating Bonds are based on the NAV of the Subsidiary, which has been prepared on a basis consistent with IFRS.

The Audit Committee confirms that the Risk Committee continues to examine the valuation of the Company's investment and the underlying investments held in the Subsidiary periodically throughout the year. Additionally, as in prior years, the Audit Committee as part of its annual audit procedures visited the Investment Manager to discuss and review the valuation methodology of the Subsidiary's investments, internal controls and operations used by the Investment Manager. This meeting allowed the Audit Committee to gain assurances as to the appropriateness and robustness of the valuation methodology applied by the Investment Manager.

The Committee regularly reviews the valuations prepared by the Investment Manager for the Subsidiary's investments where readily available market prices are not available. At the financial year end these represented 1.51% of total investments.

The valuations of the Subsidiary's investments are scrutinised and compared against valuations of investments with similar characteristics. These valuations are also subject to a sensitivity analysis based on changes in key assumptions.

In addition to the above the Committee reviewed the quarterly Pricing Committee minutes and also considered the Auditor's approach to their audit of the valuation in respect of the Company's investment and the Subsidiary's investments. The Committee discussed in depth with KPMG their approach to testing the appropriateness and robustness of the valuation methodology applied by the Investment Manager to the Subsidiary's investments. The members of the Committee had meetings with KPMG, where the audit findings were reported. KPMG did not report any significant differences between the valuations used by the Subsidiary and the work performed during the testing process.

Based on the above review and analysis the Committee confirmed that they were satisfied with the valuation of the Subsidiary's investments and subsequently the Company's investment designated as fair value through profit or loss of the Company.

External Audit Process

The effectiveness of the external audit process is dependent on appropriate audit risk identification at the start of the audit cycle. The Committee received a detailed audit plan from KPMG, identifying their assessment of these key risks. For the year ended 31 March 2016 the primary risk identified was in relation to valuation of investments. The risk is tracked through the year and the Committee challenged the work done by the Auditor to test management's assumptions and estimates around this area.

The Committee assessed the effectiveness of the audit process addressing these matters through the reporting received for both the interim and year-end financial statements. The Committee sought feedback from the Investment Manager and the Administrator on the effectiveness of the audit process.

In addition, the Committee noted that the Financial Reporting Council (the "FRC"), through its Audit Quality Review Team, had selected and completed an audit quality review of the audit of the Company for the year ended 31 March 2015. The results of this review were discussed with the Auditor and the Committee consider that there were no significant findings for those specific areas covered by this review. The Committee further noted guidance issued by the FRC in reporting the results of any audit quality review which can be found here https://frc.org.uk/Transparency-of-AQR-findings.

Appointment and Independence

The Committee considers the reappointment of KPMG, including the rotation of the Audit Engagement Partner, and assesses their independence on an annual basis. KPMG is required under Ethical Standards to rotate the Audit Engagement Partner responsible for the Company audit every five years. The current Audit Engagement Partner has overseen the audit of the Company for the two years since March 2015 following the retirement of his predecessor. KPMG has been the Company's auditor for four years since the Company's listing in 2012.

The Committee reviews the objectivity and effectiveness of the audit process on an annual basis and considers the audit tendering provisions of the revised UK Code in determining whether the Company should put the audit engagement out to tender. Having considered the quality and level of service currently being provided by KPMG, the Committee believes that it is in the best interests of the shareholders to retain their services and has therefore provided the Board with its recommendation to the shareholders on the reappointment of KPMG as external auditor for the year ending 31 March 2017.

Accordingly, a resolution proposing the reappointment of KPMG as the Company's auditor will be put to the shareholders at the AGM. There are no contractual obligations restricting the Committee's choice of external auditor.

Non Audit Services

To safeguard the objectivity and independence of the external auditor from becoming compromised, the Committee has a formal policy governing the engagement of the external auditor to provide non-audit services. No material changes have been made to this policy during the year. The Auditor and the Directors have agreed that all non-audit services require the pre-approval of the Audit Committee prior to commencing any work. Fees for non-audit services are tabled annually so that the Audit Committee can consider the impact on auditors' objectivity.

KPMG were remunerated as follows during the period 1 April 2015 to the date of approval of the audited financial statements:

Committee Evaluation

The Committee's activities formed part of the Board evaluation performed in the year. Details of this process can be found under "Performance Evaluation".

DIRECTORS' REMUNERATION REPORT 

Annual Remuneration Statement

This report meets the relevant rules of the Listing Rules of the Financial Services Authority and the AIC Code describes how the Board has applied the principles relating to Directors' remuneration. An ordinary resolution to ratify this report will be proposed at the Annual General Meeting on 21 September 2016.

Changes to the Board

There were no changes to the Board during the year. In accordance with the Articles, Directors retire and stand for re-election at every third AGM.

