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6 Oct 2008 16:09
PANTHEON INTERNATIONAL PARTICIPATIONS PLC
FINAL RESULTS FOR THE YEAR ENDED 30 JUNE 2008
The full Annual Report and Accounts can be accessed via the Company's websiteat www.pipplc.com or by contacting the Company Secretary on telephone 01392412122.Financial SummaryHighlights 30TH JUNE 2008 30TH JUNE 2007 CHANGE Summary of results NAV per share 1,108.7p 919.2p 20.6% Total assets less current ‚£736.1m ‚£610.3m 20.6% liabilities Ordinary shares Share price 750.0p 917.5p (18.3%) Discount to NAV 32.4% 0.2% - Redeemable shares Share price 819.5p 897.5p (8.7%) Discount to NAV 26.1% 2.4% - Investment activity Invested in private equity ‚£272.5m ‚£218.1m 24.9% assets Received from private equity ‚£133.0m ‚£146.7m (9.3%) assets 1 YEAR 3 YEARS 5 YEARS 10 YEARS SINCE INCEPTION * Performance % % P.A. % P.A. % P.A. % P.A. NAV per share 20.6 19.0 15.2 12.1 14.5 Ordinary share price (18.3) 4.9 11.1 11.9 13.2 FTSE All Share (13.0) 7.2 11.3 3.5 8.1 MSCI World (9.4) 5.7 8.4 2.8 6.4
* PIP was launched on 18th September 1987
Capital Structure Ordinary shares 37,521,013 Redeemable shares 28,871,255 Total 66,392,268CHAIRMAN'S STATEMENTI am pleased to report an increase of 20.6% in PIP's NAV per share in thefinancial year to 30th June 2008. However, the ordinary share price fell by18.3% as the discount widened to 32.4% from 0.2% at the beginning of the year.In part, this was due to the market's increasing concerns over the effect ofrecent equity market volatility on private equity valuations and the currentuncertain outlook for corporate profits.Our net assets rose by ‚£125.8 million to ‚£736.1 million during the year, mainlyas a result of an uplift in the value of investments. This performance wasaided by currency movements, in particular, the strengthening of the euro whichappreciated 15.0% against sterling, resulting in a ‚£31m increase in thesterling value of the private equity portfolio.
Investment Activity
The lack of availability of debt and an increase in investor uncertainty hasresulted in reduced activity levels in the market. These conditions contributedto a reduction in distributions and, to a lesser degree, a slower rate of newinvestment achieved through our primary programme in the second half of theyear. In the year, PIP invested ‚£272.5 million in underlying private equityassets. Of this amount, ‚£145.4m was paid to meet investment calls arising fromPIP's primary portfolio and ‚£127.1m was applied to the secondary portfolio tocomplete 13 new secondary purchases and to pay further calls. The total amountof cash distributed to PIP as a result of investment realisations during theyear was ‚£133.0 million. Of this amount, ‚£51.3m came from the primary portfoliowith ‚£81.7m arising from the secondary portfolio.
Primary Commitments
Despite the challenging market conditions, the fundraising environment remainedactive. During tough economic periods, the dispersion of performance in privateequity funds tends to increase. Pantheon's relationships with top-tier privateequity fund managers helps to ensure that PIP gains access to top quality fundsworldwide - a factor that is critical to achieving good performance.
PIP committed a total of ‚£237.0 million to primary funds, encompassing 13 Europe-focused funds (‚£161.0m), 22 US-focused funds (‚£72.5m) and one Israeli-focused fund (‚£3.5m). In addition, PIP continued to invest in Asia via Pantheon's Asian fund of funds, which committed to 15 new funds during the year.
Secondary Commitments and Co-Investments
PIP committed ‚£112.5 million to 13 secondary transactions to purchase existinginterests in private equity funds. More than half of the value of thesetransactions was buyout-focused, with the remainder focused on venture capitaland special situations.In recent times, changes in investor strategy and the rebalancing of portfolioshave been the most common reasons for sales. However, the debt marketcorrection is increasing deal flow from investors seeking liquidity. The largeflow of capital into the private equity market prior to the credit crisisshould increase the supply of attractive opportunities.
PIP committed ‚£6.9m to 4 direct co-investments as part of its strategy to deploy additional capital selectively alongside top tier managers.
Market Review and Prospects
Since August last year, the market has been increasingly characterised by thelack of available debt financing following the "credit crunch" and a weakereconomic outlook. The inexpensive loans offered to buyout firms over the pastfew years are no longer readily available, particularly at the larger end ofthe market. As a result, in the second half of the financial year, we have seenin the buyout market a reduction in large transactions, secondary buyoutactivity and debt recapitalisations. Relatively speaking, the investmentactivity of venture capital firms has been less affected due to their lesserreliance on debt. However, both venture capital and buyout firms have beenimpacted by the slowing of the IPO and M&A markets, reducing exit opportunitiesand subsequent fund distributions.As a result of the debt market correction, fears have mounted over possibleknock-on effects to the wider economy, and in particular corporate profits.Early warning signs of recession and rising inflation rates have taken theirtoll on investor sentiment, with falls of around 13% and 9% in the FTSE AllShare and MSCI World Indices respectively over PIP's reporting period. Mostbuyout assets are valued by comparison to listed companies, and because of thereporting time lag, the impact of falls in the valuation multiples of listedcompanies on private equity valuations remains to be seen. It would not besurprising if in certain circumstances some portfolio companies, especiallythose acquired on higher purchase multiples, or with reduced earnings or highlevels of debt, experience pressure on valuations in the near term.Consequently, the outlook for returns in the buyout market is lower than thereturns of the recent past. However, weak markets which may have a negativeimpact on valuations in the short term, can also present attractive investmentopportunities. Lower valuations tend to provide circumstances where privateequity managers can purchase good quality assets at attractive prices.The diversification of PIP's portfolio across buyout, venture and specialsituations sectors, and across all major geographical regions of the privateequity industry, should help mitigate any difficulties experienced by specificcompanies or sectors in the current economic conditions. As always, it isimportant for investors in private equity to ensure that they select themanagers that are able to continue to deliver superior performance across themarket cycle. Pantheon's strategy is to focus on managers that can demonstrateclear value creation. Much of this value creation is centred on greaterefficiency and building scale in middle market businesses. The ability of PIPto benefit from Pantheon's truly global expertise and experience places it wellfor superior performance over the long term.
Capital Structure and Financing
As planned, during the year PIP increased by ‚£30m the total amount of "standby"commitments under which institutional investors have agreed to subscribe, ifcalled upon by PIP to do so, for new redeemable shares. This brings the totalaggregate amount under these "standby" agreements to ‚£150m.
As at 30th June 2008, PIP had utilised ‚£70m of its ‚£150m available bank loan facility during the year to facilitate the execution of its investment strategy. At the end of August, the Company had utilised a further ‚£34m.
In the coming quarters it is likely that calls will exceed distributions. Whilewe have substantial facilities available to us, as referred to above, to meetthe calls, it remains a key objective to continue to secure resources to enablePIP not only to fund outstanding commitments but also to commit to newinvestments. Until there is a full recovery in the level of distributions, PIPwill suspend its new fund commitment programme to ensure that any cashresources not needed to finance outstanding commitments can be applied toprioritising secondary activity.
