RIV.L Regulatory News (RIV)

15 October 2019

LEI: 2138005C7REHURGWHW31

River and Mercantile Group PLC

Full Year Preliminary Results Announcement

Year ended 30 June 2019 - Unaudited

River and Mercantile Group PLC ("the Group"), the advisory and investment solutions business, today releases its unaudited preliminary results and management report for the year ended 30 June 2019.

This was a strong year in asset growth for the Group, with assets under management increasing by 18% during the period from a combination of healthy net sales and positive investment performance. Growth was delivered substantively in the second half of our financial year and this phasing of asset flows impacted our financial results in the short term. This does however, mean that the Group is well positioned for the new financial year, with strong embedded revenue growth.

Financial Highlights (unaudited)

 • Statutory net profit after tax was £13.0m, compared with £15.1m in the prior year;

 • Statutory basic earnings per share were 16.22 pence per share, compared with 18.83 pence per share in

the prior year;

 • Adjusted underlying profit before tax1 was £14.7m, compared with £16.1m in the prior year;

 • Adjusted underlying EPS was 13.91 pence per share, compared with 16.06 pence per share in the prior year;

 • Adjusted profit after tax2 was £16.2m, compared with £17.6m in the prior year;

 • Adjusted basic earnings per share3 was 20.26 pence per share, compared with 21.85 pence per share in

the prior year.

Asset Growth

 • Fee earning AUM/NUM increased by 18% year on year, to £39.8bn;

 • Gross sales for the year were £6.9bn;

 • Net flows for the year were £5.4bn;

 • Investment performance increased AUM by £0.6bn.

Operating Highlights

 • Net management and advisory fees increased by 2% year on year to £65.6m;

 • Performance fees were £12.5m, compared with £10.6m in the prior year;

 • Adjusted underlying pre tax margin was 22%, compared with 25% in the prior year. The Core business,

before investment in new business opportunities, generated an adjusted underlying pre tax margin of 25%.

Dividends

The Board of Directors have declared a second interim dividend of 5.1 pence per share, of which 1.6 pence is a special dividend and relates to net performance fees. The second interim dividend will be paid on 22 November 2019 to shareholders on the register as at 25 October 2019. The ex-dividend date is 24 October 2019. 

The Board of Directors have also proposed a final dividend for the year ended 30 June 2019, subject to approval by shareholders at the Group's AGM on 9 December 2019, of 5.0 pence per share, of which 2.4 pence is a special dividend and relates to net performance fees4.

The total dividends paid, declared and proposed in respect of the 2019 financial year are 16.4 pence per share, representing 80% of the adjusted underlying profit after tax and 100% of the net performance fee profit after tax.

Jonathan Dawson, Chairman said:

"Despite the external challenges, at River and Mercantile we have remained steadfast in our focus on putting our clients' interests at the heart of everything that we do. Our investment performance has been strong over the longer term with all of our funds ahead of their respective benchmarks since inception, although long equity funds have had a more challenging period, as value driven investment has been less favoured by the market. At the same time, we have been careful to communicate our economic and market thinking clearly with our clients. In our Solutions and Macro businesses, our focus on the River FOURcast (our proprietary approach to investment thinking) model of investment behaviours has given clients, particularly in Fiduciary Management, direct insight into our thinking and processes by which we seek to achieve their investment objectives.

River and Mercantile is at an exciting point in its growth and we think that there are significant opportunities for us across our business lines in our key markets of the UK, USA, and Australia."

James Barham, Group Chief Executive Officer said:

"The last year has been a period of robust performance for the Group during challenging market and industry conditions. We have delivered excellent asset growth with fee earning AUM/NUM rising by 18% to £39.8bn. It is very encouraging to see the net sales ratio return to the level we strive to achieve. The year has seen a record level of gross sales at £6.9bn, a year on year increase of 21%. As we have described previously, we want to deliver asset growth in our business by a minimum of 12% per annum. This growth is a combination of net sales and investment performance. Net sales delivered growth of 12% whilst investment performance including rebalance delivered an additional 6%. 

The investment environment during the period was, and continues to be, demanding and a number of our investment strategies, whilst outperforming in absolute terms, underperformed against their relative benchmarks as the factors they favour struggled. 

Whilst net management and advisory fees rose by 2% to £65.6m, adjusted underlying profit before tax was £14.7m, a decrease of 9%. This reduction reflects the phasing of asset growth towards the end of our financial year along with the underlying investments and initiatives we are making in our business to drive future growth. The phasing of AUM/NUM flows also delivers a strong in-force revenue position running into the new financial year."

Notes

1 Adjusted underlying profit comprises net management and advisory fees less associated remuneration, administrative expenses, depreciation and amortisation of software, and finance income and expense.

2 Adjusted profit comprises adjusted underlying profit, plus performance fees net of associated remuneration and the gain/losses on investment seed positions.

3 Adjusted basic earnings per share represents adjusted profit after tax divided by the weighted average number of shares outstanding in the period.

4 The final dividend will be paid on 20 December 2019 to shareholders on the register as at 29 November 2019, subject to approval by shareholders at the Group's AGM on 9 December 2019. The ex-dividend date is 28 November 2019.

The financial information set out in this annual results release does not constitute the Group's statutory accounts for the year ended 30 June 2019 or 2018. Statutory accounts for the year ended 30 June 2018 have been delivered to the Registrar of Companies. The auditor's report on those accounts was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006. The financial information for the year ended 30 June 2019 is unaudited. The statutory accounts for the year ended 30 June 2019 will be delivered to the Registrar following the Group's AGM on 9 December 2019. The 2019 Annual Report and Accounts will be published in November 2019 and a copy will be posted on the Group's website.

This RNS has been approved on behalf of the Board.

For further information please contact:

River and Mercantile Group PLC +44 (0) 20 3327 5100

Kevin Hayes, CFO

Forward looking statements

This announcement contains forward looking statements with respect to the financial conditions, results and business of the Group. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report. However, such statements should be treated with caution as they involve risk and uncertainty because they relate to events and depend upon circumstances that may occur in the future. 

There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements. The continuing uncertainty in global economic outlook inevitably increases the economic and business risk to which the Group is exposed. By their nature forward looking statements relate to events and circumstances that could occur in the future and therefore involve the risk and uncertainty that the Group's actual results may differ materially from the results expressed or implied in the forward looking statements.

Nothing in this announcement should be construed as a profit forecast. 

River and Mercantile Group PLC

Preliminary results (unaudited) and management report 2019

Chairman's Statement

In many respects much of the background picture that I described last year has continued without major change.

First, how the UK will withdraw from the European Union is, at the time of writing, no closer to being answered than a year ago, although we are obviously now very close to the 31 October deadline. Whether Boris Johnson can achieve a breakthrough with Parliament and/or the EU remains to be seen. I am confident, however that River and Mercantile is as well prepared as it can be at present.

Secondly, the global trade environment continues to be under threat from the ongoing US/China trade dispute, as well as the risk of further tariff barriers involving USA/EU trade. This uncertainty is a significant threat to future prosperity of the world. In addition, there are further tensions in the Gulf involving the US, ourselves and Iran, as well as the impact of the continuing proxy war involving Saudi Arabia and Yemeni rebels and ongoing threats to safe navigation in the Gulf.

Despite the external challenges, at River and Mercantile we have remained steadfast in our focus on putting our clients' interests at the heart of everything that we do. Our investment performance has been strong over the longer term with all of our funds ahead of their respective benchmarks since inception, although long equity funds have had a more challenging period as value driven investment has been less favoured by the market. At the same time, we have been careful to communicate our economic and market thinking clearly with our clients. In our Solutions and Macro businesses, our focus on the River FOURcast model of investment behaviours has given clients, particularly in our Fiduciary Management business, direct insight into our thinking and processes by which we seek to achieve their investment objectives.

River and Mercantile is at an exciting point in its growth. We think that there are significant opportunities for us in our pensions business in the UK and, increasingly, the USA and Australia, in our derivatives and our long-only asset management businesses. We believe this has played a significant part in our achieving, this year, gross new sales of £6.9bn and growth of 18% in fee earning AUM/NUM.

The majority of the AUM/NUM net growth occurred in the second half of the year and as a result net management and advisory revenue grew by only 2% in the year. We have also seen the full impact of MiFID II on research costs and we have continued to invest in infrastructure and new initiatives; however, margin levels have been broadly maintained.

As a result of the combined effect of the second half phasing of AUM growth and investment initiatives made, the statutory profit before tax and adjusted underlying profits before tax both fell by 9%. We have maintained the policy of returning a high level of adjusted profits to shareholders, with total dividends this year declared and proposed of 16.4 pence or 86% of adjusted profit (2018 18.6 pence, 85%). 

As described in James Barham's CEO report, the Group will undertake investments to grow the business organically. We will provide shareholders with specific guidance relating to the financial impact of these investments on the current period's net earnings, which will allow shareholders to evaluate anticipated dividend distributions based on the Group's current dividend policy. 

Conduct

Last year, I emphasised the critical importance of creating and sustaining a strong culture based around exemplary standards of behaviour. We set high standards and set the tone from the top, reinforcing our strategy, our actions and our communications. It is, like the old image of painting the Forth railway bridge, a never-ending task: culture does not exist in a vacuum - it requires to be continually learned, relearned, lived and taught. No company is of course immune from mistakes being made, but in a conduct-led culture we expect errors to be admitted up front and problems rectified openly. We have always believed that how a business deals with these challenges speaks volumes about the strength of integrity and values. Only in that way will we meet the expectations of our clients, regulators and shareholders.

