2 Apr 2009 07:00
| To: Stock Exchange | For immediate release: |
| 2 April 2009 |
F&C Private Equity Trust plc
Final results for the year to 31 December 2008
NAV total return for the year of -4.8 per cent for the ordinary shares*, benefiting from significant currency gains;
NAV total return for the year of 14.5 per cent for the restricted voting shares;
Portfolio valued at 6.3x EV:EBITDA;
Ordinary share interim dividend of 0.5 pence paid;
Restricted voting share dividends of 2.0 pence paid and declared.
* Based on fully diluted NAV
Chairman's Statement
The last year has been tumultuous for the global economy and this strongly influenced the performance of your Company. In particular the crisis in the banking sector, which intensified in the final quarter of the year, affected the ability of private equity managers to organise debt for management buy-outs, while the consequent correction in the stock market indirectly reduced the valuation basis of many private companies. The attendant recession, which is forecast to be as severe as any in recent history, will also put pressure on company profits and further affect valuations. These factors are reflected in a sharply reduced valuation of your Company's portfolio in the final quarter of the year.
The Company had net assets at 31 December 2008 of £165.6m. The net assets of the ordinary share pool stood at £159.9m, giving a fully diluted net asset value per share of 218.74p, a decline of 5.3 per cent over the year. This decline, representing a total return of -4.8 per cent, would have been considerably greater without the benefit of currency gains which added approximately 22 per cent to the value of the Company's portfolio during the year. The net assets of the restricted voting pool stood at £5.7m, giving a net asset value per share of 8.53p, which, after adjusting for the return of capital of 36.25p on 25 January 2008, represents a total return of 14.5 per cent over the year.
There is no final dividend proposed for the ordinary shares. An interim dividend of 0.5p was paid on 22 October 2008. An interim dividend of 0.5p per restricted voting share, together with a special dividend of 0.5p per restricted voting share, have been declared and are payable on 8 May 2009 to restricted voting shareholders on the register on 17 April 2009. A special dividend of 1.0p per restricted voting share was paid on 27 June 2008.
Over the last several years your Company has broadened its portfolio of funds and co-investments. The predominant feature is that these investments are positioned in the middle and lower end of their respective private equity markets. Traditionally valuations have been lower in this tier, and the proportion of debt in the buy-out vehicles has also been lower. We have very little exposure to the 'mega' buy-out funds which are commonly perceived to be the most vulnerable to current pressures as a result of, on average, higher purchase prices and more leverage. The diversification of the Company's investment portfolio is one of its defining features, and this, together with the quality and positioning of our private equity fund managers and their funds, has mitigated the decline in net asset value and should allow us to deliver good returns for shareholders over the medium term.
The share price rating of the Company does not, in the Board's view, reflect the strengths of the portfolio. The ordinary shares stood at a 65.5 per cent discount to net asset value at 31 December 2008, and the discount has widened to 80.6 per cent as I write. Uncertainties surrounding valuations, commitment levels, financing and potential remedies have been prevalent influences on the whole private equity fund-of-funds sector. These are addressed in this report.
For several years the Company has pursued a policy of committing in advance to private equity funds in order to maintain a portfolio which is fully or substantially invested in private equity. It was, and remains, our expectation that the bulk of these commitments will be financed by realisations from the current portfolio. The Company has also funded new drawdowns with borrowing. Currently gearing stands at 14.7 per cent, and the Company has authority to gear up to 30 per cent of total assets. A commitment policy of this sort requires a detailed forecasting of inflows and outflows from the portfolio incorporating a sufficient margin to account for unexpected eventualities. The Manager maintains and constantly updates such a forecast.
The Company had outstanding undrawn commitments at 31 December 2008 of £158.4m. This figure increased over the final quarter as a result of exchange rate movements. The weighted average unexpired life of these commitments is 3 years 5 months. Given current conditions in the international private equity market we expect that the rate of drawdown will be slower than of late and that a considerable proportion of these commitments will not be drawn before the investment periods of certain funds expire.