Annual General Meeting and Presentation
The Annual General Meeting of the Company will take place at 12 noon on 25thNovember 2008 at Pantheon's office. Pantheon will give a presentation on theprogress of PIP's portfolio. Both the Directors and Pantheon look forward tomeeting shareholders informally after the meeting.Tom BartlamChairman6th October 2008THE MANAGER'S REVIEWMarket ReviewThe private equity industry was affected by the significant tightening in thedebt markets, resulting in a slowdown in investment activity in the second halfof the year, particularly at the larger end of the buyout market. Depressed IPOand M&A markets resulted in a corresponding decrease in distributions. Thecurrent conditions could provide opportunities for private equity managers toacquire quality assets at attractive prices.Buyout activity in the USA has been subdued, in large part, by the reduction inthe liquidity of the leveraged debt market. During the first quarter of 2008,buyout volume was $46 billion, a 55% decrease over the first quarter of 2007.The biggest impact was felt at the larger end of the buyout market, where thesupply of finance has almost completely disappeared, whereas activity levels atthe mid and small end of the buyout market have held up relatively well.Current market conditions are likely to reduce the valuation multiples appliedto buyout transactions, providing more attractive entry opportunities in thecoming year. Vintages at the height of previous economic uncertainty, such as1993 and 2003 have provided strong returns, and this current period of marketinstability may prove to be no different.The US venture capital market has not experienced as significant a slowdown infundraising or investment activity as the US buyout market, primarily due toits lesser dependency on debt financing. However, the sector has been heavilyimpacted by the slowing IPO and M&A markets. US venture-backed firms did notlaunch a single IPO in the second quarter of 2008, a situation which has notbeen seen since early 2003. Additionally, venture-backed M&A activity dropped by42% year on year - its lowest level for at least 10 years. Notwithstandingthis, we believe that managers are able to continue to build value within PIP'sventure capital portfolio, and expect returns to pick up once the exitenvironment improves.The European buyout market has been subdued similarly to the US. In the firsthalf of 2008 the continental European buyout market was at its lowest levelsince 2004 with deals totalling ¢â€š¬22.7 billion, a 64% drop year-on-year. Theimpact was felt most in the large end of the private equity market (defined asdeals greater than ¢â€š¬1 billion), where the value of the combined deals plummetedto ¢â€š¬6.4 billion (as a reference, large deals for the full year 2007 totalled ¢â€š¬86billion). Additionally the number of exits in the first half of 2008 decreased42% year-on-year. This reduced activity has had a knock-on effect on the pricesfirms are willing to pay in European buyout transactions, which should providemore attractive entry opportunities in the coming year.Private equity firms continue to extend themselves internationally, with anotable trend for US private equity funds to increase their focus on Europe andAsia. Up to mid-August 2008, more than half of the takeovers announced by USprivate equity firms involved foreign targets, up from 35% in all of 2007. Thishighlights the importance of having a global perspective - a Pantheoncharacteristic that has consistently, over many years, ensured access to topclass private equity opportunities worldwide.The Asian market was not immune to the recent concerns of investors. Investmentactivity in the region during the first half of 2008 was down 23% year on year,while the value of private equity IPOs and M&A exits was down 41% and 21%respectively. Asia is growing in importance as a private equity market. It iscurrently a smaller opportunity than either the US or European markets but itspotential is expanding rapidly.The secondaries market has continued to mature this year. We are seeingincreased deal flow as more investors are seeking liquidity in the tougheconomic conditions. We also expect the re-balancing of portfolios betweenbuyout and venture and the desire of limited partners to manage theirportfolios to stimulate further activity in the secondary market. Pantheon'sreputation and skill as one of the best private equity fund secondary investorsenables PIP, subject to available financing, to benefit from the attractive opportunitiesthat we are seeing in the market place today. It remains a priority of theCompany to raise capital in order to finance such opportunities.
Portfolio Review
The underlying companies in the portfolio range from large and matureindustrial enterprises with multinational operations to early-stage venturesoperating at the leading edge of technological development. All the companieshave one factor in common: the influence of professional private equitymanagers who are motivated to maximise the value of each underlying investment.
Geographic Spread
While the USA remains the most developed and largest private equity market, theEuropean market continues to mature and grow in relative size. The weighting tothe USA, at 53% is down from 59% at the start of the year. PIP's exposure toAsia and other is 7%, up from 6% at 30th June 2007.USA 53% Europe 40% Asia and other 7% Stage Composition
The table below shows the breakdown of the portfolio by the stage focus of theunderlying funds. Buyouts made up 61% of the portfolio at 30th June 2008. PIP'sperformance in the year has been mainly driven by the buyout sector, where PIPhas the majority of its assets. The weighting to venture capital fundsdecreased from 29% to 27%.Buyouts 61% Venture 27% Special Situations 5% Generalist 5% Directs 2% Sector Composition
PIP's portfolio is well diversi¯¬ed by the sectors in which the underlying companies operate. This sectoral diversi¯¬cation helps to minimise the effects of cyclical trends or volatility within particular industry segments.
Other services & manufacturing 33% Consumer-related 15% Computer-related 13% Medical / Health-related 11% Communications 8% Industrial products 8% Biotechnology & pharmacology 4% Energy-related 4% Other electronics-related 4% MaturityPIP's portfolio contains a wide range of fund vintages (referring to the yearthe fund was established), as shown in the table below. Private equity fundstypically take up to ¯¬ve years of a fund's life to invest the majority of theiravailable capital into underlying companies. As a result, signi¯¬cant flows ofrealised proceeds tend not to be returned to investors until the middle andlater stages of a fund's life.2007-08 13% 2006 14% 2005 13% 2004 11% 2003 3% 2002 3% 2001 7% 2000 19% 1999 6% 1998 and earlier 11% Listed Company Exposure
PIP's portfolio of funds primarily comprises private equity assets. These funds may also hold listed companies as a result of recent IPOs within fund portfolios that may be held subject to selling restrictions or in some instances due to private investments in public equity (PIPEs).
Underlying listed company interests represented 8% of PIP's investments at 30th June 2008.
HedgingDue to the uncertain timing of cash flows in and out of underlying privateequity assets, it is not possible to match currency movements perfectly withhedging instruments. For this reason, the present policy of the PIP Board isnot to hedge the portfolio against currency movements except where there is asigni¯¬cant change in the geographic weighting that is expected to be of ashort-term nature. PIP did not hedge the portfolio against exchange ratemovements during the ¯¬nancial year. The net effect of currency movementsresulted in a ‚£31m increase in the sterling value of the private equityportfolio. This compares to a ‚£25.1m decrease in the previous year.
Activity
PIP has made commitments of ‚£356.4 million to private equity funds during thepast year. Of this, ‚£237.0m was committed to new funds, ‚£112.5m was committedto the purchases of secondary investments and ‚£6.9m was committed to thepurchase of direct holdings in private companies.
New Investments
PIP committed a total of ‚£237.0 million to 36 new funds in the year, of which ‚£18.7 million had been drawn down by 30th June 2008. 22 of the new funds areUS-based funds (total ‚£72.5m), of which ten are focused on venture stageinvestments (‚£21.5m), ten on buyouts (‚£45.9m) and two on special situations (‚£5.1m). The remaining new fund commitments during the year were to nine Europeanbuyout funds (‚£136.5m), three European venture funds (‚£11.3m), one Europeanspecial situations fund (‚£13.2m) and one Israeli venture fund (‚£3.5m). PIPcontinues to invest in Asia via Pantheon's Asia fund of funds. During the year,these funds committed to 15 new investments.
Secondary Acquisitions
PIP completed 13 secondary purchases during the year at a value of ‚£112.5 million including unfunded commitments.
The 13 transactions comprised interests in approximately 65 underlying privateequity funds with more than half of the committed capital focused on buyout,with the remainder focused on venture capital and special situations.
Distributions
PIP enjoyed another good year for distributions. In all, the Company received ‚£133.0 million in proceeds from the portfolio, equivalent to 25% of openingprivate equity assets.Secondary ‚£81.7m Primary ‚£51.3m TOTAL ‚£133.0M Calls
Cash calls increased during the year by 25% to ‚£272.5 million.
Primary portfolio ‚£145.4m Secondary portfolio ‚£127.1m TOTAL ‚£272.5M Outstanding CommitmentsPIP has had an active year, with signi¯¬cant activity in both primarycommitments and secondary purchases. As a result, PIP's outstanding commitmentsto investments rose to ‚£641.2 million at 30th June 2008, compared with ‚£528.0million at 30th June 2007.Finance
During the year PIP has drawn down ‚£70 million of its ‚£150 million loan facility to allow the Company to carry out its investment strategy.
As planned, during the year PIP entered into new five-year `standby' agreementswith two institutional investors under which the investors have committed tosubscribe, if called upon by PIP to do so, a total of ‚£20 million for newredeemable shares. In addition, the commitment under an existing standbyagreement with another institutional investor was increased by ‚£10 million.This brings the total aggregate amount which institutional investors havecommitted, if required, to subscribe for new redeemable shares under standbyagreements to ‚£150 million.PIP's ability to call on these commitments is subject to PIP retainingsufficient unutilised redeemable share capital and shareholder authority toallot on a non-preemptive basis the redeemable shares which would be requiredto be issued and certain events of default (including a change of control, theappointment of a receiver or a similar insolvency event in relation to PIP orPantheon, or a successor manager approved by the investors, ceasing to be PIP'smanager) not occurring.PIP pays a fee of 0.5% per annum on these undrawn commitments. The purpose ofthese agreements is to provide an additional level of assurance that PIP willbe in a position to meet portfolio calls, irrespective of market appetite forissues of new shares and other sources of capital in the short term.