We have been making our final preparations for the implementation of the Senior Managers and Certification Regime ("SMCR") on 9 December 2019. The Group's two FCA regulated entities will be in-scope of the SMCR and will be 'core' firms. Our work towards SMCR implementation has included identifying and training our senior managers and certified staff and putting in place the relevant policies, processes, systems and controls designed to facilitate ongoing compliance. As with many regulatory projects the story does not end on the implementation date, we have therefore been very focused on looking ahead to ensure the smooth transition of our business-as-usual practices into the new SMCR environment.

Board and management changes

Over the last couple of years, Mike Faulkner has increasingly focused his efforts on driving forward our investment thinking, developing new investment approaches and the preparation of new investment funds for launch. After careful reflection over the past year, Mike concluded that he would best be able to serve the Group if he could spend the majority of his time focused on the investment parts of our business. As a result, we announced in June that James Barham would be appointed Group Chief Executive Officer on 1 July. James had been the Deputy Group CEO since September 2018. The Board is very pleased with the start that James has made in his new role.

Since then our thinking has evolved further and we have agreed that the investment elements of River and Mercantile should be pulled together under the overall guidance of Mike and we are pleased to announce that Mike will take on the role of Group Chief Investment Officer (Group CIO). The ongoing delivery of market leading investment returns along with the development of our Macro business is central to fulfilling the long-term potential of River and Mercantile.

To ensure that his time is unencumbered, we have agreed with Mike that he will step down as an executive director at the 2019 AGM. This will allow him the time to be fully focused on development of our investment thinking as Group CIO and the management and development of our Macro business. Mike's remuneration will be restructured to be consistent with his new role and will be comparable with the arrangements that other similar portfolio managers and CIOs receive.

In parallel, Jack Berry continues to play a key role in the management of our Solutions business and some of our most important clients. To allow him more time to work on the positioning and future development of our UK Solutions business and to focus on growing the complex client base, especially in light of the retendering opportunities arising from the CMA review of the fiduciary management sector in June 2019, we have agreed that he will also step down from the Board at the 2019 AGM.

There have also been three changes amongst the non-executive members of the Board. Robin Minter-Kemp, previously Remuneration Committee chair, stepped down on 30 June as previously announced. His replacement in that role is Miriam Greenwood, who was appointed to the Board on 28 May 2019. In addition, Jonathan Punter, one of the founder members of Punter Southall Group (PSG) and its representative on the board under the relationship agreement entered into at the time of the IPO, stepped down on 30 June.

I am personally grateful to both Robin and Jonathan for their contributions to the Board since IPO and especially since I was appointed Chairman.

With effect from 1 July, River and Mercantile became subject to the new UK Corporate Governance Code (the '2018 Code'). Under the previous UK Corporate Governance Code (the '2016 Code'), as a small company, River and Mercantile had been exempt from compliance with the requirement that at least half of the Board, excluding the Chairman, should comprise independent non-executive directors. As a result of Mike Faulkner, Jack Berry and Jonathan Punter stepping down from the Board we shall be fully compliant with the 2018 Code in respect of the membership of the Board following the AGM. The Board will then comprise myself as independent Chairman, three independent non-executive directors and two executive directors (CEO and CFO). The significantly smaller size of the Board will enhance our governance focus and improve our effectiveness. The Board and the Board Committees will continue to exercise careful oversight of each of the businesses in the Group, ensuring that all senior executives in the Group get exposure to the Board and Committees in the regular reviews of the performance of their business responsibilities. In addition, the restructured Board will also meet the Hampton-Alexander target that at least 33 per cent of the Board should be female.

As required by the 2018 Code, Miriam Greenwood has been appointed as the Board's designated non-executive director responsible for engagement with our workforce. As Chair of the Remuneration Committee, Miriam has a broad remit for the oversight of employee remuneration and employee matters.

Annual General Meeting

This year's AGM will be held on 9 December 2019.

In addition to the usual business, there are two important items, in particular, on which I wish to comment. First, we have put forward a resolution to give the directors power for the company to buyback shares. This power is widely held by public companies and it had been the intention to incorporate such a power at the time of the IPO. It can be an attractive way to return excess capital to investors. Appropriate use of the power would also be expected to enhance per share growth and improve overall returns to shareholders. We have no immediate intention to use the power but wish to have that ability should the returns from such a buyback be more attractive than other routes such as special dividends. I emphasise that the Board would only initiate buybacks if we considered that the Company had surplus capital which could not be profitably invested in growing the business.

Secondly, following the general meeting earlier this year in which shareholders' approved a resolution to ratify and confirm the payment of certain dividends previously paid, we have put forward a resolution to give the Board approval to undertake a Court approved capital reduction process to reclassify the merger reserve (£44m at 30 June 2019) as a distributable reserve.

I would also like to comment on the shareholder feedback we received on the application of the current Remuneration Policy at our 2018 AGM. Whilst there was a majority of votes in favour of the 2018 Remuneration Report, we noted that a number of shareholders had some concerns and were unable to support the 2018 Remuneration Report. We had planned to consult with shareholders fully on a new Remuneration Policy, but following the change in Remuneration Committee Chair and Executive Director role changes, we decided to delay proposing a new Policy until next year. We have naturally listened carefully to comments from investors and proxy agents on the application of the current Policy and have accordingly increased our disclosures relating to performance targets and the scoring of individual senior executives as well as removing the inclusion of a direct share of investment Performance Fees in the remuneration available to senior executives.

Outlook

The business is well positioned to take advantage of some developing themes in our marketplace over the coming year:

 • The retendering window emanating from the CMA review;

 • The growing demand for our derivatives solutions;

 • The strong performance of our Macro strategy and our ability to take advantage of a compressing market;

 • The recognition by investors of "Value" as an investment strategy and our long track record of delivering that

strategy.

The Board therefore looks forward with continued confidence.

Finally, on behalf of the Board, I would like to thank all of our people at River and Mercantile for their continuing hard work, spirit and enthusiasm for our business. The Company is nothing without its people and the Board deeply appreciates everyone's effort to make River and Mercantile a success.

Jonathan Dawson

Chief Executive Officer's Review

It was a great honour to be asked to step up and take over the Chief Executive role from Mike Faulkner earlier this year. We have known each other and worked together in various guises over the last 25 years and whilst we are very similar in terms of our values, beliefs, ambitions and entrepreneurial spirit, we do think in different ways. It is this difference that has been our strength.

As General George Patton once said;

"If everyone is thinking alike, then somebody isn't thinking."

Review of the year

The last year has been a period of robust performance for the Group during challenging market and industry conditions. We have delivered excellent growth with AUM/NUM rising by 18% to £39.8bn, which is 6% ahead of analyst expectations at the beginning of the financial year. It is very encouraging to see the net sales ratio return to the level we strive to achieve. This year has seen a record level of gross sales at £6.9bn, a year on year increase of 21%. As we have described previously, we want to deliver asset growth in our business by a minimum of 12% per annum. 

This growth is made up of a combination of net sales ratio and growth generated through investment performance.

http://www.rns-pdf.londonstockexchange.com/rns/8454P_2-2019-10-14.pdf http://www.rns-pdf.londonstockexchange.com/rns/8454P_1-2019-10-14.pdf

The investment environment during the period was, and continues to be, demanding and a number of our investment strategies whilst outperforming in absolute terms underperformed against their relative benchmarks as the factors they favour struggled. 

Net management and advisory fees including performance fees rose by 4% to £78.1m slightly ahead of analysts' average expectations. Adjusted underlying profit before tax was £14.7m in line with the average of analysts' expectations at £14.7m and adjusted basic earnings per share was 20.3p, a decrease of 7% against the previous year.

A key element of this growth came through from the strong performance fees earned during the year. Equity Solutions provided £2m and Solutions provided £10.6m, following positive performance. This part of our growth will vary over time and as I discuss later in this report, will be subject to our ability to generate strong investment returns for our clients. This can be expected to wax and wane over time depending on the underlying conditions.

We have seen a volatile market over the last twelve months and in particular, at certain stages during the period, falling equity markets in particular in the final quarter of the last calendar year. We have always believed that our diversified business model, where nearly 50% of our revenues are independent of equity market beta, provides the business and our shareholders greater protection. It was encouraging to see this belief statement proved as equity markets fell. In spite of our lower beta, we are still able to provide strong growth and we continue to work hard with our clients to ensure that we have enduring relationships. 

http://www.rns-pdf.londonstockexchange.com/rns/8454P_3-2019-10-14.pdf http://www.rns-pdf.londonstockexchange.com/rns/8454P_4-2019-10-14.pdf

RWAA. Revenue weighted asset allocation. This measures the sensitivity of our revenues to equity market beta.

We continue to monitor attrition rate and whilst the long term levels maintain stable at around 3% we will see this spike from time to time dependent on circumstances. Over the period this was only 1% and reflected strong underlying client relationships.

It was encouraging to see growth across our business in the last year. We have seen a return to growth in our Fiduciary Management division and strong growth in Equities - Institutional and Derivatives and I comment further on our distribution focus later in this report.

We continue to invest in our business - which will be a theme over the coming years - and I have talked in detail later in this report on the nature of our current investments. We will monitor and report on these as they develop and once they have reached profitability we will roll these investments into our core business. In addition we are continuing to invest in our core business and we refer to these investments as initiatives. Initiatives are designed to bolster our existing core businesses and are captured within the core business from a cost and remuneration perspective. 

