BPET.L Regulatory News (BPET)

14 Apr 2008 10:10

F&C Private Equity Trust PLC14 April 2008 To: Stock Exchange For immediate release: 14 April 2008 F&C Private Equity Trust plcPreliminary results for the year to 31 December 2007 • NAV total return for the year of 83.6 per cent for the A shares; • NAV total return for the year of 31.9 per cent for the B shares*; • A share return of capital of 36.25 pence paid; • A share revenue dividends of 0.60 pence paid and declared; • B share revenue dividends of 1.35 pence paid and declared; • Realisation of private equity investments of £90.2 million during the year; • New investment in private equity investments of £66.1 million during the year. * Based on fully diluted NAV Chairman's Statement I am delighted to report another year of excellent progress for your Company.The net asset value ("NAV") total return for the A shareholders was 83.6 percent and, for the B shareholders, 31.9 per cent. During the year the A pool hascontinued to realise its investments most successfully, while the B pool hasmade substantial gains through both realisations and valuation uplifts. At 31 December 2007 the A pool had net assets of £29.9 million, giving a NAV perA share of 44.6 pence. A return of capital of 36.25 pence per A share was madeafter the year end on 25th January 2008. This related to the sale of the Apool's major holding in the Dakota, Minnesota and Eastern Railroad ("DM&E") andreduced the A share NAV to 8.3 pence, leaving net assets of just £5.6 million. The Directors are recommending a final dividend of 0.30 pence per A share which,together with the interim dividend of 0.30 pence, gives a total dividend of 0.60pence per A share for 2007. The basic NAV per B share at 31 December 2007 was 233.8 pence. After adjustmentfor possible future dilution arising from the exercise of management warrantsthe fully diluted NAV per B share at 31 December was 231.1 pence. The B poolnow has net assets of £169.0 million. The Directors are recommending a finaldividend of 0.85 pence per B share which, together with the interim dividend of0.50 pence, makes a total dividend of 1.35 pence per B share for 2007. At 31 December 2007 the B pool had net cash or near cash equivalents of £22.4million and unutilised borrowing capacity of up to 30 per cent of its totalassets. On 30 April 2007 the Company entered into a 5 year £40 million revolvingcredit facility, meaning that its access to credit, and the margin cost of thatcredit, has been secured until 2012. The B pool has outstanding undrawncommitments of £143.7 million, the bulk of which we expect to be drawn over thenext five years. I have previously spoken of the Board's desire to merge the A and B share pools.This arose from circumstances where the great majority of the A pool's assetshad been realised and returned as cash to shareholders, allied to a wish for themarket to understand more properly the characteristics of your Company. It isessential that any merger of A and B shares is conducted on terms that are fairto both sets of shareholders. A major complicating factor has arisen from theterms of the sale of DM&E to the Canadian Pacific Railroad, in particular thepotential for the former DM&E shareholders, including A pool shareholders, toreceive payments related to the construction of the Powder River Basinextension; shareholders may remember that this was of considerable strategicvalue to DM&E. These payments, which depend on the successful construction ofthe railroad extension and its subsequent operation, are very long term innature, with the potential for payments extending out as far as 2025. The longterm and contingent nature of these payments make valuing this interest, andconsequently merging the two pools, difficult. This inherent uncertainty isincreased by current conditions in the financial markets. In line with ourvaluation methodology no value has been placed on these contingent payments ineither the A or B share NAVs. The Board is regrettably not therefore in a position to bring forward a mergerproposal which meets the fairness test and which it judges would be likely to beaccepted by both A and B shareholders. It therefore intends to recommend thatthe A share pool remains in existence until this situation changes, possibly asa consequence of greater clarity on the scale and timing of contingent paymentsfrom DM&E. In the meantime, to reflect the small size of the A pool and thefact that this pool has dropped below the level at which the Company's articlesof association specify that the voting rights of the A pool are reduced (10pence of NAV), the Board intends that these shares should be renamed as 'restricted voting shares'. The B shares will also be renamed, simply as 'ordinary shares'. While this does not entirely simplify the situation it will gosome way to distinguishing more clearly to the market the difference betweenthese share classes and their respective rights. This does not affect theeconomic interest of either class of share. Elizabeth Kennedy joined the Board on 1 July 2007. Elizabeth is a corporatefinance director with Brewin Dolphin and the Board is already