Annual Financial Report

HgCapital Trust plc Private equity investment trust of the year Investment Week Awards 2005, 2006, 2007, 2008 and 2009 The Directors present the Annual Financial Report of the Company for the year ended 31 December 2009. The financial information set out below does not constitute the Company's statutory accounts for the years ended 31 December 2009 or 2008. The full Annual Report and Accounts can be accessed via the Company's website at www.hgcapitaltrust.com/results.htm or by contacting the Company's Registrar (Computershare Investor Services plc) on telephone number 0870 707 1037. Annual report and accounts 31 December 2009 Investment objective The objective of the Company is to provide shareholders with long-term capital appreciation in excess of the FTSE All-Share Index by investing in unquoted companies. The Company provides investors with exposure to a diversified portfolio of private equity investments primarily in the UK and Continental Europe. Financial highlights of 2009 +3.6% Positive net asset growth (assuming historic dividends are reinvested) +30% Increase in share price compared with a 30% increase in the FTSE All-Share Index 37% Net assets in liquid funds available for deployment Â£30m Funds deployed during the year including Â£17.2m in two new buyouts and Â£ 7.6m invested in renewable energy projects through Hg RPP +18% Average annual EBITDA growth of our top 10 investments over the last 12 months +14% Ten year total return per annum versus 2% per annum from the FTSE All-Share Index >3.8x Growth in value of shares over 10 years Chairman's statement This introductory statement forms part of the Directors' report which continues later on in this document. With a strong balance sheet and a solid portfolio that has good prospects for growth the Company looks forward to acquiring more good businesses at reasonable prices The year in review Following the previous year's dramatic events in financial markets, 2009 was a quiet year in the private equity sector. A sharp fall in the availability of bank borrowing, especially of underwritten loans for very large buyouts, reduced the capacity of most private equity firms to complete acquisitions. Unless under pressure to realise cash, owners of businesses preferred to defer planned sales. Market conditions for the sale of private equity investments were poor, especially for the onward sale of businesses to other private equity buyers. Furthermore, some private equity houses were severely distracted by poor performance in their underlying investments leading to the breach of bank covenants. Our Manager, HgCapital, had wisely pursued a policy of realising investments not only to capture strong valuations, but also to be positioned with cash for reinvestment. Between June 2005 and December 2008 the Company exited 30 investments, receiving proceeds totalling Â£295 million and representing 2.7x original cost. The last in this round of disposals, the sale of Orbiscom to MasterCard, was completed in December 2008, returning a multiple of 1.8x original cost. The Company made several new investments during the year. The acquisition of Epyx, the leading private electronic marketplace serving the contract automobile hire & leasing market was completed in June 2009; this investment reflected the Manager's special expertise in business services and technology. The Manager's specialist healthcare team was successful in its recommended offer for Goldshield Group plc, the listed manufacturer of generic pharmaceuticals, and completed the transaction in December 2009. In March the Board was informed by HgCapital that it was taking action following the discovery of possible under-reporting by Goldshield of past profits, but had no reason to believe that any adjustment to the book value of this investment was necessary. Further information is set out on the Goldshield section of the Review of Principal Buyout Investments below. The conditions for investment in the renewable energy sector were more accommodating, with banks continuing to lend on acceptable terms for long-term infrastructure projects generating stable cash flows; the Company participated in the acquisition of five solar photovoltaic generating plants in Spain. Both the Board and the Manager are committed to providing shareholders with the fullest possible information about the Company and its portfolio. Further information about all the Company's principal investments can be found in the Manager's Report and at www.hgcapital.com. Your Company ended the year with liquid funds of Â£87 million, representing 37% of net assets, available for deployment. Of this, Â£6.3 million will be disbursed in payment of the Company's dividend. Performance record Net assets Net Revenue Year attributable to asset Ordinary available Earnings Dividends ended ordinary value share for ordinary per per 31 shareholders per price Gross shareholders ordinary ordinary December ordinary revenue share share share Â£'000 p p Â£'000 Â£'000 p p 2000 103,521 411.0 356.5 7,332 4,623 17.9 14.50 2001 95,795 380.3 294.0 3,893 2,420 9.6 8.00 2002 83,837 332.9 219.5 3,528 2,148 8.5 8.00 2003 99,987 397.0 289.5 7,106 3,969 15.8 -** 2004 122,040 484.5 451.5 4,905 2,649 10.5 12.00 2005 156,487 621.3 583.5 4,963 2,965 11.8 8.00 2006 187,135 743.0 731.0 7,769 4,519 17.9 10.00 2007 238,817 948.2 782.5 12,129 7,446 29.6 14.00 2008 234,094 929.4 668.5 12,068 7,445 29.6 25.00 2009 236,044 937.2 844.0 9,682*** 7,148 28.4 25.00* *Interim dividend for the year ended 31 December 2009, declared on 17 February 2010, to be paid on 31 March 2010. **Change in accounting standards relating to recognition of dividends. ***Gross revenue before General Partner attribution Valuation The net asset value published in these results is based on the fair value of unquoted investments at the reporting date. These have been valued following the established IPEV guidelines; how the Company applies these guidelines is described in the Notes to the Financial Statements and the guidelines can be found in full at www.privateequityvaluation.com. Detailed valuations are prepared by the Manager, using multiples for a range of selected comparator companies, adjusted to take account of their relevance; the Board's Audit & Valuation Committee then scrutinises these valuations in detail, raising questions or calling for further evidence if appropriate, before the valuations are agreed and adopted by the Board and the Manager. The Board believes that its valuation process is rigorous, consistently applied and conforms fully to IPEV guidelines. In particular, historic earnings are used for valuation purposes when earnings are increasing, while forecast earnings are used if they are declining. The prudence of the Company's approach to valuation is shown by its achievement of average proceeds of 1.9x book value on a total of 30 exits since mid-2005. I commented in my statement last year that against a background of economic recession, the sharp fall in equity market ratings and the credit crisis, valuing private businesses was challenging and valuations must be subject to material uncertainty and the risk that they may change. The Board strongly believes in the importance of recognising any fall in value quickly and at that time sixteen investments were written down in value or written off completely. As a result, in the valuation at 30 June 2009, only