ELTA.L Regulatory News (ELTA)

19 Sep 2006 07:02

Electra Private Equity PLC19 September 2006 This announcement and the information contained herein is not for release,publication or distribution in whole or in part in or into Canada, Australia or Japan Tuesday, 19 September 2006 Electra Private Equity PLC Update of Investment Strategy, Terms of Appointment of Electra Partners and Related Matters On 8 June 2006, the Board announced that in order to build on Electra's strongtrack record of value creation, the Board was undertaking a review of Electra'smarket, its investment manager and its investment strategy. Under the existing strategy up to one-third of realisation proceeds from the portfolio as at June 2001 are made available for re-investment. The results of this review are summarised below: * The Board considers that Electra has strong potential to continue to create significant value for Shareholders * The Board is proposing to adopt a new investment strategy whereby Electra returns to full investment of its capital resources in private equity * The new investment strategy will be complemented by ongoing share buy-backs and the active management of its capital position * Electra will target a Return on Equity of between 10 and 15 per cent per annum over the long-term * The Board proposes to appoint Electra Partners as its investment manager as it believes that Electra Partners has the best team to maximise returns on the existing portfolio and to implement the proposed new investment strategy Sir Brian Williamson, Chairman of Electra Private Equity, said: "Electra provides Shareholders with liquid and flexible access to the privateequity market. By returning to full investment, supplemented by a target Returnon Equity of between 10 and 15 per cent per annum over the long term and anactive on-market share buy-back programme, the Board believes that Electra willcontinue to deliver value to Shareholders." Hugh Mumford, Managing Partner, of Electra Partners, said: "Private equity is an established and attractive asset class. Electra Partnersstrong track record and capabilities, coupled with its differentiated approachto private equity investing, has created substantial shareholder value" This summary should be read in conjunction with the full text of theannouncement together with its Appendices. Capitalised terms used in thissummary have the meanings given to them in the full announcement. Note to Editors In 1999, EPL's investment professionals were organised as two separate anddistinct teams, one dedicated to managing Electra's assets and the other havingresponsibility for managing a new European limited partnership private equityfund. The team responsible for managing the European limited partnership privateequity fund subsequently left EPL and established a separate and distinct fundmanagement business called Electra Partners Europe LLP. On 31 August 2006,Electra Partners Europe LLP changed its name and removed references to Electrafrom its business and funds under its management. Enquiries: Electra: 020 7306 3883 Sir Brian WilliamsonMichael Walton Electra Partners: 020 7214 4200 Hugh MumfordTim SyderDavid Symondson Lazard: 020 7187 2000 Jon HackRichard Chang M Communications: 020 7153 1530 Nick Miles Lazard & Co., Limited, which is authorised and regulated in the United Kingdomby the Financial Services Authority, is acting exclusively for Electra and noone else in connection with the Proposals and will not be responsible to anyother person for providing the protections afforded to its clients, nor forproviding advice in relation to the Proposals or any other matter referred to orinformation contained in this document. This announcement and the information contained herein is not for release,publication or distribution in whole or in part in or into Canada, Australia or Japan Tuesday, 19 September 2006 Update of Investment Strategy, Terms of Appointment of Electra Partners and Related Matters On 8 June 2006, the Board announced that it was finalising a review of Electra'sinvestment strategy and management arrangements. Having concluded its review theBoard is pleased to make the following announcement. Since the change of investment strategy in April 1999, Electra has createdsignificant value for Shareholders. In the period from 1 April 1999 to 31 August2006, Electra sold 68 investments realising a total of GBP 2.1 billion, investedGBP 0.6 billion in 52 companies and returned a total of GBP 1.2 billion in cashto Shareholders through tender offers and on-market share buybacks. During thisperiod, Electra's Net Asset Value increased by 89 per cent which compares with arise in the FTSE All-Share Index of 1 per cent over the same period. In order to build on this strong track record of value creation, the Board hasundertaken a review of Electra's market, its investment manager and itsinvestment strategy. Following this review, the Board considers that Electra hasstrong potential to continue to create significant value for Shareholders. Inorder to best achieve this potential, the Board is proposing to adopt a newinvestment