I have shown below metrics on our business split into these two areas; our core business which includes initiatives and those areas in which we are currently investing, which we refer to as investment areas. I have set out in more detail later in this report the specific initiatives we are making in our core business and the investment areas.

The core business adjusted underlying profit is continuing to grow, which in time will feed into a steadily improving reported adjusted underlying operating margin.

We are also expanding our capabilities, with a particular focus on distribution. Since the year end, we have recruited David Hanratty to be our Global Head of Distribution. David was previously in a similar role at Pioneer, subsequently bought by Amundi in late 2017. David is highly regarded in the industry and has significant experience in our core and developing markets as well as strong technical knowledge. I am delighted he has joined the business and we will make a range of additional appointments across our distribution capabilities to ensure we are in a strong position to deliver the exciting strategies that we currently manage and are continuing to develop. 

We have delivered organic growth in AUM/NUM at a compound rate of 18% per annum since our IPO five years ago and we now want to complement this growth with alternative sources of expansion that will position the business more aggressively in those areas in which we are currently competing, but also in certain areas where we see exciting opportunities.

Overview of the Group

River and Mercantile Group PLC was formed following the merger of River and Mercantile Asset Management LLP and P-Solve Limited in February 2014 and subsequently listed on the London Stock Exchange in June of that year. These antecedent businesses were founded by their respective CEOs, Mike and I, in 2001 and 2006. We both agreed at the time of the merger that it was more appropriate that Mike lead as CEO with myself responsible initially for the Group-wide distribution function and subsequently incorporating the Asset Management elements of our business and then more recently as Deputy Group CEO. As every business should, we have a series of long-term succession plans and these are based on how our business evolves, and how its needs change alongside the development of our people. 

It has been clear that the needs of our clients and therefore our business are undergoing some significant change and this means that the needs of our business are better served by a change in leadership that allowed Mike to focus the entirety of his time on the development and management of a range of existing and emerging macro strategies and driving forward our broader investment thinking. Subsequent to this change, Mike and I have concluded that we need to be more harmonised as a Group in the way we approach investment challenges to ensure that our investment thinking is driven forward in a coordinated and cohesive fashion. Mike will therefore become the Group CIO, to ensure that we are maximising our capabilities in this vital area of our business and that our clients' investment needs are foremost in our minds. Mike has written at some length on his new role in the 2019 Annual Report and in particular, the macro strategies and why these are so critical to the longer term development of our business.

Our industry is in the throes of some significant change; some driven by the evolving needs of our clients but also because of commercial imperatives. All industries have to develop; we operate in a living and breathing investment universe and to remain static will lead to a business fast becoming isolated and potentially extinct. Change therefore should be seen as pre-requisite for commercial survival as opposed to a threat that must be resisted. This applies to the existing investment solutions and products that we deliver and manage for our clients as well as how we manage and evolve our own business. 

I am not espousing fundamental reinvention of investment beliefs; a fund management company that changes its investment philosophy and process is probably more vulnerable than one that is resistant to any evolution. That said, I have always admired fund managers and fund management companies that learn. The market evolves and therefore an investment process must learn from history. 

Writer and philosopher George Santayana stated,

"Those who cannot remember the past are condemned to repeat it"

This, as in many markets, has significant ramifications in our industry. Hugh Sergeant and his investment team have continuously demonstrated this learning characteristic. Although he has always had a committed value style, the application of this has evolved away from the narrow implementation of many of his peers over the years into the pragmatic investment approach that is known as PVT (Potential, Valuation and Timing) and has served him and his clients so well. That said there are always investment cycles and we have been through a period where the factors he favours have struggled; however that does not mean that you change your investment spots and chase the latest investment fad; you remain committed to the core principles of your investment beliefs. As an aside, we do believe that we are moving into a period where the value investor is likely to be better rewarded. It is clear when looking at Hugh's performance as a committed value manager, if investors wish to take advantage of the value opportunity, when looking at the evidence of his returns against his value peer group there is no one better at delivering superior investment returns than Hugh.

We believe that the broader investment market is moving into a different phase and the returns that have been achieved in the past may be more difficult to achieve in the future. We are not suggesting that certain asset classes are doomed to uncertain times; in fact, we believe that the equity market and in particular those stocks with attractive value characteristics, could provide some very attractive returns in the medium term. However, we do believe that with the prevailing economic backdrop we are more likely to be entering a period where returns may well be lower than has been the case in recent history.

We have been through a period where institutional advisors have promulgated a need to reduce risk, this has been driven by the changing circumstances within pension funds and their sponsoring employers. The arguments for reducing risk have been clearly articulated. However, the consequence of reduced risk in many cases is reduced and in some cases no return. I am sure that we all agree that we have to take some risk in our daily lives to exist. I need to go to work to earn money to pay my mortgage etc. However, there is a risk that in leaving the house to go to work I am involved in a terrible accident that reduces or removes my ability to earn money. I clearly still need go to work and therefore I assess the associated risks and act accordingly. 

This is the same in investment markets; if I do not take any risk, I will not be able to generate any return and therefore will be unable to meet my liabilities. Whilst this analogy does not apply to those pension funds with strong and dependable sponsors and healthy levels of investment surplus, it does apply to the majority of pension funds and other investors. Our Solutions business has always been the advisor or fiduciary manager that has solved complex client problems. The investment expertise and advice required to solve significantly underfunded positions is different to that required to manage a more solvent position. The development of our Derivatives capability alongside this investment advice has placed us in a unique position to manage risk alongside return and many of our clients have benefited from this approach. The addition of complex Macro solutions further enhances our ability to deliver positive outcomes for all of our clients.

The change that we have made at a leadership level at River and Mercantile is designed to give our business the freedom to meet this change and to develop and manage appropriate solutions that will help our clients manage their investment needs.

We therefore need to embrace change and all this means for our clients and our shareholders. I have always believed that our industry is dominated by two pieces of high ground: one the prevail of the large multi-national fund managers who have been able to utilise their scale and distribution capabilities to dominate markets and to withstand the twin commercial pressures of reduced fees and increased costs. The other area of high ground is dominated by the specialists that have been able to grow and manage fee pressures due to the high quality of the products and solutions that they develop which are very difficult to replicate. The remainder are trapped in the valley between these two opposing forces and as any military person will know, become vulnerable and weak. 

We at River and Mercantile have always prided ourselves on our ability to change and evolve to prevailing market conditions. These included the development of the Fiduciary Market in the UK in 2003 which was a direct response to changing governance requirements; the use of Derivatives as a means of managing risk and delivering required return in pension funds in 2005; the evolution of specific investment strategies to meet recovery investment opportunities emanating from the global financial crisis in 2008; and the recognition of changing market conditions and needs leading to the first merger of an asset management and solutions business in 2014. These have all been examples of where our business has recognised the need and changed accordingly.

Developing solutions for a lower returning world is more than just simple investment engineering. It requires not only a fundamental understanding of the holistic needs of our clients, but also crucially an understanding of macro-economic factors and how these can influence investments. We have been working on developing a range of investment strategies designed to deliver significant returns at a time when the need is greatest. An example of this is the Global Macro strategy that we launched in early 2018 and ran with corporate money only as we tested the operational and underlying investment model. This was designed to provide double-digit returns through the cycle and critically provide positive absolute returns during sustained periods of negative equity markets. The early returns have been very encouraging; Mike discusses this in detail in the Global Macro strategy white paper we have recently sent to potential clients, which provides the academic and numeric evidence in support of his investment approach, and more broadly how this influences many of the other new developments on which we are working.

We are continuing to invest in our business and have expanded on this in detail below. We have decided it would be helpful if we described our business in terms of our core business and the investments and initiatives we are making in our business to drive growth over the next three years. We articulated this approach at the time of our interims, and we have continued this approach more explicitly in this report. It is crucial that a business continues to make sensible investments in its people and processes, and responds to the changing business landscape and environment. I do not want River and Mercantile to become a business driven by senseless metrics that do not define how we are currently performing or will fare in the years to come. We have a fantastic opportunity to invest in developing the products and solutions that we deliver to our clients and the people who make this happen. We will also continue to recruit high quality individuals into the business at every opportunity. These investments will help our business flourish, maintain our position on the "high ground" and avoid the dangers lurking in the "valley".

Initiatives and Investments

As I highlighted earlier in my report, we are making a number of "investments" and "initiatives" in our business and will continue to support these until the point at which they become part of our core business or that "Investment" or "Initiative" does not turn into a feasible opportunity and we decide to withdraw support. We have set clear metrics to allow ourselves and the Board to govern the relative success or otherwise.

We are investing in the following specific "Initiatives" within our core business:

1. Macro Strategies

With Mike's guidance, we have developed a range of innovative strategies to meet the emerging needs of our clients such as Global Macro, Emerging Market Absolute Return, and Global Quality. We have launched these strategies and are already taking these to our clients across the business.

2. ILC

We made an investment in the Emerging Market equity team, based in Chicago that joined us from Credit Suisse. The team have a value based investment approach similar to that utilised by the PVT team and a long track record. We are in the process of establishing a range of suitable investment vehicles in the US to meet client requirements.