Remuneration Summary

The External Board Evaluation Report recommended an increase in Director remuneration to be in line with industry average on the basis that Director remuneration had not increased since the inception of the Company and the Chairman had taken on additional responsibility as Chairman of the Risk Committee following the Company's becoming a self-managed AIF.

The Directors of the Company are remunerated per annum as follows:

· Chairman and Chairman of the Risk Committee - £30,000 from inception of the Company to 30 November 2015 and £50,000 with effect from 1 December 2015.

· Chairman of the Audit Committee - £30,000 from inception of the Company to 30 November 2015 and £42,000 with effect from 1 December 2015.

· Chairman of the Remuneration and Nomination Committee and of the Management Engagement Committee - £25,000 from inception of the Company to 30 November 2015 and £40,000 with effect from 1 December 2015.

The Company's policy is that Directors may receive a fee of £5,000 for a C-share issue or similar placement programme.

Remuneration Policy

The determination of the Directors' fees is a matter dealt with by the Remuneration and Nomination Committee and the Board. The Committee considers the remuneration policy annually to ensure that it remains appropriately positioned. Directors will review the fees paid to the boards of directors of similar investment companies. No Director is to be involved in decisions relating to his or her own remuneration.

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.

Directors are authorised to claim reasonable expenses from the Company in relation to the performance of their duties.

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 Board may amend the level of remuneration paid within the limits of the Company's Articles of Incorporation.

Policy Table

Service Contracts and Policy on Payment of Loss of Office

Directors are appointed with the expectation that they will stand for re-election every three years. Any Director may resign in writing with six months' notice to the Board at any time. Directors' appointments are reviewed during the annual board evaluation.

No Director has a service contract with the Company. Directors have agreed letters of appointment with the Company.

Mrs Ewing will be put forward for re-election by shareholders at the Annual General Meeting to be held on 21 September 2016.

Copies of the Director's letters of appointment are available for inspection by shareholders at the company's Registered Office, and are available at the Annual General Meeting. The dates of their letter of appointments and details of the outstanding term are shown below.

Dates of Directors' Letters of Appointment

Directors' Interests

The Company has not set any requirements or guidelines for Directors to own Shares in the Company.

Annual Report on Remuneration

The Company paid the following fees to the Directors for the years ended 31 March 2016 and 31 March 2015.

1 - The Directors were not paid any other fees for the year ended 31 March 2016.

No other remuneration or compensation was paid or is payable by the Company during the year to any of the Directors, other than travel expenses of €2,723 (31 March 2015: €3,303).

Advisors to the Remuneration Committee

As noted, the Board employed the services of Optimus Group Limited as external advisers in respect of its consideration of the Directors' remuneration.

Statement of Consideration of Shareholder Views

An ordinary resolution to ratify the Directors' remuneration report will be proposed at the Annual General Meeting on 21 September 2016. 

Directors' Responsibilities Statement

The Directors are responsible for preparing the Directors' Report and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the Annual Report includes information required by the Rules of the UK Listing Authority.

Guernsey company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union and applicable law.

The financial statements are required by law to give a true and fair view of the state of affairs of the Company for that period.

In preparing these financial statements, the Directors are required to:

· select suitable accounting policies and then 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 audited 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. They have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

The Directors are also responsible for ensuring that the Company complies with the Listing Rules and the Disclosure Rules and Transparency Rules of the UK Listing Authority which, with regard to Corporate governance, requires the Company to disclose how it applied the principles and complied with the provisions of the UK Corporate Governance Code applicable to the Company.

The Directors confirm to the best of their knowledge that:

· the audited financial statements, which have been prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit of the Company;

· the Annual Report includes a fair review of the information required by DTR 4.1.8R (indication of important events up to 31 March 2016 and a description of key risks and uncertainties);

· the Annual Report includes a fair review of the information required by DTR 4.1.9R and 4.1.10R (analysis of the development and performance of the Company and position at period end aided by the use of key performance indicators; and where appropriate information relating to environmental factors);

· the Annual Report includes a fair review of the information required by DTR 4.1.11R (disclosure of important events that have occurred post period end; future developments; financial risk management objectives and policies and Company exposure to price, credit, liquidity and cash flow risk); and

· the Annual Report and Audited Financial Statements, taken as a whole, are fair, balanced and understandable and includes a fair review of the development and performance of the business and position of the Company, together with a description of the key risks and uncertainties that the Company faces. This provides the information necessary for Shareholders to assess the Company's performance, position, business model and strategy.

The Directors are also responsible for the maintenance and integrity of the corporate and financial information included in the Company's website.

Legislation in Guernsey governing the preparation and dissemination of audited financial statements may differ from legislation in other jurisdictions.