benefiting fromher experience. Following the European Court of Justice's ruling that investment trusts areexempt from VAT on management fees, and HMRC's announcement that it will notappeal against the decision, the Company no longer pays VAT on its managementfees. We expect to make a recovery in respect of amounts paid in past years. The Companies Act 2006 brought about a number of changes in UK company law. Wepropose to adopt new articles of association, primarily to take account of thesechanges. The international environment for investment has changed considerably overrecent months as the fuller effects of what has now become termed the 'creditcrunch' are felt. The situation is changing constantly, but certaingeneralisations can be made. The banking sector is now much more reluctant tolend than previously and this is affecting all kinds of business and consumeractivity to differing degrees. As most of the funds in our portfolio, and all ofthe co-investments, rely on bank debt as a key component of their dealstructures, the reduced availability of bank debt has inevitable consequences.The principal ones are that the multiples at which banks are prepared to lendhave reduced and the cost of the debt has increased. Most of the funds in which we invest are operating in the mid market of privateequity in Europe or North America and we understand that these private equitymanagers are relying on their longstanding relationships and strong credithistories with the mainstream banks to secure debt for their deals. Newinvestments continue to be made on acceptable terms. Because bank debt has beena key component in pushing up prices of private equity deals, we would expectreduced availability to have the effect of reducing prices. From the point ofview of funds which are at an early stage in establishing portfolios thissituation is in many respects encouraging, and can be viewed as a buyingopportunity. From the perspective of a private equity fund looking to sellcompanies, particularly to other highly leveraged buy-out vehicles, the outlookis more challenging. It is important to note that the banks' appetite for newlending into the private equity sector varies from bank to bank and from countryto country. Our portfolio is internationally diversified and there is an equallywide spread of supporting banks. We are confident that the disciplines and processes which have formed thefoundations of the success of our investment partners during an expansionaryphase will also stand them in good stead in a more challenging economic andfinancial environment. Much will depend on how the banking problem affectsconsumer and business confidence over the coming months. The structure of theprivate equity funds in which we invest, where rewards are based on absolutereturns, not relative performance, and where the manager is not compelled toinvest if pricing is unsatisfactory provides us with some insulation. This,coupled with the wide spread of high quality investments in our portfolio,leaves F&C Private Equity Trust well placed to weather 2008 and to look to 2009and beyond. David Simpson Manager's Review Investment Strategy This review covers an exceptionally active period for the Company. 2007 islikely to have marked a high point in private equity deal activity. In thewider private equity market there was a definitely perceptible watershed ofactivity around the mid year point, when the credit crunch issues beganincreasingly to affect confidence. Despite this, underlying activity in thefunds in which we invest has been maintained at very healthy levels throughoutthe year. Our experience in private equity fund investment has taught us that wheninvestment activity slows down so also does realisation activity. This is notsurprising as market participants are naturally both buyers and sellers atslightly different size levels and both are affected by the general level ofconfidence in the economic outlook. It is also the case in private equity, as inmost asset classes, that a reduction in deal activity tends to go in tandem witha decline in price. Because of the effects of the credit crunch we would expectthere to be a reduction in the price of private equity deals over the course of2008. For many of our mid market funds this will provide a welcome buyingopportunity and they should be able to capitalise on some cyclical softnesswithin an already attractive and inefficient market. For the investments alreadyin portfolios the key factors are likely to be the extent to which morechallenging economic conditions affect their trading performance, their profitsand, consequently, the value of these businesses. Since the establishment of the B pool in 2001 we have moved our portfoliodeliberately towards a very well diversified range of funds and underlyinginvestments. This has taken several years to achieve and there are twinmotivations. The primary one is to gain opportunities for strong investmentreturns that cannot easily be achieved through investing in a narrowergeographic or sectoral focus. Secondly, we have used diversification by manager,geography, sector, age of deals, size and investment