Pantheon Vehicles
Pantheon is not entitled to management and commitment fees in respect of PIP'sholdings in, and outstanding commitments to, the ¯¬rm's managed fund-of-fundsvehicles. In addition, Pantheon has agreed that PIP will never be disadvantagedin terms of fees compared with the position it would have been in had it madeinvestments directly into the underlying funds rather than indirectly throughsuch fund-of-funds vehicles.
Company Strategy
PIP's primary investment objective is to maximise capital growth by investingin a diversified portfolio of private equity funds and, occasionally, directlyin private companies.The spread of performance in private equity is much wider than in other assetclasses and the selection of managers has a signi¯¬cant influence on investmentperformance. As a specialist fund-of-funds manager monitoring and researchingthe global private equity market, Pantheon, PIP's Manager, is well positionedto identify fund managers who have the skills and strategies to deliversuperior performance within their particular market segments.PIP's strategy is to invest with leading private equity managers whilstreducing investment risk through diversi¯¬cation of the underlying portfolio bygeography, manager, investment stage and sector. This strategy is implementedthrough PIP's primary and secondary investment programmes. PIP has theflexibility to vary the size of the primary and secondary investment programmesdepending on available financing at the point of commitment.
Primary Programme
The primary programme invests in private equity funds when they are ¯¬rst formed. Pantheon aims to secure access to superior managers whose funds are frequently oversubscribed and to identify high-quality managers often overlooked by the market. Investments are made on a pro-rata basis alongside Pantheon's regional fund-of-funds.
Through the primary programme, PIP invests in fewer than 2% of the estimateduniverse of private equity funds and thus is able to substantially outperformthe market averages, given the high dispersement of returns between managers.The primary programme enables PIP to invest strategically in speci¯¬c areas ofthe market, put money to work steadily over time and gain access to the verybest funds.Secondary ProgrammeThe secondary programme purchases existing investments in private equity funds.Typically these investments are acquired between three and six years after afund's inception. PIP bene¯¬ts because the fees and expenses in the ¯¬rst fewyears have been paid and distributions from the fund will be returned over ashorter time period.In accordance with the terms of its management agreement with Pantheon, PIP isentitled under Pantheon's allocation policy to the opportunity to co-invest ina predetermined ratio alongside Pantheon's global secondary fund programme,bene¯¬ting from access to larger secondary opportunities that it would not havehad the capacity to complete alone. The secondary programme enables PIP toacquire attractively priced secondary interests as and when these becomeavailable and is thus able to outperform market averages through judiciouspricing and timing.This dual approach of investment in the primary and secondary market is moreconsistent and ef¯¬cient than investing solely through either the primary orsecondary market.
The 20 largest managers as at 30th June 2008
NUMBER MANAGER REGION STAGE % OF PIP'S TOTAL PRIVATE EQUITY ASSET VALUE 1 Safeguard USA BUYOUT 3.3% International 2 Apax Partners EUROPE BUYOUT 3.0% 3 Nordic Capital EUROPE BUYOUT 2.8% 4 Argan Capital EUROPE BUYOUT 2.4% 5 Industri Kapital EUROPE BUYOUT 2.3% 6 BC Partners EUROPE BUYOUT 2.0% 7 Nova Capital EUROPE BUYOUT 1.7% 8 ABS Capital Partners USA GENERALIST 1.7% 9 Vision Capital EUROPE BUYOUT 1.6% Partners 10 Barclays Private EUROPE BUYOUT 1.6% Equity 11 Oaktree Capital GLOBAL GENERALIST 1.5% Management 12 Doughty Hanson and EUROPE BUYOUT 1.5% Co. 13 Altor Capital EUROPE BUYOUT 1.4% 14 Brentwood Associates USA BUYOUT 1.4% 15 Carlyle Group GLOBAL GENERALIST 1.4% 16 Avista Capital USA BUYOUT 1.4% 17 CVC EUROPE BUYOUT 1.4% 18 Permira Europe EUROPE BUYOUT 1.2% 19 Catalyst Investors GLOBAL GENERALIST 1.2% 20 Hutton Collins EUROPE MEZZANINE 1.2%
The 20 largest companies as at 30th June 2008
NUMBER COMPANY SECTOR % NAV 1 AMG Advanced INDUSTRIAL PRODUCTS 2.3% Metallurgical Group * 2 ALD International INDUSTRIAL PRODUCTS 1.3% 3 SciLabware BIOTECHNOLOGY AND PHARMACOLOGY 1.3% 4 Nycomed MEDICAL/HEALTH-RELATED 1.1% 5 MessageLabs Group COMPUTER-RELATED 1.1% 6 Hortex CONSUMER-RELATED 0.8% 7 N & W Global Vending OTHER SERVICES AND MANUFACTURING 0.6% 8 LM Glasfiber OTHER SERVICES AND MANUFACTURING 0.5% 9 Cavium Networks * OTHER ELECTRONICS-RELATED 0.4% 10 GCE Gas Control Equipment INDUSTRIAL PRODUCTS 0.4% 11 Trident Components Group OTHER SERVICES AND MANUFACTURING 0.4% 12 American Public Education OTHER SERVICES AND MANUFACTURING 0.4% 13 Lindorff OTHER SERVICES AND MANUFACTURING 0.4% 14 AGR Group * ENERGY-RELATED 0.3% 15 TDC COMMUNICATIONS 0.3% 16 Capio MEDICAL/HEALTH-RELATED 0.3% 17 Spectrum Clubs CONSUMER-RELATED 0.3% 18 Amadeus COMPUTER-RELATED 0.3% 19 Tommy Hilfiger CONSUMER-RELATED 0.3% 20 GSI Commerce * COMMUNICATIONS 0.3%
* Quoted holding as at 30th June 2008
BUSINESS REVIEW
The Business Review which follows is designed to provide shareholders with information about the Company's business and results in the year to 30th June 2008. It covers the following:
¢â‚¬¢ Description of the Company's business and strategy
¢â‚¬¢ Principal risks and uncertainties facing the Company
¢â‚¬¢ Review of business and results
¢â‚¬¢ Performance measured against key performance indicators
¢â‚¬¢ The Manager's role in managing the Company's assets
Business and Strategy
PIP, a closed-ended investment trust, is the longest established private equityfund of funds quoted on the London Stock Exchange. It enables investors to gainaccess to a substantial portfolio of unquoted companies in the USA, Europe andAsia, within funds managed by experienced private equity managers selected fortheir ability to outperform.PIP's primary investment objective is to maximise capital growth by investingin a diversified portfolio of private equity funds and, occasionally, directlyin private companies.The Company has received written approval from HM Revenue & Customs as anauthorised investment trust, under Section 842 of the Income and CorporationTaxes Act 1988, up to the year ended 30th June 2006. It is the opinion of theDirectors that the Company has subsequently sought to direct its affairs so asto enable it to continue to qualify for such approval and the Company willcontinue to seek approval under Section 842 each year.The Company's status as an investment trust allows it to obtain an exemptionfrom paying taxes on the pro¯¬ts made from the sale of its investments.Investment trusts offer a number of advantages for investors, including accessto investment opportunities that might not be open to private investors and toprofessional stock selection skills at low cost.
Principal Risks and Uncertainties Facing the Company
The Company invests principally in private equity funds. However, the Company'sstrategy is to adopt a global fund-of-funds investment programme maximisingreturns through selection of the best available funds and to mitigateinvestment risk through diversi¯¬cation of the underlying portfolio bygeography, investment stage and sector. The principal risks facing the Companyinclude the following:
Funding of investment commitments
In the normal course of its business, the Company typically has outstandingcommitments to private equity funds which are substantial relative to theCompany's assets. The Company's ability to meet these commitments is dependentupon it receiving cash distributions (the timing and amount of which can beunpredictable) from its private equity investments and, to the extent these areinsuf¯¬cient, on the availability of ¯¬nancing facilities.
Risks relating to investment opportunities
There is no guarantee that the Company will ¯¬nd suf¯¬cient suitable investmentopportunities, or that private equity funds in which it invests will ¯¬ndsuitable investment opportunities, to achieve the level of diversi¯¬cation whichthe Company seeks to achieve in relation to its investment portfolio.
Financial risk of private equity
The Company invests in private equity funds and unquoted companies which areless readily marketable than quoted securities and may take a long time torealise. In addition, such investments may carry a higher degree of risk thaninvestments in quoted securities. The Company may be adversely affected bythese risks notwithstanding the level of diversi¯¬cation which it seeks toachieve in relation to its investment portfolio.
