JZCC.L Regulatory News (JZCC)

JZ CAPITAL PARTNERS LTD - Half-yearly Report

PR Newswire

London, October 27

JZ CAPITAL PARTNERS LIMITED (the "Company" or "JZCP")

(a closed-end investment company incorporated with limited liability under the laws of Guernsey with registered number 48761)

INTERIM RESULTS FOR THE SIX MONTH PERIOD ENDED

31 AUGUST 2015

~ Steady performance with healthy investment and realisation pipeline ~

28 October 2015

JZ Capital Partners, the London listed fund that invests in high quality US and European micro-cap companies and US real estate, announces its interim results for the six month period ended 31 August 2015.

Results Highlights

1 The ordinary shares issued in the placing and open offer will not rank for this interim dividend but will rank for dividends declared hereafter. 

Portfolio Highlights

o $22 million in K2 Towers, an acquirer, owner and operator of wireless communication towers throughout the United States and Puerto Rico

o $12.5 million in Jordan Healthcare Products, a new vehicle established to invest in micro-cap healthcare companies in the US

o €7.6 million in S.A.C, an operational van leasing company based south of Copenhagen, Denmark

o €3.8 million to capitalise an alternative lending vehicle for Fincontinuo

o Acquired nine new properties in Brooklyn and Miami

o $15.9 million of proceeds from refinancing Healthcare Revenue Cycle Management JZCP-held debt

o Cash dividends of $3.4 million from Salter Labs and $1.3 million from Southern Petroleum Laboratories received

o $4.6 million of proceeds from the refinancing of two real estate properties in Brooklyn’s Williamsburg neighborhood.

David Zalaznick, JZCP’s Founder and Investment Adviser, said: “We’re pleased with the underlying performance of the portfolio during the first six months of the fiscal year, characterised by a good flow of investment and realisation activity.

Underpinning this, we undertook a number of strategic initiatives, post period end, aimed at providing JZCP with new capital to diversify and grow its portfolio as well as deleverage the Company and lower its cost of capital. We look ahead to the next six months with new realisation prospects which will provide additional liquidity for us to make investments.”

David Macfarlane, Chairman of JZCP, said: “We are pleased with the hard work that’s been completed during the period, against a stuttering global economic recovery, and remain confident that the recent measures taken will serve to safeguard and enhance the growth prospects of the Company over time.”

Presentation details:

There will be an analyst and investor call to discuss JZCP’s recent financial performance and portfolio developments on Wednesday, 28 October 2015 at 14:30 (GMT). It can be accessed by dialling +44(0)20 3427 1910 (UK) or +1 718 354 1357 (US) with the participant access code 9134653.

A playback facility will be available two hours after the conference call concludes. This facility may be accessed by dialing +44(0)20 3427 0598 (UK) or 347 366 9565 (US) with the participant access code 9134653.

For further information:

About JZCP

JZCP is a London listed fund which invests in high quality US and European micro-cap companies and US real estate. Its objective is to achieve a superior overall return comprised of a current yield and significant capital appreciation. JZCP receives investment advice from Jordan/Zalaznick Advisers, Inc. (“JZAI”) which is led by David Zalaznick and Jay Jordan. They have worked together for 30 years and are supported by teams of investment professionals in New York, Chicago, London and Madrid. JZAI’s experts work with the existing management of micro-cap companies to help build better businesses, create value and deliver strong returns for investors. JZCP also invests in mezzanine loans, first and second lien investments and other publicly traded securities. For more information please visit www.jzcp.com.

Chairman's Statement

I am pleased to report the results of JZ Capital Partners ("JZCP" or the "Company") for the six-month period ended 31 August 2015.

Market Background

The Company’s steady performance over the six months has been set against a stuttering global economic recovery, which began to show signs of life earlier this year. Divergent central bank monetary policy and global growth concerns weigh on investors, whilst volatility appears to be returning to the markets.

The Eurozone continues to show gradual improvement, supported through measures taken by the ECB to boost prices and growth. At the same time, the US Federal Reserve appeared closer to raising interest rates than at any other time since 2006, but chose not to during its September FOMC meeting. Overarching the broader economic environment were geopolitical events which continue to capture headlines and contribute to investor anxiety.

