Dunedin Ent.it. Regulatory News (DNE)

10 Apr 2008 12:01

Dunedin Enterprise Inv Trust PLC10 April 2008 10 April 2008 DUNEDIN ENTERPRISE INVESTMENT TRUST PLC (the "Company") Recommended proposals regarding the Company's investment policy and newmanagement fee and incentive arrangements The Board has today published a circular in respect of proposals to adopt anamended investment policy and revised management fee and incentive arrangementswith Dunedin Capital Partners Limited ("Dunedin" or the "Manager") (the "Proposals"). Terms used in the circular have the same meaning as thisannouncement. In summary, the Proposals will involve an increase over time in the overallproportion of private equity investments which are held through third partymanaged funds specialising predominantly in small and medium sized buyouts inEurope. As part of the Proposals, the current level of management fees will bereduced and new profit sharing arrangements will be entered into between theCompany and the Executives of Dunedin, its investment manager. In addition, thenotice period of the existing Dunedin Enterprise Management Agreement will bereduced after an initial period of 2 years. The Proposals are conditional upon approval of Shareholders at a GeneralMeeting. Introduction The Company has been investing in unquoted companies throughout the 34 years ofits existence, the last 20 of which as a company listed on the London StockExchange. Over this time the strategy has proven to be highly successful. In thelast 20 years its assets have grown from approximately £26m to approximately£160m (as at 31st December 2007). Throughout those 20 years, the investment strategy of the Company has continuedto evolve in line with developments in the wider market for unquoted investmentsand as the venture capital and private equity industry has matured. At alltimes during that period the Board has sought to develop the investment strategyof the Company to continue to deliver long term capital growth to shareholders. Since 2000, the Company has increased its concentration on smaller and mediumsize buyouts based in the UK through increasing its commitments to the buyoutfunds managed by the Manager. At the same time, the Company has made commitmentsto funds managed by private equity groups other than Dunedin and in 2007 theCompany gained exposure to unquoted investments outside the UK by purchasingshares in listed private equity companies in Europe. The Company's investments were categorised as follows at 31 December 2007: Type of Investment Value (£m) proportion of net assetsDirect investments 40.7 25 per cent.Dunedin managed funds 21.4 13 per cent.Third party managed funds 9.4 6 per cent.Listed private equity 33.1 21 per cent.Cash 55.4 35 per cent.Debtors/creditors (0.1) 0 per cent.Total 159.9 The Company intends to continue investing in the above investment categories butto increase the proportion of investments made in Europe, predominately throughcommitments to funds managed by third party private equity managers. The Board, aware that the broader European private equity market has beengrowing rapidly in recent years, believes that the Company's growth can beenhanced by accessing this market and in particular by accessing the market forsmall and medium sized buyouts similar in nature to those successfullyundertaken by Dunedin in the UK. The Board believes that the most appropriate way to implement this strategy toincrease the Company's access to a wider pool of investment opportunities is forthe Company to make commitments to, and direct co-investments alongside, fundsmanaged by leading local private equity managers across Europe which invest insmall and medium sized buyouts. The consequence of the new investment policywill be a greater focus on private equity managers based in Europe whichspecialise in investing in smaller buyouts, the area of Dunedin's specificexpertise in the UK. Implementing this strategy will, in the opinion of the Board, give the Companyaccess to attractive investment opportunities in the European private equitymarket and also differentiate the strategy of the Company from that adopted bythose private equity investment trusts which also invest in large and megabuyout funds. The Board believes that this strategy will, over time, utilise the current cashbalance built up by Dunedin Enterprise through successful investment disposalsand will ultimately move the Company to a modestly geared position. Financialgearing as a result of this strategy will not exceed 40 per cent. of theCompany's gross asset value. The Proposals The Company's overall investment objective will remain unchanged, that is toachieve substantial long term growth in Shareholder assets through capital gainsfrom its investments. The Proposal under consideration would mean that a higher proportion of theCompany's assets will be invested outside the UK through third party funds notmanaged by Dunedin. The Company has stated previously that as a result of private equitytransactions being more commonly structured with yield being rolled up and paidwhen the investment in the underlying company is sold, the trend towards a lowerdividend paid to Shareholders will be gradual but inevitable. Implementing theProposals will reinforce this trend. Conditional upon approval of Shareholders at the General Meeting, the investmentpolicy of the Company will be as follows. Investment Policy The Company's investment objective will be achieved by investing in a portfolioof unquoted companies either directly, via private equity funds or via quotedprivate equity companies. Investments will be structured to deliver capitalgrowth for the Company. The mix of investments by the Company among each of these principal investmentcategories will vary from time to time. It is expected that, in the medium tolong term, the allocation of direct investment and investment into quotedprivate equity companies as a proportion of the total portfolio will decrease asindirect investment through private