Independent Auditor's Report to the Members of Alcentra European Floating Rate Income Fund Limited

Opinions and conclusions arising from our audit

Opinion on financial statements 

We have audited the financial statements of Alcentra European Floating Rate Income Fund Limited (the "Company") for the year ended 31 March 2016 which comprise the statement of comprehensive income, the statement of financial position, the statement of changes in equity, the statement of cash flows and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards as adopted by the European Union ("EU"). In our opinion, the financial statements:

· give a true and fair view of the state of the Company's affairs as at 31 March 2016 and of its total comprehensive income for the year ended 31 March 2016;

· have been properly prepared in accordance with International Financial Reporting Standards as adopted by the EU; and

· comply with the Companies (Guernsey) Law, 2008.

Our assessment of risks of material misstatement

The risks of material misstatement detailed in this section of this report are those risks that we have deemed, in our professional judgment, to have had the greatest effect on: the overall audit strategy; the allocation of resources in our audit; and directing the efforts of the engagement team. Our audit procedures relating to these risks were designed in the context of our audit of the financial statements as a whole. Our opinion on the financial statements is not modified with respect to any of these risks, and we do not express an opinion on these individual risks.

In arriving at our audit opinion above on the financial statements, the risk of material misstatement that had the greatest effect on our audit was as follows:

Valuation of investment in Subsidiary (€229,376,731 (equivalent to 100% of NAV))

Refer to the Audit Committee Report, note 3f (principal accounting policies) and note 6 (financial instruments disclosures).

The risk - The Company's sole investment that is designated as fair value through profit or loss is its investment in Profit Participating Bonds issued by Alcentra European Floating Rate Income S.A. (the "Subsidiary"), where the Net Asset Value of the Subsidiary, adjusted for the elimination of balances between the Company and the Subsidiary, is assessed to be its fair value. A significant proportion of the Subsidiary's Net Asset Value is represented by a portfolio of unquoted and infrequently traded floating rate, secured loans or high-yield bonds, which are predominantly rated below investment grade or deemed by the Investment Manager to be of a corresponding credit quality (the "Portfolio").

The valuation techniques applied by management in valuing the Portfolio are subjective and necessarily involve the selection of indicative broker price quotes provided by the Company's Approved Pricing Providers, and marking investments against market information for similar quoted instruments. Indicative broker price quotes may not represent prices traded in an active market and the marking of investments against market information for similar quoted instruments may be highly subjective in relation to the selection of the appropriate inputs and assumptions.

As a result there is a risk that the valuation techniques used by management in determining the fair value of the Portfolio and in turn the fair value of the Subsidiary may not be appropriate. Consequently, the valuation of the Portfolio is considered to be a significant risk and area of audit focus, given that it represents the majority of the Net Asset Value of the Subsidiary and in view of the subjectivity that may be involved in the determination of fair value.

Our response - Our audit procedures over the valuation of the Portfolio held by the Subsidiary included, but were not limited to the following:

· We tested the design and implementation of controls over valuation of the Portfolio.

· We involved our own valuation specialist to support the challenge of the valuation of the Portfolio. Our valuation specialist derived prices from independent data vendors, where available, and assessed the quality and integrity of these price quotes. Where price quotes from independent data vendors were not available our valuation specialist derived valuations based on yield and spread information for the relevant credit rating and industry sector and used this information to derive a mark-to-model valuation. The independent prices obtained from data vendors or valuations derived by the valuation specialist were evaluated against the Portfolio valuations used by the Company.

We also considered the Company's disclosures (see note 3c) in relation to the use of estimates and judgments in determining the fair value of investment in the Subsidiary and the Company's investment valuation policies adopted and fair value disclosures in note 3f and note 6 for compliance with International Financial Reporting Standards as adopted by the EU.

Our application of materiality and an overview of the scope of our audit

Materiality is a term used to describe the acceptable level of precision in financial statements. Auditing standards describe a misstatement or an omission as "material" if it could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. The auditor has to apply judgment in identifying whether a misstatement or omission is material and to do so the auditor identifies a monetary amount as "materiality for the financial statements as a whole".

The materiality for the financial statements as a whole was set at €6,879,000. This has been calculated using a percentage of the Company's net asset value (of which it represents approximately 3%), which we believe is the most appropriate benchmark as net asset value is considered as the prime driver of return to the members.

We agreed with the audit committee to report to it all corrected and uncorrected misstatements we identified through our audit with a value in excess of €343,950, in addition to other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds.

Our audit of the Company was undertaken to the materiality level specified above, which has informed our identification of significant risks of material misstatement and the associated audit procedures performed in those areas as detailed above. The audit was performed at the offices of BNP Paribas Securities Services S.C.A., Guernsey Branch.