Long-term nature of private equity investments
Private equity investments are long-term in nature and may take some yearsbefore reaching a level of maturity at which they can be realised. Accordingly,it is possible that the Company may not receive a return on investments made byit for a number of years.Liquidity risk
Due to the Company's investment policy, a large proportion of the Company'sportfolio comprises indirect participations in unquoted investments and directholdings in unquoted investments. Such investments are less readily marketablethan quoted securities and realisation of such investments may require alengthy time period or may result in distributions in kind to the Company.
Valuation uncertainty
In valuing its investments in private equity funds and unquoted companies andin publishing its net asset value, the Company relies to a signi¯¬cant extent onthe accuracy of ¯¬nancial and other information provided by these funds andcompanies to the Manager. There is potential for inconsistency in the valuationmethods adopted by these funds and companies. In addition, the informationprovided is typically more than 90 days old at the time the net asset value ofthe Company's shares is reported.
Gearing
As at 30th June 2008 the Company had borrowings of ‚£72.2m. The use of gearingcan cause both gains and losses in the asset value of the Company to be magni¯¬ed. The Company may also invest in private equity funds or unquoted companieswhich are geared by loan facilities that rank ahead of the Company's investmentboth for payment of interest and capital. As a consequence, the Company may beexposed to gearing through the borrowings from time to time of such privateequity funds and companies, therefore investment in such assets presents ahigher risk as to their capital return.
Foreign currency risk
The Company makes investments in US Dollars, Euros and other currencies as well as Sterling. Accordingly, the Company is exposed to currency exchange rate fluctuations.
Competition
The Company competes for investments with other investors. It is possible that competition for appropriate investment opportunities may increase, thus reducing the number of opportunities available and adversely affecting the terms upon which such investments can be made.
Unregulated nature of underlying investments
The private equity funds and underlying unquoted investments that form thebasis of the majority of the Company's portfolio are not subject to regulationby the Financial Services Authority or an equivalent regulatory body. Funds andunquoted companies in which the Company invests (directly or indirectly) may bedomiciled in jurisdictions which do not have a regulatory regime which providesan equivalent level of investor protection to that provided under the laws
ofthe United Kingdom.Defaults on commitments
If, in consequence of any failure to meet a demand for payment of any outstanding unpaid capital commitment of the Company to any private equity fund in which the Company has invested, the Company is treated as a defaulting investor by that fund, the Company may suffer a resultant dilution in its interest in that fund and, possibly, the compulsory sale of that interest.
Taxation
Any change in the Company's tax status or in taxation legislation or practicecould affect the value of the investments held by and the performance of theCompany. In addition, the income and gains of the Company from its investmentsmay suffer withholding tax which may not be reclaimable in the countries wheresuch income and gains arise.
The Manager
The Company is dependent upon the services of Pantheon as manager and may be adversely affected if the services of Pantheon cease to be available to the Company.
REVIEW OF 2007/2008Net Asset ValueThe Company's total net assets attributable to shareholders increased duringthe year to ‚£736,105,000 (2007: ‚£610,261,000). The net asset value per ordinaryshare was 1,108.7p at 30th June 2008 (2007: 919.2p).
Results and Dividends
As set out in the Income Statement, the Company's net revenue deficit onordinary activities before taxation for the year was ‚£8,080,000 (2007: ‚£2,649,000 ) and capital profits were ‚£133,547,000 (2007: ‚£74,688,000). TheDirectors do not recommend the payment of a dividend in respect of the yearended 30th June 2008 (2007: nil). The results for the year are as set out inthe Income Statement.
An analysis of financial assets and liabilities is included in note 19 to the financial statements.
Performance Highlights
The Board and the Manager monitor the following Key Performance Indicators:
1. The net asset value over 1 year, 3 years, 5 years, 10 years and since inception
2. The level of discount
3. The Total Expense Ratio of the Company
PIP's portfolio of investments in private equity funds has shown goodperformance in the year to 30th June 2008, leading to an increase in PIP's netasset value per share of 20.6% to 1,108.7p. Total assets increased by ‚£125.8million to ‚£736.1 million.The 20.6% increase in PIP's net asset value per share compares to decreases inthe MSCI World Index of 9.4% and the FTSE All Share Index of 13.0%respectively. PIP's ordinary share price during the year decreased by 18.3% andthe discount widened to 32.4% by the year end (this compares to a discount of0.2% at June 2007).
The net asset value per ordinary share and redemption value per redeemable share at 30th June 2008 was 1,108.7p.
The net asset value returns over 1 year, 3 years, 5 years, 10 years and sinceinception are set out in the financial summary. The total expense ratio of theCompany for the year ended 30th June 2008 was 1.45%.STATEMENT OF DIRECTORS' RESPONSIBILITIESin respect of the financial statements
The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for eachfinancial year. Under that law the directors have elected to prepare financialstatements in accordance with United Kingdom Accounting Standards (UnitedKingdom Generally Accepted Accounting Practice. The financial statements arerequired by law to give a true and fair view of the state of affairs of thecompany and of the profit or loss of the company for that period. In preparingthese financial statements, the directors are required to:
¢â‚¬¢ select suitable accounting policies and then apply them consistently;
¢â‚¬¢ make judgements and estimates that are reasonable and prudent;
¢â‚¬¢ state whether applicable UK accounting standards have been followed, subjectto any material departure disclosed and explained in the financial statements;and
¢â‚¬¢ prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The directors, to the best of their knowledge, state that:
¢â‚¬¢ the financial statements, prepared in accordance with UK Accounting Standards, give a true and fair view of the assets, liabilities, financial position and profit of the company; and
¢â‚¬¢ the Directors' report includes a fair review of the development and performance of the business and the position of the company together with a description of the principal risks and uncertainties that it faces.
The directors are responsible for keeping proper accounting records thatdisclose with reasonable accuracy at any time the financial position of thecompany and enable them to ensure that the financial statements comply with theCompanies Act 1985. They are also responsible for safeguarding the assets ofthe company and hence for taking reasonable steps for the prevention anddetection of fraud and other irregularities.
In so far as the directors are aware:
¢â‚¬¢ there is no relevant audit information of which the company's auditors are unaware; and
¢â‚¬¢ the directors have taken all steps that they ought to have taken to makethemselves aware of any relevant audit information and to establish that theauditors are aware of that information.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
By order of the BoardTom BartlamChairman6th October 2008
REPORT OF THE INDEPENDENT AUDITOR
The Company's financial statements for the year ended 30 June 2008 have beenaudited by Grant Thornton UK LLP. The text of the Auditors Report can be foundin the Company's Annual Report and Accounts at www.pipplc.com.The statutory accounts for the year ended 30 June 2008 have been prepared onthe basis of the financial information presented by the directors in thisannouncement and will be delivered to the Registrar of Companies following thecompany's annual general meeting. The financial information for the year ended30 June 2007 is derived from the statutory accounts for that year which havebeen delivered to the Registrar of Companies. The auditors reported on thoseaccounts; their report was unqualified and did not contain any emphasis ofmatter or a statement under s237(2) or (3) Companies Act 1985. INCOME STATEMENTYear ended 30th June 2008 2008 2007 REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL NOTE ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000
Gains on investments at 9 b - 137,351 137,351 - 77,537 77,537 fair value through profit
or loss** Currency gains / (losses) 17 - 310 310 - (625) (625) on cash and borrowings Investment income 2 4,787 - 4,787 7,179 - 7,179 Investment management fees 3 (9,768) (3,660) (13,428) (7,189) (1,607) (8,796) Other expenses 4 (900) (454) (1,354) (1,152) (617) (1,769) Return on ordinary (5,881) 133,547 127,666 (1,162) 74,688 73,526
activities before ¯¬nancing
costs & tax Interest payable and 6 (2,199) - (2,199) (1,487) - (1,487)similar charges / finance costs Return on ordinary (8,080) 133,547 125,467 (2,649) 74,688 72,039 activities before tax Tax on ordinary activities 7 609 (275) 334 - (1,297) (1,297) Return on ordinary (7,471) 133,272 125,801 (2,649) 73,391 70,742 activities after tax for the ¯¬nancial year RETURN PER ORDINARY AND 8 (11.25)p 200.73p 189.48p (4.76p) 131.89p 127.13pREDEEMABLE SHARE
All revenue and capital items in the above statement derive from continuing operations.
No operations were acquired or discontinued during the year.