Strategic Initiatives

Within this market environment, the Board undertook a number of measures that will help the Company to continue to grow.

After the period end, we successfully completed an open offer and placing to shareholders that raised approximately £77 million that will provide JZCP with new capital to diversify and grow our portfolio. We also announced the rollover of £41.6 million of our current 8% Zero Dividend Preference shares (“ZDPs”) into a longer-dated ZDP with a much lower, 4.75%, gross yield, leaving JZCP with a final liability (including a 1% redemption premium) of £32.9 million of its current 8% ZDPs due in June 2016. As a result, the Company has a lower cost of capital.

Furthermore, our European team raised €237 million in the first round of fundraising for JZI Fund III, L.P. (“Fund III”), the successor fund to the EuroMicrocap Fund 2010, LP ("EMC 2010"). JZCP has committed €75 million to Fund III, which will enable JZCP to continue to expand and diversify its investment portfolio in Western Europe, which has in the last five years become an increasingly important strategic region for JZCP and provided diversification to our US micro-cap portfolio. Finally, JZCP closed a $100 million six-year term loan from Guggenheim Partners, which was partially used to pay down a $50 million one-year loan facility with Jefferies.

These activities follow the recent amendments to the Company’s investment policy, which enable the Investment Adviser to take advantage of a wider range of investment opportunities providing the flexibility to adapt as market opportunities warrant.

Portfolio Update

For the six-month period ended 31 August 2015, JZCP’s pre-dividend net asset value ("NAV") remained steady at $10.84 per share (FY14 $10.85 per share), as portfolio company valuation increases were offset by fees and expenses and finance costs.

It has been a solid investment period for the Company, putting $124.3 million to work across the three main portfolios – US and European micro-cap and US real estate - whilst realising $29.9 million, primarily through the refinancing of our Healthcare Revenue Cycle Management (“HRCM”) vertical with third-party debt and the refinancing of two properties located in Williamsburg, Brooklyn.

The US and European micro-cap strategies continue to be important elements of the Company’s investment strategy, whilst US real estate becomes an increasingly significant proportion of the Company’s portfolio. The Company’s portfolio, 51% of which is less than three years old, continues to become more diversified geographically as we grow our European portfolio. At the end of the period, the Company’s portfolio consisted of 61 micro-cap businesses across eight industries and 36 properties located across New York and Miami.

US and European Micro-cap

The US micro-cap portfolio continues to perform well and further progress has been made with investments and realisations. The portfolio has seen a valuation increase of 31 cents per share, primarily due to increased performance at our ISS vertical and positive performance at several co-investments.

JZCP continues to expand and diversify its investment portfolio in Western Europe. As of 31 August 2015, EMC 2010 had made eight investments in Spain, and one investment each in the UK, Germany, Italy and Denmark, which combined represent 25% of JZCP’s investment portfolio. Following the fundraising for Fund III, we look forward to putting more capital to work.

Real Estate

The Board is pleased with the significant progress the Company has made in building a balanced portfolio of retail and residential properties in conjunction with our partner, RedSky Capital. As of 30 September 2015, JZCP had approximately $214 million invested in 37 properties, (one post-period in September 2015), all currently in various stages of development and re-development.

During the period, JZCP invested $52 million to acquire nine properties, reflecting RedSky Capital’s ability to originate a healthy pipeline of attractive investment opportunities in both Brooklyn and Miami.

Realisations

There have been four significant realisations generating most of the $29.9 million received during the period. These include a portion of the Company’s investment in our HRCM vertical, proceeds following Salter Lab’s refinancing and partial repayment of its existing senior subordinated notes, and a dividend from Southern Petroleum Laboratories. JZCP also received proceeds from the refinancing of its two properties located on Driggs Avenue in Brooklyn’s Williamsburg neighbourhood.

Distributions

In accordance with our policy to distribute annually an amount equal to 3 per cent of NAV, the Directors have declared an interim dividend of 16 cents per share for the six months ended 31st August 2015, compared to 15 cents for the period ended 31st August 2014. This implies an annualised yield as at 31st August 2015 of 5.0%. The Ordinary Shares issued in the Placing and Open Offer will not rank for this interim dividend but will rank for dividends declared hereafter.