strategy whereby Electra returns to full investment of its capitalresources in private equity, complemented by ongoing share buy-backs and theactive management of its capital position. The Board also proposes to appoint Electra Partners as its investment manager.The Board believes that Electra Partners has the best team to maximise returnson the existing portfolio and to implement the proposed new investment strategy. The existing management arrangements are with EP Private Equity Limited, alimited liability company. If the Proposals are approved, the new managementarrangements will be entered into with Electra Partners LLP, a limited liabilitypartnership. From Electra's perspective, this change in corporate form is notmaterial to the substance of the Proposals as the individuals comprising theSenior Management Team who currently manage Electra's assets under the existingarrangements will be responsible for managing those assets under the newarrangements. Electra's Objective Following implementation of the Proposals, Electra will target a Return onEquity of between 10 and 15 per cent per annum over the long-term. Electra will aim to achieve this target Return on Equity by: * Exploiting a track record of successful private equity investment * Utilising Electra's inherent competitive advantages as an investor * Exploiting the proven skills of the Senior Management Team with its strong record of deal flow generation and long-term presence in the private equity market * Investing in a number of value-creating transactions with a balanced risk profile across a broad range of investment sectors through a variety of financial instruments * Effecting ongoing on-market share buy-backs to generate shareholder value * Actively managing its total capital position and gearing, in light of prevailing market conditions Background to Changes In making its decision to adopt a revised investment strategy, the Board has hadregard to the attractiveness of the private equity market and Electra's abilityto exploit the opportunities potentially available in that market, for thebenefit of its Shareholders. In recent years, private equity has become an increasingly popular andestablished asset class, which has resulted in a substantial increase in thefunds being made available for private equity investment opportunities. Thisincreased flow of funds into the private equity market has led to an upturn inthe number of transactions financed by private equity groups. The Board stronglybelieves that in light of these positive market developments, there continues tobe a significant role for Electra, which provides investors with liquid andflexible access to the private equity market. Through the Senior ManagementTeam's network and expertise, Electra is able to participate in sizeabletransactions alongside other institutions where control of the investment isexercised through the collective holdings of the institutions. Furthermore,unlike many of its competitors who operate within strict investment andrealisation mandates and timescales, Electra is able to adopt a more flexibleapproach to investment including the type of financial instrument in which itinvests, its ability to take majority or minority positions in relation to suchinstruments, and the timing of realisations, which has enabled shareholder valueto be maximised by holding investments until the Senior Management Team believesthe optimum time for disposal is reached. The Board believes that the benefitsof these advantages have been clearly demonstrated by the out performance ofElectra's Net Asset Value per Share relative to the FTSE All Share Index overthe 15 year period to 31 August 2006. Investment Strategy and Policy INVESTMENT STRATEGY Under the investment strategy approved by Shareholders in June 2001, up toone-third of realisation proceeds from the portfolio as at June 2001 were madeavailable for re-investment. The Board considers that this restriction is nolonger appropriate and that shareholder value will be maximised under a strategywhereby all of Electra's capital resources are available for investment inprivate equity and share buy-backs in proportions that reflect market conditionsrather than the fixed proportions described above. Electra will continue to actively manage its gearing and capital position inlight of prevailing market conditions. The Board believes that an on-marketshare buy-back programme is an important element in generating Shareholdervalue, and efficiently managing Electra's total capital base and returns. SinceJuly 2004, Electra has repurchased through its on-market share buy-backprogramme 12.1 million Shares at an average price of GBP 9.28, thereby returninga total of GBP 112.5 million to investors. Since April 1999 Electra has returneda total of GBP 1.2 billion to its Shareholders. Electra currently has significant net cash resources available on its balancesheet. It is the Board's current intention that Electra will engage in an activeon-market share buy-back programme. To this end, a special resolution will beproposed at the EGM to allow Electra to buy