* The total column of this statement represents the company's profit and lossstatement prepared in accordance with UK Accounting Standards. Thesupplementary revenue return and capital columns are prepared under guidancepublished by the Association of Investment Companies.
** Includes currency movements on investments.
There were no recognised gains or losses other than those passing through the income statement.
RECONCILIATION OF MOVEMENTS IN EQUITY SHAREHOLDERS' FUNDS
CAPITAL CAPITAL CAPITAL SHARE SHARE REDEMPTION RESERVE RESERVE SPECIAL REVENUE CAPITAL PREMIUM RESERVE REALISED UNREALISED RESERVE
RESERVE TOTAL
‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 Movement for the year ended 30th June 2008 OPENING EQUITY 25,428 183,139 26 187,543 131,745 99,861 (17,481) 610,261SHAREHOLDERS' FUNDS Return for the - - - 39,961 93,311 - (7,471) 125,801year Expenses relating - 43 - - - - - 43 to issue of Ordinary shares written back CLOSING EQUITY 25,428 183,182 26 227,504 225,056 99,861 (24,952) 736,105SHAREHOLDERS' FUNDS Movement for the year ended 30th June 2007 OPENING EQUITY 18,024 91,971 26 151,664 94,233 99,897 (14,832) 440,983SHAREHOLDERS' FUNDS Return for the - - - 35,879 37,512 - (2,649) 70,742 year
Issue of Ordinary 7,404 92,599 - - - - -
100,003shares Expenses relating - (1,431) - - - - - (1,431)to issue of Ordinary shares Additional costs - - - - - (36) - (36) of redemption of Redeemable shares CLOSING EQUITY 25,428 183,139 26 187,543 131,745 99,861 (17,481) 610,261SHAREHOLDERS' FUNDS BALANCE SHEETAs at 30th June 2008 2008 2007 NOTE ‚£'000 ‚£'000 Fixed assets Investments at fair value through profit or loss 9a 806,485 595,994* Current assets Debtors 10 927 2,018 Cash at bank 16 8,801 17,010 9,728 19,028
Creditors: Amounts falling due within one year
Other creditors 11 7,888 4,761 Bank loan 16 69,966 - Bank overdraft 16 2,254 - 80,108 4,761 NET CURRENT ASSETS (70,380) 14,267 TOTAL ASSETS LESS CURRENT LIABILITIES 736,105 610,261 Capital and reserves Called-up share capital 12 25,428 25,428 Share premium account 13 183,182 183,139 Capital redemption reserve 13 26 26 Capital reserve - realised gains 13 227,504
187,543
Capital reserve - unrealised gains 13 225,056 131,745 Special reserve 13 99,861 99,861 Revenue reserve 13 (24,952) (17,481) Total equity shareholder's funds 736,105
610,261
Net asset value per share - ordinary and 14 1108.7p 919.2p redeemable
* Includes fixed interest investments held for cash management purposes
The ¯¬nancial statements were approved by the Board on 6th October 2008 and weresigned on its behalf byTom BartlamChairmanCASH FLOW STATEMENTYear ended 30th June 2008 2008 2007 NOTE ‚£'000 ‚£'000
Cash flow from operating activities
Investment income received 4,814 7,107
Deposit and other interest received 210 12 Investment management fees paid (9,198) (6,372) Secretarial fees paid (102) (109) Other cash payments (2,022) (2,169)
NET CASH (OUTFLOW) FROM OPERATING ACTIVITIES 17 (6,298) (1,531)
Returns on investment and servicing of ¯¬nance Revolving credit facility and overdraft interest (471) (571) paid Loan commitment and arrangement fees paid (552)
(1,071)
Redeemable share commitment fees paid (654)
(477)
NET CASH (OUTFLOW) FROM RETURNS ON INVESTMENT AND (1,677) (2,119) SERVICING OF FINANCE Taxation Net taxation refund / (charge) 498
(1,230)
NET CASH INFLOW / (OUTFLOW) FROM TAXATION 498
(1,230)
Capital expenditure and ¯¬nancial investment
Purchases of investments (280,170) (224,262) Purchases of government securities (23,455) (251,677) Disposals of investments 136,172 149,337 Disposals of government securities 94,152 243,503 Realised currency (losses) (94) (152) NET CASH (OUTFLOW) FROM CAPITAL EXPENDITURE AND (73,395) (83,251) FINANCIAL INVESTMENT NET CASH (OUTFLOW) BEFORE FINANCING (80,872) (88,131) Financing Proceeds from issues of Ordinary shares -
100,003
Written back / costs of Ordinary shares issue 43
(968)
Costs to redeem Redeemable shares - (36)
Drawdown of loan 69,966 10,211 Repayment of loan - (10,211)
Realised currency (losses) / gains on repayment of (594) 75 revolving credit facility NET CASH INFLOW FROM FINANCING 69,415
99,074
(DECREASE) / INCREASE IN CASH 15 (11,457)
10,943
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting Policies
A summary of the principal accounting policies, all of which have been applied consistently throughout the year, is set out below.
(A) Basis of preparation
The ¯¬nancial statements have been prepared on the historical cost basis ofaccounting, except for the measurement at fair value of investments and ¯¬nancial instruments, and in accordance with applicable UK accounting standardsand on the basis that all activities are continuing.
(B) Statement of recommended pratctice
The accounts have been prepared in accordance with the Statement of Recommended Practice (revised December 2005) issued by the Association of Investment Companies.
(C) Valuation of investments
All investments held by the Company are classi¯¬ed as `fair value through pro¯¬tor loss'. As the entity's business is investing in ¯¬nancial assets with a viewto pro¯¬ting from their total return in the form of interest, dividends orincreases in fair value, quoted equities and ¯¬xed income securities aredesignated as fair value through pro¯¬t or loss on initial recognition. Theentity manages and evaluates the performance of these investments on a fairvalue basis in accordance with its investment strategy. For investmentsactively traded in organised ¯¬nancial markets, fair value is generallydetermined by reference to Stock Exchange quoted market bid prices at the closeof business of the balance sheet date. For investments that are not activelytraded in organised ¯¬nancial markets, fair value is determined using reliablevaluation techniques as described below
(i) Unquoted ¯¬xed asset investments are stated at the estimated fair value.
In the case of investments in private equity funds, this is based on the netasset value of those funds ascertained from periodic valuations provided by themanagers of the funds. Such valuations are necessarily dependent upon thereasonableness of the valuations by the fund managers of the underlyinginvestments. In the absence of contrary information the values are assumed tobe reasonable. These valuations are reviewed periodically for reasonableness.In the case of direct investments in unquoted companies, the initial valuationis based on cost. Where better indications of fair value become available, suchas through subsequent issues of capital or dealings between third parties, thevaluation is adjusted to reflect the new evidence. This information may includethe valuations provided by private equity managers who are also invested in thecompany. Valuations are reduced where the company's performance is notconsidered satisfactory.Private equity funds may contain a proportion of quoted shares from time totime, for example, where the underlying company investments have been takenpublic but the holdings have not yet been sold. The quoted market holdings atthe date of the latest fund accounts are reviewed and compared with the valueof those holdings at the year end. If there has been a material movement in thevalue of these holdings, the valuation is adjusted to reflect this.
(ii) Quoted investments are valued at the bid price on the relevant stock exchange.
(iii) The Company may acquire secondary interests at either a premium or adiscount to the fund manager's valuation. Within the Company's portfolio, thosefund holdings purchased at a premium are normally immediately revalued to theirstated net asset values irrespective of the purchase price. Those fund holdingspurchased at a discount are normally held at cost until the receipt of avaluation from the fund manager in respect of a date after acquisition, whenthey are revalued to their stated net asset values, unless an adjustmentagainst a speci¯¬c investment is considered appropriate.
(D) Income
Dividends receivable on quoted equity shares are brought into account on the ex-dividend date.
Dividends receivable on equity shares where no ex-dividend date is quoted are brought into account when the Company's right to receive payment is established. The ¯¬xed return on a debt security is recognised on a time apportionment basis so as to reflect the effective interest rate on the security.
Other interest receivable is included on an accruals basis.
(E) Taxation
Corporation tax payable is based on the taxable pro¯¬t for the year. The chargefor taxation takes into account taxation deferred or accelerated because oftiming differences between the treatment of certain items for accounting andtaxation purposes. Full provision for deferred taxation is made under theliability method, without discounting, on all timing differences that havearisen but not reversed by the balance sheet date, unless such provision is notpermitted by Financial Reporting Standard No.19: Deferred Tax.