Outlook

We are pleased with the hard work that’s been completed during the period and are confident that JZCP’s NAV will continue to grow over time providing an attractive long-term return for investors.

The recent placing and open offer and ZDP rollover have strengthened the Company’s balance sheet leaving JZCP better positioned for continued long term growth and securing its long-term future. We anticipate having significant realisations in the foreseeable future which, with the recent injection of new capital, will provide the resources for the Company to invest in attractive opportunities and build on its long track record of delivering healthy returns for our shareholders.

David Macfarlane

Chairman

27 October 2015

The US micro-cap portfolio increased 31 cents, primarily due to an increase in value at our Industrial Services Solutions (“ISS”) vertical (8 cents). Also contributing to the positive portfolio performance were increases at several co-investment companies: Justrite Manufacturing, an industrial safety company (8 cents); Southern Petroleum Laboratories, an industry leader in hydrocarbon testing services (7 cents); Suzo-Happ, a manufacturer of parts for the global gaming industry (5 cents); and New Vitality Holdings, a marketer of premium nutritional supplements (5 cents).

Offsetting these uplifts in valuation were decreases in performance at: Accutest, our full service environmental testing laboratory business (4 cents); Vitalyst, our co-investment IT support business (5 cents); Healthcare Products Holdings, our power wheelchair company (4 cents); and Priority Express, our logistics and courier business (4 cents).

The European micro-cap portfolio increased 2 cents, primarily due to write-ups at One World Packaging (2 cents), our niche manufacturer of environmentally friendly packaging, Fidor Bank (4 cents), an online German bank, and Winn (3 cents), a legal claims business in the UK. These increases were offset by write-downs due to decreased performance at security business Ombuds (8 cents) and business process outsourcing company Docout (3 cents).

Finally, expenses at JZCP Realty Fund amounted to 3 cents per share. Increases in value of our real estate properties result from third-party appraisals received during our valuation periods. No appraisals were received during the six months ended 31 August 2015 (which were not already reflected in the valuation of our properties at 28 February 2015) that materially affected the valuation of any property.

Returns

The chart below summarizes the cumulative total NAV returns and total shareholder returns for the most recent three-month, six-month, twelve-month, three-year and five-year period.

Portfolio Summary

New US investments – Verticals

Industrial Services Solutions (“ISS”) Vertical

In March 2015, JZCP’s ISS vertical completed the add-on acquisition of Midwest Valve Parts Supply Company (“MVP”), an independent supplier of replacement parts for valves, actuators, and related equipment to valve remanufacturers, as well as direct to end users in a variety of markets. MVP’s acquisition required no cash from JZCP.

In July 2015, JZCP’s ISS vertical completed the add-on acquisition of Cajun Valve Services (“CVS”), which specializes in all aspects of repairing and reconditioning control valves and associated instrumentation. CVS’ acquisition required no cash from JZCP.

In September 2015, JZCP’s ISS vertical completed the add-on acquisition of All-Pump & Equipment Co. (“AP&E”), which specializes in pump repair, controls and related equipment for water and wastewater in the municipal, hotel and office building management markets. AP&E’s acquisition required no cash from JZCP.

Healthcare Revenue Cycle Management (“HRCM”) Vertical

In June 2015, JZCP’s HRCM vertical completed the acquisitions of The Receivables Outsourcing Companies (“ROI”) and Avectus Healthcare Solutions (“Avectus”). ROI provides a variety of critical revenue cycle management services to hospital clients and Avectus provides third party insurance liability and workers’ compensation billing and recovery services to hospitals and trauma centres. As part of these transactions, JZCP was able to refinance out most of its existing debt from previous HRCM vertical transactions. The combined purchase price for ROI and Avectus was $68 million, which was funded with bank debt and equity from JZCP and Edgewater.

New US Investments – Co-Investments

In April 2015, JZCP invested $4.9 million in Sloan LED, a designer and manufacturer of LED lights and lighting systems for various end-markets and product applications.

Also in April 2015, JZCP invested $22 million in K2 Towers, an acquirer, owner and operator of wireless communication towers throughout the United States and Puerto Rico.