relatively modest adjustments were needed. In the valuation at December 2009 a number of buyout investments, led by the Company's largest holdings Pulse and Visma, have been written up in value. These revaluations have mostly been driven by improved earnings, reflecting strong revenue growth despite the recession. The analysis of movements in net asset value below sets out an analysis attributing changes in value of the portfolio held at year-end. In aggregate, in the first half of the year values were largely unchanged before the effects of foreign exchange; in the second half the main driver of improving values was growth in earnings, delivered through a combination of good sales growth and early action taken across the portfolio to cut costs. Performance As a consequence, the total return (NAV plus dividend) over the whole year was 3.6%, with NAV at year-end of 937.2 pence per share. This compares with a rise of 30% in the FTSE All-Share Index, reversing the Company's substantial out-performance of listed equities in the previous year. At 28 February 2010, after providing for the interim dividend and adjusting for movements in foreign exchange, listed investments and the sale of Hoseasons, the NAV was 926.6 pence per share. The sale of Hoseasons was completed in February 2010, returning a multiple of 2.3x original cost and in excess of 2.0x the book value as at 31 December 2009. We have consistently said that we expected an investment in the Company's shares to reward the long-term investor, and so it has proved. The Company's portfolio has been managed by the same senior management team since November 1994. Over the 15 year period from 1994 to 31 December 2009 the Company has delivered growth in Net Asset Value (with dividends reinvested) of 15.4% per annum. These returns exceed the returns for the FTSE All-Share Index by 7.9% per annum, compounded over that period. On the basis of the unaudited NAV as at 28 February 2010, Â£1 invested in the Company in December 1994 would now be worth Â£8.45, compared with Â£2.96 if invested in the FTSE All-Share Index over the same period. The Company was chosen, for the fifth consecutive year, as Private Equity Investment Trust of the Year in the 'Investment Week' awards. The citation for the award referred to the Company's outstanding long-term performance and its high standards of governance. Revenue return was 28.4 pence per share, compared with 29.6 pence in the previous year. Revenue comprises interest earned on the Company's liquid assets, gilts and bank deposits, and from interest-bearing securities that make up a large part of the Company's investment in many buy-outs. The revenue available for distribution varies each year according to the Company's liquidity and the structure of the buy-outs held at the time: the Board recommends a dividend based on the revenue return each year, to maintain its status as an investment trust. This year the Board has resolved to pay an interim dividend of 25.0 pence per share (2008: 25.0 pence) and elected to take advantage of HMRC's new framework by "streaming" income from interest-bearing investments into dividends that will be taxed in the hands of shareholders as interest income. This has permitted the Company's dividend to be deducted from its taxable interest revenue, resulting in both a small increase in NAV at 31 December 2009 and payment of a higher dividend, while some shareholders may also benefit directly from the interest receipt, depending on their tax status. Prospects The market correction of 2008 marked the end of a long and benign period for investment. The Board and the Manager are united in believing that the recession of 2009 will be seen as the starting point for a new phase of investment at more attractive prices. Late in 2008 the Board and the Manager agreed on terms for the Company to commit to invest Â£250 million, and up to a further Â£50 million, alongside HgCapital's new fund, HgCapital 6. The Manager is in the final stages of its fund-raising programme with aggregate commitments (including the Company's) exceeding Â£1.88 billion, nearly twice the size of the Manager's previous fund. The demand from sophisticated institutional investors to participate in HgCapital 6 indicates confidence, similar to our own, that we are entering an attractive period for investment in private equity. Institutional investors are also aware that returns in private equity have shown a wide dispersion, with many private equity managers delivering unexciting returns; selection of the right manager is especially important in private equity. Whilst awaiting confirmation from the Manager of the final closing commitment, the Company's commitment to invest alongside HgCapital 6 is in excess of Â£280 million. This is a substantial figure but necessary if the Company is to take full advantage of the opportunities open to it now. However, I draw your attention to the unique characteristic of this commitment, namely that in circumstances where the Company will not have cash to invest it can opt-out of any investment. This opt-out gives a high level of protection from the potential effects of over-commitment that have seriously affected some other private equity investment trusts. The terms of the Company's commitment were set out in full in a circular to shareholders issued in December 2008. The investment phase for HgCapital 6 began in 2009 and the Company has already deployed Â£17 million in the buyouts of Epyx and Goldshield. Investment will continue over three to four years, as the economy gradually recovers, which should in turn lead to an improved market for realisations. In addition, the Manager has advised the Board that it intends to raise a second renewable energy fund, in which the Board is minded to invest. We believe that over the long-term the returns from HgCapital's investments in renewables are similar, on a risk-adjusted basis, to those achieved in its buyouts; and the return characteristics, through cash distributions as well as capital receipts, suit the Company as it has a pool of permanent capital. The Manager's second renewable energy fund will invest over a similar period to HgCapital 6. Between 2007 and 2009 discounts across all private equity investment trusts increased substantially; during 2009 these discounts gradually reduced. Shares in HgCapital Trust have traded at a consistently narrower discount than its peers. We attribute this to a number of factors: the Manager's outstanding long-term returns; the transparency of our reporting; a rigorous valuation process; avoidance of borrowing at company level and of unfunded commitments; and the Manager's success in realising a substantial part of the portfolio before the recession set in. These policies have resulted in the Company being well positioned to take full advantage of the investment opportunities that this stage in the economic cycle will reveal. Reflecting these opportunities the Board announced in February that it was considering raising further funds by way of a placing and offer of new ordinary shares with subscription shares attached, combined with a bonus issue of subscription shares to existing shareholders: a further announcement will be made if the Board decides to proceed. Roger Mountford Chairman 4 March 2010 Ten Year Record Historical total return* performance One year Three years Five years Seven years Ten