up to an additional 14.99 per centof its Shares. In deciding when to buy-back Shares, the Board will take accountof the prospective returns of prevailing investment opportunities and thediscount at which the Shares trade to their Net Asset Value. The Directors donot intend to use this authority to purchase Shares unless it is judged at thetime that it would result in an increase in Net Asset Value and would be in thebest interests of Shareholders generally. Shares purchased under this authoritywould be cancelled. Furthermore, the Board will actively manage its total capital position andlevels of gearing, subject to prevailing market conditions and to the amountsborrowed by Electra's underlying portfolio companies. INVESTMENT POLICY Consistent with its current investment policy, Electra intends to target privateequity opportunities (including direct investment, fund investment and secondarybuyouts of portfolios and funds) so that the risks associated with suchinvestments are justified by expected returns. Such investments will be madeacross a broad range of sectors and types of financial instrument. Electra will continue to focus principally on Western Europe, with the majorityof investments expected to be made in the United Kingdom which continues to bethe largest private equity market in Western Europe and where historicallyElectra has made the majority of its investments. Electra will also continue toinvest across all industry sectors, but would expect there to be an emphasis onareas where the Senior Management Team has specific knowledge and expertise. Incircumstances where Electra Partners believe that there is merit in gainingexposure to countries and sectors outside Electra Partners' network andexpertise, Electra will also consider investing in specific funds managed by athird party with such expertise or co-investing with private equity managerswith whom the Senior Management Team has developed a long-standing relationship. Electra will also continue to invest in a range of financial instruments such asequity, senior equity, convertibles and mezzanine debt. Electra Partners APPOINTMENT Following its review of Electra's investment strategy, the Board has concludedthat Electra Partners is the best manager to maximise returns on the existingportfolio and to implement the revised investment strategy and policy. This issupported by the successful track record of the Senior Management Team inmanaging Electra's assets over the last 15 years as outlined below. ElectraPartners will be appointed for an initial period of three years under newarrangements, which are summarised below. Electra Partners regards Electra asits most important client. Electra Partners is in the process of applying for FSA authorisation and in theevent this authorisation is not received prior to the Effective Date, theproposed management agreement will be entered into with EPL for an interimperiod with such agreement being transferred to Electra Partners once FSAauthorisation is received. The existing management agreement will terminate uponthe proposed management agreement becoming effective. TEAM Electra Partners comprises a team of senior partners supported by investmentprofessionals and administrative staff who together will manage Electra'sbusiness and assets. Following the recruitment of additional investmentexecutives, the team is expected to total at least 35 in number. The Senior Management Team are: Name Role Age Industry Experience Hugh Mumford Investment Professional 60 25 years Timothy Syder Investment Professional 48 23 years David Symondson Investment Professional 51 24 years Rhian Davies Investment Professional 41 14 years Philip Dyke Compliance/Company Secretarial 59 36 years Stephen Ozin Chief Financial Officer 43 16 years TRACK RECORD The members of the Senior Management Team have together built up a strong trackrecord of successful private equity investment over a period of more than 15years. Of the 42 UK investments with investment cost greater than GBP 10 millionarranged and managed by EPL for Electra over the past 15 years (excluding thosemade by the Electra European Fund in which Electra has invested but which ismanaged independently of EPL), 29 investments were led and subsequently managedby the Senior Management Team. In terms of investment value (at cost), theseinvestments amounted to approximately GBP 793 million out of the totalinvestment of GBP 1,075 million. Over the same period, 9 continental investmentswith investment cost greater than GBP 5 million were overseen by the SeniorManagement Team. Hugh Mumford has chaired the investment committee of EPL, whichapproves all investments made by Electra, for the last 17 years. The investment track record of the Senior Management Team is outlined in thetable below. UK Investments Greater than GBP 10m Attributable to the Senior Management Team* No. Capital Realisation on Valuation Total Gross Gross Invested Proceeds GBP m GBP m GBP m Multiple IRR GBP m Realised 23 633 1,445 - 1,445 2.3x 29.4% Unrealised 6 160 25 140 165 1.0x 1.0% Total 29 793 1,470 140 1,610 2.0x 27.2% * Past