In August 2015, JZCP invested $12.5 million in Jordan Healthcare Products (“JII Healthcare”), a portion of which was used to acquire Global Medical Imaging (“GMI”), a company which sells, repairs and installs new and refurbished medical imaging equipment. JII Healthcare has been established to invest principally in the United States and primarily in buyouts and build-ups of companies in the micro-cap healthcare equipment sales, service and installation arenas.

In September 2015 (post-period), JZCP invested $5.5 million in JII Healthcare to fund the acquisition of DRE, Inc. (“DRE”), a surgical and medical equipment supplier that provides a combination of new and professionally refurbished equipment to medical professionals worldwide.

European Micro-Cap Portfolio

JZCP invests in the European micro-cap sector through its 75% ownership of EMC 2010 and (post-period) its 32% ownership of Fund III, which had its first close in August 2015 at €237 million. As you may recall, EMC 2010 and Fund III have offices in London and Madrid and an outstanding team with over fourteen years of investment experience in European micro-cap deals. Fund III will enable JZCP to continue to expand and diversify its investment portfolio in Western Europe; in addition our European team will be able to speak for more capital in each transaction which should produce better opportunities.

As of 31 August 2015, EMC 2010 had made eight investments in Spain, and one investment each in the UK, Germany, Italy and Denmark. Post-period, EMC 2010 transferred three of these ‘warehoused’ investments to Fund III (Petrocorner, Fincontinuo and S.A.C) and Fund III made its first direct investment, acquiring Collingwood, a niche auto insurer in the UK.

New European Investments

In March 2015, JZCP invested a further €1.1 million in Fidor Bank (through EMC 2010), as part of a larger Tier 1 capital increase from existing Fidor Bank shareholders. With headquarters in Munich, Germany, Fidor combines a social-media banking model with traditional banking services, offering internet-based and mobile-based transactions, supplemented by full service cash management solutions to retail customers. In addition, as of 30 June 2015, Fidor Bank de-listed from the Frankfurt Stock Exchange, which we expect to enhance the mid- to long-term valuation of the company.

Also in March 2015, JZCP invested a total of €7.6 million (€2.8 million in equity through EMC 2010 and €4.8 million directly as mezzanine lender) in S.A.C, an operational (lease and service) van leasing company based south of Copenhagen, Denmark. In September 2015 (post-period), this entire ‘warehoused’ investment (both JZCP’s direct investment and investment made through EMC 2010) was transferred to Fund III.

Additionally in March 2015, JZCP invested a further €3.8 million (through EMC 2010) to capitalize an alternative lending vehicle for Fincontinuo. Fincontinuo is a leading independent lending platform that has been distributing and servicing Cessione del Quinto (“CdQ”) loans, a low risk and niche form of consumer lending in Italy since 1997. JZCP is investing in this opportunity alongside Avenue Capital. As a ‘warehoused’ transaction, EMC 2010 transferred its original investments in Fincontinuo to Fund III in October 2015, in conjunction with the first close of Fund III.

In July 2015, JZCP invested a further €1.7 million (through Fund EMC 2010) in Docout, a leading provider of digitalisation, document processing and storage services to financial institutions, utilities, telecoms, insurance companies and large blue chip corporate customers in Spain.

In October 2015 (post-period), JZCP invested £15 million in Collingwood (through Fund III), a niche auto insurer in the UK. Collingwood currently focuses on four products in the UK motor market using a non-automated approach to underwriting namely, weekly taxi insurance, learner drivers and distressed motor fleet with a growing fourth new line in the younger driver segment.

Real Estate Portfolio

Working with high quality management teams is at the core of our investment approach and over the past three and one half years, we have assembled a portfolio of retail, office and residential properties in Brooklyn, New York and Miami, Florida in partnership with RedSky Capital, a team with significant experience in this sector. As of 30 September 2015, JZCP had approximately $214 million invested in the real estate portfolio.

The underlying thesis of our real estate portfolio is to acquire off-market properties in neighbourhoods that are beginning to see rental and valuation growth.