years % p.a. % p.a. % p.a. % p.a. % p.a. Share price 30.2 7.7 15.8 24.4 14.4 Net asset value 3.6 10.6 16.5 18.2 12.8 FTSE All-Share Index 30.1 (1.3) 6.5 9.3 1.6 FTSE Small Cap Index 54.3 (8.2) 2.7 8.9 1.5 Based on the Company's share price at 31 December 2009 and allowing for dividends to be reinvested, an investment of Â£1,000 ten years ago would now be worth Â£3,842 An equivalent FTSE All-Share Index return would be worth Â£1,177 *Total return assumes all dividends have been reinvested. Investment activity 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Invested 25 20 20 15 22 35 45 50 26 30 Realised (including income) 18 26 27 31 47 52 62 106 92 8 Investing in private equity Private Equity Private equity is the term given to the provision of equity and equity type risk capital to unlisted companies. It is normally used to finance beneficial change in businesses. The changes that require equity finance are manifold and ever present. They include a change in the scale of a business (through fast growth or acquisitions), a change in ownership, often in conjunction with management (the management buyout), a change in the strategic direction of a company, a significant change in the structure and operations of a business or financing the commercialisation of new technologies. Healthy economies require constant change in their corporate sector, otherwise they stultify. Private equity is probably the best form of finance to pay for this change as it is patient, welcomes considered risk taking, and participates directly in outcomes. In return for their investment, private equity investors receive a share of the equity in the businesses they finance and do so with the objective of making a significant capital gain over holding periods from three to seven years. Private equity investors like HgCapital aim to deliver their clients higher returns than may be obtained from a portfolio of public equity investments over any rolling period of five to ten years. Attractive returns can be garnered if the private equity manager exploits the inherent advantages private equity investors have over investors in public markets. Investment profile Private equity investments are less liquid than public equities. To compensate for this, they offer greater control and more attractive returns. Individual private equity investments have a risk profile dependent on the nature of the underlying business. Investing in a diversified portfolio helps to mitigate some of these risks; the quality of company selections by the private equity manager and the manager's ability to manage its portfolio further mitigates risk. Manager selection is a key determinant of returns. Advantages of the private equity model Compared with investment in the public markets, a private equity investor has significant advantages: â€¢ Better governance model Theory and experience tells us that businesses run by their owners tend to perform better than those run by salaried agents. In a private equity backed business almost everybody around the board table and often a high percentage of managers and staff own shares in the companies they run. In addition, the private equity managers also own equity in the portfolio companies through their co-investment obligations and via their carried interest. Accordingly, interests of all parties are closely aligned and focused on creating value and realising a substantial capital gain. This is achieved by selecting ambitious medium to long-term goals and allowing managers to pursue them, free from short-term distractions that often beset the managers of listed companies. â€¢ Better control The private equity manager has more control over the method and timing of the sale of the business than a manager of listed equities. This superior control also extends to the appointment of management. â€¢ Able to attract the best management talent Working in a private equity backed business is highly attractive to the best and most ambitious managers. They will be exposed to capital returns that the listed companies rarely, if ever, match and are given the challenge and satisfaction of running their own business. â€¢ Larger universe of opportunities to choose from The universe of privately owned businesses is much larger than the publicly-traded one so the investor has greater choice. The choice available to private equity also includes listed companies which are frequently de-listed and refinanced with private equity capital. â€¢ Better access presenting the possibility for better assessment Prior to investing, private equity managers have better access to information, including detailed market, financial, legal and management due diligence. Listed Private Equity Listed Private Equity ('LPEQ') refers to public companies whose shares are listed and traded on a primary stock exchange. In Europe, primary exchanges include the London Stock Exchange and Euronext. Some private equity companies quoted on the London Stock Exchange are structured as investment trusts. All listed private equity companies provide the stockholder with an exposure to a differentiated portfolio of private companies, either directly or via funds. By buying shares in LPEQ companies, the investor benefits from liquidity while participating in the potentially superior returns of a private equity portfolio. In addition, LPEQ companies allow investors access to private equity without having to commit to the ten year lock-in and minimum investment required when investing in private equity via limited partnerships. For the most comprehensive single source of information on listed private equity go to www.lpeq.com. London Stock Exchange-listed private equity investment trusts are supervised by boards of directors, the majority of whom are independent, in order to re-enforce the manager's accountability to the shareholders. Provided they meet certain criteria, investment trusts pay no corporation tax on capital gains but must distribute most of their net income as dividends in each financial year. The objective of listed private equity is usually to provide shareholders with long-term capital appreciation, rather than income. Each listed company, like each private equity firm, has its own investment strategy relating to geography, size and type of investment, etc. Listed private equity companies vary considerably in the number of their own holdings, ranging from specialist direct investment trusts, with a handful of portfolio companies in one country, to a fund-of-funds manager with holdings in over 300 private equity funds worldwide. Listed private equity companies continually invest and reinvest; they have no fixed lifespan like a limited partnership. Proceeds from the sale of assets are generally retained for reinvestment, rather than being distributed to investors, which would trigger taxable gains. This, together with the long-term horizon of private equity, means that listed private equity is best suited to long-term holding, rather than frequent trading. In Europe, there are about 80 investable listed private equity companies, with market capitalisation of Â£22 billion (â‚¬25 billion) of which Â£11 billion are London-listed companies (source: LPX as at end 2009). These listed private equity companies should not be confused with Venture Capital Trusts (VCTs), which offer targeted tax advantages to investors, but must follow stringent regulations