The tax effect of different items of income/gain and expenditure/loss is allocated between capital and revenue on the same basis as the particular item to which it relates, using the Company's effective rate of tax for the accounting period.
(F) Expenses
All expenses are accounted for on an accruals basis. Expenses, including investment management fees, are charged through the revenue account except as follows:
¢â‚¬¢ expenses which are incidental to the acquisition or disposal of an investment are treated as capital costs and separately identified and disclosed in note 9;
¢â‚¬¢ expenses of a capital nature are accounted for through the capital account; and
¢â‚¬¢ investment performance fees.
(G) Foreign currency
The currency of the Primary Economic Environment in which the Company operates(the functional currency) is pounds Sterling (Sterling), which is also thepresentation currency. Transactions denominated in foreign currencies arerecorded in the local currency at actual exchange rates as at the date oftransaction or, where applicable, at the rate of exchange in a related forwardexchange contract. Monetary assets and liabilities denominated in foreigncurrencies at the year end are reported at the rates of exchange prevailing atthe year end or, where appropriate, at the rate of exchange in a relatedforward exchange contract. Any gain or loss arising from a change in exchangerates subsequent to the date of the transaction is included as an exchange gainor loss in the Income Statement. For non-monetary assets these are covered byfair value adjustments.
(H) Capital reserve (realised)
The following are accounted for in this reserve:
- investment performance fees;
- gains and losses on the realisation of investments;
- realised exchange differences of a capital nature; and
- expenses of a capital nature.
Capital distributions from investments are accounted for on a reducing cost basis; cash received is ¯¬rst applied to reducing the historical cost of an investment; a realised gain will be recognised only when the cost has been reduced to nil.
(I) Capital reserve (unrealised)
The following are accounted for in this reserve:
- increases and decreases in the value of investments held at the year end.
(J) Cash and cash equivalents
Cash and cash equivalents are held for the purpose of meeting short-term cashcommitments rather than for investment purposes. Assets are classified as cashequivalents if they are readily convertible to cash and are not subject tosignificant changes in value.
Cash and cash equivalents are defined as cash at bank.
(K) Investment performance fee
The manager is entitled to a performance fee from the Company in respect of aninitial calculation period of 18 months to 30th June 2008 and, thereafter, inrespect of each 12 calendar month period ending on 30th June in each year. Thefee payable in respect of each such period is 5% of any increase in the NetAsset Value of the Company at the end of such period over the applicable `highwater mark' plus the hurdle rate of 10%.The applicable `high water mark' in respect of any calculation period is theNet Asset Value at the end of the previous calculation period in which aperformance fee was paid, compounded annually at the hurdle rate for eachsubsequent completed calculation period up to the commencement of thecalculation period for which the performance fee is being calculated. If noperformance fee has previously been paid, the applicable `high water mark' isthe Net Asset Value at 31st December 2006 (multiplied by 1+(181/365x10%)),compounded annually at the hurdle rate for each completed 12 calendar monthperiod after 30th June 2007 up to the commencement of the calculation periodfor which the performance fee is being calculated.2. Income 30TH JUNE 2008 30TH JUNE 2007 ‚£'000 ‚£'000 Income from investments Unfranked dividends 3,037 6,312
Interest from US ¯¬xed interest investments - 37 Interest from UK ¯¬xed interest investments 1,540 763 Interest from European ¯¬xed interest investments - 55
4,577 7,167 Other income Deposit interest 210 10
Exchange differences on income - 2
210 12 TOTAL INCOME 4,787 7,179 Total income comprises: Dividends 3,037 6,312 Interest 1,750 865
Exchange differences on income - 2
4,787 7,179
Analysis of income from investments Listed overseas - 92 Listed UK 1,540 763 Unlisted 3,037 6,312 4,577 7,167 3. Investment Management Fees 30TH 30TH JUNE JUNE 2008 2007 REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 Investment management 9,768 - 9,768 6,722 - 6,722 fees Irrecoverable VAT - - - 467 - 467 thereon Investment performance - 3,660 3,660 - 1,503 1,503 fee Irrecoverable VAT - - - - 104 104 thereon 9,768 3,660 13,428 7,189 1,607 8,796
The investment management fee is payable monthly in arrears at the rate set outin the Directors' Report in the Annual Report. At 30th June 2008 ‚£1,885,000(2007: ‚£1,315,000 excluding VAT) was owed to the Manager (see note 18 for moredetails on VAT reclaim). A performance fee of ‚£5,163,000 is payable to theManager in respect of the initial 18 month performance fee calculation periodended 30th June 2008, ‚£1,503,000 of which has been accrued in respect of the 6calendar month period to 30th June 2007 and the balance of ‚£3,660,000 of whichhas been accrued in respect of the 12 calendar month period to 30th June 2008.The basis upon which the performance fee is calculated is explained in note 1(K) and the Directors' Report in the Annual Report.4. Other Expenses 30TH 30TH JUNE JUNE 2008 2007 REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 Secretarial and 113 - 113 103 - 103 accountancy services Fees payable to the 34 - 34 26 - 26 Company's auditor for the audit of the annual financial statement Fees payable to the 20 - 20 30 50 80 Company's auditor for other services: - All other services Directors' remuneration 135 - 135 135 - 135 (see note 5) Fixed income management 41 - 41 49 - 49 Irrecoverable VAT (153) - (153) 51 - 51 Legal and professional 288 454 742 399 567 966 fees Printing 87 - 87 61 - 61 Other 335 - 335 298 - 298 900 454 1,354 1,152 617 1,769
The directors do not consider that the provision of non-audit work to the Company affects the independence of the auditors.
5. Directors' Remuneration
Directors' emoluments comprise wholly Directors' fees.
6. Interest Payable and Similar Charges
30TH JUNE 2008 30TH JUNE 2007 ‚£'000 ‚£'000
Bank loan and overdraft interest 885 571 Loan commitment and arrangement fees 725 315 Redeemable share commitment fee 589 601 2,199 1,487 7. Tax on Ordinary Activities 30TH 30TH JUNE JUNE 2008 2007 REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 Income tax refund (609) - (609) - - - Withholding tax deducted - 191 191 - 1,256 1,256 from distributions Japanese tax charged on - 84 84 - 41 41 capital gains (609) 275 (334) - 1,297 1,297 Current taxation
The current taxation for the year differs from the standard rate of corporation tax in the UK (30%). The differences are explained below:
Net return on ordinary (8,080) 133,547 125,467 (2,649) 74,688 72,039 activities before tax
Theoretical tax at UK (2,424) 40,064 37,640 (795) 22,406 21,611 corporation tax rate of 30%
(2007: 30%) Non-taxable investment and - (41,345) (41,345) - (23,073) (23,073)currency gains
Effect of expenses in excess - 1,281 1,281 - 667 667
of taxable income Unused management expenses 2,424 - 2,424 795 - 795 Withholding tax deducted - (191) (191) - (1,256) (1,256) from distributions Japanese tax charged on - (84) (84) - (41) (41) capital gains Income tax refund 609 - 609 - - - TOTAL CURRENT TAX 609 (275) 334 - (1,297) (1,297)
Factors that may affect future tax charges
The Company is an investment trust and therefore is not subject to tax oncapital gains. Deferred tax is not provided on capital gains and losses arisingon the revaluation or disposal of investments because the Company meets (andintends to meet for the foreseeable future) the conditions for approval as anInvestment Trust Company.
No deferred tax asset has been recognised in respect of excess management expenses and expenses in excess of taxable income as they will only be recoverable to the extent that there is suf¯¬cient future taxable revenue.
The figure as at 30 June 2008 is estimated to be in excess of ‚£25,000,000.
8. Return per Share 30TH 30TH JUNE JUNE 2008 2007 REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL Return per Ordinary and (11.25)p 200.73p 189.48p (4.76)p 131.89p 127.13p Redeemable share
Ordinary and Redeemable Shares
Revenue return per share is based on the net deficit on ordinary activities after taxation of ‚£7,471,000 (2007: ‚£2,649,000) and on 66,392,268 (2007: 55,645,008) ordinary shares and redeemable shares, being the weighted average number of shares in issue during the year.
