17 Jul 2009 16:25
Regulatory Announcement
Bramdean Alternatives Limited
17 July 2009
Posting of Notice of Annual General Meeting and Report & Financial Statements for the year ended 31 March 2009
Bramdean Alternatives Limited (the "Company") announces that its Annual General Meeting (the "AGM") will be held at 10.30 am on Thursday 27 August 2009 at Canada Court, Upland Road, St Peter Port, Guernsey GY1 3QE, Channel Islands.
In connection with this, the following documents have been posted to shareholders today:
- Report & Financial Statements for the year ended 31 March 2009, which includes the Notice of the 2009 Annual General Meeting
- Proxy form for the 2009 Annual General Meeting
These documents have also been submitted to the Financial Services Authority (the "FSA") and will shortly be available for inspection at the FSA document viewing facility, which is situated at: Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS.
Copies of the Report & Financial Statements 2009 and the Notice of AGM are available to view on the Company's website at www.bramdeanalternatives.com. Full copies of the Notice of AGM are set out in this announcement.
Enquiries
Company Secretary and Administrator
RBC Offshore Fund Managers Limited
Robin Amer T: 01481 744000
Mainland PR
Neil Mainland T: 020 3008 7400
M: 07753 787290
Notice of Annual General Meeting
Bramdean Alternatives Limited (the "Company")
(A closed-ended investment company incorporated in Guernsey with registered number 46192)
Notice is hereby given that the third Annual General Meeting of the Company will be held at Canada Court, Upland Road, St Peter Port, Guernsey, Channel Islands GY1 3QE, on Thursday 27 August 2009 at 10.30 am to consider, and if thought appropriate, approve the following resolutions:
Ordinary Resolutions
1 THAT the financial statements of the Company for the year ended 31 March 2009 with the Report of the Directors and auditors thereon be received and adopted.
2 THAT the appointment of PricewaterhouseCoopers CI LLP as auditors of the Company to hold office until the conclusion of the next Annual General Meeting of the Company, at a remuneration to be determined by the Directors, be approved.
3 THAT the Directors be and hereby are generally and unconditionally authorised pursuant to Article 38A(8) of the Articles of Incorporation of the Company to issue and allot participating shares of no par value in the capital of the Company ("Shares") as if Article 38A(1) does not apply to such issue and allotment. This authority shall expire at the conclusion of the Annual General Meeting of the Company to be held in 2010 or following the passing of an ordinary resolution to that effect, whichever is the earlier, (save that the Company may before such expiry make any offer or agreement which would or might require Shares to be allotted after such expiry and the Directors may allot Shares in pursuance of any such offer or agreement as if the authority conferred hereby had not expired).
Special Resolution
4 THAT the Company be and is hereby generally and unconditionally authorised in accordance with section 315 of the Companies (Guernsey) Law, 2008, as amended (the "Law") to make one or more market acquisitions (as defined in section 316 of the Law) of Shares in the Company provided that:
(a) the maximum number of Shares authorised to be acquired is 14.99% of each class of Shares in issue at the time this resolution is duly passed;
(b) the minimum price payable by the Company for each Share (of whatever class) is 1 pence for sterling denominated Shares (or for Shares designated in other currencies the smallest available monetary unit in such other currency) and the maximum price payable is the higher of (i) 105% of the average of the mid-market quotations for such class of Share taken from and calculated by reference to the London Stock Exchange Daily Official List for the five business days prior to the date of the acquisition and (ii) the higher of the price of the last independent trade and highest current independent bid as stipulated by Article 5(1) of Commission Regulation (EC) 22 December 2003 implementing the Market Abuse Directive as regards exemptions for buy back programmes and stabilisation of financial investments (No 2233/2003);
(c) such authority shall expire at the conclusion of the next Annual General Meeting of the Company; and
(d) notwithstanding paragraph (c), the Company may make a contract to purchase Shares under this authority before the expiry of this authority which will or may be executed wholly or partly after the expiry of this authority and may make a purchase of Shares in pursuance of any such contract after such expiry.
By order of the Board
Bramdean Alternatives Limited
Canada Court
Upland Road
St Peter Port
Guernsey
Channel Islands GY1 3QE
8 July 2009
Registered number 46192
Notes
1 A shareholder entitled to attend and vote at the meeting may appoint a proxy to attend, speak and vote instead of him/her. A proxy need not be a shareholder of the Company. A shareholder may appoint more than one proxy in relation to the meeting provided that such proxy is appointed to exercise the rights attached to a different share or shares held by the shareholder.
The following persons should complete, sign and return form(s) of proxy of the following colours:
| Shares held | Form(s) of proxy to complete, sign and return |
| U.S. Dollar Shares | White |
| Sterling Shares | Blue |
If you hold U.S. Dollar Shares and Sterling Shares, you should complete forms of proxy in relation to each.
2 Form(s) of proxy is (are) included for use by shareholders to complete, sign and return. Completion and return of the form(s) of proxy will not prevent a shareholder from subsequently attending the meeting (or any adjournments) and voting in person if he/she so wishes.
3 To appoint more than one proxy to vote in relation to different shares within your holding you may photocopy the form. Please indicate the proxy holder's name and the number of shares and whether they are Sterling Shares or U.S. Dollar Shares in relation to which they are authorised to act as your proxy (which, in aggregate, should not exceed the number of shares of that class held by you). Please also indicate if the proxy instruction is one of multiple instructions being given. All forms must be signed and should be returned together in the same envelope.
4 Form(s) of proxy, duly completed together with any power of attorney or other authority (if any) under which it is signed, or a notarially certified copy of such power or authority, must be lodged with Capita Registrars, Proxy Department, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU not less than 48 hours before the time fixed for the meeting or any adjournment thereof, or in the case of a poll taken more than 48 hours after it was demanded, 24 hours before the time appointed for the taking of the poll.
5 There are no service contracts between any of the Directors and the Company.
6 No shareholder will be entitled to be present or vote at the meeting (or any adjournment) either personally or by proxy unless their name appears on the register of members of the Company as at 10.30 am on Tuesday 25 August 2009. Changes to the entries on the register of members after that time shall be disregarded in determining the rights of any person to attend and vote at the meeting (or any adjournments). This record time is being set for voting at the meeting (and any adjournments) because the procedures for updating the register of members in respect of shares held in uncertificated form require a record time to be set for the purpose of determining entitlements to attend and vote at the meeting.
7 CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for the meeting and any adjournment(s) of the meeting by using the procedures described in the CREST Manual. CREST personal members or other CREST sponsored members, and those CREST members who have appointed a voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a "CREST Proxy Instruction") must be properly authenticated in accordance with CRESTCo's specifications and must contain the information required for such instructions, as described in the CREST Manual. The message, regardless of whether it constitutes the appointment of a proxy or an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the Company's agent (ID RA10) by the latest time(s) for receipt of proxy appointments specified above. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Applications Host) from which the Company's agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means. CREST members and, where applicable, their CREST sponsors or voting service provider(s) should note that CRESTCo does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service provider(s) are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings.
BRAMDEAN ALTERNATIVES LIMITED
STATEMENT OF ANNUAL FINANCIAL REPORT
17 JULY 2009
The financial information set out in this announcement does not constitute the Company's statutory accounts for the year ended 31 March 2009.
The financial information for the year ended 31 March 2009 is derived from the financial statements delivered to the UK Listing Authority. The Auditors reported on those accounts, their report was unqualified and did not contain a statement under Section 263 of The Companies (Guernsey) Law, 2008.
CHAIRMAN'S STATEMENT
Extraordinary General Meeting ("EGM")
On 21 May 2009, the Company issued a circular to shareholders convening an EGM, pursuant to a shareholder's requisition, which set out the proposed resolutions to remove the existing Board and appoint three individuals nominated by the shareholder.
The EGM was held on 18 June 2009 and, as a result of a shareholder vote on the resolutions, the existing Board was removed and three new Board members were appointed with immediate effect.
Commenting on the new Board's appointment, Jonathan Carr incoming Chairman, said "I would like to thank the outgoing Directors for their service to the Company. I would also like to thank the shareholders for the support that they have shown in appointing the new Board to consider the best course of action for their Company to take. The new Board of Bramdean Alternatives Limited has significant experience in finance and investment and it is our intention to conduct a comprehensive review of the Company's strategy and investments and consider all possible options to maximise value for shareholders. As independent Directors we will report back to shareholders on the avenues open to us. We take up our appointments with open minds and welcome all advice and suggestions from stakeholders as to how maximum value can be achieved.'
As the newly appointed Chairman I am pleased to present to shareholders the Report & Financial Statement of Bramdean Alternatives Limited for the financial year ended 31March 2009.
During the first financial year of the Company's life there was extraordinary turmoil in financial markets stemming from the decision to allow Lehman Brothers to go into administration. The Federal Reserve took early action in cutting interest rates, which seemed to some like a high risk policy given the level of commodity prices. Eventually, commodity prices began to fall in response to a faster slowdown in global economic activity than had been predicted. Against this background, equity markets were extremely weak. In 2008, the US market fell by 37.5% and Europe ex-UK fell by 40.4% in local currency terms. The UK equity market, as measured by the FT Actuaries All-Share Index, fell by 32.2% over the year. Within the fixed income markets, gilts performed well, with the Government All Stocks Index returning 10.3% (including income). But UK corporate bonds declined in value by 13.5% (also including income). Over the course of the financial year to 31 March 2009, the Credit Suisse Tremont Hedge Fund Index fell by 16.7%, whilst the HFRI Fund Weighted Composite Index of hedge funds fell by 20.6%.
At the end of March 2008, the Company's net asset value ("NAV") per Sterling Share was 98.55 pence and stood at 90.10 pence at the end of March 2009. This represented a decline of 8.6%, which was encouraging when compared with the overall performance of the equity markets. The U.S. Dollar Share's NAV began the year under review at US$0.9782 and ended the period at US$0.7503, a fall of 23.3%. The disparity in performance between the two share classes was due to movements in the value of Sterling against the U.S. Dollar. The Investment Manager had followed a policy of hedging the majority of the U.S. Dollar and Euro exposure for the Sterling class shareholders up until October 2008. Thereafter, the hedge was significantly reduced and was at zero by the end of the year. This resulted in a currency gain for the Sterling class shareholders over the year as a whole because Sterling had declined sharply against the U.S. Dollar.
It was extremely disappointing that the Company had to write off 9.5% of its NAV following the arrest of Bernard L Madoff on allegations of securities fraud. The Company was holding two investments that, directly or indirectly, held trading accounts with Bernard L. Madoff Investment Securities LLC ("BMIS"). The first was Rye Select Broad Market XL portfolio Ltd. ("Rye Select"), an investment which represented 4.4% of the Company's NAV as at 31 October 2008 and which was held in the Strategic Hedge Funds portfolio.
The second was Defender Ltd. ("Defender"), which represented 5.1% of the Company's NAV as at 31 October 2008 and was held in the Transitional portfolio. On 12 December 2008, the Company received a letter from Defender stating that the Federal Bureau of Investigation in the US had arrested Mr Madoff, the founder of BMIS, on charges of alleged securities fraud. Mr Madoff was later convicted and imprisoned, having pleaded guilty to the charges brought against him.
Having received the news about Mr Madoff, the Company immediately consulted with its auditors, PricewaterhouseCoopers CI LLP and it was decided to take a full provision against its investments in Rye Select and Defender to nil in the calculation of the November 2008 NAV, which was announced via the London Stock Exchange's Regulatory News Service on 18 December 2008. The Company is continuing to monitor the situation in respect of its investments in Rye Select and Defender and will make every appropriate effort to seek recovery of the assets.