Whilst the audit process is designed to provide reasonable assurance of identifying material misstatements or omissions it is not guaranteed to do so. Rather we plan the audit to determine the extent of testing needed to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements does not exceed materiality for the financial statements as a whole. This testing requires us to conduct significant depth of work on a broad range of assets, liabilities, income and expense as well as devoting significant time of the most experienced members of the audit team, in particular the Responsible Individual, to subjective areas of the accounting and reporting process.

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 Board of Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Disclosures of principal risks

Based on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to:

· the directors' viability statement, concerning the principal risks, their management, and, based on that, the directors' assessment and expectations of the Company's continuing in operation over the five years to June 2021; or

· the disclosures in note 2 of the financial statements concerning the use of the going concern basis of accounting.

Matters on which we are required to report by exception 

Under International Standards on Auditing ("ISAs") (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the Annual Report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading.

In particular, we are required to report to you if:

· we have identified material inconsistencies between the knowledge we acquired during our audit and the directors' statement that they consider that the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy; or

· the Corporate Governance Report does not appropriately address matters communicated by us to the audit committee.

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

· the Company has not kept proper accounting records; or

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

· we have not received all the information and explanations, which to the best of our knowledge and belief are necessary for the purpose of our audit.

Under the Listing Rules we are required to review the part of the Corporate Governance Report relating to the Company's compliance with the eleven provisions of the UK Corporate Governance Code specified for our review. 

This report is made solely to the Company's members, as a body, in accordance with section 262 of the Companies (Guernsey) Law, 2008 and, in respect of any further matters on which we have agreed to report, on terms we have agreed with the Company. 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.

As explained more fully in the Directors' Responsibilities Statement, 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 ISAs (UK and Ireland). Those standards require us to comply with the UK Ethical Standards for Auditors.

Statement of Comprehensive Income

For the year ended 31 March 2016

All results are derived from continuing operations.

The Company has no other comprehensive income other than operating profit for the year.

The accompanying notes form an integral part of these audited financial statements.

Statement of Financial Position

As at 31 March 2016

These audited financial statements were approved and authorised for issue by the Board of Directors on 28 June 2016.

The accompanying notes form an integral part of these audited financial statements.

Statement of Changes in Equity

For the year ended 31 March 2016

The accompanying notes form an integral part of these audited financial statements.

Statement of Cash Flows

For the year ended 31 March 2016

The accompanying notes form an integral part of these audited financial statements.

Notes to the Audited Financial Statements

For the year ended 31 March 2016

1. General Information

The Company is a non-cellular company limited by shares and was registered in Guernsey under the Companies (Guernsey) Law, 2008 (as amended) ("Guernsey Law") on 3 November 2011 with registered number 54200 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.

The Company controls its Subsidiary, Alcentra European Floating Rate Income S.A. (the "Subsidiary"), through a holding of 100% (31 March 2015: 100%) of its shares. The Subsidiary is domiciled in Luxembourg and has no subsidiaries. No financial or other support was provided without a contractual obligation to do so during the reporting period. As at 31 March 2016, there were no significant restrictions on the ability of the Subsidiary to transfer funds to the Company in the form of redemption of the shares held by the Company.

The Company's investment objective is to provide its shareholders with regular quarterly dividends and the opportunity for capital growth by utilising the skills of the Investment Manager in selecting suitable investments. To pursue its investment objective, the Company uses net issue proceeds to invest into Profit Participating Bonds issued by the Subsidiary. The Subsidiary then uses these proceeds to invest in floating rate, secured loans or high-yield bonds issued by European or US corporate entities predominantly rated below investment grade or deemed by the Investment Manager to be of corresponding credit quality.

The Company expects at least 80% of the Subsidiary's investments to be debt obligations of corporate entities domiciled or with significant operations in Western Europe (including the United Kingdom). Investments are expected to be denominated in Euros, Sterling or US Dollars.

Alcentra Limited has been appointed by the Company as the Investment Manager and the administration of the Company is delegated to BNP Paribas Securities Services S.C.A., Guernsey Branch ("the Administrator").

2. Going Concern

Going concern refers to the assumption that the Company has the resources to continue in operation for the foreseeable future. The Directors believe that it is appropriate to adopt the going concern basis in preparing these audited financial statements based on the following assessment:

1. Working capital - As at 31 March 2016, there was no working capital surplus in the Company, however, the Company has the ability to sell bonds in the Subsidiary and/or request repayment of accrued interest. The Subsidiary has a working capital surplus of approximately €7.0m.

2. The Company has been registered with the Guernsey Financial Services Commission as a Registered Closed-ended Collective Investment Scheme. As such shareholders have no right to have their Ordinary Shares redeemed, and therefore no cash flows out of the Company in this respect.