as to the size and nature of the companies in which VCTs can invest. Such companies are generally embryonic businesses. Advantages of listed private equity Compared with an investment in a limited partnership with a ten year life, the normal route to obtaining a diversified exposure to private equity, listed private equity offers significant advantages: â€¢ Listed private equity offers the opportunity for retail investors as well as institutions to participate in a diversified portfolio of mainly unlisted companies for the price of one share, rather than a typical minimum commitment of over Â£5 million; â€¢ By buying shares in a listed private equity company, the investor has liquidity in the shares and does not have to make a ten year commitment to a fund. Accordingly they can trade without requiring the manager's consent and the need to run private auctions for their interest; â€¢ Listed vehicles handle the cash management and administration, which are complex for a limited partnership interest. All listed private equity investors need do is monitor the value of their shareholdings in the quoted vehicle itself; and â€¢ Capital gains retained within London-listed trusts are not taxed. The listed sector is diverse, offering a wide range of private equity investment vehicles adopting different investment strategies and criteria. The Company The Company is an investment vehicle with an independent board of directors, listed on the London Stock Exchange, whose objective is to provide shareholders with long-term capital appreciation, by investing in all investments managed by HgCapital alongside HgCapital's institutional funds, on the same economic terms and on a pro rata basis. This approach provides investors with exposure to a diverse portfolio of fast growth private companies across Western Europe run by a well resourced and experienced manager. More recently, the Company and the Manager have agreed a no cost opt-out which enables it to decline an investment in HgCapital's latest fund, HgCapital 6, if cash resources are not available. Manager's Report HgCapital Trust plc gives the investor access to a diversified private equity portfolio run by an experienced and well-resourced Manager who makes investments in well-established companies over a number of geographies and sectors. We believe our approach will continue to reward investors with superior performance, both relative to the public markets and its peers over the long-term. Manager's strategy HgCapital provides investors with an exposure to a diversified portfolio of growing private companies, located in the UK and Continental Europe. Middle-market focus â€¢ HgCapital focuses on middle-market buyouts with enterprise values of between Â£50 million and Â£500 million and renewable energy investments. â€¢ The middle-market offers a high volume of companies with proven financial performance and defensible market positions. â€¢ These companies are small enough to provide opportunities for operational improvement, yet large enough to attract quality management and offer multiple exit options across market cycles. European focus â€¢ HgCapital focuses its buyout investments in the UK, Germany, Switzerland, Austria, the Nordic Region and Benelux. â€¢ Our renewable energy investments are focused on proven technologies in the British Isles and Continental Europe. â€¢ Our activity is directed by specialist sector teams located in London and Munich who work within a common culture and apply consistent processes. Broad coverage â€¢ HgCapital's dedicated sector teams provide investors with access to the substantial majority of private equity activity within their target size range and across their relevant geographies. Clear investment criteria â€¢ HgCapital applies a rigorous and commercial investment approach when evaluating all investment opportunities. Our objective is to complete the most attractive investments rather than being limited by a top-down asset allocation. â€¢ HgCapital seeks companies with protected business models and predictable revenues, which offer a platform for growing market share or have the potential for significant performance improvement. â€¢ HgCapital targets situations where significant change is taking place and where the Manager's specialist knowledge and skills can make a real difference. Manager's tactics HgCapital aims to deliver attractive investment returns through the combination of deep sector knowledge, sound operational skills and the allocation of significant time and resource to every investment. Sector specialisation - Buyouts â€¢ HgCapital's well-resourced sector teams combine the domain knowledge and expertise of a trade buyer with the flexibility of a financial investor. â€¢ Deep sector knowledge and associated thematic investment origination and selection practices aim to optimise relevant deal flow, investment selection and hence improve returns. â€¢ Dedicated buyout teams cover the healthcare, industrials, business services and TMT sectors. Sector specialisation - Renewable power generation Over the past five years HgCapital has built a specialist team to assemble a portfolio of electrical power generating assets, located in Western Europe, using proven renewable energy technologies such as wind and solar. These assets deliver returns which are uncorrelated with general economic activity and oil prices. Active portfolio management â€¢ Our sole objective is to ensure that all businesses in which we invest maximise their long-term potential and reward all of their stakeholders. â€¢ As a result, HgCapital typically invests as the lead, majority shareholder and appoints HgCapital executives to the companies' boards to ensure that each firm applies active, results-oriented corporate governance and that the interests of the owners and managers are closely aligned. â€¢ Experienced HgCapital professionals work with the management of our portfolio companies to develop, execute and monitor value enhancement strategies for each business. â€¢ Accordingly, HgCapital is in a position to review the performance of all of its investments, quickly identify any issues that demand attention and see that appropriate action is taken. Deep resources â€¢ Our practice of employing specialisation - both in investment selection and management - places significant demands on our time. Accordingly we have built a deeply resourced business employing over 45 investment professionals currently managing approximately 22 active buyout investments. â€¢ Investing in businesses, many of which have a global footprint and which are located across Europe, requires an understanding of local cultures. Accordingly, our people come from around the globe including ten Western European countries. â€¢ Our investment professionals have on average 16 years' experience of private equity. Manager's review - the market Buyout volumes fell as vendor and buyer confidence came under strain. 