equity funds increases. The Board, inconjunction with the Manager, has discretion as to asset allocation and can atany time determine that up to 100 per cent. of the Company's assets may beinvested in any particular investment category. In implementing the revised investment policy Dunedin Enterprise will seek todiversify its current portfolio of investments principally by making commitmentsto private equity funds managed by leading private equity fund managers acrossEurope. Commitments will be predominantly to buyout funds specialising in smalland medium sized buyouts in Europe. The European buyout funds to which the Company will seek to make commitmentswill be managed by experienced private equity fund managers. The funds willnormally be structured as limited partnerships similar to the Dunedin BuyoutFunds, and have a life of between 10 and 15 years. Such funds typically makeinvestments over a five year period and realise these investments over a furtherfive years. Given the timings of the various cashflows the net amounts of cashdrawn down by each partnership is expected to be significantly less than thetotal commitment. The Company will also make a small number of co-investments principallyalongside the private equity funds in Europe to which it makes a commitment.Co-investment activity is anticipated to be a smaller part of the overallprogramme albeit one that offers the Company the prospect of enhanced returns. The Board believes that implementing the proposed programme will allow theCompany, over time, to utilise the cash balances built up as a result of thesuccessful exits of previous investments. The nature of fund structurestypically with five year investment periods means that the Company can undertakea modest level of 'over-commitment' in its investment strategy. The Proposalswould mean a maximum 'over-commitment' position of less than 50 per cent. of netasset value. This 'over-commitment' strategy is more conservative thanstrategies adopted by other private equity investment trusts investing inprivate equity funds. The aim of this 'over-commitment' strategy is to increasefurther returns made on investments made by the Company. In addition to the above, Dunedin Enterprise will retain the ability to continuea policy of investing in European listed private equity companies and to makesubstantial commitments to funds managed by Dunedin. The Manager actively monitors the Company's portfolio of investments andattempts to mitigate risk primarily through diversification. By investing in adiversified portfolio of private equity funds, the Company will be exposed tonumerous underlying investments in individual companies. As these investmentswill most likely be denominated in currencies other than Sterling, the Boardwill seek to ensure that the Manager manages any currency risk appropriately andthe Board will be responsible for setting the Company's hedging policy. Not morethan 15 per cent. of Net Asset Value, at the date of investment, will beinvested in any single investment. For the avoidance of doubt, if the Companyinvests into a limited partnership fund, this limitation shall be appliedindividually to each of the underlying companies invested into by that fund. In common with most investment companies, the Company may borrow to financefurther investment. Although the Company is permitted by its Articles ofAssociation to borrow an amount equal to the amount paid up on the issued sharecapital and the total amounts standing to the credit of the capital and revenuereserves of the Company, financial gearing will not exceed 40 per cent. of grossasset value. The Company currently has a borrowing facility of £39 million. New Management Fee and Incentive Arrangements To reflect the revised investment policy, the Board has concluded that changesshould be made to the fee and incentive arrangements with the Manager to bringthem into line with terms and conditions that prevail in the marketplace. Due to the nature of the proposed revision to the investment policy of theCompany, the Board has taken advice from the independent remunerationconsultants MM&K as to the appropriateness of the proposed fee and incentivearrangements with the Manager. MM&K has researched the management fee andincentive arrangements of other private equity investment trusts with aninvestment policy similar to that outlined in these proposals in confirming theappropriateness of the proposed arrangements. Dunedin Enterprise currently holds assets in five broad categories. These are: 1) direct investments in individual companies; 2) investments in limited partnership funds managed by Dunedin; 3) investments in limited partnership funds not managed by Dunedin; 4) investments in listed private equity companies; and 5) cash. Currently the Manager is remunerated through an annual management fee of 2 percent. of the total gross assets of the Company. This fee is paid quarterly inadvance. Where the Company has invested in other investment vehicles controlledby Dunedin there is a fee offset mechanism in place. The Manager also benefitsfrom a co-investment scheme on certain investments whereby Executives can investup to 7.5 per cent. of the equity on a deal by deal basis. The proposed changes to the investment policy would see the introduction of twonew investment classes within the overall assets of the Company, namely alimited partnership which will make commitments predominantly to European buyoutfunds (the "Fund of Funds Limited Partnership") and a limited partnership whichwill make co-investments (the "Co-Investment Limited Partnership") principallyalongside funds where Dunedin Enterprise is, or is seeking to become, aninvestor. The proposed arrangements would see differing fees charged on the various assetpools within the Company. These fees would, as before, be paid quarterly inadvance. The new proposals for the annual management fee are shown in the tablebelow. Dunedin Enterprise Revised Annual Management Fees Vehicle Fee Fund of Funds Limited Partnership 1.5 per cent. on the value of investments plus 0.5 per cent. on undrawn commitments to third party fundsCo-Investment Limited Partnership 1.5 per cent. on the value of investmentsDirect investments in individual companies 1.5 per cent. on the value of investmentsDunedin Managed Funds Same fees as paid by third party investors in such FundsThird party managed funds 1.5 per cent. on value of investmentsListed private equity funds 1.5 per cent. on value of investmentsCash 0.5 per cent. on cash balances not committed to third party funds through the Fund of Funds Limited Partnership These new proposals reflect the fact that Dunedin will be actively seeking outand making commitments to leading private equity funds across Europe. Amanagement fee of 0.5 per cent. will be payable on undrawn commitments to thirdparty funds to reflect the work carried out to identify, appraise and gainaccess to suitable funds. The revised arrangements will mean that managementfees paid to the Manager, as a percentage of gross assets, will reduce in thefuture. Given that this proposal represents a material change in the structure of thefee arrangements and to support the Manager in recruiting a team with theappropriate experience to implement this revised investment policy, the Boardfeels it fair and reasonable to allow the Manager a two year transition periodwhere the existing fee basis will remain in place. This period matches thelength of the notice period in the current contract held by Dunedin to managethe Company. The Manager is confident that it will be able to attract a teamwith the requisite skills and experience. Furthermore, to align the interests of the Manager with the Shareholders, inline with current market practice, the executives of the Manager (the "Executives") will be entitled to a share of the profits on the performance ofthe assets held within the Fund of Funds Limited Partnership and theCo-investment Limited Partnership. In respect of the Fund of Funds Limited Partnership, it will be structured as aseries of annual Sub-Funds, each of which will have a one year Commitment Period(other than the first Sub-Fund which will have a Commitment Period expiring on31st December 2008). The value of the investments of each Sub-Fund will becalculated after three years from the end of the Commitment Period and thenannually thereafter. The Executives will be entitled to a carried interest, i.e.a share of profits, equal to 10 per cent. of the growth in the value of theinvestments of the Sub-Fund provided that the growth is above a hurdle set atthe amount of outstanding loan commitments made by the Company to the Fund ofFunds Limited Partnership in respect of the Relevant Sub-Fund plus interest at 8per cent. per annum (compounded quarterly) on such amounts, and provided thatthe value of the investments of the Sub-Fund is above a 'high watermark' set asthe highest previous value of the investments of the Sub-Fund. The carriedinterest profit share earned will be paid into an escrow account and may only bereleased once, and then only to the extent that, the value of the escrow accountexceeds 10 per cent. of the amount of any outstanding exposure that DunedinEnterprise has to the Sub-Fund. Finally, a 'clawback' mechanism will be in placewithin each Sub-Fund to seek to ensure that no more than 10 per cent. of theprofits of each Sub-Fund are distributed by way of the carried interest profitshare to the Executives. As regards the Co-Investment Partnership, the Executives will be entitled to acarried interest profit share of 10 per cent. of the realised profits of eachco-investment made by the Co-investment Limited Partnership so long as theprofits from each co-investment exceed a hurdle of 8 per cent. per annumcompounded quarterly on the capital invested. In addition, the Executives willco-invest 1 per cent. of the Company's commitment alongside the Company in eachinvestment made by the Co-Investment Limited Partnership. Extraordinary General Meeting The implementation of the Proposals will require the approval of Shareholders.The General Meeting of the Company will be held at The Merchants' Hall, 22Hanover Street, Edinburgh EH2 2EP on 13 May 2008 at 12.30 p.m. (or immediatelyfollowing the Annual General Meeting). The Resolutions will be proposed at theGeneral Meeting to approve the Proposals. Related Party The proposed new management incentive arrangements involve the Company andDunedin. Under the UKLA Listing Rules, an investment manager is deemed to be arelated party of the investment company it manages and, accordingly, Dunedin isa related party of the Company. The consequence of this is that the proposednew management fee and incentive arrangements are required to be approved byShareholders. Furthermore, the Board must receive advice from an independentadviser that the proposed arrangements are fair and reasonable as far as theShareholders are concerned. No member of the Dunedin Group is a shareholder in the Company and, therefore,Dunedin (as the related party) has no right to vote at the General Meeting. One of the directors of the Company, Simon Miller, is a director of, andshareholder in, the holding company of Dunedin. Mr Miller has not taken part inthe Board's consideration of the Proposals and will abstain from voting at theGeneral Meeting in respect of his shareholding in the Company. Expected Timetable 2008 Latest time and date for receipt of Forms of Direction from Plan 12.30pm on 8 MayParticipants for General Meeting Latest time and date for receipt of Forms of Proxy for General 12.30pm on 11 MayMeeting General Meeting 12.30pm (or immediately following the conclusion of the AGM of the Company) on 13 May Proposed Effective Date for Proposals As soon as practical following the General Meeting and not later than 1 JuneEnquiries Edward Dawnay - 020 7409 5699Chairman Angus Gordon Lennox - 020 7588 2828JPMorgan Cazenove This information is provided by RNS The company news service from the London Stock Exchange