3. In accordance with the Articles of Association a Continuation Resolution was passed at the Annual General Meeting on 25 September 2014. The next Continuation Resolution will be considered at the September 2017 AGM.

Based on the above assessments, the Directors are confident that the Company is able to meet its liabilities as they fall due, as it has adequate cash resources to continue in operational existence for the foreseeable future.

3. Principal Accounting Policies

a) Basis of preparation

The audited financial statements for the year ended 31 March 2016 have been prepared in accordance with 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. They give a true and fair view of the Company's affairs and comply with the Company (Guernsey) Law 2008, as amended.

The Directors have determined that the Company continues to meet the investment entity criteria. Therefore, in accordance with the investment entity exemption within IFRS 10 - Consolidated Financial Statements, the Company has prepared individual audited financial statements and measures its investment in the Subsidiary at fair value.

b) Significant accounting policies

The accounting policies adopted in the preparation of the audited financial statements are consistent with those followed in the preparation of the 2015 Annual Report and financial statements.

Detailed below are new standards, amendments and interpretations to existing standards that become effective in future accounting periods which have not been adopted by the Company:

The Directors have assessed the impact of these amendments and the new standards and are of the opinion that they will not have a significant impact on the audited financial statements.

c) Critical accounting judgements and key sources of estimation uncertainty

The preparation of the audited 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.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods. Information about critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the audited financial statements are set out in note 3(d) and 3(f). Information about significant areas of estimation uncertainty that have the most significant effect on the amounts recognised in the audited financial statements are set out in note 6.

d) Functional and presentation currency

The audited financial statements are presented in Euro, which is the Company's functional currency. Euro is used as the functional and presentation currency as the majority of the Company's investments and transactions are denominated in Euro.

e) Foreign currency translation

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 year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Comprehensive Income.

f) Investments designated as fair value through profit and loss

Recognition and initial measurement

Financial assets and liabilities at fair value through profit or loss are recognised initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument. Other financial assets and liabilities are recognised on the date they originated.

Classification

The Company measures its investment into the Subsidiary as a financial asset at fair value through profit or loss. The underlying investments of the Subsidiary are purchased principally for capital growth and income generation and the Subsidiary's portfolio is managed, and performance evaluated, on a fair value basis in accordance with the Company's documented investment strategy.

Forward Foreign exchange contracts entered into by the Company are designated as held for trading and classified as fair value through profit or loss.

The Company has designated certain of its financial instruments, including cash and cash equivalents and dividends at their carrying amounts which approximate to their fair value due to their immediate or short-term maturity.

Derecognition

Derecognition of financial assets occur when the rights to receive cash flows from financial instruments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred.

On derecognition of a financial asset, the difference between the weighted average carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised), and consideration received (including any new asset obtained less any liability assumed), is recognised in profit or loss.

The Company derecognises a financial liability when its contractual obligations are discharged, cancelled or expired.

Measurement and valuation

Investment designated as fair value through profit or loss is the fair value of the Subsidiary measured at its NAV, which includes the fair value of the Subsidiary's investments.

g) 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 and are included in the Statement of Comprehensive Income. All changes in fair value are recognised in the Statement of Comprehensive Income as unrealised gain / (loss) on revaluation of investments.

Forward foreign exchange contracts are recorded on the trade date. Realised gains and losses arising on the expiry of the forward foreign exchange contracts are included in the Statement of Comprehensive Income.

Unrealised gains and losses arising on the difference between the forward rate and the contract rate on the forward foreign exchange contracts held at the reporting date are also included in the Statement of Comprehensive Income.

h) Income

Interest income in the Statement of Comprehensive Income includes bank interest. Interest income is recognised on an accruals basis.

i) Expenses

All expenses are recognised in the Statement of Comprehensive Income on an accruals basis. Costs incurred on the issuance of shares are netted off against the share issue proceeds.

j) Placing cost

The expenses incurred for the Placing Programme include placing fees and commissions, registration, listing and admission fees, the cost of settlement and escrow arrangements, printing, advertising and distribution costs, legal fees, and any other applicable expenses incurred in connection with the Placing Programme.

k) Cash and cash equivalents

Cash and cash equivalents comprise deposits with banks which have original maturities of less than three months, other than cash collateral provided in respect of derivatives, securities sold short and securities borrowing transactions.

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 £1,200.

m) Dividends

In any financial year, the Company will aim to pay regular quarterly dividends to Shareholders subject to the solvency test prescribed by Guernsey law. It is expected that a distribution will be made by way of a dividend with respect to each calendar quarter.