Brooklyn continues its renaissance where areas that have been historically industrial, low-income and/or artist communities are beginning to see seismic population changes, fuelled by an influx of young and affluent ex-Manhattan residents in search of more space and a trendier community that embraces a relaxed, artistic and young lifestyle. Our properties are located in the Williamsburg, Downtown Brooklyn, Greenpoint, and Bushwick Wyckoff Heights neighbourhoods.

We are seeing similar trends and opportunities in the Wynwood and Design District neighbourhoods of Miami, Florida, which each draw strong parallels to the upscale, urban atmosphere of Williamsburg, Brooklyn. We made our first investment in Miami in January 2015, quickly followed by another three acquisitions in late February and March 2015. We believe that rapidly increasing retail rents amid a thriving arts scene are providing very attractive investment opportunities currently in Miami.

During the period, JZCP, together with RedSky, acquired nine properties, reflecting RedSky Capital’s ability to originate a healthy pipeline of attractive investment opportunities in both Brooklyn and Miami. Since we began investing with RedSky in April 2012, we have acquired a total of 37 properties (one post-period in September 2015), all currently in various stages of development and re-development.

We have written this portfolio down by 3 cents per share due to expenses related to the portfolio. Increases in value of our real estate properties are based on third-party appraisals received during our valuation periods. No appraisals were received during the six months ended 31 August 2015 (which were not already reflected in the valuation of our properties at 28 February 2015) that materially affected the valuation of any property.

New Real Estate Investments

Brooklyn, New York Acquisitions

In April 2015, JZCP invested $7.0 million to acquire another property on Bedford Avenue in the Williamsburg neighbourhood of Brooklyn.

In June 2015, JZCP invested $0.6 million to acquire another property in the Downtown Brooklyn neighbourhood, an addition to our Downtown Brooklyn portfolio.

In August 2015, JZCP invested $11.2 million to acquire three contiguous buildings in the Downtown Brooklyn neighbourhood, additions to our Downtown Brooklyn portfolio.

Miami, Florida Acquisitions

In March 2015, JZCP invested a further $12.5 million (net) to close on two properties in Miami, Florida, one each in the city’s adjacent Wynwood and Design District neighbourhoods.

In June 2015, JZCP invested $8.8 million to acquire a property in Miami’s Design District neighbourhood, across the street from the two buildings previously acquired in the Design District.

Also in June 2015, JZCP invested $5.0 million to acquire a property in Miami’s Wynwood neighbourhood, JZCP’s third acquisition in Wynwood.

In September 2015 (post-period), JZCP invested $7.6 million to acquire another property in Miami’s Design District neighbourhood, adjacent to the property acquired in June 2015.

Other Investments

Our recently established asset management business in the US, Spruceview Capital Partners, addresses the growing demand from corporate pensions, endowments, and foundations for fiduciary management services through an Outsourced Chief Investment Officer (“OCIO”) model. We launched the first product in July 2014, the Bright Spruce Fund, LP. JZCP invested $50 million in the Bright Spruce Fund, whose investment strategy is capital appreciation in liquid funds while mitigating risk. JZCP is not being charged any fees on this ‘fund’ investment.

As previously reported, Richard Sabo, former Chief Investment Officer of Global Pension and Retirement Plans at JPMorgan and a member of that firm’s executive committee, is leading a team of 12 senior investment, business development, legal and operations professionals. We are targeting corporate pensions, university endowments, foundations and family offices and are beginning to gain traction with several accounts. While this is a long-term building process, the business continues to progress in line with expectations. Following shareholder approval in September 2015 (post-period), JZCP increased its commitment to Spruceview by $15 million.

Listed Investments

We have continued our program of holding highly rated listed corporate bonds as a means of earning an enhanced return on our cash. Currently, Goldman Sachs is the sole obligor of these bonds, which mature in January 2017. We also continue to hold UK Gilts, with an eye toward the 2016 maturity date of our ZDPs.

Significant_Realisations

We had four significant realisations during the period.

US Micro-Cap - Verticals

In June 2015, JZCP realised a portion of its investment in our HRCM vertical, refinancing certain notes, which had been used for the previously purchased businesses, with third-party debt. JZCP invested a net $3.6 million in the context of the refinancing and acquisition of ROI and Avectus (described above).