2009 was a year of recession across Europe and North America. The deleveraging of the financial sector continued apace, with governments resorting to extreme measures to avoid a depression. Against this background, it is unsurprising that the profitability of many companies fell, valuation multiples compressed and M&A activity receded. Accordingly, our investment stance was cautious during the year and we spent most of our time driving efficiency in our existing investments and preparing for a gradual up-turn in new deal activity over the next three to four years by identifying those businesses we wish to buy. Economic activity was hit hard in the first half of the year as companies halted capital expenditure, ran down inventories and cut employment while consumers increased their savings. Governments injected liquidity and ran unprecedented deficits to boost activity. This recession has had the greatest adverse consequences for manufacturers of capital goods, consumer durables and/ or construction-related products. In contrast, those businesses which satisfy non-discretionary demand continued to grow. By the fourth quarter it was possible to see revenues stabilise and, in some cases, increase as customers rebuilt inventories and Asian export markets picked up. We start 2010 with more evidence that the modest pick up in the economy is continuing but we need to flag our concern that another downturn, either triggered by action to prevent the Chinese economy from over heating and /or by a sovereign debt crisis, could yet happen. Moreover, the huge amount of debt many countries have incurred has to be serviced and repaid, dampening growth over the next decade. For the full year, the value of European buyouts totalled â‚¬9 billion, down 87% from â‚¬69 billion in 2008. In our target segment of deals with a value from Â£ 50-500 million, deal volumes fell from â‚¬35 billion to â‚¬13 billion. The first half of the year was particularly quiet but towards the end of the year it became apparent that distressed vendors were finally taking action to raise cash by selling non-core assets. Private equity owners have started to test the market with disposals as a necessary precursor to raising new funds. Some private vendors were also tempted to sell. Even after public markets rebounded in the summer some public-to-private activity took place as small cap investors wanted to raise cash to either redeploy or meet redemptions. We expect this trend towards higher activity levels in the buyout market to continue for several reasons. First, it is clear that the pressures on distressed vendors are mounting. Banks are tightening credit availability meaning, yet again, that cash is king. Better placed businesses who wish to restructure their portfolios and sell non-core activities become more confident that they can secure acceptable valuations often as the market turns so they will start selling. The banks who are taking control of over-leveraged buyouts will inevitably look to unload them to free up scarce capital in their already overstretched balance sheets. Private equity owners have to liquidate their portfolios at some stage and will sell into any upswing. Finally, we may see a revival of the privatisation of state-owned assets across Europe as fiscal imbalances have to be addressed to maintain the confidence of the international bond markets. Many people comment on the depressed state of debt markets and the appetite of banks to lend to our sector. It is true that banks largely withdrew from the buyout market as the old 'originate and distribute' model stopped working. This left just a small number of banks serving the middle market. Their appetite to lend was subdued and the spreads they could charge doubled over pre-crunch levels. We have maintained good relations with a number of banks, who have had good experiences in HgCapital sponsored buyouts. As a result we were able to secure, on acceptable terms, the debt we have needed to complete the two buyouts financed since January 2009. It is worth noting that, over the past ten years, over 80% of value creation in HgCapital's buyout deals has come through operational improvements in the underlying portfolio businesses, with less reliance on debt and financial structuring. Going forward, this emphasis on developing and growing portfolio investments will remain a key focus for HgCapital. Manager's review - performance & portfolio Despite a challenging economic environment, trading in the unrealised portfolio has remained robust. Buyout investments are held through limited partnerships of which the Company is the sole limited partner. HgCapital Trust (the 'Company') invests alongside other clients of HgCapital. Typically, the Company's holding forms part of a much larger majority interest held by HgCapital clients in buyout investments in companies with an enterprise value ('EV') of between Â£50 million and Â£500 million. The Manager's review generally refers to each transaction in its entirety, apart from the tables detailing the Company's participation or where it specifically says otherwise. The Company's net asset value rose by Â£1.9 million (0.8%) over the year moving up to Â£236.0 million after a dividend of Â£6.3 million (25p per share) and all fees and expenses. The unrealised portfolio appreciated in value by Â£5.8 million (2008: Â£35.1 million decline) and realised gains over book value were Â£ 0.5 million (2008: Â£35.8 million). Gross revenue was Â£9.7 million (2008: Â£12.1 million). Six investments and the Euro hedge contributed to an unrealised appreciation (including accrued interest) of Â£33.5 million and eight saw a depreciation in holding value of Â£19.7 million. The movement in unrealised holdings is analysed in the table below between changes in trading results, changes in ratings, movements in net debt levels for each underlying holding, foreign exchange movements and acquisitions and disposals. Analysis of movements in net asset value for the year ended 31 December 2009 Â£'000 Opening net asset value as at 1 January 2009 234,094 Gross revenue 9,682 Priority profit share to General Partners (6,401) Other expenditure (1,078) VAT recovery on prior year's management fees 833 Dividend paid (6,297) Realised proceeds in excess of 31 December 2008 book value (excludes gross 493 revenue) Net unrealised appreciation of investments 5,780 Carried interest (1,062) Closing net asset value as at 31 December 2009 236,044 Realised and unrealised movements in investment portfolio (including accrued interest) for the year ended 31 December 2009 Net unrealised appreciation/ Realised proceeds in excess of 31 (depreciation) of investments December 2008 book value Â£'m (excludes Â£'m gross revenue) Pulse (2)* 14.9 2.6 Visma (1) 11.6 - SLV (8) 3.1 - Sporting 1.5 - Index (6) Euro Hedge 0.9 - Americana 0.8 - (9) Mondo (5) 0.7 - Other (0.3) 1.2 SHL (15) (0.9) - Cornish (1.0) - (18) Weston Presidio (1.1) - (19) KVT (1.7) - Voyage (2.7) - (13) Fabory** (3.0) - Atlas** (4.3) - Casa Reha (5.0) - (14) *Investment name and ranking within top 20 investment portfolio at year-end **These investments are currently written down to nil in the Company's balance sheet 2009 was a year of modest gains, healthy dividend and investments made, reducing liquid funds to nearly Â£88 million. Net assets grew by Â£1.95 million after the payment of a dividend of Â£6.3 million (25 pence per share). Unrealised gains and accrued interest on loan stock investments held in portfolio companies contributed Â£15.2 million to the growth in net assets, realised gains added Â£0.5 million and total expenses, including carried interest, amounted to Â£7.5 million or 3% of net assets. As the table above shows, the portfolio's book value rose by Â£38.9 million during the year. New and follow-on investments, net of the carrying value of disposals of Â£4.4 