Separate to this we have made the following "Investments" in our business over the last eighteen months:

1. Australian Distribution

We have been building relationships and clients in Australia for the last few years and recognised that we needed to make an investment and establish a presence in this very vibrant and sophisticated market. The first stage in this investment programme was the recruitment of Tim Horan in 2018. He has made an excellent start in ensuring that River and Mercantile is a recognised feature of the institutional and wholesale markets, and we will continue this investment with additional hires over the coming 12 to 18 months.

2. New York

We were fortunate to be able to recruit a team of high-level executives from Mercer last year and we subsequently opened an office in New York, which will allow the team to spearhead our continued growth into this important market. The early signs are extremely positive, we are seeing the level of engagement with larger multinational pension funds increase significantly and we will continue to support this investment over the coming years.

The entrepreneurial spirit burns fiercely within River and Mercantile and there is a range of other initiatives that are being identified and researched as possible future investments. We will continue to keep you informed of our thinking in this space and when we are at the point of investing further in our development.

These investments will generally involve hiring additional resources and incurring additional remuneration costs. In the Group's Remuneration Policy, approved by shareholders in 2017, provision was made for the temporary increase of the remuneration ratio above 54% of underlying revenue to permit such investments. While historically we have not had to do this, and have been below the 54% remuneration cap, the Remuneration Committee has adjusted this, on a temporary basis, to allow management to be above the 54% cap specifically to fund these investments, if necessary. 

Detailed review of 2019

In reviewing the last twelve months, I think that it is important to put this into context of the last twenty four months and since our IPO in June 2014. The headline asset numbers for 2019 look positive; the Group has moved back onto a strong growth path and I was delighted to see that our net sales ratio is again at a level that compares favourably against our peers in the industry. The investment environment was more challenging than we have seen since the Group was formed and conditions for some of our strategies have been less than supportive. However, our long-term investment returns remain strong with all of our investment strategies and products ahead of their respective benchmarks since inception. 

The wholesale market in the UK has continued to be difficult and the Investment Association numbers bear this out. Retail sales of Equities over the 12 months to June 2019 were negative by over £4bn on a net basis and we were impacted by this trend. We have also seen an unusually narrow market where sales have been channelled through a small number of funds at a restricted number of investment houses and investment platforms. Investment in UK wholesale funds has fallen over the last 12 months and whilst there has been growth in certain global funds these have tended to be those strategies that have focused on the most expensive and fashionable stocks in markets. Our own wholesale business had a more muted period and saw redemptions in our UK strategies consistent with the Investment Association figures. In contrast we have seen strong growth in our global equity strategies from institutional clients in the UK, US and Australia, however this tends to be at a lower margin and this "mix-shift" in margin at a group level has had an impact on our overall financials. Our long-term investment returns are very strong, 100% of our portfolios are ahead of their respective benchmarks since inception, and we expect that we will see a return to growth in our wholesale book as the investment cycle changes. We are committed to this market in the UK and the recruitment of David Hanratty with his experience and expertise and the additional recruitments that will be made to support our existing clients and widen our client base are evidence of this commitment. 

Operating businesses

The Group has grown its assets at a compound average growth rate of 18% per annum since its IPO in 2014. The development of four intertwined divisions has continued to be a success and we have continued to see strong growth across the business.

Fiduciary Management

The last few years have been dominated by the CMA review into the industry and this has clearly had a dampening impact on activity levels during the early part of the year. The final order was published on 10 June 2019 although the interim report was circulated earlier in the year. During the course of the CMA investigation, we provided the CMA with our views and we are delighted that there appear to be some sensible decisions regarding clarification and consistency of investment returns and fee structures.

We have continued to see a recovery in activity in this market and there is evidence of a strong return to growth from our business as the market normalises following the review. We expect activity levels to increase as we move into a window during which we expect a significant number of legacy mandates across the market to undertake formal tenders. 

Investment returns have continued to be strong during the period and we have rolled out our River FOURcast investment thinking to all of our Solutions clients to ensure a clear understanding of our approach and the investment implications of our macro views.

We were instrumental in developing the fiduciary solution for UK pension funds in 2003 and we continue to be one of the leading players in this growing market. We continue to develop a series of new investment solutions to service both our Fiduciary and advisory clients as their needs evolve and we will continue to invest in this division over the coming years.

Advisory

Our advisory revenues remained broadly flat for the period in the UK as we continued to see a number of our clients, due to changes in their governance structure, decide to retain River and Mercantile, accessing our investment thinking and approach in a Fiduciary manner as opposed to Advisory following a competitive tender. We have always maintained and were pleased to see the CMA concur that, fiduciary and advisory are merely different sides of the same coin. The primary decision a Trustee Board needs to make is to identify the right investment partner with whom they wish to work and the secondary decision is to understand the appropriate governance structure to meet their needs. 

We are continuing to see growth emanate from both the UK and US. We have made a significant investment in opening offices in New York following the arrival of two senior executives from Mercer and we are delighted with early developments. The Advisory part of our business has been core since our inception and we will continue to invest in this area both in personnel and by identifying suitable inorganic growth opportunities to complement our activities in this area.

Derivatives

We have seen very strong growth in our Derivatives business since the IPO. We have grown notional assets under management by over 150% in that period. Growth in the financial year ending June 2019 has continued. We are now working with a broad range of clients and consultants and in particular, we have seen a strong growth in mandates from Local Government Pension Schemes ("LGPS") over the last 18 months. Our skills in this area are recognised as being some of the most professional and innovative in the market and we are working hard to develop these further and identify opportunities to both develop solutions and clients that would benefit most from the implementation of this thinking alongside or instead of their existing relationships. 

As highlighted above, we have continued to see a strong appetite for structured equity/protection mandates in LGPS. We are beginning to see a strong appetite for Derivative structures in the US and Masroor Ahmad (Head of Derivative Solutions) and his team are working closely with the New York team and engaging with multinational corporations. We also see interesting opportunities in our other markets such as Australia, where we are beginning to see some early signs of interest in Derivative solutions.

We will continue to invest in this business line, which we believe will continue to provide strong growth opportunities as the market increasingly becomes more sophisticated and the use of complex risk management tools becomes more widespread. 

Equities

As highlighted earlier in this review, our equities businesses have a clear investment philosophy and process and have consistently applied this in what has been a challenging environment for their favoured factors. This approach has gone through periods when their favoured factors have not supported the investment approach and the last twelve months has been one of those environments. The teams in London led by Hugh Sergeant and in Chicago led by Al Bryant have similar investment processes and the impact of this investment environment has been similar across both teams. We are not short-term investors, we are looking to generate superior returns through the cycle and whilst frustrating in the near term this does provide some fantastic valuation opportunities for the sophisticated investor who has the ability to "look across the valley".

We have continued to invest in the equities franchises and we have identified a number of opportunities to grow these further in the coming twelve months. We have been loath to buy assets for the sake of some short-term asset growth on its own, but we have identified a number of opportunities that also provide additional manufacturing opportunity and/or additional distribution resource.

We have continued to see strong growth in our institutional client base in all markets and in particular the exciting opportunities that we are beginning to see from our decision to open an office in Australia last year.

Macro

We are treating Macro as a new initiative and we believe that in time this will become a separate division in its own right. Once that is the case we will report on this accordingly. The Macro Initiative has evolved over this year and as we highlighted is a result of the emerging needs we have identified in the market and it provides the business with the infrastructure to develop a range of relevant solutions. Mike will cover in the Annual Report in more detail the Macro opportunity and what we mean by Macro. I am delighted with the way the business has reacted to these changes and the large number of exciting products and solutions that are being developed are a testament to the high quality of individuals we have across the business. These strategies are in the process of being taken to our clients and the response appears to be supportive.

Distribution

We have begun a phase of investment in our distribution platform and as highlighted earlier in my report I am delighted that David Hanratty has joined the business to develop further our distribution capabilities across the Group. I have always believed that this development should be a combination of "build, buy and partner". We will build internal distribution capabilities as we find the right individuals and teams and evidence of this is the investment we made last year in Australian distribution. Tim Horan joined the business from WestPac where he had many years of success building out a new business line for the bank and he has made a great start in developing the River and Mercantile franchise in the region since he joined our business. We will continue to invest and support Tim and we hope to make further recruitments over the coming twelve months. 

We will look to identify strategic opportunities that assist our development plans and provide significant distribution capabilities in markets where we are underrepresented or where we identify opportunities to diversify. We have also collaborated with some distribution specialists in the US market, which will provide much-needed bandwidth as we develop our own capabilities. 

This was a record year of AUM growth for the Group with total sales of £6.9bn and net sales of £4.1bn. It was encouraging to see the continued penetration into the LGPS market championed by Jason Wood with our structured equity and LDI solutions and the broader growth in our overall Institutional business led by Arabella Townshend.

As we have previously highlighted, we have made a significant commitment and investment in Australia with the establishment of a presence in Sydney and Brisbane following a number of years developing relationships. It has been very rewarding to see the continued growth in this market with a recent AU$390m global equities mandate appointment from a major Superfund.

We are committed to the wholesale market here in the UK and developing relationships over time in these markets in the US and Australia. The UK wholesale market has seen a difficult trading environment and the Investment Association reported that the UK All Companies Sector has been the worst selling sector 8 times in the last 10 years; in addition, UK domiciled funds according to figures from Morningstar Direct have suffered total outflows of £30bn since April 2018. Notwithstanding these depressing industry numbers, 100% of our investment strategies available to this market are ahead of their respective benchmarks since inception and continue to be relevant to our client needs in this space. We will continue to work hard to make sure that our strategies are available across all platforms and accessible to the end client.