US Micro-Cap - Co-Investments

In March 2015, JZCP received proceeds of $3.4 million from Salter Labs, following Salter Lab’s refinancing and partial repayment of its existing senior subordinated notes.

In July 2015, JZCP received a dividend of $1.3 million from Southern Petroleum Laboratories.

Real Estate

In July 2015, JZCP Realty Fund received proceeds of $4.6 million from the refinancing of its two properties located on Driggs Avenue in Brooklyn’s Williamsburg neighbourhood.

Escrow Receipts and Other

In the six month period ended 31 August 2015, JZCP received escrow distributions of $0.6 million and settlement proceeds, from a Mezzanine investment, totalling $2.6 million.

Significant Events and Financings

In June 2015, JZCP closed on a $100 million six-year term loan from Guggenheim Partners. This term loan carries an interest rate of LIBOR plus 5.75% and was partially used to pay down the entire Jefferies $50 million one-year loan facility.

In August 2015, Fund III closed its first round of fundraising at €237 million. JZCP has committed €75 million to Fund III, which will enable JZCP to continue to expand and diversify its investment portfolio in Western Europe.

Post-period, JZCP raised approximately a net £77 million through an issuance of 18,888,909 new ordinary shares while concurrently rolling over approximately £41.6 million of 8% ZDPs due June 2016 into 4.75% ZDPs due October 2022. The combined effect of these two transactions deleverages the Company’s balance sheet, lowers its cost of capital and rebalances its debt maturity profile, better positioning the Company to take advantage of the growing pipeline of investments.

Outlook

We remain committed to pursuing our value-added investment strategy across several asset classes. As always, our objective is to put your (and our) money to work in a diverse portfolio of reasonably priced assets.

We are confident that JZCP’s net asset value will continue to grow at a risk-adjusted rate that will be an attractive return for investors. It has been a good first half of the year with the recent placing and open offer and ZDP rollover strengthening the Company’s balance sheet; we are developing many attractive opportunities for future investment.

Going forward, we have the prospect of several realisations in the coming year which will provide JZCP with more liquidity on the back of strong investment returns.

Thank you for your confidence in our investment strategy and in particular those who participated in the placing and open offer and ZDP rollover. Please feel free to contact us with any ideas that might be beneficial to JZCP.

Yours faithfully,Jordan/Zalaznick Advisers, Inc.

27 October 2015

Investment Portfolio

(1) Original book cost incurred by JZEP/JZCP adjusted for subsequent transactions. The book cost represents cash outflows and excludes PIK investments.

(2) JZCP owns 100% of the shares and voting rights of JZCP Realty Fund, Ltd.

(3) Legacy Investments. Legacy investments are excluded from the calculation of capital and income incentive fees.

(4) Co-investment with Fund A, a Related Party (note 20).

Unaudited Statement of Comprehensive IncomeFor the Period from 1 March 2015 to 31 August 2015

All items in the above statement are derived from continuing operations.

The profit for the period is attributable to the Ordinary shareholders of the Company.

The format of the Income Statement follows the recommendations of the 2014 AIC Statement of Recommended Practice.

The "Total" column of this statement represents the Company's statement of comprehensive income, prepared in accordance with IFRS.

There was no comprehensive income other than the profit for the period.

The accompanying notes form an integral part of the unaudited condensed financial statements.

Statement of Financial PositionAs at 31 August 2015

These unaudited condensed financial statements were approved by the Board of Directors and authorised for issue on 27 October 2015. They were signed on its behalf by:

David Macfarlane Christopher WaldronChairman Director

The accompanying notes form an integral part of the unaudited condensed financial statements.

Unaudited Statement of Changes in EquityFor the Period from 1 March 2015 to 31 August 2015

Comparative for the period from 1 March 2014 to 31 August 2014

The accompanying notes form an integral part of the unaudited condensed financial statements.Unaudited Statement of Cash FlowsFor the Period from 1 March 2015 to 31 August 2015

Notes to the Financial Statements

3. Critical Accounting Judgements and Key Sources of Estimation Uncertainty

The following are the key assumptions and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year:

Fair Value of Investments at Fair Value Through Profit or Loss ("FVTPL")

Certain investments are classified as FVTPL, and valued accordingly, as disclosed in note 2 of the annual financial statements for the year ended 28 February 2015. The key source of estimation uncertainty is on the valuation of unquoted equities and equity-related securities.