style as means of reducingthe innately high risk of private equity to acceptable levels. The portfolio nowconsists of 65 private equity funds, 12 co-investments and handful of smallremnant listed holdings. There are well chronicled issues facing the biggest buy-out funds as theavailability of very large debt packages for buy-out vehicles has almost driedup; however, it would be wrong to conclude that this method of investment isunder fundamental threat. Rather, this should be viewed as a period ofadjustment. Over time structures, terms and pricing requirements will change toaccommodate a different view of the future. In the mid market, where almost allour funds are invested, the situation is serious but less acute and thereremains a steady flow of deals being struck at good prices. There is atheoretical risk that the largest buy-out funds could move down the size scalein order to find deals, but there are some strong reasons why this would not beeasy or natural for them. First, private equity managers do not have to deal andmany of the most successful have periods in their histories when they haveabstained from deal activity whilst waiting for market conditions to adjust. Itis therefore quite likely that large buy-out funds will simply keep their powderdry and wait, potentially for years, before committing to deals. Secondly,private equity managers are only as good as the dealflow they can generate andif a firm has been absent in a particular market tier for some yearsre-establishing dealflow will prove difficult. Lack of dealflow will deterlarger funds from moving down the size scale. Thirdly, to deploy a very largemulti-billion Euro fund into the mid market will require a far broader portfolioof investments than most firms have the resources to manage. Lastly, a moveinto a different size bracket will be regarded by many fund investors as anunacceptable drift in strategy. In summary the case for mid market privateequity investment has if anything been relatively enhanced. New Investments The Company has made new investments totalling £66.1m over the course of theyear. This has been entirely for the B pool and has included 4 newco-investments totalling £7.9m. The remainder has been drawn from no fewer than52 funds. There have been over 180 drawdowns for new investments or for followon investment in existing positions. The portfolio is extremely diversecovering an exceptionally wide range of companies spanning the mid market ofEurope and further afield. Some appreciation of this spread can be gained byconsidering some of the larger individual investments during the year. In theUK we have gained exposure to, amongst many others, software company 4Projects(£1.0m, August Equity), drug dispensing and nursing company Healthcare at Home(£0.8m, Hutton Collins), elderflower cordial company Bottlegreen (£0.3m, Piper),insurance broker Ostrakan (£0.3m, Hutton Collins) and supply teacher agencyTeaching Personnel (£0.5m, RJD Partners). In France similar diversity isachieved through our new investments in travel luggage company Delsey (£0.7m,Argan), tax consultancy Alma (£0.7m, Candover), and clothes and shoes retailerVivarte (£0.6m, Chequers). In Spain we are also building a diversified portfoliowith investments in charter airline Futura (£0.7m, Hutton Collins), civilexplosives manufacturer Maxam (£0.4m, Ibersuizas) and IT consultancy Everis(£0.7m, Hutton Collins). Italy is a relatively new market for us, but theportfolio is growing with major additions including agricultural machinerycomponents manufacturer Faster (£0.7m, Argan). We continue to see a strong flow of co-investment opportunities from ourinvestment partners. During the year we invested £1.1m in Blues, a characterlicensing clothing company, to acquire 7.6% alongside Penta, £2.5m in LifewaysCommunity Care, a provider of care services primarily to disabled adults, toacquire 6.3% alongside August Equity, £1.3m in Senturion, vehicle leasing to thelocal authorities market, to acquire 6.9% alongside RJD Partners and £3.0m intelephony services provider Eurotel, to acquire 9.4% alongside Inflexion. Thesehave all been UK based companies, but we are also seeing some encouragingdealflow from Europe as well. The co-investment activity provides us with afront seat view into the activities of some of the leading mid market buy-outgroups, something that has been very helpful in assessing not just thesemanagers but also others. It provides us with a first hand demonstration of theadded value in private equity investment. Realisations Realisations over the year have totalled £90.2m. There have been 130 separatedistributions during the year from 37 funds. The largest individual inflow wasfrom our very longstanding holding in the Dakota, Minnesota and Eastern Railroad("DM&E"). Our 21 year hold in this mid western railroad operator with ambitiousexpansion plans was entirely vindicated by the return of £33.0m in October whenthe company was sold to Canadian Pacific. This represented an investmentmultiple in dollar terms of 35x and an IRR of 28%. Other excellent returns fromco-investments included £10.6m from the sale of the Stirling Square ledinvestment in Global Design Technologies. This aerospace components businessachieved an investment multiple of 3.8x and an IRR of 86%. We also sold ourholding in the RJD led investment Academy Music Group yielding £2.5m during theyear to give an investment multiple of 2.5x and IRR of 53%. The final proceedsof the sale of Pizza Express holding company Gondola were also received, with£6.8m coming in at the start of 2007 to complete this TDR led investment at aninvestment multiple of 4.0x and an IRR of 65%. From our wide range of funds we have also received very substantial inflowsreflecting successful exit activity. The larger notable ones include Tragus(£1.2m restaurants, LGV 4), Intermed (£0.9m medical devices, August), MTEM(£1.3m hydrocarbon detection, SEP II), Viking Moorings loanstock redemption(£1.2m oil services, Inflexion), South Lakeland Parks (£1.2m caravan parks,LGV5) and GAM (£0.7m machinery, Nmas1). Again, these exits attest to thediversity and strength of the underlying portfolio. New Commitments In order to establish a basis for future returns we continue to make freshcommitments to private equity funds. Several of these are to funds where we havewell established links, for example our commitments to Accession Mezzanine II(€7m Eastern Europe), Mezzanine Management IV (€7m European Mezzanine) andAugust Equity II (£10m UK mid market buy-outs). Other commitments to groupsknown to us include those to AIG New Europe Fund II (€7m Eastern Europe), AIGBrazil Special Situations Fund II ($5m Brazil) and Warburg Pincus IX ($15mGlobal generalist).We have established new links with UK mid market firm PentaCapital through an £8m commitment to their co-investment fund. We are aselective participant in the secondary market and during 2007 we acquired twosuch positions; £4m in Close Brothers Growth Capital II B and £1.6m in Scotlandbased venture capital fund Pentech. These investments, where they arecomplementary to our portfolio, have the potential to contribute to performancemore quickly as their holdings can already be fairly mature. Valuation Changes Total uplifts in value over the year were £54m. Of this approximately £40m wasattributable to the B pool and £14m to the A pool. These uplifts reflect boththe successful realisations noted above, which are usually at considerablepremia to the latest carrying value, and also the ongoing fundamental progressof underlying companies which allows revaluation. The most significantindividual contributors have been the co-investments which have been sold orwhere there has been a partial redemption. For example DM&E contributed £22m,Global Design Technologies £5.7m and Viking Moorings £3.5m. Many of our fundholdings have shown uplifts including LGV (£2.0m), Candover 2001 (£2.0m), TDRCapital (£2.0m), Argan Capital (£1.8m) and Camden Strategic III (£1.5m).Foreign exchange movements have added £4 million to the portfolio valuation overthe year. Outlook 2007 was an exceptional year for international private equity both in terms ofactivity and in the returns achieved. The background environment is likely to betougher in 2008; but, how this will affect our portfolio and its returns dependson how the managers of the funds and the individual business management teamscope with these new challenges. The most successful private equity managers andcompanies have strong disciplines and processes. Our portfolio has benefitedfrom partnership with these skilled managers in recent years and we aim toallocate capital to these successful partners so that we can maintain excellentreturns for our shareholders. Hamish Mair For more information, please contact: Hamish Mair 0131 718 1184Martin Cassels 0131 718 1095hamish.mair@fandc.com / martin.cassels@fandc.com F&C PRIVATE EQUITY TRUST PLC Income Statement for theyear ended 31 December 2007 Unaudited Revenue Capital Total £'000 £'000 £'000 Gains on investments - 57,141 57,141Currency losses - (1,343) (1,343)Income - franked 103 - 103 - unfranked 2,915 - 2,915Investment management fee (391) (1,994) (2,385)Other expenses (631) - (631) _______ _______ _______Net return before finance costs and taxation 1,996 53,804 55,800 Interest payable and similar charges (17) (49) (66) _______ _______ _______Return on ordinary activities before taxation 1,979 53,755 55,734 Taxation on ordinary activities (587) 569 (18) _______ _______ _______Return on ordinary activities after taxation 1,392 54,324 55,716 _______ _______ _______Returns per A share - Basic 0.60p 19.84p 20.44p Returns per B share - Basic 1.37p 56.74p 58.11p Returns per B share - Fully diluted 1.34p 55.52p 56.86p F&C PRIVATE EQUITY TRUST PLC Income Statement for theseventeen months ended 31 December 2006 Audited Revenue Capital Total £'000 £'000 £'000 Gains on investments - 34,622 34,622Currency gains - (58) (58)Income - franked 527 - 527 - unfranked 4,344 - 4,344Investment management fee (509) (1,532) (2,041)Other expenses (857) (505) (1,362) _______ _______ _______Net return before finance costs and taxation 3,505 32,527 36,032 Interest payable and similar charges (31) (93) (124) _______ _______ _______Return on ordinary activities before taxation 3,474 32,434 35,908 Taxation on ordinary activities (941) 483 (458) _______ _______ _______Return on ordinary activities after taxation 2,533 32,917 35,450 _______ _______ _______Returns per A share - Basic 1.05p 9.31p 10.36p Returns per B share - Basic 3.21p 46.85p 50.06p Returns per B share - Fully diluted 3.20p 46.70p 49.90p F&C PRIVATE EQUITY TRUST PLC BALANCE SHEET As at 31 December 2007 As at 31 December 2006 (unaudited) (audited) £'000 £'000 £'000 £'000Investments at fair valueListed on recognised exchanges 43,984 23,922Unlisted 150,597 116,354 _______ _______ 194,581 140,276Current assetsDebtors 789 416Cash at bank 5,822 6,764 _______ _______ 6,611 7,180CreditorsAmounts falling due within one year (1,462) (1,223) _______ _______Net current assets 5,149 5,957 _______ _______Total assets less current liabilities 199,730 146,233 CreditorsAmounts falling due after more than one (822) -year _______ _______Net assets 198,908 146,233 _______ _______ Capital and reservesCalled up ordinary share capital 1,394 1,394Special distributable capital reserve 40,000 40,000Special distributable revenue reserve 38,363 38,363Capital redemption reserve 664 664Capital reserve 117,470 63,146Revenue reserve 1,017 2,666 _______ _______ 198,908 146,233 _______ _______ Net asset value per A share - Basic 44.56p 25.43pNet asset value per B share - Basic 233.82p 178.71pNet asset value per B share - Fullydiluted 231.08p 178.06p F&C PRIVATE EQUITY TRUST PLC RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS Year ended Seventeen months ended 31 December 2007 31 December 2006 (unaudited) (audited) £'000 £'000Opening shareholders' funds 146,233 82,839 Return on ordinary activities after taxation 55,716 35,450Dividends paid (3,041) (21,813)Issue of C shares - 49,757 _______ _______Closing shareholders' funds 198,908 146,233 _______ _______ F&C PRIVATE EQUITY TRUST PLC CASH FLOW STATEMENT Year ended Seventeen months ended 31 December 2007 31 December 2006 (unaudited) (audited) £000 £000 £000 £000 Operating activitiesNet dividends and interest received from 1,949 3,919investmentsInterest received from deposits 619 819Investment management fee (958) (1,507)Other cash payments (507) (1,402) _______ _______Net cash inflow from operating activities 1,103 1,829 Servicing of finance Interest paid (53) (124) _______ _______Net cash outflow from servicing of finance (53) (124) TaxationCorporation tax paid (550) (312) _______ _______Net cash outflow from taxation (550) (312) Capital expenditure and financialinvestmentPayments to acquire investments (119,545) (135,780) Receipts from disposal of investments 122,487 150,304Cash transferred from acquisition of - 3,558Discovery Trust _______ _______Net cash inflow from capital expenditure 2,942 18,082and financial investment Equity dividends paid (3,041) (21,813) _______ _______ Increase/(decrease) in cash 401 (2,338) _______ _______ Reconciliation of net cash flow tomovement in net funds Increase/(decrease) in cash in the year 401 (2,388) Currency losses (1,343) (58) _______ _______ Movement in net funds in the year (942) (2,446) _______ _______ Opening net funds 6,764 9,210 _______ _______ Closing net funds 5,822 6,764 _______ _______ Notes 1. The results, which were approved by the Board on 11 April2008, have been prepared in accordance with applicable accounting standards andthe AIC's Statement of Recommended Practice "Financial Statements of InvestmentTrust Companies" issued in December 2005. The accounting policies adopted in the preparation of the annual report andfinancial statements are consistent with those followed in the previous year. 2. The Board has proposed a final A dividend of 0.3p (2006 -nil) and a final B dividend of 0.85p (2006 - 0.4p) payable on 23 June 2008 toshareholders on the Register on 6 June 2008. 3. Returns per A share are based on the average number ofshares in issue during the period of 67,084,807. Returns per B share are based on the following number of shares in issue duringthe period:- Basic 72,282,273 Fully diluted 73,874,739 Basic net asset value per A share is based on 67,084,807 shares in issue at theend of the period. Basic net asset value per B share is based on 72,282,273 shares in issue at theend of the period. Fully diluted net asset value per B share is based on 74,241,429 shares in issueat the end of the period. 4. These are not full statutory accounts in terms of Section 240 of theCompanies Act 1985. The full audited accounts for the seventeen months to 31December 2006, which were unqualified, have been lodged with the Registrar ofCompanies. The statutory accounts for the year to 31 December 2007 will bedelivered to the Registrar of Companies following the Company's Annual GeneralMeeting which will be held at the offices of F&C Asset Management plc, 80 GeorgeStreet, Edinburgh, EH2 3BU on 23 May 2008 at 12 noon. 5. The report and accounts for the year will be sent to shareholders andwill be available for inspection at the Company's registered office, 80 GeorgeStreet, Edinburgh EH2 3BU. This information is provided by RNS The company news service from the London Stock Exchange