Capital return per share is based on the net return on ordinary activitiesafter taxation of ‚£133,272,000 (2007: ‚£73,391,000) and on 66,392,268 (2007:55,645,008) ordinary shares and redeemable shares, being the weighted averagenumber of shares in issue during the year.Total return per share is based on net return for the year of ‚£125,801,000(2007: ‚£70,742,000) and on 66,392,268 (2007: 55,645,008) ordinary shares andredeemable shares, being the weighted average number of shares in issue duringthe year.9a. Movements on Investments 30TH JUNE 30TH JUNE 2008 2007 ‚£'000 ‚£'000 Book cost brought forward 464,286 340,442 Acquisitions at cost 303,457 476,105 Capital distributions - proceeds (230,316) (391,735) - realised gains on sales 45,038 39,474 BOOK COST AT 30TH JUNE 582,465 464,286
Unrealised appreciation / (depreciation) of investments
Listed investments - (21) Unlisted investments 224,020 131,729
VALUATION OF INVESTMENTS AT 30TH JUNE 806,485 595,994
9b. Analysis of Investments 30TH JUNE 30TH JUNE 2008 2007 ‚£'000 ‚£'000 United Kingdom Unlisted investments 56,516 23,023
Listed ¯¬xed interest investments - 69,311
USA Unlisted investments 522,181 365,330 Other Unlisted investments 227,788 138,330 806,485 595,994 Realised pro¯¬ts on sales 45,038 39,474
Amounts previously recognised as unrealised 10,329 (775) appreciation / (depreciation) on those sales Increase in unrealised appreciation 81,984 38,838
GAINS ON INVESTMENTS 137,351 77,537
Further analysis of the investment portfolio is provided in the Manager's Review.
Transaction costs incidental to the acquisition of investments totalled ‚£nil(2007: ‚£nil) and to the disposals of investments totalled ‚£6,000 (2007: ‚£2,000)for the year.10. Debtors 30TH JUNE 30TH JUNE 2008 2007 ‚£'000 ‚£'000
Amounts owed by investment funds 221 457 Prepayments and accrued income 706 1,383
Taxation recoverable - 178 927 2,018
11. Creditors: Amounts falling due within one year
30TH JUNE 30TH JUNE 2008 2007 ‚£'000 ‚£'000
Amounts owed to investment funds - 168
Investment management fees 1,885 1,545 Investment performance fee 5,163 1,767 Other creditors and accruals 840 1,281 Other Creditors 7,888 4,761 Bank loan 69,966 - Bank overdraft 2,254 - 80,108 4,761
The Company has facility agreements whereby participating banks have agreed tomake available to the Company a ‚£150,000,000 ¯¬ve-year committed revolvingcredit facility, a ‚£15,000,000 364-day committed revolving credit facility andan overdraft facility of ‚£5,000,000. Each individual drawdown bears interest ata variable rate agreed in advance for the period of the drawdown. At 30th June2008 the amount of ‚£72,220,000 (30th June 2007: nil) was drawn down under
thefacilities.12. Called-up Share Capital 30TH JUNE 30TH JUNE 2008 2007 ‚£'000 ‚£'000 Authorised: 63,474,919 (2007: 63,474,619) Ordinary shares of 67p 42,528 42,528 each
100,000,000 (2007: 100,000,000) Redeemable shares of 1p 1,000 1,000
each 43,528 43,528
Allotted, called-up and fully paid: 37,521,013 (2007: 37,521,013) Ordinary shares of 67p 25,139 25,139 each
28,871,255 (2007: 28,871,255) Redeemable shares of 1p 289 289
each 25,428 25,428 Redeemable shares rank equally with ordinary shares regarding dividend rightsand rights on winding up or return of capital (other than a redemption orpurchase of shares). The holders of redeemable shares have the right to receivenotice and attend all general meetings of the Company but not to speak or vote.The holders of ordinary shares are entitled to one vote for each ordinary shareheld.
The redeemable shares are redeemable at the option of the Company, at the prevailing net asset value per share, within 60 days following the end of each quarterly NAV calculation date or within 60 days of any other business day which is determined by the Directors to be a NAV calculation date.
13. Reserves CAPITAL CAPITAL CAPITAL SHARE REDEMPTION RESERVE RESERVE SPECIAL REVENUE PREMIUM RESERVE REALISED UNREALISED RESERVE RESERVE ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 Beginning of year 183,139 26 187,543 131,745 99,861 (17,481) Net gain on realisation of - - 55,367 _ - - investments Increase in unrealised - - - 81,984 - - appreciation Transfer on disposal of - - (10,329) 10,329 - - investments Exchange differences on - - (688) 994 - - loan and currency Exchange differences on - - - 4 - - other capital items Tax withheld from capital - - (191) - - - distributions Tax paid on Japanese - - (84) - - - investments
Legal and professional - - (454) - - - costs charged to capital
Performance fee charged to - - (3,660) - - - capital Costs of issue of Ordinary 43 - - - - - shares written back Revenue return for the year - - - - - (7,471) END OF YEAR 183,182 26 227,504 225,056 99,861 (24,952)
14. Net Asset Value per Share
The net asset value per share and the net assets attributable at the year end calculated in accordance with the Articles of Association were as follows:
NET ASSET VALUE NET ASSETS PER SHARE ATTRIBUTABLE 2008 2007 2008 2007 ‚£'000 ‚£'000 Ordinary and Redeemable shares 1,108.7p 919.2p 736,105
610,261
Basic net asset value per share is based on net assets attributable to equityshareholders of ‚£736,105,000 (2007: ‚£610,261,000) and on 66,392,268 (2007:66,392,268) ordinary shares and redeemable shares, being the number of sharesin issue at the year end.
15. Reconciliation of Net Cash Flow to the Movement in Net Funds
30TH JUNE 2008 30TH JUNE 2007 ‚£'000 ‚£'000 Decrease in cash in year (11,457) 10,943 Non-cash movement - Exchange gains / (losses) 994 (569) CHANGE IN NET FUNDS (10,463) 10,374
NET FUNDS AT BEGINNING OF YEAR 17,010 6,636
Loans drawndown (69,966) -
NET (DEBT) / FUNDS AT END OF YEAR (63,419) 17,010
16. Analysis of Net Debt / Funds
AT 30TH JUNE AT 30TH JUNE 2008 2007 ‚£'000 ‚£'000 Cash at bank 8,801 17,010 Bank overdraft (2,254) - Bank loan (69,966) - (63,419) 17,010
17. Reconciliation of Return on Ordinary Activities Before Tax and Financing
Costs to Net Cash Flow From Operating Activities 30TH JUNE 30TH JUNE 2008 2007 ‚£'000 ‚£'000
Return on ordinary activities before ¯¬nancing costs 127,667 73,526
and tax Gains on investments (137,351) (77,537)
Currency (gains) / losses on cash and borrowings (310) 625
Increase in creditors 3,187 2,127
Decrease / (increase) in other debtors 509 (272) NET CASH (OUTFLOW) FROM OPERATING ACTIVITIES (6,298) (1,531)
18. Contingencies, Guarantees and Financial Commitments
At 30th June 2008 there were ¯¬nancial commitments outstanding of ‚£641.4 million (2007: ‚£528.0 million) in respect of investments in partly paid shares and interests in private equity funds.
As a result of the AIC/Claverhouse ruling the Company no longer pays VAT on itsinvestment management fees. The Company is in ongoing discussions with the managerregarding the reclaim of VAT previously paid. The Company has been informed that a claim by the manager is being considered by HM Revenue & Customs. The amount ultimately recoverable by the Company is approximately ‚£1.8m. Once the negotiations with the manager and HM Revenue & Customs are resolved, the Company will be able to determine as virtually certain an appropriate value to be recognised in the accounts.
There is the possibility that additional amounts of VAT may be recoverable in respect of earlier years.
19. Analysis of Financial Assets and Liabilities
The primary investment objective of the Company is to seek to maximise long-term capital growth for its shareholders by investing in funds specialising in unquoted investments, acquiring unquoted portfolios and participating directly in private placements. Investments are not restricted to a single market but are made when the opportunity arises and on an international basis.
The Company's financial instruments comprise securities and other investments, cash balances and debtors and creditors that arise from its operations, for example sales and purchases awaiting settlement and debtors for accrued income.
The principal risks the Company faces in its portfolio management activities are:
- liquidity/marketability risk;
- interest rate risk;- market price risk; and- foreign currency risk.
The Company has little exposure to credit risk. The Manager monitors the financial risks affecting the Company on a daily basis and the Directors receive financial information monthly, which is used to identify and monitor risk.
In accordance with Financial Reporting Standard No.29: Financial Instruments:Disclosures, an analysis of financial assets and liabilities, which identifiesthe risk to the Company of holding such items, is given below.