The Company has a committed revolving credit facility of £40m, of which £33.8m was drawn at 31 December 2008 and £32.4m at the time of writing. The Company had cash balances of £4.4m as at 31 December and £2.5m at the time of writing. Whilst the Company does not expect to exceed the borrowing facility, we are exploring several options with a view to further ensuring that we can meet our commitments comfortably as they are called. These include raising additional funds, the disposal of certain non-core assets in a programme the first stage of which the Directors have already authorised, and reduction of certain commitments. This will improve the liquidity position of the Company but will also involve a moderate reduction in asset value since the secondary market tends to trade at a discount to the Board's current valuations. Any sales will represent a balance between cash raised, commitments relieved and the consequent reduction in asset value.
I welcome Mark Tennant who joined the Board on 3 February 2009. Mark is a senior adviser to JP Morgan, and his experience has already proved valuable as we look to steer a path through the current economic and market turmoil.
The issue of the recovery of VAT paid in past years on our investment management fees has been satisfactorily resolved during the year. Shareholders may recall that the European Court of Justice ruled that investment trusts were exempt from VAT on management fees, a ruling subsequently accepted by HMRC. We received £337,000 during the year in respect of VAT that we had paid on management fees invoiced by F&C Investment Business Ltd, together with interest on that amount of £27,000. We have accrued a further £456,000 at the year end due to us in respect of management fees invoiced by Martin Currie Investment Management Ltd during the period when they were the manager of the Company, and will account for the interest received on that amount in 2009.
The Manager has successfully managed the balance between the Company's resources and its commitments for many years, including through previous bear markets. The Board believes that the Company's valuations are conservative in light of currently available information, as outlined in the Manager's review, but should the prevailing economic and financial climate deteriorate, further reductions could not be ruled out. The dislocation in the banking sector has posed significant challenges for the Company, but we are confident that the portfolio strength and diversification will enable the Company to trade through the current period and put the Company in a strong position to deliver growth in net asset value as the economic climate improves.
David Simpson
Manager's Review
Investment Strategy
F&C Private Equity Trust is a private equity fund-of-funds with a significant element invested directly in private companies through co-investments. There are two principal aims of a fund-of-funds structure. First there is the objective of achieving strong returns by accessing the skills of a wide range of complementary private equity managers. The second objective is to take much lower manager and stock specific risks than would be the case with a single manager strategy.
The individual portfolios of private equity funds are relatively concentrated with perhaps 10 investments or fewer per fund. The highly focused and involved management approach of private equity demands this degree of concentration and it is the primary source of the value creation. Additionally the close alignment between the private equity managers, the investee company management and the investors in the private equity fund combine to give a good prospect of success. Expert input and high motivation are the hallmarks of private equity and we expect these attributes to become ever more relevant as the recession takes hold. At present, not surprisingly, the potential problems posed by leverage and economic contraction are receiving more attention than the proven benefits of the private equity model.
The Company has exposure to nearly 500 underlying companies through its fund positions and it also has significant holdings directly in 16 private companies. This covers a very wide range of sectors and geographies but the common factor is that the great majority of the portfolio is invested in funds and companies which would be classed as mid market. In many case these companies, which usually have an enterprise value of between £30m and £300m, have a well established niche, often in a growing market. The growth characteristics and potential of the companies and markets as well as the sustainability of cashflows are the key attractions for private equity investors. These are companies which are still small enough to grow rapidly but are large enough to support high quality management teams and to be of interest to larger acquirers, often from their own sector. The very breadth of the mid market gives rise to inefficiencies based upon imperfect dissemination of information and this is one of the main reasons why mid market company deals have been consistently cheaper than the larger higher profile and far more intermediated large company deals. Furthermore, it is generally true that the mid market company capital structures are less aggressive and leverage, although important, is not always the dominant component in the investment case.
The smaller size of mid market companies can make them vulnerable but as noted above it can also be to their advantage. In particular deal sizes are smaller and accordingly require smaller debt 'packages'. As the 'hold' level of banks has been reduced dramatically this now tends to relatively advantage smaller deals. The mid market is by no means immune to the economic recession and the travails of the banking sector and stockmarket pose direct and acute challenges but within the private equity sector the mid market is increasingly being recognised as a safer haven.
New Commitments
The economic recession will create buying opportunities for many private equity funds. In order to fully benefit from this the Company requires to be invested with active private equity funds which are building up portfolios through the trough of the current recession. Although the current rate of investment is slow and many funds will not draw all their commitments over the next few years it is still likely that they will establish significant portfolios of private companies.