million, came to Â£25.4 million. This left unrealised investments increasing in value by Â£13.5 million (12.4% of opening book value). The increase in the book value of the investment portfolio was attributed to an increase in trading profits delivering Â£16.2 million of value, repayment of debt contributing Â£10.3 million offset by a reduction in ratings or trading multiples used in our valuations causing a Â£10.5 million reduction in value and adverse foreign exchange movements costing Â£2.4 million. In short, positive trading in the portfolio of underlying companies was partially offset by an adverse movement in ratings and foreign exchange movements. Clearly economic conditions in 2009 presented problems for many businesses. The companies that sit in HgCapital's portfolio were no exception. Those businesses which service markets where demand is largely discretionary suffered most, experiencing a very sharp and deep decline in sales and even greater pressure on earnings. Their valuations have accordingly been written down heavily, in some cases to zero. These businesses are leaders in their market segments and have strong teams who have taken swift action to restructure costs. We will continue to work with them with the objective of rebuilding value in the equity. In other cases, notably Voyage and Casa Reha, comparable ratings have been compressed sharply and their enterprise valuations have been reduced, with gearing amplifying the extent of this decline on the equity valuation and hence our book values. However the ten largest buyout investments, which represent 78% of the portfolio valuation and 49% of year-end net assets, delivered continued growth in sales (averaging 7%) and even stronger profit growth (18%). These growth rates will probably compare favourably with the average for all European companies. Of course it is true that even for the better performing companies, growth rates have declined during the year. However, management action to improve operations across the top ten companies has delivered a respectable increase in net margins from 18% to 20%. At the end of 2009, the Company had 37% of its assets in cash and fixed interest securities while 63% was in unquoted and quoted investments. We remain liquid and capable of exploiting the attractive opportunities which we believe will arise over the next 3-4 years. Our concentration on buyouts remains but our exposure to renewable power generating assets, which we believe offer attractive returns uncorrelated to overall equity markets, is building steadily and according to plan. Analysis of the portfolio by sector shows the importance of TMT and healthcare investments, which have been chosen for their growth characteristics and the lower correlation of their profitability to GDP changes than other sectors. Industrial companies represent a lower percentage of the portfolio value than was the case 24 months ago, having been the sector most exposed to the downturn. Our portfolio of business services companies is small but we expect it will build over the next three years while our legacy investments in consumer-facing businesses will be reduced as we realise our holdings. Geographic distribution by value is roughly equal between the UK and Continental Europe. We expect the exposure to Continental European companies to increase over time because we see better value there and have a proven capability of making good money from investments in Germany, the Nordic Region and Benelux. It is perhaps worth noting that for many businesses the location is set by the location of headquarters and that these companies serve global markets, allowing us to gain an exposure to faster growing economies. Our distribution of value by year of investment or vintage shows a small 6% exposure to the over-priced year of 2008. Our investment rate in that year was low and we have quickly and heavily written down the investments we made in that year. Asset class+ Unquoted and quoted 63% Cash & other assets 37%* Deal type by value++ Buyout 90% Renewable energy 8% Expansion 1% Fund 1% Valuation++ Earnings 64% Cost 15% Written down 12% Net assets 9% Geographic spread by value++ UK 50% Nordic region 26% Germany 12% Europe 8% Benelux 3% North America 1% Sector by value++ TMT 31% Healthcare 29% Consumer & Leisure 17% Industrials 12% Renewable energy 8% Services 2% Funds 1% Vintage by value++ 2009 12% 2008 6% 2007 17% 2006 36% 2005 9% Pre 2005 20%* *17% relates to Pulse Staffing Limited +Percentages are based on net assets ++Percentages are based on fixed assets (excluding hedges) and accrued interest and are shown by value The top ten companies within the portfolio have out-performed the UK GDP by over 4x in 2008, and although the recession slowed down sales growth in 2009, it did not stop the companies from growing revenues. The chart below shows the quarterly EBITDA growth of the top ten companies within the portfolio as well as EBITDA margin over the last two years. This demonstrates that EBITDA has grown at approximately 1.5-2x revenue growth. Action taken to restructure businesses during 2009 has positioned the portfolio well to take full advantage of the improving economic climate. At 31 December 2009 the average EV/EBITDA multiple used to value the top ten investments was 7.7x, compared with a FTSE All-Share equivalent of 14.3x. The weighted average debt/EBITDA multiple for the top ten investments was 3.1x as at 31 December 2009. Investments We were a net buyer in 2009, increasing new investment in companies that can perform through the downturn. Buyout investments are held through limited partnerships of which the Company is the sole limited partner. Our investment stance has been influenced by our concern that there will be a second leg to the recession. Accordingly we have little interest in cyclical stories but are very focused on buying growth companies at valuations below the long run averages for similar companies. This attitude flows through to the provision of further capital to our existing portfolio. We have reserved capital to support them where they wish to expand organically or by acquisition or, in the right circumstances, where they need to repair balance sheets to reduce capital gearing. Acquisition financing remains relatively easy to obtain if the price is right, the targets are on strategy and management has proven its capability to acquire and integrate other businesses. Fortunately, the portfolio has many companies that meet these three criteria and which are buying businesses at good values. Repairing balance sheets is more challenging and our approach, based on our experience of every recession since 1978, is to take each case strictly on its merits as an investment, to recognise the need for companies to make significant changes to how they operate, to evaluate the capital needs very carefully and lastly, to price any new capital correctly. During 2009 HgCapital invested Â£157.9 million on behalf of its clients in buyout investments, including Â£22.3 million for the Company. HgCapital has been a net seller of investments over the eight years ending December 2008. In 2009 we increased deployment modestly, investing conservatively in businesses which are anticipated to perform strongly across economic cycles. During 2009, HgCapital invested Â£56.2 million in renewable energy investments through the Hg RPP fund in which the Company's