Summary

This has been a strong year of development for the business. We have continued to deliver growth in our underlying business and whilst there has been a mix-shift in the economics from where this growth has emanated, we believe that this will settle over time.

We continue to invest across our business and are also making specific investments and delivering initiatives in four key parts of our business and I will continue to report on these over the coming years. As we identify additional opportunities to support our future growth, we will add these to this broader list. I am excited by the opportunities that exist for our core business and I have been delighted in the growth that we have been able to deliver. The investment in our core-operating platform has continued and is now in a position to be able to support not just the core business but also the investments that we are making more broadly. 

As a business, we have clear set of values; we are passionate about our clients' success, we want to be creative- involving, challenging and convincing others. We want to create an open, candid and constructive working environment, individually demanding of our best, and whilst being commercial in all that we do, remain focused on our people.

I would like to take this opportunity to thank all our employees for their continued support and hard work over the last year and our shareholders who have continued to support our plans to grow and develop the business.

James Barham

Chief Executive Officer

River and Mercantile Group PLC

Financial Review

A strong year of net flows and investment performance, however, the timing of AUM/NUM growth and the full year effect of reduced wholesale AUM has reduced the Group's overall financial results this year.

Financial Highlights (unaudited)

·; Statutory net profit after tax was £13.0m, compared with £15.1m in the prior year;

·; Statutory basic earnings per share were 16.22 pence per share, compared with 18.83 pence per share in the prior year;

·; Adjusted underlying profit before tax was £14.7m, compared with £16.1m in the prior year;

·; Adjusted underlying EPS was 13.91 pence per share, compared with 16.06 pence per share in the prior year;

·; Adjusted profit after tax was £16.2m, compared with £17.6m in the prior year;

·; Adjusted basic earnings per share was 20.26 pence per share, compared with 21.85 pence per share in the prior year.

Asset Growth

·; Fee earning AUM/NUM increased by 18% year on year, to £39.8bn;

·; Gross sales for the year were £6.9bn;

·; Net flows for the year were £5.4bn;

·; Investment performance increased AUM by £0.6bn.

Operating Highlights

·; Net management and advisory fees increased by 2% year on year to £65.6m;

·; Performance fees were £12.5m, compared with £10.6m in the prior year;

·; Adjusted underlying pre tax margin was 22%, compared with 25% in the prior year. The Core business, before investment in new business opportunities, generated adjusted underlying pre tax margin of 25%.

Key Performance Indicators (KPIs)

The following summarises the Group's KPI's for the year ended 30 June 2019:

AUM/NUM and margins

We have continued to grow AUM/NUM through both positive net flows and investment performance. Net management fee margin levels have been broadly maintained across all divisions.

The following table shows the AUM/NUM for the year ended 30 June 2019:

This year has seen a record level of gross sales at £6.9bn, a year on year increase of 21%. Gross sales included £4.4bn of AUM/NUM from new clients and £2.5bn from increased allocations and new mandates from existing clients. Net rebalance included £1bn relating to increased hedging levels for clients with LDI. Redemptions were £2.8bn, including £0.6bn of structured equity strategies in Derivative Solutions that reached their contractual maturity, and £483m of Fiduciary Management mandates where the schemes went to buy out or buy in. The net outflows in Equity Solutions - Wholesale of £253m reflects general negative retail sentiment to equities during the year. For the year, investment performance added £0.6bn and while positive in Fiduciary Management, was overall negative in Equity Solution reflecting the equity markets during the year.

In FY2019 H1 investment performance was negative £1.0bn, while FY2019 H2 showed a significant recovery adding £1.6bn to client portfolios. As discussed in the Group CEO's statement, a period of economic downturn had been anticipated in FY2019 H1 and therefore we had positioned clients' portfolios more defensively in Fiduciary Management. In FY2019 H2 all divisions were able to take advantage of the more positive markets and recorded significant investment performance gains.

Net sales were £4bn for the year with the majority in FY2019 H2.

Regretted institutional attrition (RIA)

Our business model is focused on meeting the clients' investment needs. Our engagement approach results in an alignment between the investment strategy and the clients' desired range of investment outcomes. Our aim through this approach is to achieve higher levels of client satisfaction and therefore lower redemption rates. We measure this through RIA.

In the prior year Derivative Solutions' RIA saw the redemption of a large mandate which reached its contractual maturity date, excluding this redemption the 2018 RIA for Derivatives was 6.6% and 3.4% for the Group. In Equity Solutions - Institutional the increase in redemptions in 2019 reflect reduced allocations to Emerging Market and UK equity strategies as sentiment has continued to be more negative in this space.

Total Revenues

Total revenues increased 4% to £78.1m, with 2% growth in net management and advisory fees and 18% increase in performance fees.

In FY2019 the timing of AUM/NUM flows had a significant impact on the level of management fees earned in the year. In FY2019 H1 net AUM/NUM flows and investment performance were £326m, compared with FY2019 H2 of £5.6bn.

Overall net management fees increased 3% to £55.5m, below our medium-term target of at least 12% growth per year, however Derivative Solutions and Equity Solutions - Institutional both grew revenues significantly ahead of this target at 14% and 31%, respectively.

The loss of high margin Equity Solutions - Wholesale AUM resulted in wholesale revenues being down 22%.

In Fiduciary Management revenues grew by 2% largely due to the timing of net flows and investment performance which were biased towards FY2019 H2 resulting in lower revenue generation in the year. 

Based on the year end AUM/NUM and average margin, the estimated in-force revenue is estimated to be £61m, an increase of 10% over the actual management fee revenue recorded in the year. 

Advisory revenues declined in the year by 2% which reflected a lower level of project revenues and a slowdown in new advisory mandate opportunities pending the release of the CMA's findings on fiduciary management and consulting services during the year.

Performance fees increased by 18% compared with the prior year as a result of continued strong investment performance that triggered the crystallisation of previously deferred performance fees in Fiduciary Management. It is anticipated that FY2020 will have significantly lower levels of performance fees in Fiduciary Management. Equity Solutions' performance fees (which are now primarily from the River and Mercantile Micro Cap Investment Company (RMMIC), were £2.0m. These were lower than last year largely due to lower investment performance.

Management Fee Margins

The divisional management fee margins have remained consistent with our medium term guidance. Our overall margin decreased by one basis point reflecting the decrease in higher margin Equity Solutions - Wholesale AUM during the year and an increase in NUM from Derivative Solutions. We anticipate that as a result of the mix-shift in our AUM/NUM the overall management fee margin will reduce from 16bps to 15bps for FY2020. In Fiduciary Management we anticipate that as a result of the re-tendering of mandates, post the publication of the CMA findings, the management fees in the industry will reduce and therefore we have reduced our average medium term guidance by 1bps to 14-15bps.

Net management fees

Fiduciary Management

While Fiduciary AUM grew by 21% through net flows and investment performance overall, the majority of the AUM growth occurred in FY2019 H2 and as a result management fee revenue grew by only 2% in the year. In-force revenues at year end are therefore higher than the actual revenue in the FY2019 which means that we have embedded revenue growth in FY2020 of c10%. New fiduciary management mandate opportunities have been more muted during the year pending the publication of the CMA findings into fiduciary management and investment consulting. However, we anticipate significant new fiduciary management mandate opportunities in FY2020 both from participation in new clients considering fiduciary management and participation in the industry wide re-tendering of existing fiduciary management mandates.

Derivative Solutions

Derivative Solutions comprises Liability Driven Investment (LDI including gilt collateral management) and Structured Equity products.

Derivatives by type:

LDI relates to the management of interest rate and inflation risk in the underlying pension liabilities. In 2019 we continued to see strong flows from new clients and existing who have increased their level of hedging to respond to market and scheme funding levels.

Derivative Solutions' Structured Equity capabilities provide strategies to shape the return profile of clients' equity portfolios. The continued strength of the equity markets coupled with an increase in the fear of a pullback in equities have led to a number of mandates including a £2bn mandate from a local government pension scheme.

As Structured Equity products are usually sold at a lower margin than LDI, the average margins of the Derivative Solutions division will fall over time if structured equity continues to sell strongly, due to mix-shift effects.

Equity Solutions - Wholesale

The net outflows in Equity Solutions - Wholesale of £253m reflects general negative retail sentiment to equities during the year. Revenue growth in the year was negative due to the full year impact of AUM reduction last year and the impact of weaker AUM growth this year.

Equity Solutions - Institutional

Equity Solutions - Institutional grew strongly in the year, as demand continued for the Global High Alpha strategy in particular in the UK, US, Australia and New Zealand. We now manage £905m of AUM originating from Australia/New Zealand and by establishing our new office in Australia, we expect to expand our business in a market with significant pension assets.

Advisory revenues

Advisory revenues declined in the year by 2% which reflected a lower level of project revenues and a slowdown in new advisory mandate opportunities given the CMA review of fiduciary management and consulting services during the year.

The split between retainers and project fees was:

Performance fee revenue

This year has been another strong year of investment performance across all strategies. Performance fees in Fiduciary Management were £10.6m, resulting from the underlying investment performance generated by the investment teams, coupled with the more stable interest rate environment. Equity Solutions performance fees are primarily from the River and Mercantile Microcap Investment Company (RMMIC), fees in the year were £2.0m.