Liquidity Risk
Due to the nature of the Company's investment policy, the largest proportion ofthe portfolio is invested in unquoted securities, many of which are lessreadily marketable than, for example, `blue-chip' UK equities. The Directorsbelieve that the Company, as a closed-end fund with no fixed wind-up date, isideally suited to making long-term investments in instruments with limitedmarketability. The investments in unquoted securities are monitored by theBoard on a monthly basis.As discussed in the Manager's Review, there are limited opportunities for theCompany to acquire secondary unquoted portfolios due to the cyclical nature oftheir occurrence. As a result, at times of low investment opportunity, somefunds may be invested in gilts and other fixed interest government bonds. It isthe nature of investment in private equity that a commitment to invest will bemade and that calls for payments will then be received from the unlistedinvestee entity. These payments are usually on an ad-hoc basis and may becalled at any instance over a number of years. In order to cover suchcommitments, the Company has entered into a ‚£150,000,000 five-year committedrevolving credit facility and a ‚£15,000,000 364-day committed revolving creditfacility with The Royal Bank of Scotland. At 30th June 2008 the amount drawndown was ‚£69,966,000 (30th June 2007: nil) (see note 11 for furtherinformation). The Royal Bank of Scotland has a first charge over the assets ofthe Company in respect of amounts owing under the facility.
Interest Rate Risk
Fair Value Interest Rate Exposure
The Company holds fixed interest rate securities and 0% government bonds forcash management purposes. These securities are included as part of theportfolio. These securities have a fixed life and at maturity the nominal valueof the security is received.
The effective interest rate (EIR) of the 0% government bonds is determined by the discount to the nominal value on the purchase of the security and the length of time remaining to maturity.
The Company has facility agreements in place to borrow funds on two revolving credit facilities.
Interest is payable at variable rates determined subject to drawdown. Theinterest rate is then fixed for the period that the loan is drawndown. At 30thJune 2008 there were ‚£69,966,000 funds drawn down on the loan facilities. (30thJune 2007: nil). The loan is due to be repaid within one year and as such fairvalue is considered to be the same as par value.
The Company's bank accounts do not earn interest. Should any balance go overdrawn then interest will become payable at variable rates.
Non-Interest Rate Exposure
The remainder of the Company's portfolio and current assets are not subject to interest rate risks.
As at 30th June 2008, the interest rate and maturity profile of the Company's financial assets was as follows:
FIXED INTEREST WEIGHTED NO MATURES AVERAGE MATURITY WITHIN INTEREST TOTAL DATE 1 YEAR RATE 30TH JUNE 2008 ‚£'000 ‚£'000 ‚£'000 %
Fair value interest rate risk ¯¬nancial assets
INVESTMENTS UK - - - - USA - - - - Other European - - - -
No interest rate risk ¯¬nancial assets
INVESTMENTS UK 56,516 56,516 - - USA 522,181 522,181 - - Other European 227,788 227,788 - - Other - - - - 806,485 806,485 - -
The interest rate and maturity profile of the Company's financial assets as at 30th June 2007 was as follows:
FIXED INTEREST WEIGHTED NO MATURES AVERAGE MATURITY WITHIN INTEREST TOTAL DATE 1 YEAR RATE 30TH JUNE 2008 ‚£'000 ‚£'000 ‚£'000 %
Fair value interest rate risk ¯¬nancial assets
INVESTMENTS UK 69,311 - 69,311 6.5 USA - - - - Other European - - - -
No interest rate risk ¯¬nancial assets
INVESTMENTS UK 23,023 23,023 - - USA 365,330 365,330 - - Other European 138,289 138,289 - - Other 41 41 - - 595,994 526,683 69,311 -
As at 30th June 2008, the interest rate and maturity profile of the Company's financial liabilities was as follows:
NO MATURES MATURITY WITHIN TOTAL DATE 1 YEAR 30TH JUNE 2008 ‚£'000 ‚£'000 ‚£'000 Overdraft 2,254 - 2,254
As at 30th June 2007, the interest rate and maturity profile of the Company's financial liabilities was as follows:
NO MATURES MATURITY WITHIN TOTAL DATE 1 YEAR 30TH JUNE 2008 ‚£'000 ‚£'000 ‚£'000 Overdraft - - - Financial LiabilitiesThe Company primarily finances its operations through its issued capital, bankborrowings and existing reserves. At 30th June 2008, the Company had ‚£69,966,000 (2007: nil) drawn down of its ‚£150,000,000 committed 5-yearrevolving credit facility or ‚£15,000,000 364-day committed revolving creditfacility with The Royal Bank of Scotland. Tranches from this facility aredrawable in US dollars, Euros & Sterling. Interest is incurred at a variablerate as agreed at the time of drawdown and is payable at the maturity date ofeach advance. At the year end, interest of ‚£414,000 (2007: nil) was accruing.With the exception of the bank overdraft which at 30th June 2008 stood at ‚£2,254,000 (2007: nil), there was no interest rate risk associated with othershort-term creditors at 30th June 2008 or 30th June 2007.At 30th June 2008 and 30th June 2007, with the exception of the bank revolvingcredit facility referred to above, all other financial liabilities were duewithin one year. The revolving credit facility is included in creditors fallingdue within one year.Market Price Risk
The method of valuation of the fixed asset investments is described in note 1(C) to the financial statements. The nature of the Company's fixed assetinvestments, with a high proportion of the portfolio invested in unquotedsecurities, means that the investments are valued by the Directors after dueconsideration of the most recent available information from the underlyinginvestments.If the investment portfolio valuation fell by 5% from the 30th June 2008valuation with all other variables held constant there would have been areduction of ‚£40,324,000 (2007: ‚£29,800,000) in the return before taxation. Anincrease of 5% in the investment portfolio valuation would have had an equaland opposite effect in the return before taxation.
Foreign Currency Risk
Since it is the Company's policy to invest in a diverse portfolio ofinvestments based in a number of countries, the Company is exposed to the riskof movement in a number of foreign exchange rates. A geographical analysis ofthe portfolio and hence its exposure to currency risk is given in the Manager'sReview. Although it is permitted to do so, the Company did not hedge theportfolio against the movement in exchange rates during the financial year asthere was no significant increase in the perceived risk of exchange ratemovement.The investment approach and the Manager's consideration of the associated riskare discussed in further detail in the Manager's Review. The Company settles itstransactions from its bank accounts at an agreed rate of exchange at the dateon which the bargain was made. As at 30th June 2008, realised exchange lossesof ‚£94,000 (2007: ‚£152,000) and unrealised gains relating to currency of ‚£998,000 (2007: ‚£551,000 losses) have been taken to the capital reserve.
An analysis of the Company's exposure to foreign currency, excluding private equity investments, is given below:
30TH JUNE 30TH JUNE 30TH JUNE 30TH JUNE 2008 2008 2007 2007 ASSETS LIABILITIES ASSETS LIABILITIES ‚£'000 ‚£'000 ‚£'000 ‚£'000 US Dollar 8,308 52,258 3,815 168 Euro 187 10,962 4,907 - Japanese Yen 1 - 2 - 8,496 63,220 8,724 168 If the sterling/dollar and sterling/euro exchange rate had reduced by 10% fromthat obtained at 30th June 2008, it would have the effect, with all othervariables held constant, of reducing the equity shareholders' funds by ‚£6,081,000 (2007: increase ‚£950,000). If there had been an increase in thesterling/dollar and sterling/euro exchange rate of 10% it would have the effectof increasing the equity shareholders' funds by ‚£4,975,000 (2007: decrease ‚£778,000). The calculations are based on the investments held at fair valuethrough profit or loss and the exchange rate of 1.99015 sterling/dollar and1.26315 sterling/euro as at 30 June 2008.
Fair Value of Financial Assets and Financial Liabilities
All of the financial assets and liabilities of the Company are held at fair value.
Managing Capital
The capital structure of the Company consists of cash held and shareholders'equity. The Company's equity is analysed into its various components in note12. Capital is managed so as to maximise the return to shareholders whilemaintaining a capital base to allow the Company to operate effectively in themarketplace and sustain future development of the business.
The Company's capital requirement is reviewed regularly by the Board of the Company.
20. Related Party Transactions
The manager, Pantheon Ventures Limited, is regarded as a related party of theCompany. Mr R.M. Swire, a Director of the Company, is a director of PantheonHoldings Limited, the holding company of Pantheon Ventures Limited.
The amounts paid to the Manager are disclosed in the Directors' Report and in note 3.
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