The Directors in their absolute discretion can offer a scrip dividend alternative to Shareholders when a cash dividend is declared from time to time.

n) Derivatives

The Company hedges the value of any non-Euro assets held at Subsidiary level into Euro using spot and forward foreign exchange contracts rolling on a monthly basis and, in relation thereto, has entered into a hedging master agreement with BNP Paribas Securities Services S.C.A. ("BNPP"). Under the same hedging master agreement, the Company hedges the value of any non-Euro share classes in their original currency against the Euro on a rolling-monthly basis.

The Company estimates fair values of forward foreign exchange contracts based on the latest available forward exchange rates extrapolated to the contract maturity date.

The Company does not apply hedge accounting.

4. Material Agreements

a) Investment Management Agreement

Under the terms of the Investment Management Agreement dated 9 January 2012, amended on 21 July 2014, the Company appointed the Investment Manager to provide management services to the Company. The Investment Manager is entitled to a management fee which is calculated and accrued daily at a rate equivalent to 0.70% per annum based on the NAV of the Company. The management fee is payable quarterly in arrears by the Company. The Investment Manager is not entitled to any incentive or performance based fee.

b) Administration and Custodian Agreement

The Company has engaged the services of the Administrator, to provide administration and custodian services. Under the terms of the administration and custodian agreement dated 9 January 2012, the Administrator is entitled to the following fees per annum:

On first £100m of the NAV 0.075%

On £100m to £250m of the NAV 0.050%

On £250 to £500m of the NAV 0.030%

Any amount greater than £500m of the NAV 0.020%

The Administrator is entitled to an annual minimum fee of €113,000.

The Administrator is entitled to the following loan administration fee per annum:

Less than £500m of the NAV 0.035%

Any amount greater than £500m of the NAV 0.020%

The Administrator is entitled to an annual minimum fee of €40,000 for loan administration.

The Secretary is entitled to an annual fee of €41,000 plus fees for ad-hoc board meeting and services of €3,000 per meeting and plus ad-hoc placing programme fee of £600 (approximately €759) per placing.

c) Registrar's Agreement

Capita Registrars (Guernsey) Limited has been appointed as registrar of the Company pursuant to the Registrar Agreement dated 9 January 2012. 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 £8,250 (approximately €10,433).

d) Placing Agreements

The Company, the Investment Manager and J.P Morgan Securities Plc entered into a Sponsor's and Placing Agreement on 22 April 2014, in connection with the Placing Programme, Initial Placing and Offer for Subscription to issue up to 350 million new Ordinary Shares. The Placing Agreement was governed by the laws of England. The Placing Programme was closed on 21 April 2015.

e) Hedging Master Agreement

The Company and the Administrator entered into an International Forward Foreign Exchange Master Agreement dated 9 January 2012 (the "Hedging Master Agreement"), pursuant to which the parties enter into foreign exchange transactions with the intention of hedging against fluctuations in the exchange rate between the Euro and other currencies. The Hedging Master Agreement is governed by the laws of England and Wales. Note 6 details the gross derivative asset and liability position by contract type and the amount for these derivatives contracts.

5. Earnings per Share and NAV per Share

The calculation of basic earnings per Ordinary Share is based on the operating (loss) or profit attributable to Ordinary Shares of €(14,237,001) (£11,257,766) (31 March 2015: €38,199,390 (£27,608,227)); and on the weighted average number of Ordinary Shares during the year of 175,966,398 Ordinary Shares (31 March 2015: 165,630,059).

The calculation of NAV per Ordinary Share is based on a NAV attributable to Ordinary Shares of €229,306,601 (£181,321,902) (31 March 2015: €255,661,882 (£184,777,069)) and the number of shares in issue at 31 March 2016 of 175,975,961 (31 March 2015: 175,475,961).

6. Fair Value of Financial Instruments

The Company measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:

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

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

Level 3: Inputs that are unobservable for the asset or liability and reflect the Investment Manager's own assumptions. This category includes instruments that are valued based on price quotes for which the inputs are unobservable or price quotes for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

The investment designated as fair value through profit and loss is the Profit Participating Bonds held in the Subsidiary. The fair value of the Profit Participating Bonds is based on the NAV of the Subsidiary, which has been prepared on a basis consistent with IFRS.

The NAV of the Subsidiary predominantly comprises the fair values of the investment portfolio of the Subsidiary consisting of Level 2 and Level 3 investments and other financial assets and liabilities at carrying value, which together form the NAV of the Subsidiary.

The investments in the Subsidiary's portfolio are valued as follows:

(a) Fair values of debt instruments are initially based on price quotes, where available. Price quotes are sourced from the Company's Approved Pricing Providers. The Approved Pricing Providers source price quotes from brokers/market makers and determine an average bid price based on the quotes obtained, after adjusting for outliers as identified by the Approved Pricing Providers. Where price quotes are unavailable, the Investment Pricing Committee of the Investment Manager determines fair value using valuation techniques. Valuation techniques used include comparison to similar instruments for which market observable prices exist. Assumptions and inputs used in the valuation technique include interest rates and credit spreads used in estimating discount rates. The Investment Pricing Committee has applied judgment and estimation and used significant unobservable inputs in selecting the appropriate valuation technique used, consideration of identical or similar instruments, and selection of appropriate discount rates.