The Company has invested its assets with a view to spreading investment risk in accordance with its published investment policy. As at 31 March 2009, the Company was invested in a diversified portfolio of 33 funds across many geographical regions and investment strategies. Further details on the diversification of the investment portfolio are set out in the Investment Manager's review. The Company's total NAV at the end of the year was US$176.11 million. Out of the 33 funds held by the Company, 18 were Private Equity and Speciality Funds and the total commitments to these funds stood at US$223 million at the Company's year end. The Company's current level of over commitments is low relative to many peer group private equity funds and no borrowing facility has been put in place. The Company's private equity commitments may not be easily transferred or sold in the current market and the Company has contractual obligations to fund undrawn amounts in its private equity commitments. Where commitments cannot be transferred or sold the Company will maintain adequate provision to meet such contractual obligations.
Although the NAV performance of the Company was creditable, even after writing off the value of the Madoff investments, the share price performance has been unsatisfactory. The Sterling Shares saw a decline of 49.7% over the year ended 31 March 2009, whilst the U.S. Dollar Shares declined by 45.1%. The nervousness of the market about the private equity sector was demonstrated by the widening of discounts to NAV. At the end of the year, the Company's Sterling Shares stood at a discount of 55.5% relative to NAV and the U.S. Dollar Shares stood at a discount of 25.4%. The private equity fund of funds sector stood at an average discount of 63.6% at 31 March 2009.
The Board monitors the level of share price relative to the NAV carefully and has been concerned about the widening discount. This is reviewed at each quarterly Board Meeting.
As stated above, the Company had no debt at 31 March 2009. In line with the Company's dividend policy, the Board has not recommended payment of a final dividend.
Over the last financial year, the Company's Investment Manager has sought to position the Company's investments in light of continued financial turmoil, including taking steps to increase cash balances. At the year end, the Company was holding 30.8% of its assets in cash. However, it should be noted that the Company has made commitments to Private Equity and Speciality funds and that this cash will be drawn down by these funds over time.
On behalf of the new Board I would like to assure shareholders that we are committed to enhancing shareholder value and thank shareholders for their support during this period of transition.
Annual General Meeting
I look forward to welcoming shareholders to the Annual General Meeting of the Company at 10.30 am on Thursday 27 August 2009, which will be held at Canada Court, Upland Road, St Peter Port, Guernsey, GY 3QE, Channel Islands.
Jonathan D Carr
Chairman
8 July 2009
DIRECTORS' REPORT
Incorporation and principal activity
Bramdean Alternatives Limited (the "Company") was incorporated on 5 January 2007 in Guernsey, Channel Islands, with limited liability under The Companies (Guernsey) Law, 1994 (as amended) as an investment holding company. The Company is now a Guernsey closed-ended investment company, following its admission to the London Stock Exchange. Trading in the Company's U.S. Dollar and Sterling Shares commenced on 9 July 2007.
Management arrangements
Dividends
For the year ended 31 March 2009 the Directors do not propose the payment of a dividend.
Investment Management Agreement
The Company has entered into an Investment Management Agreement with Bramdean Asset Management LLP (the "Investment Manager"). The Investment Manager is responsible for the management of the Company's assets, subject to the overall supervision of the Board. The Investment Manager's investment team consists of five investment professionals and is led by its Chief Executive Officer, Nicola Horlick.
The annual management fee is 1.5% of the Net Asset Value ("NAV"), payable monthly in arrears with a 10% performance fee subject to an 8% return with a high watermark.
Following the recent appointment of the Directors, and in light of their ongoing discussions with shareholders, the Board is currently considering the future of the Company. Pending their decision as to what proposals they consider would be in the best interest of shareholders as a whole, the Directors are currently of the opinion that the continuing appointment of the Investment Manager on the terms agreed is in the interests of shareholders as a whole.
The Investment Manager has appointed RMF Investment Management - Nassau Branch ("RMF") to manage investments in that part of the Company's portfolio which may, from time to time, be allocated to investments in hedge funds. RMF has discretionary authority to invest and divest with respect to all investments making up the part of the portfolio allocated to investments in hedge funds.
Discount control
As part of the discount control mechanisms, the Board may consider implementing a share buy-back (subject to the limitations set out in resolution 4 in the Notice of the Annual General Meeting of the Company and all other applicable laws and regulations) at each quarterly Board meeting should the Shares have been trading at a discount to NAV of 10% or greater for more than 90 days. The Company has the authority to manage demand flows for its Shares by purchasing up to 14.99% of each class of Share. Up to 10% may be held within its Treasury function and resold. The remainder will be cancelled.
Annual shareholder approval will be sought to renew this authority.
In the year ended 31 March 2009, the Company bought back 260,000 Sterling Shares for cancellation at a cost of US$427,684.
Investment objective and investment policy
The investment objective of the Company is to generate long-term capital gains. The Company invests in a diversified portfolio of private equity funds, hedge funds and other specialty funds as described below. The Company may also hold direct holdings in unquoted companies and quoted securities.
The Company seeks to hold a broadly diversified portfolio of investments by country, industry sector, investment stage and size of investment, as well as by strategy. Geographical analysis of investments is disclosed in Note 15.
The Company seeks to operate within the asset allocation ranges set out below. While the Company is establishing its strategic allocation to private equity funds and specialty funds, the Company manages the capital that is committed but not yet called in a Transitional portfolio. This portfolio invests in funds that reflect the characteristics of private equity and is also structured to preserve that capital over the medium-term and be as liquid as possible so that the Company can satisfy capital calls. Over the course of the reporting period and as a reflection of the turbulence being experienced by the global equity markets, the decision was taken to reduce the emphasis on achieving private equity-type returns and to increase the focus on capital preservation.
Asset allocation ranges
The Company operates on the basis of the following long-term asset allocations:
Private Equity Funds 30% - 60%
Strategic Hedge Funds 15% - 45%
Specialty Funds 10% - 30%
The actual percentage of the Company's gross assets invested in private equity funds and direct holdings, strategic hedge funds and specialty funds may fall outside these ranges.
Private equity funds and direct holdings
The Private Equity Funds portfolio comprises investments primarily in the buy-out, growth equity, venture capital, secondaries and mezzanine debt sectors. The Company may also make co-investments, either directly with the general partners of the private equity funds that the Company invests in, or via a co-investment fund. The underlying private equity funds are expected to be primarily invested in Europe and the United States. No co-investments have been made to date.
Hedge funds
The Company invests in a concentrated range of hedge funds which pursue multiple investment strategies - specifically: Relative Value, Event Driven, Equity Hedge, Global Macro and Managed Futures to create balance within the portfolio. The Company will typically hold 10 to 15 underlying hedge funds at any given point in time within its Strategic Hedge Funds portfolio. The Strategic Hedge Funds portfolio is neither style nor strategy specific. RMF has been appointed as Investment Sub-Manager under the terms of an Investment Sub-Management Agreement. RMF is responsible for taking decisions on all individual hedge funds which form part of the Company's Strategic Hedge Funds portfolio.
Specialty funds
The Company invests in a globally diversified portfolio of specialty funds which include, but are not limited to:
- real estate funds;
- infrastructure funds;
- natural resources funds; and
- structured finance funds.
Over-commitment
The Company employs a policy of over-commitment in order to ensure it deploys its capital efficiently and that its intended investment allocation to private equity is met. At 31 March 2009, the Company was 81% over-committed to its private equity and specialty investments. The over-commitment is based on the Company's expectation to have approximately 70% of its NAV represented by the Private Equity and Specialty Funds portfolio.
Gearing
The Company may borrow up to 25% of the NAV of the Company for short-term purposes as may be necessary for settlement of transactions, or for long-term purposes to fund over-commitments to private equity and specialty funds, to fund hedging contracts or to meet ongoing expenses. The Company will also be geared indirectly to the extent that underlying funds are themselves geared. The Company had no debt as at 31 March 2009 and no loan facility was in place.
Substantial interests
The Disclosure and Transparency Directive, which became effective on 20 January 2007, required shareholders to disclose their direct or indirect holdings in the Company to the UK Listing Authority on reaching or exceeding thresholds at 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75% (based on voting rights owned or controlled in the issued share capital of the Company). The Company must disseminate notifications it receives to the wider market.
The Company has been notified of the following substantial interests:
Elsina Limited 28.72%
Hampshire County Council Pension Fund 19.20%
RMF Investment Management - Nassau Branch 19.08%
Merseyside Pension Fund 15.15%
Tilney Investment Management 5.68%
Directors' holdings
The former Directors all served from 1 April 2008 to 31 March 2009. As at 31 March 2009 and 31 March 2008, the following Directors, who were in office at 31 March 2009, had a beneficial ownership of Shares representing the following percentage interest in the Company's voting rights and net assets:
B P Larcombe 50,000 Sterling Shares 0.04%
M P S Barton 10,000 Sterling Shares 0.01%
M D Buckley 100,000 U.S. Dollar Shares 0.04%
Statement of Directors' responsibilities
The Directors are responsible for preparing financial statements for each financial year which give a true and fair view in accordance with applicable Guernsey law and International Financial Reporting Standards, of the state of affairs of the Company and of the profit or loss of the Company for that year. In preparing the financial statements, the Directors are required to:
- select suitable accounting policies and apply them consistently;
- make judgements and estimates that are reasonable and prudent;
- state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors confirm to the best of their knowledge that:
- they have complied with the above requirements in preparing the financial statements;
- there is no relevant audit information of which the Company's auditor is unaware; and
- each Director has taken all steps he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the Company's auditor is aware of that information.
The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with The Companies (Guernsey) Law, 2008. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The maintenance and integrity of the Bramdean Alternatives Limited website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of the maintenance and integrity of this website and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions
Update on regulatory regime for Guernsey funds
There have recently been a number of changes to the regulatory regime for Guernsey funds. A number of provisions which were contained in The Control of Borrowing (Bailiwick of Guernsey) Ordinance, 1959 to 2003 ("COBO") (which governed closed-ended funds) have been consolidated into The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended (the "POI Law") (which governed open-ended funds and licensees) so that the POI Law now governs both open-ended and closed-ended funds (as well as licensees).
Closed-ended funds are now Category 1 controlled investments under the POI Law. The changes have also codified a number of standard conditions and ongoing notification requirements imposed on the licensees of funds which were listed on the Company's COBO consent, but were not explicitly set out in COBO. It is intended that the changes will simplify Guernsey's investment fund regime by categorising all funds (whether open-ended or closed-ended) as either registered schemes or authorised schemes. The Directors have determined that the Company will continue as an Authorised
Closed-Ended Investment Scheme.
Corporate governance
Introduction
As a closed-ended investment company registered in Guernsey, the Company is eligible for exemption from the requirements of the Combined Code (the "Code") issued by the UK Listing Authority as updated by the Financial Reporting Council in June 2006. The main requirements of the Code set out principles of good governance and a code of best practice. The Board has put in place a framework for corporate governance which it believes is suitable for an investment company and enables the Company to comply voluntarily with the main requirements of the Code.
The Board will receive full details of the Company's assets, liabilities and other relevant information in advance of Board meetings. The Board meets formally at least four times a year; however, the Investment Manager and Company Secretary will stay in more regular contact with the Directors on a less formal basis. Individual Directors have direct access to the Company Secretary and may, at the expense of the Company, seek independent professional advice on any matter that concerns them in the furtherance of their duties.