In Fiduciary Management, based on the level of previous deferred performance fees, we anticipate a significantly lower level of performance fees in FY 2020.

Administrative expenses

Administrative costs as a percentage of revenue increased by 2% to 24%, of which the most significant increase was the full year effect of external research costs in the Equity Solutions business. In addition, we incurred fund administration costs relating to new segregated mandates, regulatory and compliance costs related to the implementation of SMCR and occupancy expense due to an office move to bring the UK facilities closer. 

We anticipate that additional expenses relating to continued investment in the business, in particular costs associated with launching new products and investments in Australia and the US will increase administration expenses in the near term by approximately £1.1m. 

From 1 July 2019, the change in accounting for leases, which came in to effect 1 January 2019, will bring our lease commitments onto the Group's balance sheet and also change the classification and recognition of costs associated with the Group's leased premises.

While the accounting change will not impact the Group's cash flows, the timing of recognition of the lease costs will be different under the new standards and will increase net expenses by up to £0.1m annually in the five years following initial application, decreasing the Group's reported profits. Occupancy charges for leased premises will be recognised through depreciation and interest expense. It is anticipated this initial increase in net costs recognised will trend towards a net decrease in the longer term. Additional detail on the new leases accounting standard is provided in note 1 to the Group financial statements.

Remuneration

Remuneration expense includes: fixed remuneration comprising base salaries, drawings, benefits and associated taxes; and variable remuneration comprising performance bonus, profit share paid to the partners of RAMAM, the amortisation of the fair value of performance share awards under non-dilutive share plans and associated taxes. Included in remuneration expenses is the cost of recruiting fees paid to third party consultants.

The Remuneration Policy, approved by shareholders in 2017, limits remuneration to 54% of underlying revenue and 50% of net performance fees. Total remuneration this year reflects remuneration at 54% and 50% compared with last year at 53% and 50%. The increase in the ratio is primarily the full year effect of the investments made in Australia and New York, referred to below.

Core Business and Investments

As discussed in the Group CEO's Report, we have continued to invest in the growth of the business through a series of organic initiatives and investments. Historically these opportunities, including the ILC team, have been funded within the existing remuneration and administration expense base of the Group. These investments represent organic growth primarily in people which will involve remuneration and additional related administration expenses. It is likely that during the initial phase of these investments the contribution to net margin may be negative and therefore will detract from the margin improvement of the overall business. Accordingly, we will disclose the business split between Core and Investments. This allows us to show the progress made in margin expansion of the Core business.

We will provide specific guidance relating to the financial impact of these investments on the current period's net earnings which will allow shareholders to evaluate anticipated dividend distributions based on applying the Group's current dividend policy.

It is anticipated that the investments in New York Solutions and Australia will continue at similar levels in FY2020.

Executive Performance Share Plan (EPSP)

The EPSP was established shortly before the IPO, and Executive Directors were given awards over a maximum of 7.3m shares, which they would be entitled to receive based upon achieving a compound total shareholder return of between 12% and 30% during the period from IPO to June 2018, with a one-year holding period after that date, until June 2019. At June 2018, the end of the measurement period, the compound annual TSR was 19%. This resulted in 57% of the A shares being eligible for award and none of the B Shares. This equates to a total of 2.9m shares, or 3% of current issued share capital.

Statutory and adjusted profits

Statutory profit after tax and adjusted underlying profit after tax both decreased by £2m compared with the prior year, as a result of increased revenue offset by increased administrative expenses and remuneration. These increases were primarily the result of the full year effect of investments made in the business and research costs.

The Directors believe that adjusted profit after tax is a measure of the cash operating profits of the business and gives an indication of the profits available for distribution to shareholders. The definition of adjusted and adjusted underlying profit, alongside a reconciliation to statutory profit can be found in note 14 of the consolidated financial statements.

The Directors believe that the underlying profits, generated from net management and advisory fee income, represent the profit from the ongoing business as they exclude the effect of performance fees which can fluctuate for year to year.

Adjusted underlying pre-tax margin represents adjusted underlying profit before tax, divided by net management and advisory fees.

Capital, liquidity and regulatory capital

The business is strongly cash generative, generating net cash from operations of £14.9m. Cash and cash equivalents at year end were £24m.

As a Group, incorporating businesses regulated by the FCA, we hold prudent levels of capital resource in order to ensure our financial stability. The Internal Capital Adequacy Assessment Process (ICAAP) is a 'living' process and is treated as a continuous exercise to ensure that we are holding sufficient levels of equity capital for the scale and nature of our operations and risk. During the year we have revised our risk and capital framework, and increased our regulatory capital resources to reflect the expansion and underlying growth in our business.

As at 30 June 2019, adjusting for the effect of the interim and proposed final dividends, the Group holds a regulatory capital surplus of around 21% in excess of our assessed requirement.

Following the adoption of IFRS16 in respect of leases, the Group's regulatory capital surplus is expected to decrease by around £0.3m from 1 July 2019.

Employee Benefit Trust

The Group's EBT purchases Group shares in the open market to meet the potential vesting of share awards granted under the Group's PSP and DEP share plans.

During the year, the Group's EBT purchased 0.7m shares relating to the previous years' share awards and transferred 0.2m shares as a result of vested awards. The net cost of these transactions was £1.3m and is shown in the statement of changes in equity. As at 30 June 2019, the EBT held 2.4m shares. The weighted average number of shares in issue has reduced as a result of purchases of own shares by the EBT.

As at 30 June 2019, the Group had granted share awards which were either expected to vest, or could possibly vest, over 4.7m shares. During the Group's end of year remuneration process, the Group granted share awards over a further 1.3m shares, based upon an estimated grant price.

Authorised Corporate Director

Group entities act as the investment managers to funds and segregated managed accounts, and River and Mercantile Asset Management LLP (RAMAM) has in the period acted as the Authorised Corporate Director (ACD) of River and Mercantile Funds ICVC.

The Group has now appointed an independent ACD, Equity Trustees Limited, for the River and Mercantile Funds ICVC. This appointment has been approved by the regulator and will take effect later in 2019.

As a result, in future periods the requirement to settle transactions between the investors and the depository of the Fund will transfer to Equity Trustees Limited as the ACD. The Group will no longer be exposed to the short-term liquidity requirements to settle with the depositary of the Fund before receiving payments from the investor and these balances will no longer be held on the Group balance sheet.

Distributable reserves and Dividends

At the 2019 AGM the Board is recommending to shareholders to give the Board approval to undertake a Court approved capital reduction process to reclassify the merger reserve (£44m at 30 June 2019) as a distributable reserve. 

On 6 April 2019, an interim dividend of 6.3 pence per share was paid, which included a special dividend of 2.0 pence relating to net performance fees. The Directors have declared a second interim dividend of 5.1 pence per share, of which 1.6 pence is a special dividend relating to net performance fees to be paid on 22 November 2019.

In addition, the Directors are proposing to shareholders a final dividend of 5.0 pence per share, of which 2.4 pence per share is a special dividend relating to net performance fees. Total dividends per share paid, declared or proposed for the year ended 30 June 2019 are 16.4 pence per share, representing 80% of the adjusted underlying profit after tax and 100% of the net performance fee profit after tax.

As at 30 June 2019, the Company had £10.8m of distributable reserves (2018: £11.5m).

River and Mercantile Group PLC

Consolidated income statement (unaudited)

River and Mercantile Group PLC

Consolidated statement of comprehensive income (unaudited)

The notes to the consolidated financial statements form part of and should be read in conjunction with these financial statements.

River and Mercantile Group PLC

Consolidated statement of financial position (unaudited)

The notes to the consolidated financial statements form part of and should be read in conjunction with these financial statements.

River and Mercantile Group PLC

Consolidated statement of cash flows (unaudited)

The notes to the consolidated financial statements form part of and should be read in conjunction with these financial statements.

River and Mercantile Group PLC

Consolidated statement of changes in shareholders' equity (unaudited)

The notes to the consolidated financial statements form part of and should be read in conjunction with these financial statements.

Transfer to retained earnings is in respect of a re-classification of capital contribution reserve which arose from forgiveness of a dividend by the Group's then parent, PSG (£3,867,000).

River and Mercantile Group PLC

Notes to the consolidated financial statements (unaudited)

1. Basis of preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), International Accounting Standards, International Financial Reporting Interpretation Committee interpretations, and with those parts of the 2006 Act applicable to groups reporting under IFRS as issued by the International Accounting Standards Board and adopted by the European Union (IFRS) that are relevant to the Group's operations and effective for accounting periods beginning on 1 July 2018.

Going concern

The Directors have a reasonable expectation that the Group and Company have adequate resources to continue in operational existence for the foreseeable future.

Accordingly, the Group and Company financial statements have been prepared on a going concern basis using the historical cost convention, except for the measurement at fair value of certain financial instruments that are held at fair value.

Basis of consolidation

The consolidated financial statements include the Company and the entities it controls (its subsidiaries). Subsidiaries are considered to be controlled where the Group has exposure to variable returns from the subsidiary, the power to affect those variable returns and power over the subsidiary itself. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

Subsidiaries are consolidated from the date that the Group gains control, and de-consolidated from the date that control is lost.

The consolidated financial statements incorporate the results of business combinations using the acquisition method. In the statement of financial position, the subsidiaries' identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. The consolidated financial statements are based on the financial statements of the individual companies drawn up using the standard Group accounting policies.

All transactions and balances between entities within the Group have been eliminated in the preparation of the consolidated financial statements.

The Employee Benefit Trust is included in the consolidated financial statements of the Group. The trust purchases shares pursuant to the non-dilutive equity awards granted to employees. These purchases and the operating costs of the trust are funded by the Company. The trust is controlled by independent trustees and its assets are held separately from those of the Group.

The consolidated statement of financial position has been presented on the basis of the liquidity of assets and liabilities.

The Group's relationship with fund entities

The Group entities act as the investment managers to funds and segregated managed accounts, and River and Mercantile Asset Management LLP (RAMAM) is the Authorised Corporate Director (ACD) of River and Mercantile Funds ICVC (collectively 'Investment Management Entities' (IMEs)).

Considering all significant aspects of the Group's relationship with the IMEs, the Directors are of the opinion that although the Group manages the investment resources of the IMEs, the existence of: termination provisions in the Investment Management Agreements (IMAs) which allow for the removal of the Group as the investment manager; the influence exercised by investors in the control of their IME and the arm's length nature of the Group's contracts with the IMEs; and independent Boards of Directors of the IME, the Group does not control the IME and therefore the assets, liabilities and net profit are not consolidated into the Group's financial statements.

Foreign currencies

The majority of revenues, assets, liabilities and funding are denominated in UK Pounds sterling (GBP/£), and therefore the presentation currency of the Group is GBP. All entities within the Group have a functional currency of GBP, except for River and Mercantile LLC which is based in the US.

Monetary items which are denominated in foreign currencies are translated at the rates prevailing at the reporting date. All resulting exchange differences are recognised in the income statement. Non-monetary items are measured at the rates prevailing on the date of the transaction and are not subsequently re-translated.

The functional currency of River and Mercantile LLC is US Dollars and is translated into the presentational currency as follows:

·; Assets and liabilities are translated at the closing rate at the date of the respective statement of financial position;

·; Income and expenses are translated at the daily exchange rate for the date on which they are incurred; and

·; All resulting exchange differences are recognised in other comprehensive income.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Exchange differences arising are recognised in other comprehensive income.

Adoption of new standards and interpretations affecting the reported results or the financial position

This is the first set of the Group's financial statements where IFRS 9 and IFRS 15 have been applied. These new standards were adopted from 1 July 2018 and have not had a significant impact on the amounts reported in these financial statements. 

IFRS 9 Financial Instruments

IFRS9 has impacted the presentation of the financial statements as described in note 28.

IFRS 15 Revenue from Contracts with Customers

Under IFRS 15, revenue is recognised when a customer obtains control of the goods or services. The Group has adopted IFRS 15, initially applying this standard recognised at the date of initial application (1 July 2018). As a result, the comparative information has not been restated and is reported under the previous standards. Whilst IFRS 15 has introduced a different approach for determining whether, when and how much revenue is recognised, the application of these tests to the Group's contracts has not resulted in a change to the revenue amounts recognised.

The Group recognises revenue under three categories (net management fees, advisory fees and performance fees) which have different features regarding how economic factors affect their amount, timing and uncertainty. These categories are unchanged on adoption of IFRS 15.

Effective for annual periods beginning on or after 1 January 2018, IFRS 15 establishes a single, principles-based revenue recognition model to be applied to all contracts with customers. Revenue recognition is now to be based on the principle of when control of a good or service transfers to a customer. Specifically, IFRS 15 introduces a five-step approach to revenue recognition: (1) identify the contract(s) with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognise revenue when (or as) the entity satisfies a performance obligation.

The Group has considered the terms of its existing IMA's and assessed the timing of management and performance fee recognition. IFRS 15 includes specific requirements in respect of variable fee income such that it is only recognised where the amount of revenue would not be subject to significant future reversals. Management and performance fees are both considered variable revenue, because they are charged against Assets under Management (AUM), which is subject to change. As such, whilst performance obligations are satisfied over time, due to their variable nature, fees are recognised at the end of any given measurement period, subject to the contractual arrangements of existing IMA's, when there is no longer uncertainty with regards to the fees earned.

The Group has not identified any material changes to existing revenue recognition principles, and therefore no adjustments have been made on transition. No judgements or changes to judgements were made as a result of application of this standard. The adoption of IFRS 15 does not have a material impact on the Group's financial statements.

Advisory revenues are recognised upon the satisfaction of performance conditions for any given engagement. This means Advisory revenues are recognised over time. Advisory work conducted is specific to the client and does not have alternative use to the Group. In addition, the Group has an enforceable right to payment for work performed to date on any given project. The Group uses an 'input' method for recognising revenues. There are three types of advisory work conducted by the Group; Consultancy, Projects and Advisory Retainers. All three types of revenue qualify for this treatment.

Consultancy work is accrued based upon the percentage completion of the work as measured by their input into it. For Project fees, they are recognised by assessing the amount of work undertaken in the period, in order arrive at the revenue accrual. Advisory retainers which provide an ongoing level of service throughout the year also pass another test for recognition over time, being that the customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs. These are also measured using the input method, with the passage of time being the best measure of performance as permitted by IFRS 15 B19.

This is in line with how revenue has historically been recognised by the Group and there has been no change to the way advisory fees are recognised as a result of IFRS 15 adoption.

Future accounting developments

IFRS 16 Leases (IFRS 16) and IFRIC 23 Uncertainty over Income tax Treatments (IFRIC 23) have been issued but were not required to be adopted by the Group in these financial statements. The expected impact of these standards when they become effective is described below:

IFRS 16 Leases

IFRS16 replaces IAS17 Leases and becomes effective for reporting periods beginning on or after 1 January 2019. It provides a single accounting method for lessees, requiring the recognition of an asset and a lease liability representing the right of use of the underlying asset over the term of a lease.

The Group has opted to apply the modified retrospective approach, where the cumulative effect of adopting IFRS16 will be recognised as an adjustment to the opening balance of retained earnings as at 1 July 2019. This approach accounts for leases as if the new standard had always been applied by the Group. Comparative information will not be restated.

The Group has reviewed its current lease arrangements and assessed the impact on transitioning to IFRS16 to its financial statements. The recognition of a right of use asset and lease liability will increase total asset and total liabilities by £3,297,000 and £3,682,000 respectively.

The adjustment to opening reserves will be £232,000. The lease liability is measured using an appropriate discount rate for the Group from the date of the initial application of the standard. The rental expenses relating to the Group’s property portfolio recognised as office facility costs will now be split as the straight-line depreciation cost of the capitalised asset and the unwinding of the lease liability charged to office facilities costs (Note 5) and finance costs respectively. Management estimates the future annual cost of the IFRS 16 depreciation of the ROU and unwind of the lease liability as £1,012,000 in 2020, in contrast to the cost under the previous IAS 17 regime of £1,022,000.

IFRIC23 Uncertainty over Income Tax Treatments

The interpretation clarifies how to apply the recognition and measurement requirements in IAS 12 Income taxes where there is uncertainty over income tax treatments. The Group does not have any instances where income tax treatment is considered uncertain and so does not expect it to have a material impact on the Group.

2. Significant judgments and estimates

As detailed in note1, these financial statements are prepared in accordance with IFRS. The significant accounting policies of the Group which impact these financial statements are:

·; Impairment of intangible assets, goodwill and investments recorded in previous acquisitions. This involves judgments including business growth and estimates including discount rates, which are described in note 9;

·; Recognition of management and performance fee revenues. This involves estimates of AUM/NUM positions for the purposes of accruing revenue, which are described in note 3;

·; Provisions, which are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Determining whether provisions are required and at what level, requires both judgment and estimates. See note 23;

·; The accounting for share-based remuneration. This involves judgments relating to forfeiture rates and business outcomes and estimates of future share prices for national insurance cost, which are described in note 7;

·; The accounting for the contingent consideration in respect of the acquisition of the Emerging Markets Industrial Lifecycle (ILC) team (note 10). This involvements judgments relating to the likely useful life of intangibles and estimates as to revenue and cost growth over time; and

·; The accounting for UCITS V deferred remuneration, which involves estimates of forfeiture rates.

3. Revenue

Net management fees

Net management fees represent the fees charged pursuant to an IMA. Net management fees are reported net of rebates to clients and are charged as a percentage of the client's AUM or Notional under Management (NUM). The fees are generally accrued contractually on a daily basis and charged to the client either monthly or quarterly. During the year ended 30 June 2019, rebates totalling £2,835,000 (2017: £3,176,000) were paid in respect of Equity Solutions and DAA Fund management fees.

Advisory fees

Advisory fees represent fees charged under Investment Advisory Agreements (IAA) and are typically charged on a fixed retainer fee basis or through a fee for the delivery of a defined project. Fees are accrued monthly and charged when the work has been completed.

Performance fees

Performance fees are fees paid under the IMAs for generating excess investment performance either on an absolute basis subject to a high water mark, or relative to a benchmark. Performance fees are calculated as a percentage of the investment performance generated and may be subject to deferral and continued performance objectives in future periods. Performance fees are recognised in income when it is probable that the fee will be realised and there is a low probability of a significant reversal in future periods. This occurs once the end of the performance period has been reached. The client is invoiced for the performance fee at the end of the performance period which is generally annually, either on the anniversary of their IMA or on a calendar year basis.

Contract balances

The timing of client revenue recognition, billings and cash collections results in either trade receivables or accrued income on the Statement of Financial Position. For both Management fees, advisory fees and Performance fees, amounts are billed pursuant to an IMA/IAA with clients, in arrears. 