performance is not indicative of future performance THE ELECTRA NAME In 1999, EPL's investment professionals were organised as two separate anddistinct teams, one dedicated to managing Electra's assets and the other havingresponsibility for managing a new European limited partnership private equityfund. The team responsible for managing the European limited partnership privateequity fund subsequently left EPL and established a separate and distinct fundmanagement business called Electra Partners Europe LLP. On 31 August 2006,Electra Partners Europe LLP changed its name and removed references to Electrafrom its business and funds under its management. In order for Electra Partners to distinguish itself clearly within the privateequity sector and to identify its close association with Electra, ElectraPartners will be granted a licence to use the Electra name for a period of 5years from the Effective Date. Management Arrangements Electra Partners will be appointed under new arrangements to manage theinvestments of Electra on a discretionary basis in accordance with Electra'srevised investment strategy. The main commercial terms of the proposedmanagement agreement are summarised below. PRIORITY PROFIT SHARE Consistent with the provisions in the current management agreement, ElectraPartners will receive an annual payment known as the "priority profit share"equal to 1.5 per cent on the gross value of Electra's investment portfolioincluding cash (but excluding any amounts committed to funds established andmanaged by Electra Partners). The priority profit share is payable quarterly andis calculated on the valuation of investments at the quarter end (as is thecurrent practice). INCENTIVE ARRANGEMENTS The current incentive arrangements are structured through a co-investment schemesuch that 8 per cent of profits realised on unquoted investments are allocatedto former and current executives of EPL on a deal by deal basis. Thesearrangements will remain in place for the Existing Portfolio, but will besupplemented by the new arrangements, summarised below. NEW ARRANGEMENTS Under the proposed incentive arrangements, Direct Investments made in the threefinancial years to 30 September 2009 will be treated as a separate pool ofinvestments. The members of Electra Partners will receive a carried interest of18 per cent of net profits (which means profits remaining after deduction of therelated priority profit share of 1.5 per cent) on that pool subject to aperformance hurdle being achieved and Electra receiving back the aggregateamounts advanced to finance investments in that pool. The performance hurdlerequires net profits (as described above) to be not less than a return of 8 percent per annum compounded annually on the amounts advanced by Electra to financethe acquisition of investments (including related priority profit share) andoutstanding from time to time. Direct Investments made between 1 April 2006 and 30 September 2006 will bedeemed to be included in this first three year pool. There are currently 3assets costing GBP 44 million, in aggregate, in this category. Similar carried interest arrangements are proposed to be put in place for FundInvestments save that the members of Electra Partners will only be entitled toreceive a carried interest of 9 per cent of net profits (as described above). The Board expects that investment pools will be for periods of three years,although the Board may, from time to time, approve a shorter period inexceptional circumstances. Realisations in respect of investments in each poolmay be made during or after expiry of the end of the three year investment poolterm. EXISTING PORTFOLIO The members of Electra Partners will also be entitled to receive a 10 per centcarried interest on net profits (which means, in respect of the ExistingPortfolio, profits remaining after the deduction of the related priority profitshare of 1.5 per cent) of the Existing Portfolio subject to Electra receivingback aggregate cash equal to the opening value of the Existing Portfolio (beingapproximately GBP 160 million at 31 March 2006) and a performance hurdle beingachieved. The performance hurdle requires net profits (which means in thisinstance the profits remaining after deduction of the related priority profitshare of 1.5 per cent and payments made under the existing 8 per centco-investment scheme) to be not less than a return of 15 per cent per annum(compounded annually) on the opening value of the Existing Portfolio includingany related priority profit share outstanding from time to time. MANAGEMENT AGREEMENT TERM AND TERMINATION The new management agreement will run for an initial three year term commencingas of the Effective Date with a 12 month rolling notice period. Neither partymay serve notice to terminate during the first two years of the agreement. LOAN NOTE In June 2001, Shareholders approved a transaction between Electra and EPLwhereby a GBP 7 million Fixed Rate Unsecured Loan Note ("Loan Note") was issuedby Kingsway Holdings Jersey Limited (and guaranteed by EPL) to Electra. The LoanNote does not bear interest