The Board
As at 31 March 2009, the Board consisted of the five non-executive Directors all of whom, with the exception of Peter Barton, were independent of the Investment Manager and RMF and free from any business or other relationship that could materially interfere with the exercise of their independent judgement. Peter Barton was appointed Chairman of the Investment Manager on 9 June 2008 and from that date ceased to be an independent Director of the Company and resigned from its Audit Committee. Peter Barton remained on the Board as a non-executive Director until his resignation on 11 May 2009. Brian Larcombe, Ceasar Anquillare, Michael Buckley and Nicholas Moss were removed as non-executive Directors of the Company pursuant to a vote of shareholders at an extraordinary general meeting of the Company on 18 June 2009 (the "EGM").
Mr Jonathan Carr was appointed as non-executive Chairman of the Company. Mr David Copperwaite and Mr Mark Tucker have been appointed as non-executive Directors of the Company. Each of these appointments was made pursuant to a vote of shareholders at the EGM and the appointments took effect immediately following completion of the EGM. Each of Mr Carr, Mr Copperwaite and Mr Tucker will be subject to re-election at intervals of no more than three years. The Board does not consider it necessary to appoint a Chief Executive or senior Independent Director. The Board has agreed to conduct annually an evaluation of the individual performance of the Directors to assess whether the performance of each Director for the year under review is, and continues to be, effective and demonstrates commitment to the role.
The attendance record of the Directors for the year ended 31 March 2009 is set out below:
| Quarterly Board Meetings | Annual General Meetings | Audit Committee Meetings | Ad Hoc Meetings | |
| B P Larcombe | 4 | 1 | 1 | 2 |
| C N Anquillare, JP | 4 | 1 | 2 | 3 |
| M D Buckley | 4 | 1 | 3 | 6 |
| M P S Barton | 4 | 1 | n/a | 2 |
| N D Moss | 4 | 1 | 3 | 6 |
The new Board has a breadth of experience relevant to the Company, and the Directors believe that any changes to the Board's composition can be managed without undue disruption. With any new Director appointment to the Board, consideration will be given as to whether an induction process is appropriate and the Board as a whole, will consider new Board appointments.
Audit Committee
The Board has established an Audit Committee. The Audit Committee meets at least twice a year and is responsible for ensuring that the financial performance of the Company is properly reported on and monitored and provides a forum through which the Company's external auditors may report to the Board. The Audit Committee reviews the annual and interim accounts, results, announcements, internal control systems and accounting policies of the Company, as well as the independence and objectivity of the external auditors.
During the year ended 31 March 2009, the Audit Committee comprised all the members of the Board with the exception of Peter Barton and was chaired by Nicholas Moss. Peter Barton resigned as a member and Chairman of the Audit Committee on 9 June 2008 and was replaced as Chairman by Nicholas Moss. Following the appointment of the new Directors, the Audit Committee now comprises all three members of the new Board and is chaired by David Copperwaite. The Company may use its external auditor to supply non-audit services with prior agreement of the Board and not before taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm
Remuneration Committee
Given the size and nature of the Company, it is not deemed necessary to form a separate Remuneration Committee.
Internal controls
The Board is ultimately responsible for the Company's system of internal control and for reviewing its effectiveness. The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. This process has been in place for the period under review and up to the date of approval of this Annual Report and Financial Statements, is reviewed by the Board and accords with The Turnball Guidance. The Code requires Directors to conduct at least annually a review of the Company's system of internal control, covering all controls, including financial, operational, compliance and risk management, and to take the necessary action to address any significant failings or weaknesses identified.
The internal control systems are designed to meet the Company's particular needs and the risks to which it is exposed. Accordingly, the internal control systems are designed to manage rather than eliminate the risk to achieve business objectives and by their nature can only provide reasonable and not absolute assurance against material misstatement and loss. On this basis the Board does not consider there to be any need for the Company to have its own internal audit function, as required by the Combined Code.
The Board has delegated the responsibility for managing the Company's investment portfolio, the provision of custody services and the administration, registrar and corporate secretarial functions including the independent calculation of the Company's NAV and the production of the Annual Report and Financial Statements, which are independently audited. Whilst the Board delegates responsibility, it retains accountability for the functions it delegates and is responsible for the systems of internal control. Formal contractual agreements have been put in place between the Company and providers of these services. Compliance reports are provided at each Quarterly Board Meeting by the Administrator.
Going concern
After making enquiries of the Investment Manager and given the nature of the Company, its investments and outstanding commitments, the Directors are satisfied that it is appropriate to adopt the going concern basis in preparing the financial statements; after due consideration, the Directors consider that the Company is able to continue as a going concern for the foreseeable future.
Financial instruments
The Company's financial risk management objectives and policies, including the policy for currency hedging to reduce the risk of currency fluctuations, and the exposure to capital risk, credit risk and liquidity risk are set out in Note 9 in the Notes to the Financial
Statements under the heading "Financial risk management".
Independent auditors
PricewaterhouseCoopers CI LLP have indicated their willingness to continue in office. A resolution to re-appoint PricewaterhouseCoopers CI LLP will be proposed at the forthcoming Annual General Meeting.
Statement under the Disclosure and Transparency Rules 4.1.12
The Directors each confirm to the best of their knowledge that:
the financial statements, prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
this Annual Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
By order of the Board
J D Carr
Director
D S Copperwaite
Director
8 JULY 2009
INVESTMENT MANAGER'S REVIEW
Synopsis
Over the past year, Bramdean Asset Management (the "Investment Manager"), was becoming increasingly nervous about the markets. As a result, the decision was taken to reduce the Company's exposure to hedge funds and to increase the percentage of its assets held in cash. At the beginning of the Company's financial year, 70.9% of its assets were invested in hedge funds and cash stood at 10.9%. By the end of the year, hedge funds represented 29.0% and cash had risen to 30.8% of the Company's total assets. Although hedge funds are meant to afford some protection when markets are weak, this was not so in 2008/09. During the year under review, the Credit Suisse Tremont Hedge Fund Index fell by 16.7% and the HFRI Fund Weighted Composite Index of hedge funds fell by 20.6%. Hence, it was the correct strategy to reduce the Company's overall exposure to hedge funds over the year. Ironically, the bearish view taken by the Investment Manager and RMF, led us to leave the Madoff investments in place, which were widely regarded by fund of fund managers as defensive strategies. An exposure held between the two managers of 9.5% of the Company's total net assets had to be written off on the advice of the Company's auditors, PricewaterhouseCoopers CI LLP, when it became apparent that fraudulent activity had taken place. This was extremely disappointing, but the overall performance of the Company's portfolio was still creditable relative to other vehicles over the year.
Performance
The Investment Manager is responsible for the performance of the Company's assets. As the Chairman has noted, the Sterling class shareholders saw a decline of 8.6% over the year ended 31 March 2009, which was a good performance relative to all market indices and hedge fund indices. A large part of this performance came from the Investment Manager's decision to remove the currency hedge, which was reduced in three stages between early October 2008 and early March 2009. The U.S. Dollar Share's NAV declined by 23.3% over the period as it did not benefit from the removal of the U.S. Dollar hedge. This compared reasonably well to indices, despite the write-down of the Madoff investments.
Investment Portfolio
As stated above, there was a major shift in asset allocation over the course of the year under review. At 31 March 2008, the Transitional portfolio represented 37.3% of the Company's assets and this had fallen to 6.1% by 31 March 2009. The Transitional portfolio seeks to provide returns higher than cash while the Company awaits drawdowns for its Private Equity and Speciality investments. The Investment Manager's view was that few asset classes were likely to provide returns in excess of cash, despite the sharp fall in cash yields as governments reduced interest rates. It was therefore felt necessary to continue redeeming hedge funds and holding the proceeds in cash. In the Company's Prospectus, it was stated that the range for the Strategic Hedge Funds portfolio would be 15-45% and an initial target of 30% was set. This part of the Company's overall portfolio represented 33.6% of the Company's assets at 31 March 2008 and a decision by the Investment Manager to reduce the target for this part of the portfolio meant that the Strategic Hedge Funds portfolio represented 23% of the Company's NAV at 31 March 2009, with further redemptions pending. The overall result was that cash increased from 10.9% to 30.8% over the year.
By the Company's year end, there were only three funds in the Transitional portfolio and a redemption notice was pending for one of these, Aarkad Plc. Since the year end, a redemption notice has been submitted for another fund, Kaiser Trading Fund SPC. There were 12 funds in the Strategic Hedge Funds portfolio at the year end, although redemption notices were submitted for two of these.
At 31 March 2009 the Company had made commitments to 18 Private Equity and Speciality funds. Of these, 11 were classified as Private Equity funds and 7 as Speciality funds. At the year end, total commitments across these 18 funds stood at US$223.0 million and the Company's net assets were valued at US$176.1 million. It should be noted that the Company had no borrowings at the year end and that this was in contrast to many similar vehicles, which had used leverage to finance over-commitment. Although the market has shown nervousness about any over-commitment in the current environment, the Investment Manger is comfortable with the Company's position. During January and February 2009, the Investment Manger undertook a detailed review of the Company's Private Equity and Speciality funds on behalf of the Board and, in particular, focused on the drawdown plans of the underlying managers. Most were very cautious about the outlook and were not looking to take advantage to any great extent of lower valuations resulting from weak equity markets. The exception was the distressed debt funds in the portfolio, which were looking to draw cash down quickly.
At the year end, the total amount that had been drawn down on Private Equity and Speciality fund commitments was US$94.6 million or 42.4%. The Company had received US$3.9 million in distributions from inception to 31 March 2009. The Company intends to reinvest the distributions.
At 31 March 2009, 6.1% of the Company's assets were invested in the Transitional portfolio, 23.0% in the Strategic Hedge Funds portfolio, 22.8% in Private Equity funds, 12.1% in Speciality funds, 30.8% in cash and 5.2% in other assets and liabilities. The significant rise in the Company's cash balances reflected the Investment Manger's negative view about the outlook for markets.
In this financial year, hedge funds performed extremely poorly. During the bear markets of 2002-2003, hedge funds proved to be defensive and some managers posted impressive positive results. However, during 2008/09, most managers struggled and the main indices showed significant negative returns, with many funds losing a fifth of their value. Part of the reason for this was the sharp rise in volatility, which saw the VIX index (the index that measures volatility) rise to over 85 when Lehman Brothers went into administration. The previous high for the index was 40 and it usually trades at between 15 and 25. Against this background hedge funds found it very difficult to deliver positive returns.
Given the high exposure to hedge funds at the beginning of the year, the performance of the Company's NAV was satisfactory, particularly for the Sterling class shareholders.
Hedging Activity
During the first part of the year, Sterling was strong against the U.S. Dollar and the Investment Manger hedged around 70% of the currency exposure on behalf of the Company. Between the end of March 2008 and mid-July 2008, the Investment Manger was responsible for implementing the currency hedging. From mid-July 2008, the Company appointed Mesirow Financial Currency Management Inc. ("Mesirow"), which is based in Chicago, to manage its currency exposure. Initially, it was agreed that the default position of a 70% hedge for the major currencies would be maintained. However, during September 2008, the Investment Manger became increasingly bearish about the prospects for Sterling and instructed Mesirow to reduce the neutral position for the Sterling class shares to 35% from 70%; this was implemented on 8 October 2008. Sterling then began to fall precipitously against both the U.S. Dollar and the Euro, it was therefore decided to reduce the hedge even further. By the beginning of March 2009, the hedge fund had been taken off completely.