participation was Â£7.6 million. Deal Cost Company Sector Activity Type Â£'000 Goldshield Healthcare Markets pharmaceuticals and Buyout 11,275* nutraceuticals in the UK Epyx TMT Electronic marketplace for services Buyout 5,942** to private car fleets New investments 17,217 Hg RPP LP Renewable Renewable energy fund Fund 7,578 energy NOK / GBP Hedge n/a Financial derivative instrument n/a 1,699 SHL Services Psychometric testing and assessment Buyout 1,503 Visma TMT Business application software Buyout 1,341 KVT Industrials Leading distributors of special Buyout 293 fasteners and expanders Other investments 232 Further investments 12,646 Total investment by 29,863 the Company *Â£3.3 million has been repaid in January 2010 **Â£4.9 million reduction since June 2009 due to the admission of subsequent investors to HgCapital 6, resulting in a reduction of the Company's pro-rata shareholding Figures below refer to the total size of each acquisition, including debt raised from third parties, made by HgCapital on behalf of its clients, including the Company. New investments - Buyouts Goldshield In December 2009 HgCapital completed the Â£179 million public to private buyout of Goldshield Group plc in partnership with management. HgCapital's clients have a 53% stake in the business. Goldshield is a niche pharmaceutical and consumer health company which is structured into two main divisions: a pharmaceutical division and a consumer health division. HgCapital's principal interest is the pharmaceutical division which engages in the distribution of niche branded original and non-branded generic medicines, mainly in the UK and Continental Europe. In the course of the normal review by the Manager of any new investment's financial reporting systems, evidence was discovered suggesting that Goldshield may have understated its reported profits over a number of years, whilst it was a listed company, and prior to the Manager's acquisition. Current trading is ahead of prior year and at least in line with the Manager's investment plan. In accordance with our normal and consistent application of the IPEV guidelines, the Board currently has no reason to believe that any adjustment to the book value of this investment is necessary. Epyx In June 2009, HgCapital completed the Â£96 million buyout of Epyx Limited in partnership with its management. HgCapital's clients have a 49% stake in this business but HgCapital has effective control rights over and above its economic holding. Epyx provides a private electronic marketplace serving the contract car hire and leasing market. The Epyx electronic trading platform allows both customers and suppliers to reduce costs and increase efficiency across multiple business processes such as servicing and disposals. Epyx operates over 50 buyer schemes, hosts 11,000+ registered suppliers and is the de-facto electronic market place in the UK for the corporate car fleet users and their suppliers. Management plan to create value by increasing their share of purse from scheme members by selling more services and establishing a profitable business in at least one other European market. FURTHER INVESTMENTS SHL In November 2006 HgCapital completed the Â£100 million buyout of SHL. It performed well and repaid Â£9 million of our investment ahead of plan. However, in the second quarter of 2008, revenues fell as customers used up inventory and cut re-order levels. Management embarked on a significant cost reduction exercise, taking out annual costs of Â£14 million. This required the investment of a further Â£12 million in SHL, to pay for one-off costs and give the business adequate working capital. By the end of 2009, the restructuring was complete, profits have rebounded and customer demand has stabilised. The new CEO is modifying SHL's culture, focusing more on the significant value it delivers to its growing customer base. Visma HgCapital led the Â£382 million public-to-private buyout of Visma in May 2006. Visma is the Nordic market leader in the provision of accounting software and related services to over 250,000 SME accounts. In February 2009, HgCapital invested a further Â£8.3 million in Visma in order to fund the acquisition of the Finnish accounting services business, Teemuaho. Visma also continues to make incremental value-enhancing acquisitions, funded out of cash flow. Visma continues to pay down debt while growing revenues and EBITDA. KVT HgCapital completed the CHF530 million buyout of KVT in 2008. The company provides specialist expanders and fasteners to manufacturers of machinery. These products deliver significant cost saving benefits to users and accordingly KVT takes market share and earns high margins. However our purchase was poorly timed and in common with other industrial product vendors, KVT's revenues and profits fell precipitously in 2009. Accordingly we have written down the investment to nil. In October 2009 following a covenant breach, HgCapital invested a further Â£2.3 million in KVT in order to secure a lengthy covenant free period and a holiday on capital repayments. Management was also strengthened by the appointment of a new CEO and CFO. NOK / GBP hedge To create a partial hedge against currency risk in the portfolio, in December 2009 HgCapital acquired two NOK options at a premium of Â£10.5 million, both with a strike price of NOK10.50 to sterling. These options expire in December 2011 and December 2013. NEW INVESTMENTS - Renewable Power Hg Renewable Power Partners At the beginning of 2009, HgCapital invested â‚¬36.4 million in Mercurio Solar, a portfolio of four operational solar photovoltaic projects in Spain with a total capacity of 35.0MW. A further â‚¬7.5 million was invested in Wind Direct Solutia, a 5.0MW two turbine wind project in Newport, South Wales. In the second quarter, HgCapital invested â‚¬12.4 million to acquire the 5.0MW Bargas Solar PV project to grow our platform in Spain and this was joined in December by Tinajeros, a 12.0MW operating project in Castilla La Mancha and Fuente Alamo, an 8.0MW construction project in Murcia, both completing in January 2010. In addition, December also saw the acquisition of a 50% interest in Scout Moor, a 65.0MW wind farm in Lancashire, that also completed in January 2010. Realisations Good buying conditions are consistent with bad selling conditions. During 2009, HgCapital realised total proceeds of Â£37.8 million on behalf of its clients, including Â£8.3 million for the Company. Realisation activity was limited to repayments of loan stock, dividend distributions and the release of escrow accounts from earlier sales. Cost Proceeds* Cumulative Current year Company Sector Exit Route gain/ gain/ Â£'000 Â£'000 (loss)** (loss)*** Â£'000 Â£'000 Loan stock Pulse Healthcare redemption, interest - 5,757 5,757 2,616 & dividend Hirschmann Industrials Release of escrow - 1,251 1,251 432 Other 866 1,313 447 824 Partial 866 8,321 7,455 3,872 realisations Total 866 8,321 7,455 3,872 realisations *Includes gross revenue received during the year **Realised proceeds including gross revenue received, in excess of historic cost ***Realised proceeds including gross revenue received, in excess of 31 December 2008 book value and accrued interest Realisation figures below refer to the total value of each transaction, including, where appropriate, repayment of third party debt. Proceeds to clients including the Company are stated net