and is redeemed over time from the annual priorityprofit share (in excess of GBP 9 million) paid by Electra to EPL. Since June 2001, EPL has made GBP 0.5 million in repayments in accordance withthe terms of the Loan Note. Given the uncertainty around the quantum and timingof future repayments, the Board has made a series of provisions in Electra'saccounts such that by 31 March 2006 the carrying value of the Loan Note had beenreduced to zero. Under the new management agreement, Electra has agreed to cancel the Loan Notein consideration for reducing the amount of priority profit share payable toElectra Partners (the "PPS Reduction") by an amount equal to the amount thatwould have been payable under the Loan Note to Electra on an annual basis. Inaddition, Electra has also agreed to grant to Electra Partners an optionexercisable at any time after the Effective Date to cancel all future PPSReductions by paying Electra the equivalent of the net present value of theremaining expected PPS Reductions. This value will be approved by a qualifiedindependent third party. Board's View of New Management Arrangements Based on the independent advice provided by MM&K, an independent firm ofstrategic remuneration consultants with a particular knowledge and focus on theEuropean private equity industry, the Board of Electra considers that theproposed management arrangements are fair and reasonable as they are broadlyin-line with management arrangements typically found in private equity fundmanagement. Furthermore, as incentive payments will be linked to the performanceof an investment pool as a whole, Electra will be able to offset profits andlosses arising from individual investments to determine whether the performancehurdle has been achieved and whether an incentive becomes payable to members ofElectra Partners. Approval and Expected Timetable The Proposals are subject to approval by Electra's Shareholders. A circular inconnection with the Proposals is expected to be despatched on or around 19September. The EGM is expected to be held on or around 12 October 2006. Electra: 020 7306 3883 Sir Brian WilliamsonMichael Walton Electra Partners: 020 7214 4200 Hugh MumfordTim SyderDavid Symondson Lazard: 020 7187 2000 Jon HackRichard Chang M Communications: 020 7153 1530 Nick Miles Lazard & Co., Limited, which is authorised and regulated in the United Kingdomby the Financial Services Authority, is acting exclusively for Electra and noone else in connection with the Proposals and will not be responsible to anyother person for providing the protections afforded to its clients, nor forproviding advice in relation to the Proposals or any other matter referred to orinformation contained in this document. Appendix 1 DEFINITIONS The following definitions apply throughout this announcement unless the contextrequires otherwise: "Board" or the directors of Electra"Directors" "Direct Investments" private equity investments in companies and other entities (excluding Fund Investments) whose securities are not listed or traded on an investment exchange "Effective Date" the date of the EGM or if the EGM is adjourned, the date on which the EGM is re-convened "Electra" Electra Private Equity PLC "Electra Partners" Electra Partners LLP, a limited liability partnership constituted under the laws of England and Wales, the proposed new investment manager of Electra (registered no. OC320352) "EPL" EP Private Equity Limited (formerly, Electra Partners Limited), a limited liability company incorporated in England and Wales under the Companies Act, the current investment manager of Electra "Existing Portfolio" the Direct Investments owned by Electra as at 1 April 2006 "Extraordinary the Extraordinary General Meeting of ElectraGeneral Meeting" or"Meeting" or"EGM" "IRR" Internal rate of return "FSA" Financial Services Authority "Fund Investments" investments in funds managed by parties other than Electra Partners including limited partnership funds and collective investment schemes which will comprise no more than 25 per cent of all investments owned by Electra from time to time ''Lazard'' Lazard & Co., Limited "MM&K" MM&K Limited, a firm authorised and regulated by the FSA "Net Asset Value" the aggregate value of Electra's net assets or the value of Electra's net assets per Share, as the context requires "Proposals" the amendment of Electra's investment strategy and policy, the authority to make market purchases of Shares and the proposed changes to the management contract and revised management incentive arrangements "Return on Equity" Total 'Return on Ordinary Activities after Taxation'or "ROE" divided by opening 'Total Equity Shareholders Funds' calculated on an annual basis (as those terms are used in the Report and Accounts for the year ended 30 September 2005) ''Senior Management collectively Hugh Mumford, Timothy Syder, David Symondson,Team'' Rhian Davies, Philip Dyke, and Stephen Ozin "Share" or ordinary shares of 25 pence in Electra"Shares" "Shareholder" holders of Shares This information is provided by RNS The company news service from the London Stock Exchange