The decision to reduce the U.S. Dollar and Euro hedges for the Sterling Shares had a positive effect on the Sterling Share class over the year under review. The assets of the Company are predominantly in U.S. Dollars, as are the undrawn commitments. However, having removed the hedge, the Sterling class shareholders are now exposed to a translational effect on currency.
The Investment Manger believes that, because the Company is over-committed relative to its NAV to Private Equity and Speciality funds, it cannot take the risk of large cash outflows resulting from a hedge going the wrong way and it considers that the policy of not hedging should be retained for the time being, especially given that the shareholders have the opportunity, twice yearly, to switch between the two share classes.
Private Equity Funds portfolio review
As markets declined over the financial year, the Company saw a number of markdowns in the value of its Private Equity holdings. When private equity firms are valuing their investment, one of the major components in determining the value of a particular company is comparative valuations placed by equity markets on similar businesses. During recession, company earnings broadly decline and there is generally 'multiple compression'. Thus, a company that might have been valued on 15x earnings when equity markets are strong, will find that it is now valued at 10x a lower earnings figure. The impact of this then feeds through to the private equity industry. The underlying managers of the Company's private equity funds have broadly taken a cautious view over the last few years and have held back money for investment. They have not generally used excessive levels of leverage, having shared the Investment Manager's bearish view of the outlook. The Company has limited exposure, therefore, to mega buy-outs and the highly leveraged deals that signalled the top of the equity markets in 2007.
Furthermore, because the Company's portfolio of Private Equity funds is still relatively immature, the Company is experiencing what is described in the industry as a 'J-Curve effect'. The J-Curve defines the typical investment return pattern associated with investing in private equity. It shows how in the early years private equity funds generally show low or negative returns as initial investments are made to acquire and make changes to the portfolio businesses, and as a result of management fees together with start-up costs being drawn from the committed capital. The investment gains usually come in the later years as the companies in which investments have been made mature and, with the expertise of the general partner, increase in value. In the later years, partial or complete sales of those companies are also made, resulting in cash inflows to investors. The actual amount that will be received will be dependent on where we are in the economic cycle. During poor periods for the economy or markets, prices will be lower. When markets are more optimistic, prices will be higher.
Five of the Company's private equity and speciality funds are 2006 vintage, five are 2007 vintage and one is 2008 vintage.
The purpose of the two secondaries funds in the portfolio (which are both 2006 vintages) is to provide vintage year diversification (their strategy is to acquire primarily pre-2006 funds across a range of vintages) to the Company's private equity portfolio. They are also expected to provide distributions to fund future private equity and speciality drawdowns. These two funds account for the majority of the distributions since inception.
The other 2006 vintage private equity funds, together with one of 2007 fund, Silver Lake Partners III L.P., are all large-cap funds. Each made substantial investments prior to the beginning of the credit crunch, when the lending environment was more favourable for private equity funds, However, as described above, these funds have seen heavy write-downs on some of these investments because of the decline in value of comparable quoted companies. All of these managers have found it difficult to complete deals over the last 18 months, partly because of the lack of available credit. However, the Investment Manager recently met with Thomas H lee and was told that there were signs of recovery in credit markets.
Two of the Company's private equity managers, Goldman Sachs Capital Partners VI L.P. and AIG Brazil Special Situations Fund II L.P. focus on mid-cap transactions. The mid-cap private equity market has remained more robust than the large cap sector in the wake of the credit crunch.
Thoma Bravo IX L.P. was the last investment made in the Private Equity segments of the portfolio. The firm operates in the mid-cap area and tends to focus on IT and media companies. This manager has been negative about the outlook and so has not drawn down rapidly, with only three investments having being made by the Company's year end.
The Company has an overweight position in venture to other similar vehicles. Venture is an area of private equity investing where it is essential to select top quartile managers. In addition, the better managers tend to be located in the US. The Investment Manager selected three venture managers for the Company's portfolio: Rho Ventures VI L.P., Tenaya Capital V L.P. (formerly Lehman Brothers Venture Partners V L.P.) and DFJ Athena L.P. The latter invests in companies run by Koreans either in Korea or in the US. DFJ is one of the leading venture firms in the US. Tenaya and DFJ are situated near each other in Silicon Valley, whilst Rho is based in New York. Venture firms do not generally employ leverage and an interesting feature of the credit crunch has been that they have found that the quality of the investment opportunities available to them has risen sharply as good companies have been unable to get bank finance or go for early IPOs. The Company's exposure to this area has, therefore, proved to be defensive. However, venture firms have seen the same downward pressure on valuations as private equity firms generally and so have seen write-downs on existing investments, although the flipside is that they are generally paying lower prices now to fund new investments. The fact that no leverage is generally required means that this is currently a vibrant market.
Following the collapse of Lehman Brothers, Lehman Brothers Venture Partners bought itself out and found new investors to take on the LP interests that Lehman was holding on its books. It then changed its name to Tenaya.
Speciality Funds portfolio review
Three distressed funds are held within this part of the portfolio. As the Investment Manager became more pessimistic about the outlook for economies and markets, it moved into this area in order to seek to allow the Company and its shareholders to benefit from the downturn. The first fund that was selected was MatlinPatterson Global Opportunities Partners III L.P. The Company then invested in Oaktree OCM Opportunities Fund VIIb L.P. Oaktree focuses on acquiring debt securities at discounted prices in stressed and distressed situations. Oaktree was selected to serve as a diversifier to the portfolio's private equity holdings because Oaktree benefits from distressed environments that would typically impact negatively on private equity managers. Following on from this theme, the Investment Manager invested in a third distressed fund, HIG Bayside Debt & LBO Fund II L.P. HIG is the largest middle-market firm specialising in distressed and distressed-for-control transactions in the US. The firm has an excellent track record going back to 1993.
Pine Brook Capital Partners L.P. focuses on the energy and financial services sectors. Following the sharp fall in the oil prices form its peak of US$147 per barrel in May 2008, Pine Brook has been able to close a number of deals in the oil and gas sector. However, despite the weakness in the financial sector, it has been reluctant to invest in this area, and when it has done, it has stuck to the relatively safe area of insurance. The principal, Howard Newman, is one of the most experienced private equity investors in the financial services sector.
LimeTree Emerging Beachfront Land Investment Fund II, L.P. invests in undervalued beachfront land across the Asia Pacific region. The team combines top-down analysis of a country's stability, prospects and legal practices with bottom-up analysis of individual plots of beachfront land. Given the world recession and the turmoil in markets over the last few moths, the team has been very cautious and the fund is largely undrawn. No leverage is utilised by this manager.
Resonant Music I L.P. was established by Cutting Edge Music Holdings, a leading music supervisor in the UK and US, with the help of the Investment Manager and with exclusive access for the Company and the Investment Manager's clients. The fund was set up to exploit a compelling anomaly in the music-for-film and TV industry, acquiring the copyrights to the original scores for music in film and TV productions. These copyrights provide a long-term income stream, as well as the creation of a music publishing catalogue. The economic downturn has resulted in Hollywood producers finding it difficult to fund projects and so the interest in Resonant Music has been far greater than originally anticipated, with the fund drawing down more rapidly. No leverage is used by the manager and this is an area that is largely recession proof in that the income stream is dependent on TV showings of the movies and firms in which the Company is involved.
SVG Strategic Recovery Fund II L.P takes large minority stakes in small listed companies in the UK. Listed small cap companies were badly hit as the bear market took hold and this fund performed very poorly as a result. However, as markets have bounced, the fund has seen a sharp rise in its Net Asset Value. This fund is more akin to a hedge fund in the way it performs than to a traditional private equity fund, even though the investments are contained in a limited partnership structure.
It should be noted that the remit for the Speciality part of the Company's portfolio is extremely wide. The Investment Manager can invest in commodities, timber, leveraged real estate, distressed debt, intellectual property rights and infrastructure. Given the very negative view of the economic outlook that the Investment Manager took when constructing the overall portfolio a decision was taken to avoid commodities, infrastructure and leveraged real estate and the defensive nature of this part of the portfolio can be seen with a heavy emphasis being placed on distressed debt.
Transitional portfolio review
At the end of 2007, the Investment Manager decided to sell the long-only equities that were held in the Transitional portfolio and the proceeds of these sales came through in the early part of 2008. At the same time, the Investment Manager sought to reduce exposure to equities that the Transitional portfolio had through its hedge fund holdings. The purpose of this part of the portfolio is to manage the monies that are being held pending drawdowns form Private Equity and Speciality funds. The emphasis is on capital preservation and it was the Investment Manager's view that, in a major bear market for equities, long/short managers and other managers with equity-related strategies would suffer. The conclusion was that cash would be safer, in spite of the very low level of interest rates.
The Transitional portfolio had a position in Defender, which was an unleveraged fund with exposure to the Madoff strategy. The fund offered high liquidity relative to other hedge funds which was necessary in order to ensure that drawdowns from the private equity and speciality investments could be met. Following the announcement of Bernard Madoff's arrest, the decision was taken to write the holding down to zero value on the advice of the Company's auditors.
By the end of the year under review, only three hedge funds remained in the Transitional portfolio (which includes Defender Ltd). A redemption notice was submitted for one of these, Aarkad Plc, in November 2008. The fund provides short-term bridging finance to UK domestic property developers. As a result of the credit crunch, those developers have not been able to refinance the loans with the major banks and so the loans have remained on Aarkads's books. In January 2009, the manager announced that it was suspending redemptions and looking to restructure. Since the year end, it has announced plans to give holders the choice of liquidating or staying in the fund, although these proposals are yet to be approved by investors.
The value of the holding has been written down by 34% on the advice of the fund's auditors KPMG. This was partly related to an impairment of the loan book and partly currency-related because the fund accounts in U.S. dollars and lends in Sterling.
Another holding was in Kaiser Trading Fund SPC. Kaiser is a commodity trading advisor (CTA) manager based in Melbourne. The fund performed extremely well during the darkest days of the bear market, but has done less well while equity markets have rallied. A redemption notice was submitted after the Company's year end.
Strategic Hedge Funds Portfolio review
There are 12 funds in the Strategic Hedge Funds Portfolio. The Company has agreed investment parameters with RMF to target a 12% net annual return with appropriate volatility. The portfolio has a low correlation to both global equities and global bonds and is well diversified across the five main hedge fund strategies. In the period ending 31 March 2009, the Strategic Hedge Funds portfolio delivered a negative 9.24% return gross of the Company's fees.
The prolonged credit crisis produced additional sources of uncertainty in the markets for investors to deal with. The global economic environment experienced widespread deterioration. With markets overwhelmed by massive liquidity withdrawals, the last year has also been characterised by unprecedented interventions from government and central banks. Early enthusiasm in 2009 gave way to continued weakness until March, when global markets staged a bear market rally.
The portfolio had an excellent start, generating a return of +6.16% during the period 1 April 2008 to 30 June 2008, despite negative market sentiment and shaky equity markets. For the period 1 July 2008 to 30 September 2008, the portfolio delivered
-5.17%, as severe declines in global equity markets were witnessed coupled with an increase in volatility. As hedge fund strategies were adversely impacted by these deteriorating economic conditions and abrupt changes in market dynamics, the portfolio returned -13.03% for the period 1 October 2008 to 31 December 2008. The biggest performance detractor here was the valuation write-down of Rye Select Broad Market XL Portfolio Limited to zero following the arrest of Bernard Madoff in connection with serious allegations of a massive fraud. For the period 1 January 2009 to 31 March 2009 the portfolio returned 2.68% as investor sentiment began to improve towards the end of the financial year.