(b) Fair values of forward foreign exchange contracts are determined with reference to the forward exchange rates applicable as at valuation date.

As at 31 March 2016 and 31 March 2015, the fair value measurement of the Profit Participating Bonds is categorised into level 3 in the fair value hierarchy. This classification reflects the Company's ability to redeem its investment in the Subsidiary on the reported date at the NAV and whether adjustments to the NAV are required to reflect the inherent uncertainty in the timing and range of possible outcomes of any realisation between the NAV and the ultimate recoverable amount. The fair value level of the investment in the Subsidiary reflects management's consideration that this investment is not readily tradable. Management has considered that there are no reasonably possible alternatives in determining the fair value of the Subsidiary.

The fair value of the Subsidiary is predominantly influenced by the fair value determination of the underlying debt investments held by the Subsidiary. The Company recognises any transfers between levels of the fair value hierarchy as at the end of the reporting period during which the change occurred.

Fair values of forward foreign exchange contracts are determined with reference to the forward exchange rates applicable at the valuation date.

The table below analyses the investment designated as fair value through profit or loss at the end of the reporting period by the level in the fair value hierarchy as recognised in the Statement of Financial Position:

The following table provides a reconciliation of the Company's investment in the Subsidiary measured at fair value:

As at 31 March 2016, the net gain on the Company's investment in the Subsidiary included in the Statement of Comprehensive Income amounted to €8,737,367 (31 March 2015: €9,605,619), the breakdown of the gain is detailed in the table below:

The table below analyses the debt instruments held in the Subsidiary by the level in the fair value hierarchy:

The table below details the Company's forward foreign exchange contracts at fair value:

The table below details the Subsidiary's forward foreign exchange contracts at fair value:

7. Other payables and accrued expenses

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

8. Reconciliation of NAV to Published NAV

 (a) The investments held by the Subsidiary have been valued at bid price which is consistent with the basis used in the prior year audited financial statements.

9. Share Capital

The authorised share capital of the Company is represented by an unlimited number of Ordinary Shares with or without a par value, which upon issue, the Directors may designate as: (a) Ordinary Shares; (b) B Shares; (c) C Shares, in each case of such classes and denominated in such currencies as the Directors may determine. Since inception of the Company, no B or C shares have been issued.

Since inception of the Company, only Sterling Ordinary Shares have been issued, but the Company has the authority to issue Euro Ordinary Shares.

As at 31 March 2016 the Company had issued and fully paid up share capital as follows:

Rights attached to Ordinary Shares

The Company's share capital may be denominated in Sterling and Euro. At any general meeting of the Company each Euro share carries one vote and each Sterling share carries 1.2 votes. The shares also carry rights to receive all income and capital available for distribution by the Company.

Significant share movements

10. Dividends

In any financial year, the Company will aim to pay regular quarterly dividends to Shareholders subject to the solvency test prescribed by Guernsey law. It is expected that a distribution will be made by way of a dividend with respect to each calendar quarter.

The Directors in their absolute discretion can offer a scrip dividend alternative to Shareholders when a cash dividend is declared from time to time.

The Company has declared and paid the following dividends to its shareholders during the year:

11. 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.

Total investment management fees for the year amounted to €1,760,929 (31 March 2015: €1,568,226), with outstanding fees of €265,426 at 31 March 2016 (31 March 2015: €157,071).

As at 31 March 2016 BNY Mellon Investment Management Seed Capital Limited ("BNY Mellon") held 26,464,000 shares in the Company. BNY Mellon is wholly owned by the parent company of the Investment Manager.

As at 31 March 2016, Mr Fitzgerald held 15,000 Ordinary Shares.

As at 31 March 2016, Mr Bridel (together with his Spouse) held 5,000 Ordinary Shares.

As at 31 March 2016, Mrs Ewing (together with her Spouse) held 5,000 Ordinary Shares

The Directors of the Company are remunerated per annum as follows:

Chairman and Chairman of the Risk Committee - £30,000 (approximately €37,939) from 1 April 2015 to 30 November 2015 and £50,000 (approximately €63,232) with effect from 1 December 2015.

Chairman of the Audit Committee - £30,000 (approximately €37,939) from 1 April 2015 to 30 November 2015 and £42,000 (approximately €53,115) with effect from 1 December 2015.