In reaching its valuation of the unquoted equities and equity-related securities the key judgements the Board have to make are those relating to the multiples and the discount factors used in the valuation models.

Loans and Receivables

Certain investments are classified as Loans and Receivables, and valued accordingly, as disclosed in note 2 of the annual financial statements for the year ended 28 February 2015 as stated in note 2. The key estimation is the impairment review and the key assumptions are as disclosed in note 2 of the financial statements for the year ended 28 February 2015.

Investment in Associates

The policies applied in accounting for the Company's associate require significant judgement. Full details are disclosed in Note 2c of the annual financial statements for the year ended 28 February 2015.

Assessment as an Investment Entity

The Board has concluded that the Company meets the definition of an investment entity and as such, does not consolidate its subsidiaries but rather values them at fair value through profit or loss as described in Note 2d of the annual financial statements for the year ended 28 February 2015.

4. Segment Information

The Investment Manager is responsible for allocating resources available to the Company in accordance with the overall business strategies as set out in the Investment Guidelines of the Company. The Company is organised into the following segments:

The investment objective of each segment is to achieve consistent medium-term returns from the investments in each segment while safeguarding capital by investing in a diversified portfolio.

Investment in corporate bonds, money market funds and treasury gilts are not considered part of any individual segment and have therefore been excluded from this segmental analysis.

Segmental Profit/Loss

For the period from 1 March 2015 to 31 August 2015

For the period from 1 March 2014 to 31 August 2014

1The capital incentive fee is allocated across segments where a realised or unrealised gain or loss has occurred. Segments with realised or unrealised losses are allocated a credit pro rata to the size of the loss and segments with realised or unrealised gains are allocated a charge pro rata to the size of the gain.

Segmental Net Assets

At 31 August 2015

At 28 February 2015

Certain income and expenditure is not considered part of the performance of an individual segment. This includes net foreign exchange gains, interest on cash, finance costs, management fees, custodian and administration fees, directors’ fees and other general expenses.

The following table provides a reconciliation between total segmental operating profit and operating profit.

Other receivables and prepayments are not considered to be part of individual segment assets. Certain liabilities are not considered to be part of the net assets of an individual segment. These include custodian and administration fees payable, directors’ fees payable and Other payables and accrued expenses.

The following table provides reconciliation between total segmental net assets and total net assets.

5. Fair Value of Financial Instruments

The Company classifies fair value measurements of its financial instruments at fair value through profit or loss (“FVTPL”) using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The financial assets valued at FVTPL are analysed in a fair value hierarchy based on the following levels:

Level 1

Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2

Those involving inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). For example, investments which are valued based on quotes from brokers (intermediary market participants) are generally indicative of Level 2 when the quotes are executable and do not contain any waiver notices indicating that they are not necessarily tradable. Another example would be derivatives such as interest rate swaps or forward currency contracts where inputs are mostly observable and therefore may also fall into Level 2. At the period end, the Company had assessed it held not assets or liabilities valued at FVTPL that were using inputs that would be classified as Level 2 within the valuation method.

Level 3

Those involving inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs). Investments in JZCP’s portfolio valued using unobservable inputs such as multiples, capitalisation rates, discount rates (see page 26) fall within Level 3

Differentiating between Level 2 and Level 3 fair value measurements i.e., assessing whether inputs are observable and whether the unobservable inputs are significant, may require judgement and a careful analysis of the inputs used to measure fair value including consideration of factors specific to the asset or liability.

The following table shows financial instruments recognised at fair value, analysed between those whose fair value is based on:

Transfers between levels

There were no transfers between the levels of hierarchy of financial assets and liabilities recognised at fair value within the period ended 31 August 2015 and the year ended 28 February 2015.

(1) Real Estate portfolio value at 28 February 2015 has been reduced by $4,370,000 due to the reclassification, to 'Other receivables', of deposits paid on behalf of JZCP Realty and accrued interest.