There were £38,000 (2018: £36,000) contract liabilities as at the year ended 30 June 2019.

4. Divisional and geographical reporting

The business operates through four divisions, however these are not considered to be segments for the purposes of IFRS 8 on the basis that decisions made by the Board are made at an overall group level. The information received by the Board supports this decision making, with income statements, balance sheets, forecasts and budgets presented at a Group level. Despite this, the Directors feel that it is useful to the understanding of the results of operations to include certain information.

The net revenue for the year ended 30 June 2019 and 30 June 2018 together with the year end AUM and NUM, reflect the activities of the respective divisions.

In addition, performance fees of £10.5m (2018: £8.2 m) were earned by the Fiduciary Management division and £2m (2018: £2.4m) earned by the Equity Solutions division.

No single client accounts for more than 10% of the revenue of the Group (2018: none).

On a geographic basis the majority of the revenues are earned in the UK. The Group has an advisory, derivatives, fiduciary management and equity solutions business in the US and net revenue earned in the US for the year ended 30 June 2019 was £6.1m (2018: £5.7m). The AUM/NUM of the US business was £918m (2018: £903m).

Non-current assets held by the US business include £1.5m (2018: £1.5m) of goodwill.

5. Administrative expenses

Administrative expenses include the remuneration of the external auditors for the following services:

6. Remuneration and benefits

Fixed remuneration represents contractual base salaries, RAMAM member drawings and employee benefits. The Group operates a defined contribution plan under which the Group pays contributions to a third party.

Variable remuneration relates to discretionary bonuses, variable profit share paid to the members of RAMAM and associated payroll taxes.

Variable remuneration also includes a charge of £964,000 (2018: £2,320,000) relating to the amortisation of the Group's non-dilutive share awards and credit of £132,000 (2018: charge of £465,000) of associated social security costs.

Directors' remuneration

The aggregate remuneration and fees payable to Executive and Non-Executive Directors for the year ended 30 June 2019 was £3,082,000 (2018: £4,294,000). Fees payable for the year ended 30 June 2019 to Directors of PSG totalled £26,000 (2018: £43,000).

The remuneration of the Executive Directors (which includes the highest paid Director) is included in the remuneration report in the Annual Report.

Key management remuneration

Key management includes the Executive and Non-Executive Directors, and Executive Committee members. The remuneration paid or payable to key management for employee services is shown below:

Details of share awards granted to Executive Directors for future performance periods are included in the remuneration report in the Annual Report.

7. Share-based payments

Where share options are awarded to employees, the fair value of the options at the date of grant is charged to the consolidated income statement over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each year end date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition.

Where the terms and conditions of options are modified before they vest, the change in the fair value of the options, measured immediately before and after the modifications, is recognised in the consolidated income statement over the remaining vesting period.

Executive Performance Share Plan

As reported in the prior year's Annual Report, after completion of the Executive Performance plan share award performance period 57% of the Performance Condition A awards and none of the Performance Condition B awards were eligible for vesting following a one year holding period. The eligible awards received dividends on a reinvestment basis during the holding period. As a result of the completion of the holding period during the year ended 30 June 2019 the award shares vested on 26 June 2019.

The fair value of the Performance Condition A awards was 38p per share. The total fair value of Performance Condition A was £1,840,000. The fair value is amortised into EPSP costs over the vesting period and a charge of £452,000 was recognised for the year ended 30 June 2019 (2018: £452,000), which is treated as a non-cash adjusting item.

The Directors expect that vesting shares will be subject to applicable employer's national insurance at the date of vesting. An accrual for this cost has been calculated based on the current rate of national insurance, the number of the vesting shares and the share price at the reporting date. The movement in the accrual in the year ended 30 June 2019 was a charge of £183,000 (2018: credit of £575,000) and is included in EPSP costs.

Performance Share Plan

The Group's Performance Share Plan and Deferred Equity Plan (collectively PSP) allows for the grant of: nil cost options, contingent share awards or forfeitable share awards.

The fair value of the awards has been estimated using Black-Scholes modelling.

The grant date has not been confirmed for the 2019 awards. For the purposes of these financial statements the awards made in respect of 2019 have been assessed using the share price as at 30 June 2019, being £2.72. 

The key features of the awards are:

1. Remain employed throughout vesting period, subject to malus and good leaver provisions.

2. Achievement of specified total shareholder return target within a range.

3. Straight-line between minimum and maximum divisional AUM/NUM and revenue targets.

4. Achievement of specified revenue targets within a range.

5. Achievement of specified adjusted underlying EPS targets and personal objectives.

6. Achievement of specified adjusted underlying EPS targets and business performance criteria.

The following table sets out the movement in awards recognised in the income statement during the year and the key inputs into the fair values of awards:

The volatility for awards granted in the year has been calculated based upon the annualised daily return on the Group's share price from IPO to year end. All awards exercise at the end of the vesting period subject to the approval of the Remuneration Committee. As at the reporting date 504,000 of the awards were exercisable (2018: 311,000).

8. Depreciation and Amortisation

Depreciation charges primarily relate to IT and communications equipment, and leasehold improvements. The property, plant and equipment, and the depreciation accounting policies are described in note 21.

The amortisation charge primarily relates to the IMA intangibles and recognised as part of the acquisition of RAMAM and the ILC team as described in notes 9 and 11. The RAMAM and ILC team IMA intangibles are amortised over their expected useful life of between five and ten years based on an analysis of the respective client channels. The amortisation is not deductible for tax purposes. At the date of the RAMAM acquisition a deferred tax liability was recognised and is being charged to the income statement tax expense in line with the amortisation of the related IMAs. At the date of the acquisition no deferred tax liability was recognised in respect of the ILC team IMAs as the US business has brought-forward tax losses.

9. Intangible assets

Business combinations and goodwill

All business combinations are accounted for using the acquisition method. The cost of a business combination is the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed and equity instruments issued by the acquirer. The fair value of a business combination is calculated at the acquisition date by recognising the acquired entity's identifiable assets, liabilities and contingent liabilities that satisfy the recognition criteria, at their fair values at that date. The acquisition date is the date on which the acquirer effectively obtains control of the acquired entity. The cost of a business combination in excess of fair value of net identifiable assets or liabilities acquired, including intangible assets identified, is recognised as goodwill. Any costs incurred in relation to a business combination are expensed as incurred.

Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the Group's interest in the fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree.

Goodwill is not amortised but is reviewed for impairment annually, or more frequently when there is an indication of impairment. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the Group's cash generating units (CGUs) expected to benefit from the synergies of the combination. Each CGU to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. If the recoverable amount of the CGU is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying value of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised is not reversed in a subsequent period.

Identifiable intangible assets

Investment management agreements and customer relationships

IMAs and customer relationships acquired in a business combination are recognised separately from goodwill at their fair value at the acquisition date. Customer relationships have an estimated useful life of 20 years and IMAs have estimated useful lives of five to ten years. The identified intangible assets are carried at cost less accumulated amortisation calculated on a straight-line basis.

Impairment of intangible assets, excluding goodwill

At each statement of financial position date or whenever there is an indication that the asset may be impaired, the Group reviews the carrying amounts of its intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the CGU to which the asset belongs. The recoverable amount is the higher of the fair value less costs to sell, and the value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, an impairment loss is recognised as an expense immediately. For assets other than goodwill, where conditions giving rise to impairment subsequently reverse, the effect of the impairment charge is also reversed as a credit to the income statement, net of any depreciation or amortisation that would have been charged since the impairment.

Impairment review

Goodwill includes £13.2m (2018: £13.2m) in respect of RAMAM and £1.5m (2018: £1.5m) in respect of Cassidy Retirement Group Inc. (Cassidy).

The Directors estimated the recoverable amount of the RAMAM goodwill based upon the value in use of the business. The value in use was measured using internal budgets and forecasts to generate a five year view. The key assumptions used were: revenue based on internally approved budget in year one, an 8% revenue growth rate for the next four years; no growth after this point; and a pre-tax discount rate of 12%. Estimates were made concerning remuneration and administrative costs, based upon current levels and expected changes.

Sensitivity analysis was performed on the key inputs of the valuation, being the growth and discount rates and future cash flows. A fall of greater than 10% in projected revenue or a change in the discount rate higher than 39% is required to indicate impairment.

The Directors estimated the recoverable amount of the Cassidy goodwill using a net realisable value. This value was measured using the revenues of the CGU and third party data concerning comparable revenue multiples paid for recent acquisitions of similar businesses.

The key assumptions included in the estimate were: the costs of disposal; and the assumption that the multiples observed in other businesses would be comparable. Sensitivity analysis was performed on the valuation. A reduction in the revenue multiple of greater than 50% would be required to indicate impairment.

10. Other gains and losses

11. Gain on bargain purchase

As reported in the prior year's Annual report the Group became the investment manager of the ILC funds. The contractual agreements entered into between the parties constituted a business combination under IFRS 3.

The business combination resulted in a bargain purchase transaction due to the fair value of assets acquired and liabilities assumed exceeding the fair value of consideration payable. The Group recognised a gain in "other gains and losses" in the consolidated income statement for the year ended 30 June 2018.

The contingent consideration is calculated based on a percentage of revenue generated by an IMA and measured at fair value at each reporting date. The contingent consideration balance is recognised within "trade and other payables" in the consolidated statement of financial position and changes in fair value are recognised in the income statement.