Chairman of the Remuneration and Nomination Committee and of the Management Engagement Committee - £25,000 (approximately €31,616) from 1 April 2015 to 30 November 2015 and £40,000 (approximately €50,586) with effect from 1 December 2015.

In addition, £5,000 (approximately €6,323) was paid per Director for the Placing Programme that was terminated on 21 April 2015.

The total Directors' fees and travel expenses for the year amounted to €139,216 (31 March 2015: €113,114), with outstanding fees of €14,139 (31 March 2015: €37,947), due to the Directors at 31 March 2016.

12. Risk Management Policies and Procedures

This note presents information about the Company's exposure to risks. The majority of the Company's assets are invested in the Subsidiary through Profit Participating Bonds, as such, the majority of the risks that the Company is exposed to are borne out of the indirect exposure to the risks of the underlying portfolio held at the Subsidiary level.

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 Investment Manager monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities.

Market risk

The fair value of the Company's investment into the Subsidiary may fluctuate due to changes in market prices of the underlying portfolio of investments held by the Subsidiary. 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 at Company and Subsidiary level is monitored by the Investment Manager and is reviewed by the Board of Directors on an ongoing basis. The main market risk measures used by the Investment Manager are rolling 12 month volatility. Volatility is used as a standard market risk metric versus the Company's benchmark volatility.

Market price risk

The Company's investment designated as fair value through profit and loss is based on the NAV of the Subsidiary which is susceptible to the market price risk arising from uncertainties about future prices of the underlying portfolio of investments held by the Subsidiary.

The Board of Directors manages the risks inherent in the investment by ensuring full and timely reporting of the relevant information from the Investment Manager. Investment performance is reviewed at each Board meeting. The Board of Directors monitor the Investment Manager's compliance with the Company's objectives. At 31 March 2016, the overall market exposure of the Company is equivalent to the fair value of the underlying portfolio of investments held by the Subsidiary €222,421,036 (31 March 2015: €235,906,939).

Market price risk sensitivity

The following table illustrates the sensitivity of the return for the year and the Company's net assets to an increase or decrease of 5% in the fair values of the underlying portfolio of investments held by the Subsidiary at the reporting date.

This level of change is considered to be reasonable based on observation of current market conditions.

Currency risk

The functional and presentational currency of the Company and its Subsidiary is Euro. The Company invests in its Subsidiary which in turn invests in financial instruments and enters into transactions that are denominated in currencies other than its functional currency, primarily in US Dollars, Pounds Sterling and Swedish Krona. Consequently, the Company is exposed to risk that the exchange rate of its functional currency relative to other foreign currencies may change in a manner that has an adverse effect on the fair value or future cash flows of that portion of the Company's financial assets or liabilities.

The Investment Manager monitors the exposure to foreign currencies and reports to the Board of Directors on a regular basis. The Investment Manager measures the risk of the foreign currency exposure by considering the effect on the NAV and income of a movement in the rates of exchange to which the assets, liabilities, income and expenses are exposed.

The Subsidiary enters into forward foreign currency contracts to manage its exposure to currency risk due non-Euro investments in the portfolio of the Subsidiary.

The Company enters into forward foreign exchange contracts to manage its exposure to currency risk arising from the assets being in Euro and the issuance of shares in Sterling.

The Investment Manager seeks to engage in currency hedging contracts such as forward currency exchange contracts being available in a timely manner and on terms acceptable to them, in their sole and absolute discretion. The primary aim of the Investment Manager's use of hedging is to protect the Sterling shareholders return.

As at 31 March 2016, the Company had the following open forward foreign exchange contracts:

As at 31 March 2016, the Subsidiary had the following open forward foreign exchange contracts:

As at 31 March 2015, the Company had the following open forward foreign exchange contracts:

As at 31 March 2015, the Subsidiary had the following open forward foreign exchange contracts:

\* These fair values are included within the fair value of Investment in the Subsidiary designated as fair value through profit and loss.

The Company had the following carrying amounts of the financial assets and liabilities that have foreign currency exposure at 31 March 2016 are shown below:

The Subsidiary had the following carrying amounts of the financial assets and liabilities that have foreign currency exposure at 31 March 2016 are shown below:

The Company had the following carrying amounts of the financial assets and liabilities that have foreign currency exposure at 31 March 2015 are shown below:

The Subsidiary had the following carrying amounts of the financial assets and liabilities that have foreign currency exposure at 31 March 2015 are shown below:

Currency sensitivity analysis

Should the value of the Euro against Sterling and US Dollar increase or decrease by 10% with all other variables held constant, the increase and decrease of the comprehensive income and net assets of the Company would be as follows:

Should the value of the Euro against Sterling and US Dollar increase or decrease by 10% with all other variables held constant, the increase and decrease of the comprehensive income and net assets of the Subsidiary would be as follows: