24 Apr 2012 16:09
24 April 2012
F&C PRIVATE EQUITY TRUST PLC
new dividend policy,new inVESTMENT management incentive arrangements
AND
NOTICEs OF annual GENERAL MEETING andseparate general meeting of ordinary shareholders
F&C PRIVATE EQUITY ZEROS PLC
CANCELLATION OF SHARE PREMIUM ACCOUNTand authority to purchase ZDP shares
AND
NOTICEs OF GENERAL MEETING of F&c PRIVATE EQUITY ZEROS andseparate general meeting of zdp shareholders
Introduction
In conjunction with the announcement of F&C Private Equity Trust's annual results for the year ended 31 December 2011, which was released on 3 April 2012, the Board announced that it was proposing that F&C Private Equity Trust :
·; adopts a new dividend policy that should provide Ordinary Shareholders with a regular and relatively predictable source of income and the prospect of income growth over time - the Company will aim to pay semi-annual dividends with an annual yield equivalent to not less than 4 per cent. of the average of the published net asset values per Ordinary Share as at the end of each of its last four financial quarters prior to the announcement of the relevant dividend or, if higher, equal (in terms of pence per share) to the highest semi-annual dividend previously paid; and
·; enters into new incentive arrangements with its Investment Manager - broadly, the Investment Manager will be entitled to an annual performance fee of 7.5 per cent. of the annualised aggregate of the increase in the NAV (and taking into account the dividends paid) of the Ordinary Shares over the performance period (being rolling three year periods after an initial transitional period), provided that the IRR per Ordinary Share over that period (after accounting for the performance fee) is at least 8 per cent. per annum and the aggregate basic management and performance fees in relation to the Ordinary Pool do not exceed 2 per cent. per annum of the Ordinary Pool's NAV. The performance fee will also be subject to a "high water mark".
In addition, the Board is proposing that F&C Private Equity Zeros cancels its share premium account and obtains authority from ZDP Shareholders to buy-back ZDP Shares through the market, which will provide it with the flexibility to buy-back ZDP Shares if the Board considers such buy-backs to be in the best interests of Shareholders as a whole.
Each of the Proposals is conditional on Shareholders passing the resolutions that are required to enable them to be implemented. Accordingly, a circular to Shareholders, which explains the background to, reasons for and details of each of the Proposals and includes the notices convening the Shareholder meetings for Wednesday, 23 May 2012 to consider the requisite resolutions, will be despatched to Shareholders later today. That circular also includes the notice convening the annual general meeting of F&C Private Equity Trust for Wednesday, 23 May 2012.
The Board is recommending Ordinary Shareholders to vote in favour of the resolutions to be proposed at the Company's AGM and Ordinary Shareholders' Meeting and ZDP Shareholders to vote in favour of the resolutions to be proposed at the Subsidiary's General Meeting and the ZDP Shareholders' Meeting.
Enquiries
Hamish Mair | F&C Investment Business Limited | T: 0131 718 1184 |
Sue Inglis/Gordon Neilly | Canaccord Genuity Limited | T: 020 7050 6779T: 020 7050 6778 |
F&C Private Equity Trust's Proposed New Dividend Policy
Background to, and Reasons for, the Proposed New Dividend Policy
In the current low interest rate environment, and with the prospect that interest rates will remain low for some time, many investors are seeking a higher cash yield from their investments. As a result, higher yielding investment trusts tend to trade on narrower discounts than their lower yielding counterparts.
Within the private equity sub-sector (including both investment companies that invest directly and those that invest indirectly through other private equity funds), typically, the yield on their shares has been relatively low because of the nature of their investments. In addition, the tax rules for investment trusts prohibited investment trusts from distributing realised capital profits as dividends. Following the recent modernisation of those rules, that prohibition has been removed for all accounting periods commencing on or after 1 January 2012. In order to align company law with the new investment trust tax rules, the prohibition on Companies Act investment companies distributing realised capital profits was removed with effect from 6 April 2012.
Accordingly, subject to amending their articles of association to remove the prohibition on distributing realised capital profits, investment trusts will be permitted to pay out accumulated realised capital profits in the form of dividends. This should enable investment trust boards to manage dividends with greater flexibility, including setting a dividend yield target that is independent of the underlying portfolio revenue yield.
The Directors believe that the ability to pay dividends out of realised capital profits is particularly helpful for the private equity sub-sector, where, currently, dividend yields are relatively low and discounts are relatively wide. As at 31 December 2011, the Company had accumulated realised capital profits in excess of £120 million. The Directors are proposing, therefore, to take advantage of the new regime by adopting a new dividend policy that is designed to provide Ordinary Shareholders with a regular and relatively predictable source of income and the prospect of income growth over time.
Proposed New Dividend Policy
The Company intends to make regular cash distributions to Ordinary Shareholders in the form of semi-annual dividend payments, which will be funded out of the income and realised capital profits attributable to the Ordinary Pool. Accordingly, the Company expects to pay, in respect of each financial year, semi-annual dividends on the Ordinary Shares in November and May in respect of the six months ending on the preceding 30 June and 31 December, respectively. The first dividend under the new distribution policy is expected to be declared in August 2012 and paid in November 2012 in respect of the six months ending 30 June 2012.
The Company's objective will be to pay semi-annual dividends with an annual yield equivalent to not less than 4 per cent. of the average of the published NAVs per Ordinary Share as at the end of each of its last four financial quarters prior to the announcement of the relevant semi-annual dividend or, if higher, equal (in terms of pence per share) to the highest semi-annual dividend previously paid. For illustrative purposes only, had the new dividend policy been implemented in respect of the year ended 31 December 2011, aggregate dividends of 9.36p per Ordinary Share would have been paid, representing a yield of 5.7 per cent. based on the closing mid-market price of an Ordinary Share as at 20 April 2012.
Notwithstanding the partial funding of dividends out of capital profits, all dividends will be taxed as income in Ordinary Shareholders' hands.
Benefits of the Proposed New Dividend Policy
The Directors believe that the new dividend policy, which is designed to provide Ordinary Shareholders with a regular and relatively predictable source of income and the prospect of income growth over time, should appeal to a broader investor audience that is seeking income. Accordingly, the Directors believe that, over time, the new dividend policy should lead to a higher rating for the Ordinary Shares (that is, a narrower discount at which the Ordinary Shares trade in the market relative to their underlying NAV).
The Directors believe that the new dividend policy will be of particular interest to companies, funds that do not pay tax on UK-sourced income and investors through ISAs and SIPPs, none of which generally incur any additional tax on dividends in the UK.
Shareholder Approval
Before the proposed new dividend policy can be implemented by the Company, it is necessary to amend the Company's Articles by removing the current prohibition on paying dividends out of realised capital profits. That amendment requires to be approved, under the Companies Act, by a resolution passed at a general meeting of the Company (which will be proposed at this year's AGM) and, under the Company's Articles, by a resolution passed at a separate general meeting of Ordinary Shareholders (which has been convened for the same place and date as this year's AGM).
General
The proposed yield under the new dividend policy is a target only, does not represent a forecast and is not guaranteed. In particular, the payment of semi-annual dividends will be made only in accordance with the Company's Articles and applicable law and will be subject to compliance with the financial covenants under the Company's loan facility and the intra-Group arrangements between the Company and the Subsidiary and the Board being satisfied that the Group has sufficient cash, liquid investments and undrawn amounts under its loan facility to meet future calls on its cash resources (including repayment of the ZDP Shares).
Proposed New Investment Management Incentive Arrangements
Background to, and Reasons for, the Proposed New Performance Fee
At present, the Investment Manager is entitled to the following fees in relation to the Ordinary Pool:
·; a basic management fee, payable quarterly in arrears, of 0.9 per cent. per annum of, broadly, the aggregate of the NAV and long-term borrowings of the Ordinary Pool; and
·; an incentive fee if the IRR per Ordinary Share over the period commencing on 1 August 2006 and ending on 30 June in either 2012 or 2013 (the year to be determined by the Investment Manager) exceeds 8 per cent. per annum, in which case the performance fee will be 10 per cent. of the gains per Ordinary Share over the period in excess of that IRR multiplied by the weighted average number of Ordinary Shares in issue during that period (the incentive fee is uncapped).
The Basic Management Fee is relatively low when compared with the corresponding fees charged by other investment companies in the private equity sub-sector and the Board considers that the Basic Management Fee, without an incentive arrangement, is below the market rate for the private equity sub-sector. Accordingly, the Board believes that, following the expiry of the Existing Incentive Fee, there should be a continuing incentive arrangement for the Investment Manager for so long as it serves as the Company's investment manager.
As the Existing Incentive Fee may expire in the near future and the performance of the Ordinary Shares is broadly in line with the target IRR of 8 per cent. per annum (an IRR of 7.9 per cent. per annum per Ordinary Share over the period commencing on 1 August 2006 and ending on 31 December 2011), the Board is taking the opportunity of the circular to Shareholders required in connection with the other Proposals to propose that a new performance fee replace the Existing Incentive Fee with retrospective effect from 1 January 2012.
Proposed New Performance Fee
Subject to Shareholders approving the New Performance Fee, the Investment Manager will be entitled to a performance fee in respect of a Performance Period if:
·; the IRR per Ordinary Share over that Performance Period, based on the Opening NAV per Ordinary Share, the dividends paid and other distributions made per Ordinary Share during that Performance Period and the Closing NAV per Ordinary Share (before any accrual for the performance fee), exceeds 8 per cent. per annum; and
·; the aggregate of the Closing NAV per Ordinary Share (before any accrual for the performance fee) and the dividends paid and other distributions made per Ordinary Share since the date of the High Water Mark NAV per Ordinary Share exceeds the High Water Mark NAV per Ordinary Share.
The performance fee will be 7.5 per cent. of the annualised increase in the Opening NAV per Ordinary Share (calculated using the IRR per Ordinary Share) over the relevant Performance Period multiplied by the time-weighted average number of Ordinary Shares in issue (but excluding, for this purpose, any Ordinary Shares held in treasury) during the relevant Performance Period, provided that such fee will be reduced to such amount as may be necessary to ensure that:
·; the IRR per Ordinary Share over the relevant Performance Period, based on the Opening NAV per Ordinary Share, dividends paid and other distributions made per Ordinary Share during that Performance Period and the Closing NAV per Ordinary Share (after accruing for the performance fee), is not less than 8 per cent. per annum; and
·; the aggregate of the Closing NAV per Ordinary Share (after accruing for the performance fee) and the dividends paid and other distributions made per Ordinary Share since the date of the High Water Mark NAV per Ordinary Share is not less than the High Water Mark NAV per Ordinary Share.
Furthermore, the aggregate basic management and performance fees payable in respect of any financial year of the Company in relation to the Ordinary Pool shall be capped at 2 per cent. per annum of the average of the Ordinary Pool's NAV (before any accrual for the performance fee) as at 31 March, 30 June, 30 September and 31 December in that financial year. A performance fee, if payable in respect of any Performance Period, shall accrue quarterly and be paid annually.
For the purpose of the performance fee:
·; the "Closing NAV per Ordinary Share" is the NAV per Ordinary Share (either before any accrual for the performance fee or after accruing for the performance fee, as the context may require) at the end of the relevant Performance Period;
·; the "High Water Mark NAV per Ordinary Share" is the Closing NAV per Ordinary Share (after accruing for the performance fee) at the end of a Performance Period in respect of which a performance fee was last paid (or, until a performance fee has been paid, 243.54p per Ordinary Share, being the audited NAV per Ordinary Share as at 31 December 2011, the last date before the commencement of the first Performance Period);
·; the "Opening NAV per Ordinary Share" is the NAV per Ordinary Share immediately prior to the commencement of the relevant Performance Period (after accruing for any performance fee payable in respect of any Performance Period then ended); and
·; the "Performance Period" shall be the 36 month period ending on 31 December in each year, save that the first Performance Period shall be the 12 month period ending on 31 December 2012 and the second Performance Period shall be the 24 month period ending on 31 December 2013.
The Directors believe that the New Performance Fee will provide an adequate incentive for the Investment Manager, without resulting in undue dilution of value for Ordinary Shareholders. Furthermore, the Directors consider the maximum aggregate of the Basic Management Fee and the New Performance Fee, being 2 per cent. per annum of the Ordinary Pool's NAV, is well within the market norms of the private equity sub-sector.
Shareholder Approval
The proposed New Performance Fee constitutes a related party transaction between the Company and its Investment Manager for the purpose of the Listing Rules. As the proposed New Performance Fee payable to the Investment Manager in respect of any 12-month period will be less than 5 per cent. of the Company's NAV and no other changes are being made to the fees payable by the Group to the Investment Manager, the Listing Rules do not require the New Performance Fee to be approved by Ordinary Shareholders. Nevertheless, the Directors believe that it is good corporate governance for any new incentive fee arrangement, replacing the Existing Incentive Fee, to be so approved. Accordingly, the Directors have elected to comply with the Listing Rules' requirement that certain alterations to investment management fee arrangements be approved by an ordinary resolution passed at a general meeting of the Company (that resolution will be proposed at this year's AGM and only independent Ordinary Shareholders, being Ordinary Shareholders who are neither the Investment Manager or any other members of the F&C Group, may vote on the relevant resolution). If the relevant resolution is passed at the AGM, the Investment Manager will not be entitled to any payment in respect of the Existing Incentive Fee.
General
In the event that the resolution approving the New Performance Fee is not passed at the Company's AGM, then the Existing Incentive Fee will remain in place until its expiry later this year or in 2013.
Cancellation of F&C Private Equity Zeros' Share Premium Account
The Subsidiary does not currently have profits or reserves out of which buy-backs of ZDP Shares can be funded. Accordingly, to provide the Subsidiary with the flexibility to buy-back ZDP Shares through the market if the Board considers such buy-backs to be in the best interests of Shareholders as a whole, the Board is proposing, subject to the approval of the Subsidiary's shareholders and confirmation by the Court, that the amount standing to the credit of the Subsidiary's share premium account (being approximately £28.9 million at the date of this announcement) be cancelled and that that amount be transferred to a newly created special reserve which, following compliance with any Court undertaking (or other form of creditor protection), may be treated as a distributable reserve for all purposes. The cancellation will take effect upon the registration with the Registrar of Companies of the order of the Court confirming the cancellation, which is expected to occur in September 2012.
The proposed cancellation of F&C Private Equity Zero's share premium account requires to be approved, under the Companies Act, by a special resolution passed at a general meeting of that company. In addition, under the Subsidiary's Articles, the cancellation of its share premium account and authority to make market purchases of ZDP Shares each require to be approved by special resolutions passed at a separate general meeting of ZDP Shareholders. Both of these meetings have been convened for the same date and place as the Company's AGM.
Expected Timetable
2012
Company's AGM 12 noon on Wednesday, 23 May
Ordinary Shareholders' Meeting 12.05 p.m.1 on Wednesday, 23 May
Subsidiary's General Meeting 12.10 p.m.2 on Wednesday, 23 May
ZDP Shareholders' Meeting 12.15 p.m.3 on Wednesday, 23 May
Payment of final dividend of 0.8p per Ordinary Share inrespect of year ended 31 December 2011 Friday, 8 June
F&C Private Equity Zeros' share premium account cancelled in September
Record date for first semi-annual dividend per Ordinary Share inrespect of six months ending 30 June 2012 payable in accordancewith new dividend policy4 in October
Payment of first semi-annual dividend per Ordinary Share in respectof six months ending 30 June 2012 in accordance with newdividend policy4 in November
Notes:
1 Or, if later, such time as the Company's AGM shall have concluded or been adjourned.
2 Or, if later, such time as the Ordinary Shareholders' Meeting shall have concluded or been adjourned.
3 Or, if later, such time as the Subsidiary's General Meeting shall have concluded or been adjourned.
4 Conditional on the resolutions to be proposed at the Company's AGM and the Ordinary Shareholders' Meeting regarding the amendment to the Company's Articles so as to remove the current prohibition on paying dividends out of capital being passed.
Circular to Shareholders
A circular to Shareholders regarding the matters referred to in this announcement and including the notices convening the Meetings will be despatched to Shareholders later today. A copy of that circular will also be submitted to the National Storage Mechanism later today and will be available for inspection at www.hemscott.com/nsm.do.
Definitions
The following definitions apply throughout this announcement unless the context otherwise requires:
"Basic Management Fee" | the basic management fee in respect of the Ordinary Pool payable to the Investment Manager pursuant to the Management Agreement, details of which are set out under the sub-heading "Background to, and Reasons for, the Proposed New Performance Fee" in this announcement |
"Board" | the board of Directors, including any duly constituted committee thereof |
"Companies Act" | the Companies Act 2006 |
"Company" or "F&C Private Equity Trust" | F&C Private Equity Trust plc |
"Company's AGM" or "AGM" | the annual general meeting of F&C Private Equity Trust convened for Wednesday, 23 May 2012 at 12 noon |
"Company's Articles" | the articles of association of F&C Private Equity Trust |
"Court" | the Court of Session in Scotland |
"Directors" | the directors of the Company and the Subsidiary |
"Existing Incentive Fee" | the existing incentive fee arrangements in respect of the Ordinary Pool under the Management Agreement, details of which are set out under the sub-heading "Background to, and Reasons for, the Proposed New Performance Fee" in this announcement |
"F&C Group" | F&C Asset Management plc and its subsidiary undertakings, including the Investment Manager |
"Group" | F&C Private Equity Trust and its subsidiary undertakings from time to time, including F&C Private Equity Zeros |
"Investment Manager" | F&C Investment Business Limited |
"IRR" | internal rate of return |
"ISA" | individual savings account |
"Listing Rules" | the listing rules made by the Financial Services Authority pursuant to section 73A of the Financial Services and Markets Act 2000 |
"Management Agreement" | the investment management agreement between the Company and the Investment Manager |
"NAV" | net asset value (calculated, in the case of the Ordinary Pool and the Ordinary Shares, on the basis that the outstanding warrants to subscribe for Ordinary Shares are exercised if dilution would occur and, for the purpose of New Performance Fee, either before any accrual for that fee or after accruing for that fee, as the context may require) |
"New Performance Fee" | the proposed new performance fee described under the sub-heading "Proposed New Investment Management Incentive Arrangements" in this announcement |
"Ordinary Pool" | the assets and liabilities of the Company attributable to the Ordinary Shareholders |
"Ordinary Shareholders" | holders of Ordinary Shares |
"Ordinary Shareholders' Meeting" | the separate general meeting of Ordinary Shareholders convened for Wednesday, 23 May 2012 at 12.05 p.m. (or, if later, such time as the Company's AGM shall have concluded or been adjourned) |
"Ordinary Shares" | ordinary shares of 1p each in the capital of F&C Private Equity Trust |
"Proposals" | the Company's proposed new dividend policy, the proposed new investment management incentive arrangements with the Investment Manager in relation to the Ordinary Pool and the proposed cancellation of the Subsidiary's share premium account and authority to purchase ZDP Shares, details of which are set out in this announcement and in the circular to Shareholders dated 24 April 2012 |
"Restricted Voting Pool" | the assets and liabilities of the Company attributable to the holders of Restricted Voting Shares |
"Restricted Voting Shares" | restricted voting shares of 1p each in the capital of the Company |
"Shareholders" | holders of Shares |
"Shares" | Ordinary Shares, ZDP Shares and/or Restricted Voting Shares (as the context may require) |
"SIPP" | self-invested personal pension |
"Subsidiary" or "F&C Private Equity Zeros" | F&C Private Equity Zeros plc |
"Subsidiary's Articles" | the articles of association of F&C Private Equity Zeros |
"Subsidiary's General Meeting" | the general meeting of F&C Private Equity Zeros convened for Wednesday, 23 May 2012 at 12.10 p.m. (or, if later, such time as the Ordinary Shareholders' Meeting shall have concluded or been adjourned) |
"ZDP Shareholders" | holders of ZDP Shares |
"ZDP Shareholders' Meeting" | the separate general meeting of ZDP Shareholders convened for Wednesday, 23 May 2012 at 12.15 p.m. (or, if later, such time as the Subsidiary's General Meeting shall have concluded or been adjourned) |
"ZDP Shares" | zero dividend preference shares of 0.01p each in the capital of F&C Private Equity Zeros |
Notes
Canaccord Genuity Limited, which is authorised and regulated in the United Kingdom by the FSA, is acting solely for the Group and for no one else, in connection with the matters referred to in this announcement and will not be responsible to anyone other than the Group for providing the protections afforded to clients of Canaccord Genuity or for affording advice in relation to the matters referred to in this announcement.