During 2008 we made 9 commitments to new funds. Most of these were to European focused funds. In the Pan European sector we committed €12m to Stirling Square Capital Partners II, a group we know well from previous co-investments. €12m was committed to Candover's 2008 Fund. In the mezzanine area we made a commitment of €10m to Hutton Collins III. Extending and deepening our European regional coverage we have added a Nordic dimension to the portfolio with commitments to Sweden-based Procuritas (€7m) and Norway-based Herkules, formerly known as Ferd (60m NOK). We have committed €9m to Zurich-based fund Capvis III. This will give us useful additional exposure to German-speaking Europe. In Southern Europe we have again backed N+1 Fund II with €9m. Further afield we have continued to support Camden Partners in their Fund IV with $10m. The imperatives of climate change are increasingly affecting business activity globally. This is spawning many new industries and companies. To take advantage of these opportunities we have backed Environmental Technologies Fund with £5m.
New Investments
During 2008 the Company invested a total of £71.1m. This was evenly split between the first and second half, although there was a substantial fall-off in activity in the final quarter when only £7.3m was invested. In total investments were made by our investment partners in over 100 companies. These are spread over many sectors and countries. The investments were mainly of buy-outs in either the equity or mezzanine component but there were also some earlier stage investments by venture capital funds.
Some of the larger individual investments made by our funds illustrate the diversity of the portfolio's recent activity.
The largest investment through a fund was £1.6m into engineering conglomerate Stork NV by Candover 2005. This fund also drew £0.6m for Technogym, the leading fitness equipment manufacturer. Penta, a Glasgow-based UK buy-out group, have drawn £1.3m for investment in IDSS (CCTVs and air conditioning). RJD Partners invested a combined £1.6m in IPES, a provider of outsourced fund administration and management services for private equity funds, and in Raphael Healthcare, an independent provider of low secure hospital services to NHS patients. A number of investments have a healthcare theme. For example Argan Capital drew £0.9m for Humana, the leading provider of assistance to disabled people in Sweden, and N+1 Fund II called £0.7m for MBA group, a Spanish manufacturer of orthopaedic devices and implants. Other diverse investments building on secular trends include DBAG V's investment in ICTS, which provides aviation security systems (£0.4m), and Montagu III's take-private of Biffa plc (£0.7m), the market leader in industrial and commercial waste collection.
Four new co-investments were made bringing the co-investment portfolio to 16, accounting at current valuations for £41.3m or 21% of the portfolio. We co-invest with a small number of the investment partners where we have a close relationship based on successful previous cooperation. Two of the new investments were with Inflexion. £4m has been invested in SMD Hydrovision, the world's second largest supplier of Workclass Remotely Operated Vehicles "WROVs", electrically powered unmanned submarines that are able to work in depths and conditions that would otherwise be inaccessible for human divers. SMD Hydrovision primarily supplies the oil and gas sector as well as providing equipment for the telecoms, renewable energy, mining and defence industries. £3.3m has been invested in ICS (Independent Clinical Services), a provider of temporary nurses and doctors to hospitals, clinics and surgeries.
On the Continent we have made our first co-investments in Italy and Germany. We have invested £3.2m alongside Stirling Square Capital Partners in Sicurglobal, an Italian security company which is benefiting from deregulation in this market allowing it to grow across the regions of Italy. In Germany we have invested £1.24m alongside CapVis in Bartec, a global provider and European market leader in explosion protection and safety technology.
Realisations
Private equity realisations totalled £27.8m. These were from diverse funds. All the realisations achieved good prices and made acceptable returns for the fund investors. Private equity managers are directly incentivised to make high absolute returns and therefore tend only to sell when an acceptable target IRR or money multiple can be achieved. In 2008 certain sectors were considerably more buoyant than others in terms of M&A activity and this is reflected in the realisations in our portfolio. In particular the continuing strong demand for healthcare services and the perceived defensiveness of profits in this sector has led to considerable activity. We have already noted its prevalence in new investments for funds. Our largest individual sale proceeds amounted to £4.9m from the sale by August Equity I of Healthcare Homes, a nursing homes chain. IDH, the dental clinics company, was sold by LGV 5 yielding £1.9m and the earlier LGV4 Fund sold Classic Hospitals returning £0.9m. Further afield Accession Mezzanine Capital has sold Polish medical clinics company Euromedic returning £0.3m. In other sectors Alto Capital raised £1.8m from the sale of engineering company Metalcastello, Gilde Buy-out Fund III sold Walter Services (business outsourcing) yielding £0.8m and towards the end of the year Argan Capital realised the Italian vending machine company N&W returning £2.5m. Another major realisation was TDR Capital's sale of modular buildings company Algeco Scotsman which returned £2.3m; of this, £0.9m has been rolled over into a new co-investment vehicle.
Valuations
With a deteriorating economy and a falling stockmarket there have been numerous downward pressures on valuations. As private equity backed companies tend to have considerable levels of gearing there is an innate vulnerability to falling markets, however they also have the considerable benefit of motivated managers and owners and tend to be efficiently managed companies. These latter factors can to some extent mitigate the worst market effects.
Our portfolio is valued according to the International Private Equity and Venture Capital Valuation guidelines and there are, unsurprisingly, a large number of reduced valuations. In total the portfolio has been reduced in value by £36m. This is before taking into account the benefit of favourable currency movements which have substantially counteracted this decline.
There have been a small number of uplifts in valuation. The most notable being in our Inflexion led co-investment in oil services company Viking Moorings where the valuation was increased by £6.1m over the year. This company has traded very strongly and is in the advanced stages of a sale process. The performance of Viking and other holdings has boosted the Inflexion 2003 buy-out fund and its associated fund Hickory Fund Partnership which were uplifted by £1.7m and £1.9m respectively over the year. Other strong performing funds which bucked the downward trend included DBAG V (+£0.5m), Life Science Partners III (+£0.4m), August Equity I (+£0.3m) and Accession Mezzanine II (+£0.3m).
We have made reductions in value in the great majority of holdings. The portfolio valuation is unusually up to date with over 98% by value based on December valuations. We have adjusted certain managers' valuations downwards where we believe that current market conditions merit it. We have analysed the breadth of our portfolio, which comprises nearly 500 companies. This analysis suggests that the portfolio is conservatively valued with a weighted average enterprise value to EBITDA multiple of 6.3x and a net debt to EBITDA multiple of 2.9x. We believe that this compares well with the private equity sector in general.
Commitments and Capacity
In his statement, the Chairman has mentioned the Company's expectation that we can continue to balance drawdowns with distributions, and also that we are seeking to put in place arrangements which will allow us to fully utilise the Company's gearing authority. We have initiated a programme of selected sales of peripheral investments and we expect this to yield useful liquidity whilst not greatly impacting shareholder value in the short or longer term. Our objective is to release some cash and reduce commitments, but to as far as possible protect and, in the longer term, enhance shareholder value.
Outlook
The economic recession is creating challenges across the breadth of our portfolio. There remains a considerable degree of uncertainty over the economic outlook and this is making it difficult for company managements and their private equity partners to forecast profits. Tight cost controls and detailed attention to banking arrangements are common themes across the fund portfolios and in our co-investments. It is our objective to ensure that the Company can trade through the current financial and economic difficulties and that it is well positioned to benefit from the longer term investment opportunities.
Hamish Mair
For more information, please contact:
| Hamish Mair | 0131 718 1184 |
| Martin Cassels | 0131 718 1095 |
| hamish.mair@fandc.com / martin.cassels@fandc.com | |
F&C PRIVATE EQUITY TRUST PLC
Income Statement for the
year ended 31 December 2008
| Unaudited | ||||
| Revenue £'000 | Capital £'000 | Total £'000 | ||
| Losses on investments | - | (2,825) | (2,825) | |
| Currency losses | - | (4,903) | (4,903) | |
| Income | 2,043 | - | 2,043 | |
| Investment management fee | (202) | 216 | 14 | |
| Other expenses | (669) | - | (669) | |
| _______ | _______ | _______ | ||
| Net return before finance costs and taxation | 1,172 | (7,512) | (6,340) | |
| Interest payable and similar charges | (159) | (477) | (636) | |
| _______ | _______ | _______ | ||
| Return on ordinary activities before taxation | 1,013 | (7,989) | (6,976) | |
| Taxation on ordinary activities | (265) | 74 | (191) | |
| _______ | _______ | _______ | ||
| Return on ordinary activities after taxation | 748 | (7,915) | (7,167) | |
| _______ | _______ | _______ | ||
| Returns per ordinary share - Basic | 0.66p | (11.98)p | (11.32)p | |
| Returns per ordinary share - Fully diluted | 0.64p | (11.66)p | (11.02)p | |
| Returns per restricted voting share - Basic | 0.41p | 1.11p | 1.52p | |
F&C PRIVATE EQUITY TRUST PLC
Income Statement for the
year ended 31 December 2007
| Audited | |||||
| Revenue £'000 | Capital £'000 | Total £'000 | |||
| Gains on investments | - | 57,141 | 57,141 | ||
| Currency losses | - | (1,343) | (1,343) | (1,343) | |
| Income | 3,018 | - | 3,018 | ||
| Investment management fee | (391) | (1,994) | (2,385) | (2,385) | |
| Other expenses | (631) | - | (631) | (631) | |
| _______ | _______ | _______ | _______ | ||
| Net return before finance costs and taxation | 1,996 | 53,804 | 55,800 | 55,800 | |
| Interest payable and similar charges | (17) | (49) | (66) | (66) | |
| _______ | _______ | _______ | _______ | ||
| Return on ordinary activities before taxation | 1,979 | 53,755 | 55,734 | 55,734 | |
| Taxation on ordinary activities | (587) | 569 | (18) | (18) | |
| _______ | _______ | _______ | _______ | ||
| Return on ordinary activities after taxation | 1,392 | 54,324 | 55,716 | 55,716 | |
| _______ | _______ | _______ | _______ | ||
| Returns per ordinary share - Basic | 1.37p | 56.74p | 58.11p | 20.44p | |
| Returns per ordinary share - Fully diluted | 1.34p | 55.52p | 56.86p | 58.11p | |
| Returns per restricted Voting share - Basic | 0.60p | 19.84p | 20.44p | 56.59p | |
F&C PRIVATE EQUITY TRUST PLC
BALANCE SHEET
| As at 31 December 2008 (unaudited) | As at 31 December 2007 (audited) | |||
| £'000 | £'000 | £'000 | £'000 | |
| Investments at fair value | ||||
| Listed on recognised exchanges | 1,329 | 43,984 | ||
| Unlisted | 194,009 | 150,597 | ||
| _______ | _______ | |||
| 195,338 | 194,581 | |||
| Current assets | ||||
| Debtors | 740 | 789 | ||
| Cash at bank | 4,436 | 5,822 | ||
| _______ | _______ | |||
| 5,176 | 6,611 | |||
| Creditors | ||||
| Amounts falling due within one year | (34,943) | (1,462) | ||
| _______ | _______ | |||
| Net current (liabilities)/assets | (29,767) | 5,149 | ||
| _______ | _______ | |||
| Total assets less current liabilities | 165,571 | 199,730 | ||
| Creditors | ||||
| Amounts falling due after more than one year | - | (822) | ||
| _______ | _______ | |||
| Net assets | 165,571 | 198,908 | ||
| _______ | _______ | |||
| Capital and reserves | ||||
| Called up ordinary share capital | 1,394 | 1,394 | ||
| Special distributable capital reserve | 15,679 | 40,000 | ||
| Special distributable revenue reserve | 37,692 | 38,363 | ||
| Capital redemption reserve | 664 | 664 | ||
| Capital reserve | 109,555 | 117,470 | ||
| Revenue reserve | 587 | 1,017 | ||
| _______ | _______ | |||
| 165,571 | 198,908 | |||
| _______ | _______ | |||
| Net asset value per ordinary share - Basic | 221.15p | 233.82p | ||
| Net asset value per ordinary share - Fully diluted | 218.74p | 231.08p | ||
| Net asset value per restricted voting share - Basic | 8.53p | 44.56p | ||
F&C PRIVATE EQUITY TRUST PLC
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
| Year ended 31 December 2008 (unaudited) | Year ended 31 December 2007 (audited) | |
| £'000 | £'000 | |
| Opening shareholders' funds | 198,908 | 146,233 |
| Return on ordinary activities after taxation | (7,167) | 55,716 |
| Dividends paid | (1,178) | (3,041) |
| Return of capital paid | (24,321) | - |
| Special dividend paid | (671) | - |
| _______ | _______ | |
| Closing shareholders' funds | 165,571 | 198,908 |
| _______ | _______ | |
F&C PRIVATE EQUITY TRUST PLC
CASH FLOW STATEMENT
| Year ended 31 December 2008 (unaudited) | Year ended 31 December 2007 (audited) | |||
| £000 | £000 | £000 | £000 | |
| Operating activities | ||||
| Net dividends and interest received from investments | 2,492 | 1,949 | ||
| Interest received from deposits | 199 | 619 | ||
| Investment management fee | (1,714) | (958) | ||
| Other cash payments | (757) | (507) | ||
| _______ | _______ | |||
| Net cash inflow from operating activities | 220 | 1,103 | ||
| Servicing of finance | ||||
| Interest paid | (655) | (53) | ||
| _______ | _______ | |||
| Net cash outflow from servicing of finance | (655) | (53) | ||
| Taxation | ||||
| Corporation tax paid | (134) | (550) | ||
| _______ | _______ | |||
| Net cash outflow from taxation | (134) | (550) | ||
| Capital expenditure and financial investment | ||||
| Payments to acquire investments | (81,261) | (119,545) | ||
| Receipts from disposal of investments | 77,679 | 122,487 | ||
| _______ | _______ | |||
| Net cash (outflow)/inflow from capital expenditure and financial investment | (3,582) | 2,942 | ||
| Equity dividends paid | (26,170) | (3,041) | ||
| Financing | ||||
| Loans drawn down | 27,644 | - | ||
| _______ | _______ | - | ||
| Net cash inflow from financing | 27,644 | |||
| _______ | _______ | |||
| (Decrease)/increase in cash | (2,677) | 401 | ||
| _______ | _______ | |||
| Reconciliation of net cash flow to movement in net funds/(debt) | ||||
| (Decrease)/increase in cash in the year | (2,677) | 401 | ||
| Loans drawn down | (27,644) | - | ||
| _______ | _______ | |||
| Change in net debt resulting from cash flows | (30,321) | 401 | ||
| Currency losses | (4,903) | (1,343) | ||
| _______ | _______ | |||
| Movement in net debt | (35,224) | (942) | ||
| _______ | _______ | |||
| Opening net funds | 5,822 | 6,764 | ||
| _______ | _______ | |||
| Closing net (debt)/funds | (29,402) | 5,822 | ||
| _______ | _______ |
Principal Risks and Risk Management (unaudited)
The Board believes that the principal risks faced by the Company are:
Investment and strategic - incorrect strategy (including use of gearing), asset allocation and stock selection could all lead to poor returns for shareholders.
External - events such as terrorism, disease, protectionism, inflation or deflation, economic recessions, the availability of credit and movement in interest rates could affect share prices.
Regulatory - breach of regulatory rules could lead to suspension of the Company's Stock Exchange listing, financial penalties or a qualified audit report. Breach of Section 842 of the Income and Corporation Taxes Act 1988 could lead to the Company being subject to tax on capital gains.
Operational - failure of the Manager's accounting systems or disruption to the Manager's business, or that of third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders' confidence.
Financial - inadequate controls by the Manager or third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations.
Funding - failure by the Company to meet its outstanding undrawn commitments.
The assets of the restricted voting shares are highly concentrated. This is a consequence of the advanced stage of the realisation process.
The Company is also exposed to currency risks in respect of the overseas markets in which it invests.
More detailed explanations of these risks and the way which they are managed are contained in note 2.
The Board seeks to mitigate and manage these risks through continual review, policy setting, shareholder communication and enforcement of contractual obligations. It also regularly monitors the investment environment the management of the Company's investment portfolio, the level of undrawn commitments and the Company's gearing policy.
On behalf of the Board
David Simpson
Director
Basic net asset value per ordinary share is based on 72,282,273 shares in issue at the end of the period.