There have been three stand-out performers in the Company's Strategic Hedge Funds portfolio in the reported year: Paulson Advantage Plus Ltd, Kei Ltd. And Arcas MAC79 Ltd. The biggest drag on performance came from Rye Select Broad Market XL Portfolio Limited, Atticus European and Deephaven Global Multi-Strategy Fund Ltd.
In the year ended 31 March 2009, the Company redeemed its holdings in Abchurch Europe Fund, Arcas MAC79 Ltd., Hard Assets 2X Fund and Rye Select Broad Market XL Portfolio Limited. The Company added Alydar Fund Limited, Evergreen MAC Ltd, and Roy G Niederhoffer Negative Correlation Fund Ltd in the reported period.
Portfolio Strategy and Outlook
The year under review was one of the most difficult for investors in the history of the markets. The scale of the financial crisis that confronted the US was simply unprecedented. In the UK, too, the Government was forced to take extreme action in order to avert a collapse of the financial system. Ultimately, the turmoil impacted on the underlying economy and in particular, the lack of credit available for businesses and individuals led to a deep recession globally.
It had been hoped that Asia would avoid the effects of the western malaise, but it became apparent that this was not possible. Japan suffered considerably as a result of the distressed state of the western consumer. China fought hard to avert economic decline and was successful to a certain extent, but many factories manufacturing consumer goods for western countries were mothballed and the workers sent back to rural areas. India continued to grow, but it too has suffered in certain sectors of its economy.
Although there is growing evidence that the credit markets have stabilised and equity markets have rallied, the recovery is fragile and setbacks are possible. However, investors who are prepared to take the long term view should be prepared to buy and wait with markets still far below their previous highs.
In terms of the Company's strategy, as has been described, the portfolio was constructed conservatively in anticipation of a downturn. It is hoped that the distressed managers in the Speciality portfolio will make good returns relatively quickly. The private equity funds in the portfolio, most of which shared the Investment Manager's cautious view, have been slow to draw money down and should now be able to execute deals at more advantageous prices as credit becomes more freely available. The Company is holding a very high level of cash and the Investment Manager is of the view that this should be gradually re-invested in hedge funds with an equity bias in the second half of the calendar year to take advantage of the expected recovery in equity markets.
There is one problem tat the world many have to face in the coming months and that is the re-emergence of inflationary pressure. Some commentators believe that this will be the natural consequence of the policy of 'quantitative easing' that the US and UK governments have undertaken.
It has been interesting to see since the Company's year end that the oil price has been steadily recovering. In addition, the failure of harvests in various geographic areas due to the effects of global warming over the last 12 months led to sharp spikes in the prices of soft commodities and this could happen again.
Given these risks, the Investment Manager intends to continue to hold high levels of cash in the very short term. We do not expect any acceleration in drawdowns from the Private Equity or Speciality funds in the short term, but nor do we expect many realisations. It will take some time for IPO and M&A activity to increase, allowing private equity investors to exit deals.
Nicola K C Horlick
Investment Manager
Bramdean Alternatives Limited Net Asset Value
March 2008 - March 2009
Net Asset Value Monthly Net Asset Value Monthly
per Sterling Shares performance per U.S. Dollar performance
(Sterling Equivalent) Sterling Shares Shares U.S. Dollar shares
Mar 2008 98.55p -0.62% US$0.9782 -0.65%
Apr 2008 99.95p 1.42% US$0.9883 1.03%
May 2008 101.86p 1.91% US$1.0053 1.72%
Jun 2008 101.11p -0.74% US$1.0005 -0.48%
Jul 2008 99.42p -1.67% US$0.9836 -1.69%
Aug 2008 102.22p 2.82% US$0.9742 -0.96%
Sept 2008 97.26p -4.85% US$0.9109 -6.50%
Oct 2008 101.78p 4.65% US$0.9028 -0.89%
Nov 2008 95.52p -6.15% US$0.8138 -9.86%
Dec 2008 99.81p 4.49% US$0.8188 0.61%
Jan 2009 96.14p -3.68% US$0.8033 -1.89%
Feb 2009 96.36p 0.23% US$0.7969 -0.80%
Mar 2009 90.10p -6.50% US$0.7503 -5.85%
Commitments to Private Equity and Specialty funds at 31 March 2009
| Private Equity & Specialty funds | Private Equity & Specialty funds focus | Commitment in local currency | Date of Admission | Fund Vintage |
| Terra Firma Capital Partners III L.P. | Europe - Large buy-out | €15 million | 26 Jan 07 | 2006 |
| Goldman Sachs Capital Partners VI L.P. | Global - Mega buy-out | US$15 million | 15 Mar 07 | 2006 |
| Greenpark International Investors III L.P. | Secondaries | €14.6 million | 29 Mar 07 | 2006 |
| Coller International Partners V L.P. | Secondaries | US$15 million | 13 Apr 07 | 2006 |
| Thomas H. Lee Parallel Fund VI L.P. | US - Mega buy-out | US$15 million | 27 Apr 07 | 2006 |
| Silver Lake Partners III L.P. | Global - Large buy-out | US$15 million | 18 May 07 | 2007 |
| MatlinPatterson Global Opportunities Partners III L.P. | Global - distressed | US$10 million | 28 Jun 07 | 2007 |
| SVG Strategic Recovery Fund II L.P. | Activist UK small-cap | £7.5 million | 21 May 07 | 2006 |
| AIG Brazil Special Situations Fund II L.P. | Latin America - special situations | US$10 million | 10 Aug 07 | 2007 |
| Tenaya Capital V L.P.* | US - mid stage venture capital | US$12.5 million | 16 Jul 07 | 2007 |
| Oaktree OCM Opportunities Fund VIIb L.P. | Global - distressed debt | US$15 million | 19 Sept 07 | 2008 |
| DFJ Athena L.P. | Venture capital - Korean companies | US$10 million | 20 Dec 07 | 2007 |
| Rho Ventures VI L.P. | US venture capital - life sciences and technology | US$10 million | 21 Dec 07 | 2008 |
| Pine Brook Capital Partners L.P. | Global - growth equity | US$10 million | 1 Oct 07 | 2007 |
| Thoma Bravo Fund IX L.P. | US - growth equity | US$10 million | 27 Mar 08 | 2008 |
| HIG Bayside Debt & LBO Fund II L.P. | US - distressed debt and growth equity | US$15 million | 14 May 08 | 2008 |
| LimeTree Emerging Beachfront Land Investment Fund II L.P. | Asia Pacific beachfront land with development potential | US$5 million | 13 Aug 08 | 2008 |
| Resonant Music I L.P. | US and UK music-for-film financing fund | US$5.45 million | 31 Oct 08 | 2008 |
*Formerly Lehman Brothers Venture Partners V L.P.
Top 10 holdings as at 31 March 2008
| Fund name | Strategy | Book cost US$ | Market value US$ | Weighting% |
| Platinum Grove Contingent Capital Offshore Fund Ltd | Relative Value | 16,300,000 | 15,615,889 | 6.1 |
| York European Opportunities Unit Trust | Equity Hedged | 14,741,050 | 14,795,498 | 5.8 |
| Enso Global Equities Fund Ltd | Market Neutral | 14,330,994 | 14,576,662 | 5.7 |
| Paulson Advantage Plus Ltd | Special Situations | 8,799,673 | 11,969,996 | 4.7 |
| Defender Ltd | Relative Value | 10,200,000 | 10,712,158 | 4.2 |
| D.E. Shaw Oculus International Members Interest | Global Trading | 8,500,000 | 10,713,647 | 4.2 |
| Terra Firma Capital Partners III L.P. | Europe large buy-out | 9,220,802 | 9,972,118 | 3.9 |
| Brencourt Enhanced Multi-Strategy International Ltd | Market Neutral | 11,400,001 | 9,012,538 | 3.5 |
| Greenpark International Investors III L.P. | Private Equity | 7,368,096 | 9,002,347 | 3.5 |
| Rye Select Broad Market XL Portfolio L.P. | Derivative Arbitrage | 8,500,000 | 8,936,835 | 3.5 |
| Total | 109,360,616 | 115,307,688 | 45.1 |
Top 10 holdings as at 31 March 2009
| Fund name | Strategy | Book cost US$ | Market value US$ | Weighting% |
| Greenpark International Investors III L.P. | Private Equity | 13,371,418 | 10,999,425 | 6.3 |
| D.E. Shaw Oculus International Members Interest | Strategic Hedge Funds | 7,791,667 | 9,501,738 | 5.4 |
| Oaktree OCM Opportunities Fund VIIb L.P. | Specialty | 10,500,000 | 8,925,524 | 5.1 |
| Lansdowne UK Equity Fund | Strategic Hedge Funds | 7,200,000 | 8,271,732 | 4.7 |
| Thomas H. Lee Parallel Fund VI L.P. | Private Equity | 7,310,775 | 6,666,512 | 3.8 |
| Aarkad Plc | Transitional | 7,100,000 | 5,459,644 | 3.2 |
| Kaiser Trading Fund SPC | Transitional | 4,994,098 | 5,136,787 | 2.9 |
| Deephaven Global Multi-Strategy Fund Ltd | Strategic Hedge Funds | 8,792,213 | 5,069,234 | 2.9 |
| Paulson Advantage Plus Ltd | Strategic Hedge Funds | 2,724,301 | 5,062,899 | 2.9 |
| Coller International Partners V L.P. | Private Equity | 5,137,500 | 5,058,918 | 2.9 |
| Total | 74,921,972 | 70,242,404 | 40.1 |
Balance Sheet
As at 31 March 2009
| | | 2009 | 2008 |
| | Notes | US$ | US$ |
| | | | |
| Assets | | | |
| Financial assets at fair value through profit or loss | 4 | 112,609,762 | 229,477,844 |
| Cash and cash equivalents | | 54,309,273 | 27,948,491 |
| Trade and other receivables | 6 | 9,697,124 | 1,098,405 |
| Total assets | | 176,616,159 | 258,524,740 |
| | | | |
| | | | |
| Liabilities Trade and other payables | 7 | 509,856 | 2,123,835 |
| Total liabilities | | 509,856 | 2,123,835 |
| | | | |
| Net assets | | 176,106,303 | 256,400,905 |
| | | | |
| | | | |
| Represented by | | | |
| Share capital | 10 | 4 | 4 |
| Share premium | 10 | 258,759,096 | 259,186,780 |
| Revenue reserves | 14 | (82,652,797) | (2,785,879) |
| Total shareholders’ funds | | 176,106,303 | 256,400,905 |
| | | | |
| Net asset value per share US$ Shares Sterling Shares | 12 12 | USD 0.7503 GBP 0.9010 | USD 0.9782 GBP 0.9855 |
INCOME STATEMENT
FOR THE YEAR ENDED 31 MARCH 2009
| 2009 | 2008 | ||
| Notes | US$ | US$ | |
| Income | |||
| Net income from investments in limited partnerships and directly held investments | 498,598 | 1,202,849 | |
| Net interest income from cash and cash equivalents | 48,266 | 163,995 | |
| Net changes in fair value of financial assets / liabilities at fair value through profit or loss: | |||
| Net (losses) / gains on investments | 5 | (55,613,148) | 4,099,327 |
| Net losses on foreign exchange | (20,294,296) | (1,464,760) | |
| Total (loss) / income | (75,360,580) | 4,001,411 | |
| Expenses | |||
| Investment management fees | 8 | 3,373,765 | 2,829,902 |
| Directors' fees | 8 | 327,657 | 305,571 |
| Printing and communication costs | 220,701 | 173,671 | |
| Administration fees | 8 | 112,468 | 94,559 |
| Legal and professional fees | 112,310 | 1,652,436 | |
| Custody fees | 8 | 103,852 | 90,656 |
| Audit fees - services as auditor | 70,000 | 61,500 | |
| Audit fees - services as non auditor | 30,000 | - | |
| Brokerage fees | 62,000 | 46,125 | |
| Directors' and officers' insurance | 47,879 | 41,674 | |
| Travelling expenses | 32,458 | 25,625 | |
| Bank charges | 13,248 | 23,553 | |
| Loan facility fee | - | 871,403 | |
| Interest on loan | - | 53,097 | |
| Total operating expenses | 4,506,338 | 6,269,772 | |
| Net loss from operations | (79,866,918) | (2,268,361) | |
| The Company had no other gains or losses other than the net loss from operations disclosed in this statement. All income and expenditure relates to continuing activities. |
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2009
| Share Capital and Share Premium | Revenue Reserves | Total | ||
| Notes | US$ | US$ | US$ | |
| Net assets at 1 April 2007 | 4 | (517,518) | (517,514) | |
| Issue of Shares | 10 | 265,177,652 | - | 265,177,652 |
| Costs of Share issue | 10 | (5,789,235) | - | (5,789,235) |
| Repurchase of Shares | 10 | (201,637) | - | (201,637) |
| Net loss from operations | - | (2,268,361) | (2,268,361) | |
| Net assets at 31 March 2008 | 259,186,784 | (2,785,879) | 256,400,905 |
| Net assets at 1 April 2008 | 259,186,784 | (2,785,879) | 256,400,905 | |
| Repurchase of shares | 10 | (427,684) | - | (427,684) |
| Net loss from operations | - | (79,866,918) | (79,866,918) | |
| Net assets at 31 March 2009 | 258,759,100 | (82,652,797) | 176,106,303 | |
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MARCH 2009
| 2009 | 2008 | ||
| Notes | US$ | US$ | |
| Cash flows from operating activities | |||
| Loss for the year | (79,866,918) | (2,268,361) | |
| Net interest income from cash and cash equivalents | (48,266) | (163,995) | |
| Adjustments for unrealised losses / (gains) on investments | 49,285,255 | (7,023,559) | |
| (Decrease) / increase in trade and other payables | (1,613,979) | 856,561 | |
| Increase in trade and other receivables | (8,598,719) | (128,792) | |
| Purchase of investments | (102,078,215) | (336,095,667) | |
| Proceeds from sale of investments | 1689,661,042 | 113,871,773 | |
| Net cash inflows / (outflows) from operating activities | 26,740,200 | (230,952,040) | |
| Cash flows from financing activities | |||
| Repayment of loan | - | (450,244) | |
| Issue of shares | - | 265,177,652 | |
| Costs relating to issue of shares | - | (5,789,235) | |
| Net interest income from cash and cash equivalents | 48,266 | 163,995 | |
| Repurchase of shares | (427,684) | (201,637) | |
| Net cash (outflows) / inflows from financing activities | (379,418) | 258,900,531 | |
| Net change in cash and cash equivalents for the year | 26,360,782 | 27,948,491 | |
| Cash and cash equivalents at beginning of the year | 27,948,491 | - | |
| Cash and cash equivalents at end of the year | 54,309,273 | 27,948,491 | |
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2009
1.General information
Bramdean Alternatives Limited (the "Company") was incorporated with limited liability in Guernsey on 5 January 2007. The Company's U.S. Dollar and Sterling Shares were listed on the London Stock Exchange on 9 July 2007 whereupon the Company became a closed-ended investment company, domiciled in Guernsey.
2. Significant accounting policies
The financial statements were approved by the Board of Directors on 8 July 2009. The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Company's financial statements.
a) Basis of accounting
The financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB"), and interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC").
The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that effect the application of policies and the reported amounts of assets, liabilities, income and expenditure. Actual results may differ from these estimates. The particular accounting policies adopted in the presentation of the financial statements are set out below. These policies have been consistently applied.
The following standards and amendments to existing standards, that are relevant to the Company's operations have been published and are mandatory for accounting periods beginning on 1 January 2009 or later periods and have not been early adopted:
- IAS 1 (Revised) 'Presentation of Financial Statements' (effective from 1 January 2009);
- IAS 1 (Amendment) 'Presentation of Financial Statements' (effective from 1 January 2009);
- IFRS 8, 'Operating segments' (effective from 1 January 2009);
- IAS 32 (Amendment), 'Financial Instruments: Presentation' (effective from 1 January 2009); and
- IAS 39 (Amendment), 'Financial Instruments: Recognition and Measurement' (effective from 1 January 2009).
The Company will apply the standards and amendments from 1 January 2009, however, their adoption is not expected to have a significant impact on the financial statements.
The following standards, amendments and interpretations are mandatory for accounting periods beginning on or after 1 January 2008, or later periods, but are not relevant to the Company's operations:
- IFRIC 11, IFRS 2 - 'Group and treasury share transactions';
- IFRIC 12, 'Service concession arrangements';
- IFRIC 14, IAS 19 - 'The limit on a defined benefit asset, minimum funding requirements and their interaction';
- IFRS 1 (Amendment), 'First time adoption of IFRS' and IAS 27, 'Consolidated and separate financial statements' (effective from 1 January 2009);
- IFRS 2 (Amendment), 'Share-based payment' (effective from 1 January 2009);
- IFRS 3 (Revised), 'Business combinations' (effective from 1 January 2009);
- IAS 23 (Amendment), 'Borrowing costs' (effective from 1 January 2009);
- IAS 27 (Revised), 'Consolidated and separate financial statements' (effective from 1 July 2009);
- IFRIC 13, 'Customer loyalty programmes' (effective from 1 July 2008);
- IFRIC 15, 'Agreements for construction of real estates' (effective from 1 January 2009); and
- IFRIC 16, 'Hedges of a net investment in a foreign operation' (effective from 1 October 2008).
b) Financial instruments
i) Classification
A financial asset or financial liability at fair value through profit or loss is a financial asset or liability that is classified as held-for-trading or designated at fair value through profit or loss on inception. Forward contracts in a receivable position (positive fair value) are reported as financial assets at fair value through profit or loss. Forward contracts in a payable position (negative fair value) are reported as financial liabilities at fair value through profit or loss.
Financial assets that are not at fair value through profit or loss include certain balances due from brokers and accounts receivable. Financial liabilities that are not at fair value through profit or loss include certain balances due to brokers and accounts payable.
ii) Recognition
The Company recognises financial assets and financial liabilities on the date it becomes party to the contractual provisions of the investment. Purchases and sales of financial assets and financial liabilities are recognised using trade date accounting. From trade date, any gains and losses arising from changes in fair value of the financial assets or financial liabilities are recorded in the Income Statement.
iii) Forward currency contracts
The Company enters into forward currency contracts as a way of managing foreign exchange risk for specific share classes. Gains and losses from these contracts are allocated solely to the corresponding share classes. Forward foreign currency exchange contracts are marked to market at the applicable translation rates and any resulting unrealised gains or losses are recorded in the Income Statement within net changes in fair value of financial assets at fair value through profit or loss. The Company records realised investment gains or losses upon settlement of the forward currency contracts.
Forward currency contracts are offset and the amount reported in the Balance Sheet when there is a legally enforceable right to offset the recognised amounts and there is intention to settle on a net basis, or realise the asset and sell the liability simultaneously. Forward currency contracts result in credit exposure to the counterparty. The fair value of forward currency contracts is based on the price at which a new forward currency contract of the same notional value, currency and maturity could be effected at the close of business as provided from a third party pricing source or dealer.
iv) Fair value measurement principles
Financial assets and liabilities are initially recorded at their transaction price and then measured at fair value subsequent to initial recognition. Gains and losses arising from changes in the fair value of the 'financial assets or financial liabilities at fair value through profit or loss' category are presented in the Income Statement for the period in which they arise.
Financial assets classified as receivables are carried at cost less impairment losses, if any. Financial liabilities, other than those at fair value through profit or loss, are measured at amortised cost using the effective interest rate method.
v) Investees
The Company's investments in investees are subject to the terms and conditions of the respective investee's offering documentation. The investments in the investees are valued based on the reported Net Asset Value ("NAV") of such shares as determined by the administrator or general partner of the investee and as adjusted by the Investment Manager so as to ensure that investments held at fair value through profit or loss are carried at fair value. The reported NAV is net of applicable fees and expenses of the investees and the underlying investments held by each investee are accounted for, as defined in the respective investee's offering documentation. While the underlying fund managers may utilise various model-based approaches to value their investment portfolios, on which the Company's valuations are based, no such models are used directly in the preparation of fair values of the investments. The NAV of investees reported by the administrators may subsequently be adjusted when such results are subject to audit and the audit adjustments may be material to the Company.
vi) Cash and cash equivalents
Cash and cash equivalents consist principally of cash on hand, demand deposits and short-term, highly liquid investments with maturities of three months or less. Cash and cash equivalents are valued at amortised cost, which approximates fair value.
c) Interest income dividend/distribution income
Interest income on cash and cash equivalents are accrued using the effective interest method. Dividend income and income from investees is recognised when the right to receive payment is established.
d) Realised and unrealised gains and losses
Realised gains and losses arising on the disposal of investments are calculated by reference to the proceeds received on disposal and the average cost attributable to those investments, and are recognised in the Income Statement. Unrealised gains and losses on investments held at fair value through profit or loss are also recognised in the Income Statement.
e) Foreign currency
i) Functional and presentation currency
The Company aims to make investments primarily denominated in U.S. Dollars and to make returns to investors in U.S. Dollars. The Board of Directors considers U.S. Dollars as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. The financial statements are presented in U.S. Dollars, which is the Company's functional and presentation currency.
ii) Transactions and balances
Foreign currency transactions are translated into the functional and presentation currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies other than U.S. Dollars are recognised in the Income Statement.
Translation differences on non-monetary financial assets and liabilities such as investments at fair value through profit or loss are recognised in the Income Statement within the fair value net gain or loss.
f) Expenses
All expenses are recognised in the Income Statement on an accruals basis.
g) Share issue expenses
The expenses which are directly incurred only on the issue of Shares are written off against the share premium account.
h) Cash flow statement
For the purpose of the Cash Flow Statement, the Company considers balances due to and from banks as cash and cash equivalents.
3. Taxation
The Company is domiciled in Guernsey. The Company is exempt from paying income tax in Guernsey. The Company is registered for taxation purposes in Guernsey where it pays an annual exempt status fee which is currently £600 under The Income Tax (Exempt Bodies) (Guernsey) Ordinances 1989.
4. Financial assets at fair value through profit or loss
| 2009 | 2008 | |
| US$ | US$ | |
| Designated at fair value through profit or loss at inception: | ||
| Cost at beginning of the year | 222,889,855 | 435,570 |
| Additions | 102,078,215 | 337,295,667 |
| Disposals | (165,270,808) | (111,917,150) |
| Realised losses on investments | (4,390,234) | (2,924,232) |
| Cost at end of the year | 155,307,028 | 222,889,855 |
| Unrealised (losses) / gains on investments | (42,697,266) | 6,587,989 |
| Market value at end of the year | 112,609,762 | 229,477,844 |
5. Net changes in fair value of financial assets / liabilities at fair value through profit or loss
The net realised and unrealised investment gain or loss from trading in financial assets and financial liabilities shown in the Income Statement for the year ended 31 March 2009 is analysed as follows:
| 2009 | 2008 | |
| US$ | US$ | |
| Movement in unrealised (losses) / gains on investments | (49,285,255) | 7,023,559 |
| Realised losses on investments | (6,327,893) | (2,924,232) |
| (55,613,148) | 4,099,327 |
6. Trade and other receivables
| 2009 | 2008 | |
| US$ | US$ | |
| Prepayments | 95,057 | 110,782 |
| Accrued interest | 6,654 | 18,014 |
| Due from brokers | 9,595,413 | 969,609 |
| 9,697,124 | 1,098,405 |
7. Trade and other payables
| 2009 | 2008 | |||
| US$ | US$ | |||
| Management fees | 227,354 | 320,902 | ||
| Administration fees | 7,579 | 10,698 | ||
| Custody fees | 6,447 | 10,209 | ||
| Unrealised loss on forward foreign exchange contracts | - | 68,121 | ||
| Capital calls payable | - | 1,200,000 | ||
| Sundry expenses | 268,476 | 513,905 | ||
| 509,856 | 2,123,835 | |||
| At 31 March 2009, the Company had no commitments to forward foreign exchange contracts outstanding. | ||||
| 2009 | 2008 | |||
| US$ | US$ | |||
| Sold (U.S. Dollars) | - | 150,200,000 | ||
| Bought (Sterling) | - | (150,131,879) | ||
| - | 68,121 | |||
8. Significant agreements and related parties
Investment management
The Company has appointed Bramdean Asset Management LLP as its Investment Manager. The Investment Manager is paid by the Company a monthly fee equal to one-twelfth of 1.5% of the Net Asset Value ("NAV") of the Company (before deduction of any performance fee). The fee is calculated and accrued as at the last business day of each month and is paid monthly in arrears.
Total fees payable to the Investment Manager for the year ended 31 March 2009 amounted to US$3,373,765 (year ended 31 March 2008 - US$2,829,902) of which US$227,354 was outstanding at 31 March 2009 (31 March 2008 - US$320,902).
In addition, the Investment Manager is entitled to a performance fee of 10% with respect to each class of Shares based on the total increase in the NAV of the relevant class at the end of each performance year (ending 31 March each year). For a performance fee to be paid, the Investment Manager must achieve returns in excess of 8% (subject to a high watermark). No performance fee has been earned in the year ended 31 March 2009 (31 March 2008 - nil).
Administration
The Administrator is paid by the Company a fee of not greater than 0.06% per annum of the NAV of the Company, subject to a minimum annual fee of £50,000.
Total fees payable to the Administrator for the year ended 31 March 2009 amounted to US$112,468 (31 March 2008 - US$94,559) of which US$7,579 was outstanding at 31 March 2009 (31 March 2008 - US$10,698).
Custody
The Custodian is paid by the Company a fee not greater than 0.06% per annum of the NAV of the Company, subject to a minimum annual fee of £10,000.
Total fees payable to the Custodian for the year ended 31 March 2009 amounted to US$103,852 (31 March 2008 - US$90,656) of which US$6,447 was outstanding at 31 March 2009 (31 March 2008 - US$10,209).
Transactions with Directors
The Chairman of the previous Board received an annual fee of £75,000, the remaining four Directors each received an annual fee of £27,000, with the Chairman of the Audit Committee receiving an additional £5,000 per annum. Directors' fees were paid quarterly in advance. Total fees payable for the year ended 31 March 2009 amounted to US$327,657 (31 March 2008 - US$305,571). No fees were outstanding at 31 March 2009 (31 March 2008 - nil). The Chairman of the new Board receives an annual fee of £22,000, the remaining two Directors each receive an annual fee of £20,000.
9. Financial risk management
The Company maintains positions in a variety of investees and forward currency contracts as determined by its investment management strategy.
The Investees' own investing activities expose the Company to various types of risks that are associated with the financial instruments and markets in which they invest. The significant types of financial risk, to which the Company is exposed are market price risk, credit risk and liquidity risk.
Asset allocation is determined by the Company's Investment Manager who manages the allocation of assets to achieve the investment objectives as detailed in the Directors' Report on page 26. Achievement of the investment objectives involves taking risks. The Investment Manager exercises judgement based on analysis, research and risk management techniques when making investment decisions. Divergence from target asset allocations and the composition of the Portfolio is monitored by the Board.
The significant types of risk that the Company is exposed to are detailed below:
a) Capital management policies and procedures
The Company's capital management objectives are:
- to ensure the Company's ability to continue as a going concern; and
- to provide an adequate return to shareholders.
The Company seeks to achieve these objectives by adopting the investment objectives set out in the full report.
b) Market price risk
The potential for changes in the fair value of the Company's investment portfolio is referred to as market price risk. Commonly used categories of market price risk include currency risk, interest rate risk and other price risk.
-Currency risk may result from exposure to changes in spot prices, forward prices and volatilities of currency exchange rates.
- Interest rate risk may result from exposures to changes in the level, slope and curvature of the various yield curves, the volatility of interest rates, and credit spreads.
- Other price risk is the risk that the value of an instrument will fluctuate as a result of changes in market prices other than those arising from currency risk or interest rate risk
i) Market price risk management
The Company's unlisted equity securities are susceptible to market price risk arising from uncertainties about future values of the investment securities. The Investment Manager provides the Company with investment recommendations that are consistent with the Company's objectives.
The valuation method of these investments is described within the accounting policies. The nature of some of the Company's investments, which are unquoted investments in private equity funds, means that the investments are valued by the Investment Manager on behalf of the Company after due consideration of the most recent available information from the underlying investments as adjusted where relevant by the Directors. While the underlying fund managers may utilise various model-based approaches to value their investment portfolios on which the Company's valuations are based, no such models are used directly in the preparation of fair values of the investments.
Market price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The investments of the Company are subject to normal market fluctuations and the risks inherent with investment in financial markets. The maximum risk resulting from financial instruments held by the Company is determined by the fair value of the financial instruments. The Investment Manager moderates this risk through careful selection of investees managed by experienced fund managers, which meet the investment objectives outlined in the report; the Company's market price risk is managed through diversification of the investment portfolio. Through a variety of analytical techniques, the Investment Manager monitors, on a daily basis, the Company's overall market positions, as well as its exposure to market price risk.
By back testing the investment portfolio as it was invested at 31 March 2009 over the previous 36 months and using appropriate equity market indices as proxies for the drawn down private equity commitments, the Investment Manager has estimated the volatility and sensitivity of the portfolio. Looking back over a 12 month period the portfolio would have had an annualised volatility (calculated as the standard deviation of returns) of 6.1%. The sensitivity of the portfolio to equity markets (as expressed by the portfolio's beta to the MSCI World Index) is circa 0.37. This means that with all other variables held constant, the market value of the investment portfolio would move by around 37% of any move in global equity markets. Over the three years to 31 March 2009, the MSCI World Index has moved by an average of 22.4% per annum. If this movement were repeated in the next 12 months, the risk modelling would indicate a movement of 9.20% in the market value of the investment portfolio, which would result in an increase or decrease in the NAV of the Company of approximately US$16 million (2008 - US$11 million).
ii) Currency risk
The Company has assets and liabilities denominated in currencies other than U.S. Dollars, its functional currency. The Company is therefore exposed to currency risk, as the value of the assets and liabilities denominated in other currencies fluctuates due to changes in exchange rates. The Company may from time to time engage in currency hedging in an attempt to reduce the impact on the Sterling Shares of currency fluctuations. The U.S. Dollar exposure of the Sterling Shares is managed through the use of forward foreign exchange contracts although there can be no guarantee that the management of currency risk and exposure will be successful. As a result, the Net Asset Values of the different classes of Share may differ over time as the differing gains and losses realised on the hedging contracts are applied to the relevant class of Share. During the six months up to 31 March 2009, the value of Sterling decreased by 20.33% (2008 - 2.64%) against the U.S. Dollar. At 31 March 2009, a similar movement in the value of Sterling against the U.S. Dollar would, with all other variables held constant, increase or decrease the NAV of the Company by approximately US$663,000 (2008 - US$1.7 million).
Due to the volatile movement between the U.S. Dollar, Sterling and the Euro, the Company discontinued hedging its U.S. Dollar, Sterling and Euro exposure to both Share classes to eliminate the cash flow volatility caused by hedging currencies.
During the six months up to 31 March 2009, the value of the Euro decreased by 7.60% (2008 - 9.67% increase) against the U.S. Dollar. At 31 March 2009, a similar movement in the value of the Euro against the U.S. Dollar would, with all other variables held constant, increase or decrease the NAV of the Company by approximately US$1.1 million (2008 - US$1.8 million).
The table below summarises the Company's exposure to currency risks at the year end:
| Assets | US$ | GBP | EUR | Total |
| Financial assets at fair value through profit or loss | 95,325,615 | 3,423,451 | 13,860,696 | 112,609,762 |
| Cash and fixed deposits | 54,297,797 | 11,453 | 23 | 54,309,273 |
| Other assets and liabilities | 9,360,687 | (173,419) | - | 9,187,268 |
| Total at 31 March 2009 | 158,984,099 | 3,261,485 | 13,860,719 | 176,106,303 |
| Assets | ||||
| Financial assets at fair value through profit or loss | 206,130,733 | 4,372,646 | 18,974,465 | 229,477,844 |
| Cash and fixed deposits | 15,326,335 | 12,622,554 | (398) | 27,948,491 |
| Other assets and liabilities | (963,321) | (62,109) | - | (1,025,430) |
| Total at 31 March 2008 | 220,493,747 | 16,933,091 | 18,974,067 | 256,400,905 |
iii) Interest rate risk
The Company is exposed to interest rate risk. The Company invests primarily in private equity and hedge funds that are non interest bearing investments, primarily subject to market price risk. Investees may invest in fixed income securities and interest rate swap contracts. Interest receivable on bank deposits or payable on loan positions will be affected by fluctuations in interest rates. Changes to prevailing interest rates or changes in expectations of future rates may result in an increase or decrease in the value of the securities held. In general, if interest rates rise, the value of fixed income securities will decline. A decline in interest rates will, in general, have the opposite effect.
Although the majority of the Company's financial assets and liabilities are non interest bearing, cash and cash equivalents represent 31% of the Company's NAV. As a result, the Company is subject to significant risk due to fluctuations in the prevailing levels of market interest rates. Any excess cash and cash equivalents are invested at short-term market interest rates. As at 31 March 2009, the Company's interest bearing assets and liabilities, all of which receive or pay interest at a variable rate, were as follows:
Based on the cash and cash equivalents held at 31 March 2009, a movement of 1% in market interest rates would impact the Company's annual income by approximately US$540,000 per annum (2008 - US$280,000 per annum).
iv) Other price risk
Other price risk is the risk that the value of the investees' financial investments will fluctuate as a result of changes in market prices, other than those arising from currency risk or interest rate risk whether caused by factors specific to an individual investment, its issuer or any factor affecting financial investments traded in the market.
As the Company's investments are carried at fair value with fair value changes recognised in the Income Statement, all changes in market conditions will directly affect the overall NAV.
The investments are valued based on the latest available unaudited price of such shares or interests as determined by the administrator or general partner of the investees. Furthermore, valuations received from the administrator or general partner of the investees may be estimates and such values can generally be used to calculate the NAV of the Company. Such estimates provided by the administrators or general partner of the investees may be subject to subsequent revisions which may not be restated for the purpose of the Company's final month-end NAV.
Currency, interest rate and other price risk are managed by the Company's Investment Manager as part of the integrated market price risk management processes.
c) Credit risk
The Company takes on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. The Investment Manager has adopted procedures to reduce credit risk related to the Company's dealings with counterparties. Before transacting with any counterparty, the Investment Manager or its affiliates evaluate both creditworthiness and reputation by conducting a credit analysis of the party, its business and its reputation. The credit risk of approved counterparties is then monitored on an ongoing basis, including periodic reviews of financial statements and interim financial reports as needed. Impairment provisions are provided for losses, if any, that have been incurred by the balance sheet date.
At 31 March 2009 and 2008, the following financial assets were exposed to counterparty credit risk: investments, cash and cash equivalents, due from brokers and other receivables. The carrying amounts of financial assets best represent the maximum credit risk exposure at the year end date. There were no significant concentrations of credit risk at 31 March 2009 or 31 March 2008.
The Company enters into foreign currency contracts with counterparties whose credit ratings are all investment graded. Ratings for securities, as rated primarily by Moody's, that subject the Company to credit risk at 31 March 2009 and 31 March 2009 are noted below:
| Credit ratings for short-term notes | 2009 | 2008 | ||
| Rating | % of NAV | Rating | % of NAV | |
| BNP Paribas Group | Aa1 | 10.72 | Aa1 | 5.65 |
| Deutsche Bank | Aa1 | 3.41 | - | - |
| Bank of Scotland | A1 | 2.84 | Aa3 | 4.00 |
| Royal Bank of Canada | Aaa | 3.98 | Aaa | 0.75 |
| Royal Bank of Scotland International | A1 | 9.30 | - | - |
d) Liquidity risk
The Company's financial instruments include investments in unlisted securities, which are not traded in an organised public market and may generally be illiquid. This illiquidity is considered as part of the investment valuations, however as a result, should the Company be required to dispose of such investments in a short time-frame, an action that is not consistent with the Company's investment objective, the Company may have difficulty liquidating quickly its investments in these instruments at an amount close to fair value in order to respond to its liquidity requirements or to specific events.
The Company's outstanding commitments are detailed in Note 11. When an over-commitment approach is followed, the aggregate amount of capital committed by the Company to investments at any given time may exceed the aggregate amount of cash that the Company has available for immediate investment, so there is a risk that the Company might not be able to meet capital calls when they fall due. To manage this risk, the Company holds an appropriate amount of its assets in cash and cash equivalents together with a selection of readily realisable investments.
In planning the Company's commitments, the Investment Manager takes into account expected cash flows to and from the portfolio of fund interests and, from time to time, may use borrowings to meet draw downs; these expected cash flows are monitored against actual draw downs and distributions on a monthly basis to assess the level of additional commitments that can be made and how much cash needs to be kept on hand. The Directors have resolved that the Company may borrow up to 25% of its NAV for short-term or long-term purposes. As at 31 March 2009, the Company does
not have a loan facility in place.
The table below sets forth the liquidity risk of the Company as at 31 March 2009 and 31 March 2008. All liabilities represent amounts falling due within twelve months. Amounts due within twelve months equal their carrying balances.
| Less than one year 2009 US$ | Less than one year 2008 US$ | |
| Financial Liabilities |
| |
| Trade and other payables | 509,856 | 2,123,835 |
Based on communications with General Partners and the Investment Manager's best estimates, the outstanding commitments are expected to be drawn down with the following maturity profile:
| 2009 US$ | 2008 US$ | |
| Maturity | ||
| Less than 3 months | 13 million | 10 million |
| 3 - 6 months | 13 million | 11 million |
| 6 - 12 months | 24 million | 25 million |
| 1 - 2 years | 41 million | 50 million |
| Greater than 2 years | 42 million | 64 million |
| 133 million | 160 million |
10. Share capital and share premium
| 2009 | 2008 | |
| US$ | US$ | |
| Share capital | ||
| Management shares | ||
| Authorised: 10,000 shares of £1.00 each | ||
| 2 Management Shares of £1.00 each | 4 | 4 |
| 4 | 4 | |
| Share premium issued and fully paid | ||
| 92,142,177 / 130,142,311 Sterling Shares of no par value | 184,415,481 | 257,440,749 |
| 76,116,060 / 1,785,000 U.S. Dollar Shares of no par value | 74,343,615 | 1,746,031 |
| 258,759,096 | 259,186,780 |
| Ordinary shares | ||
| Authorised: unlimited number of shares of no par value | ||
| Issued and fully paid | ||
| Balance as at 1 April 2008 | 259,186,780 | - |
| Sterling Shares of no par value | - | 263,392,652 |
| U.S. Dollar Shares of no par value | - | 1,785,000 |
| Costs of Share issue | - | (5,789,235) |
| 260,000 / 125,000 Sterling Shares repurchased | (427,684) | (201,637) |
| Balance as at 31 March 2009 | 258,759,096 | 259,186,780 |
On 28 May 2008, certain holders of Shares in the Company owning Sterling Shares elected to switch into U.S. Dollar Shares on the basis of the NAV of the Company's Shares as at 30 April 2008. As a result of the switch, 32,055,469 Sterling Shares were converted into 64,203,142 U.S. Dollar Shares.
On 25 November 2008, on the basis of the NAV of the Company's Shares as at 31 October 2008, 5,671,846 Sterling Shares were converted into 10,332,275 U.S. Dollar Shares and 204,357 U.S. Dollar Shares were converted into 112,181 Sterling Shares.
During the year, the Company repurchased 260,000 of its Sterling Shares for US$427,684.
The authorised share capital of the Company on incorporation was £10,000 divided into 10,000 shares of £1.00 each. On 31 May 2007, a special resolution was passed by the Company to increase the share capital to an unlimited number of participating shares of no par value ("Shares"), which, upon issue, the Directors were able to designate as Sterling Shares, U.S. Dollar Shares or otherwise as determined by the Directors at the time of issue, and 10,000 Management Shares of £1.00 each.
The Shares were issued on 4 July 2007 as a result of the Company announcing the placing and offer for subscription of its Shares on 6 June 2007.
The rights attaching to the Shares are as follows:
a) On 30 April and 31 October of each year a shareholder may elect to convert some or all of their Shares of one currency class into Shares of another currency class.
b) Subject to any restrictions set out in the Company's Articles of Association, each U.S. Dollar Share carries one vote per share and each Sterling Share carries 2.0194 votes per share at a general meeting.
c) The capital and assets of the Company shall on a winding-up be divided (following payment to the holders of Management Shares of sums up to the nominal value paid up thereon) amongst the holders of Shares on the basis of the capital and assets attributable to the respective classes of Shares at the date of winding-up and amongst the holders of Shares of a particular class pro rata according to their holdings of Shares in that class.
11.Commitments
The table below summarises commitments to the underlying investments of the Company.
| Total Commitments | Outstanding Commitments | |||
| Currency | US$ | Currency | US$ | |
| AIG Brazil Special Situations II L.P. | 10,000,000 | 7,854,864 | ||
| Coller International Partners V L.P. | 15,000,000 | 8,716,816 | ||
| DFJ Athena L.P. | 10,000,000 | 5,875,000 | ||
| Goldman Sachs Capital Partners VI L.P. | 15,000,000 | 8,811,694 | ||
| Greenpark International Investors III L.P. | €14,600,000 | 19,384,476 | €4,153,909 | 5,515,161 |
| HIG Bayside Debt & LBO Fund II L.P. | 15,000,000 | 12,725,000 | ||
| LimeTree Emerging Beachfront Land Investment Fund II L.P. | 5,000,000 | 4,667,811 | ||
| MatlinPatterson Global Opportunities Partners III L.P. | 10,000,000 | 4,588,946 | ||
| Oaktree OCM Opportunities Fund VIIb L.P. | 15,000,000 | 4,500,000 | ||
| Pine Brook Capital Partners L.P. | 10,000,000 | 7,719,032 | ||
| Resonant Music I L.P. | 5,453,000 | 3,592,614 | ||
| Rho Ventures VI L.P. | 10,000,000 | 8,600,000 | ||
| Silver Lake Partners II L.P. | 15,000,000 | 11,877,475 | ||
| SVG Strategic Recovery Fund II L.P. | £7,500,000 | 10,750,068 | £2,618,906 | 3,753,789 |
| Tenaya Capital V L.P.* | 12,500,000 | 9,274,956 | ||
| Terra Firma Capital Partners III L.P. | €15,000,000 | 19,915,558 | €6,860,226 | 9,108,349 |
| Thoma Bravo Fund IX L.P. | 10,000,000 | 8,450,000 | ||
| Thomas H. Lee Parallel Fund VI L.P. | 15,000,000 | 7,158,227 | ||
| At 31 March 2009 | 223,003,102 | 132,789,734 |
*Formerly Lehman Brothers Venture Partners V L.P.
12. Net Asset Value ("NAV")
The NAV of each Sterling Share is determined by dividing the net assets of the Company attributable to the Sterling Shares of £83,020,376 (US$118,993,105) by 92,142,177 (2008 - £128,126,987 (US$254,654,739) by 130,017,311), being the number of Sterling Shares in issue at the year end.
The NAV of each U.S. Dollar Share is determined by dividing the net assets of the Company attributable to the U.S. Dollar Shares of $57,113,198 by 76,116,060 (2008 - US$1,746,162 by 1,785,000), being the number of U.S. Dollar Shares in issue at the year end.
13. Controlling party
In the opinion of the Directors on the basis of shareholdings advised to them, the Company has no immediate or ultimate controlling party.
14. Revenue reserves
| 2009 US$ | 2008 US$ | |
| Opening revenue reserves | (2,785,879) | (517,518) |
| Change in net assets from operations | (79,866,918) | (2,268,361) |
| Closing revenue reserves | (82,652,797) | (2,785,879) |
| Revenue reserves attributable to Management shares | - | - |
| Revenue reserves attributable to Sterling Shares | (65,422,380) | (2,786,010) |
| Revenue reserves attributable to U.S. Dollar shares | (17,230,417) | 131 |
| (82,652,797) | (2,785,879) |
15. Business segments and geographical analysis
For management purposes the Company has one sole principal activity and that is to make investments. The investment objective of the Company is to generate long-term capital gains by investing in a diversified portfolio of private equity funds, hedge funds and other specialty funds. As this is the primary and sole business activity, the results disclosed in the Balance Sheet and Income Statement are sufficient to satisfy the primary segmental reporting requirements of IAS 14.
The geographical allocation of Investments at the year-end was as follows:
| 2009 | 2008 | |
| North America | 60% | 31% |
| Global | 22% | 26% |
| Europe | 15% | 39% |
| Asia & Other | 3% | 4% |
16. Event after reporting year - share conversion
On 22 May 2009, on the basis of the Net Asset Values of the Company's Shares at 30 April 2009, certain shareholders in the Company owning Sterling Shares elected to switch into U.S. Dollar Shares; certain shareholders owning U.S Dollar Shares elected to switch to Sterling Shares. As a result of the switch, 1,429,183 Sterling Shares were converted into 2,461,821 U.S. Dollar Shares and 4,005 U.S. Dollar Shares were converted into 2,325 Sterling Shares.
[ends]