11 Feb 2015 07:00
ELECTRA PRIVATE EQUITY PLC
REVIEW OF CAPITAL STRUCTURE, DISTRIBUTIONS AND FEES
The Board of Electra Private Equity PLC ("Electra" or the "Company") announced, following the General Meeting on 6 October 2014, that it was launching a review covering Electra's capital structure, its distribution policy and its fee arrangements with Electra Partners LLP ("Electra Partners").
The Board is pleased to confirm that, after detailed consideration, it has now concluded the review and today announces several amendments to the financial affairs of the Company.
The summary key points are as follows:
- The current annual management fee, known as priority profit share, is set at 1.5% of gross assets, including cash. From 1 April 2015, no fee will be paid on cash and the management fee on Non-Core Listed and Primary Fund Investments will reduce to 1%. If applied to the year ended 30 September 2014, the fee would have been reduced by £7 million.
- The multi-currency revolving credit facility is drawn as at the end of January 2015 to the amount of £154 million. The facility will be repaid in full which has the effect of reducing financing costs to the Company by £4 million per annum if the facility were to remain drawn to the same extent. The facility will be redrawn in the future as required to facilitate new investment or meet ongoing expenses. The Board is content in present circumstances to accept the additional currency exposure that this debt repayment will bring. However, the Company's foreign currency exposure will be kept under review.
- Beyond the Convertible Bonds and the Zero Dividend Preference shares already in issue, it is not currently intended to borrow on Electra's balance sheet other than through the use of the existing multi-currency facility on a revolving basis.
- At present the Company does not pay dividends unless required to maintain Investment Trust status and has not initiated any share buybacks since 2008. The Board will now implement a distribution policy to return to shareholders a targeted 3% of NAV per annum by way of cash dividend or share buybacks. Any shares bought back under this policy will be cancelled.
Commenting on the Review, Roger Yates, Chairman of Electra Private Equity, said:
"I am pleased that the Board has concluded its review which has rightly involved tough and rigorous negotiations. We believe the new agreement with Electra Partners delivers improved value for all of our shareholders, while also keeping sufficient incentives and the financial means to continue our successful investment strategy. Following the announcement of another record new level of investment in the year to 30 September 2014, Electra Partners has continued to be very active and we are confident that they will continue to deliver strong returns for all of our shareholders."
Investment strategy and policy
In their review the Board has taken careful note of the investment strategy and policy as approved by shareholders in 2006. The Board believes that the principles underlying the investment strategy and policy remain as appropriate today as they were when they were approved. Accordingly the Board has concluded that the investment strategy and policy as approved in 2006 should continue to be the policy.
As noted in Electra's accounts, certain Listed Investments and Primary Fund Investments, together representing 8.5% of the investment portfolio as at 30 September 2014, are no longer regarded as part of the core portfolio and will be reduced over time allowing for greater focus on direct unlisted investments.
Management fees
Under the current management agreement Electra Partners receives a management fee equal to 1.5% per annum on the gross value of Electra's investment portfolio, including cash. The Board has now agreed with Electra Partners certain revisions to the current arrangements. Accordingly, with effect from 1 April 2015, no management fee will be payable on cash and the management fee on Non-Core Listed and Primary Fund Investments will reduce to 1% per annum. The incentive arrangement under which members of Electra Partners receive a carried interest of 18% of net profits on Direct Investments and 9% on Primary Fund Investments, subject to Electra receiving a return of 8% per annum on the relevant investment pool, will remain unchanged.
If the new fee basis had applied for the financial year to 30 September 2014, the priority profit share payable to Electra Partners would have been reduced by £7 million from £25 million to £18 million.
By way of a transitional arrangement, on 12 months' notice being given up to and including 31 March 2017, compensation payable to Electra Partners under the existing termination provisions, which is based on a multiple of management fees, would be calculated on the basis of the current fee structure. For notice from 1 April 2017, any termination compensation would become based upon the revised fee structure described above.
Capital structure
The capital structure of Electra has included a high proportion of cash in recent periods. The reason for this is twofold. First, a very strong period of realisations had led to a build-up of cash, much of which has now been successfully redeployed in attractive investment opportunities. Second, Electra's policy has been to partially hedge the currency risk on investments denominated in foreign currencies. This policy has been implemented by borrowing in US Dollars and Euros under the multi-currency revolving credit facility with the proceeds of drawings being held as cash. It has been decided that the £154 million of debt drawn under the multi-currency facility will be repaid in full in March 2015, when certain interest rate hedging requirements related to the foreign currency drawings expire. At current rates, this would save £4 million per annum in financing costs assuming that the facility remains drawn/undrawn to the same extent. The debt repayment will remove the partial foreign currency hedge which that drawn debt had achieved, and as a consequence the Company will be exposed to foreign exchange volatility on an unhedged basis which may increase net asset volatility. Portfolio foreign currency exposure will be kept under review.
Since 30 September 2014 the multi-currency revolving credit facility has been increased from £195 million to £275 million and extended from December 2017 to December 2019 on improved terms. This facility will be used when necessary to fund new investments prior to realisations of existing investments and for other working capital purposes. Beyond the Convertible Bonds and the Zero Dividend Preference shares already in issue, it is not currently intended to borrow on Electra's balance sheet other than through the use of the multi-currency credit facility on a revolving basis.
Since 30 September 2014, Electra has invested £129 million and realised £94 million; after this investment activity, operating costs and adjusting for repayment of the bank facility, Electra currently would have cash and cash equivalents of £94 million. The Zero Dividend Preference shares are repayable in August 2016 in an amount of £74 million and the remaining Convertible Bonds, if not converted to ordinary shares, are redeemable in December 2017 for £94 million.
Electra Partners has advised the Board that it expects to continue to deploy significant levels of capital during this financial year which will be financed from the available cash of £94 million, potential realisations and drawings on the revolving credit facility.
Distribution policy
The Board believes that it is appropriate to enable shareholders to have the opportunity to receive cash on an annual basis. Accordingly the Board is adopting a distribution policy as follows:
· The Board will adopt a firm policy to make an annual distribution to shareholders, other than in exceptional circumstances, and will target a return to shareholders of 3% of net assets per annum;
· The Board will assess the quantum of the return each year taking into account a number of factors such as portfolio performance, Electra's liquidity and the market outlook;
· The distribution will be by way of share buybacks or a cash dividend paid to all shareholders or a mix of the two. The Board will take account of prevailing market conditions and particularly the discount or premium to net asset value per share at which the shares trade in the market in determining whether to make all or part of the return by way of share buybacks.
In line with this policy it is the Board's current intention to declare a cash dividend in respect of the first six months of the current financial year for all shareholders at the time of the announcement of half year results in May 2015.
In future, to the extent that the outlook for investment and liquidity implies that excess cash is likely to be held on the balance sheet for a prolonged period of time, further cash returns may be made to shareholders in order to maintain an optimum balance between invested and investable capital.
Related party transaction
Electra Partners as the investment manager of Electra is a related party of the Company under the Listing Rules. The changes to the priority profit share fees payable to Electra Partners as described above are together a smaller related party transaction within LR 11.1.10R.
Enquiries
J.P. Morgan Cazenove: +44 (0) 207 742 4000
Michael Wentworth-Stanley
William Simmonds
Greenbrook Communications: +44 (0)20 7952 2000
Andrew Honnor
Charlotte Balbirnie
Matthieu Roussellier