of any such repayment. FULL REALISATIONS Pulse Pulse is one of the UK's leading providers of labour management, recruitment and temporary labour in the healthcare sector. Its revival continued in 2009 and cash generating was strong. Proceeds of Â£6.1 million were realised for HgCapital clients from a redemption of loan stock and interest in July 2009 and a dividend of Â£4 million was received in December 2009. Hirschmann Hirschmann is a supplier of electronics equipment, components and related accessories. The initial investment in the business by HgCapital was made in March 2004 and the business was successfully exited in March 2007 returning over 5.0x the original investment. Remaining funds held in escrow were released in May 2009, returning a further Â£7.4 million to HgCapital clients, of which the Company's share was Â£1.3 million. Other realisations Final proceeds of Â£1.4 million were received by HgCapital clients following the sale of Schenck Process SA in August 2007 and further small realisations were received relating to Newchurch which was sold to Tribal plc, in exchange for cash proceeds of Â£0.2 million and shares in Tribal plc, currently valued at Â£ 0.1 million. Review of principal investments 1 VISMA www.visma.com Date Invested: May 2006 Original Enterprise Value: NOK 4.3 billion Total HgCapital Clients' Equity: 53% Business description â€¢ VISMA is the number one provider of business software and other related services to small and medium-sized enterprises in the Nordic region. â€¢ The company provides solutions for financial, procurement, HR and other back office processes to a customer base of over 200,000 companies. Why did we invest? â€¢ Strong organic growth in revenue, with good visibility from a highly recurring and predictable customer base. â€¢ Significant potential to improve margins to industry standard levels. â€¢ Country specific markets with high barriers to entry driven by local regulatory requirements: highly fragmented market with significant potential for acquisition-led growth. How do we intend to create value? â€¢ Grow through acquisition and integration of smaller competitors across the Nordics and Benelux. â€¢ Grow organically by selling new services /products. â€¢ Improve EBITDA margins to industry standard levels through process change. What has been achieved? Initiatives: Supported management in making and integrating 16 bolt-on acquisitions to date. Implemented operational improvements driving margin expansion from 14% to 20% since our investment. How is it performing? Current trading: Performance in the year remained strong, with significant growth in both sales and EBITDA. How will we crystalise value? An IPO is planned for 2011. Company's Investment - VISMA Year of Residual Unrealised Accrued Total Valuation Sector Location investment cost Â£ value Â£'000 interest Â£ value Â£ methodology '000 '000 '000 TMT Nordic 2006 14,609 25,069 2,660 27,729 Earnings-based region 2 Pulse www.pulsejobs.com Date Invested: June 1999 Original Enterprise Value: Â£67 million Total HgCapital Clients' Equity: 74% Business description Pulse is a market leader in the placement of doctors, allied health professionals and nurses into flexible and permanent roles in the UK and abroad. The company also has a growing presence in the scientific, social care and qualified social work markets. Why did we invest? â€¢ Pulse is one of the top two players in the UK healthcare staffing sector. It benefits from a diversified revenue base covering all disciplines to both NHS Trusts and to the private sector. â€¢ We believe that growth is possible through the further penetration of Pulse's target sectors. â€¢ Industry-leading management team, with a proven track record of value creation. â€¢ A low entry price and these strong features encouraged us to accept the risks posed by the policy choices of central government, an ever present feature of serving the NHS. How do we intend to create value? Management's plan is simply to use surplus cash flow to return capital, pay dividends and to grow organically by building private care revenues. What has been achieved? â€¢ NHS-derived profit stands at 50% compared to 65% at the beginning of 2007. New service offerings, established in the past three years, now represent 37% of revenues and 51% of profit. â€¢ Management has been strengthened and morale improved. The firm was voted 'Staffing Agency of the Year' in 2009. How is it performing? Since HgCapital took over this investment, EBITDA has risen from Â£1 million to Â£13.5 million on sales of Â£164 million (unaudited). How will we crystalise value? An IPO is being considered for 2010. Company's Investment - Pulse Year of Residual Unrealised Accrued Total Valuation Sector Location investment cost value interest value methodology Â£'000 Â£'000 Â£'000 Â£'000 Healthcare UK 1999 6,131 24,597 - 24,597 Earnings-based 3 Goldshield www.goldshield-pharmaceuticals.com Date Invested: December 2009 Original Enterprise Value: Â£179 million Total HgCapital Clients' Equity: 53% Business description - Goldshield is a profitable niche pharmaceutical company with a small consumer health division. - The pharmaceutical division sells mature branded products and niche generics, typically re-formulating them to extend their lives. It is primarily focused on serving the UK, where demand for its products benefits from attempts to reduce prescription costs. - The consumer health division sells a range of weight management and consumer health products. Why did we invest? - The niche pharma business has a good record of organic growth and prospects are sound. - It benefits from having a lean operating model which delivers attractive margins and strong cash conversion. We believe that surplus cash can be used to acquire new products and to finance in-licensing deals that will extend the product portfolio and deliver continued growth How do we intend to create value? - Simplify activities by withdrawing from unprofitable activities. - Acquire / in-licence more products in the pharmaceutical business. What has been achieved? The post-acquisition plan focused on Goldshield's financial reporting and on continuing to streamline the business and its supply chain. In the course of this review, HgCapital discovered evidence suggesting that Goldshield may have understated its reported profits over a number of years, prior to the acquisition by HgCapital. As explained in the Investments section above, HgCapital believe no adjustment to the book value of this investment is necessary. How is it performing? Current trading: Goldshield has met all financial targets to date. How will we crystalise value? The most likely exit route is a trade sale to a larger pharmaceutical company. Post-December repayments Following a return of cash in January, the current cost and valuation of this investment is Â£7.9 million, representing 3.4% of the Company's net assets as at 31 December 2009. Company's Investment - Goldshield Year of Residual Unrealised Accrued Total Valuation Sector Location investment cost value interest value methodology Â£'000 Â£'000 Â£'000 Â£'000 Healthcare UK 2009 11,275 11,275 24 11,299 Cost 4 Mondo www.mondominerals.com Date Invested: October 2007 Original Enterprise Value: â‚¬230 million Total HgCapital Clients' Equity: 91% Business description - Mondo is the world number two in talc mining and processing. - Mondo is a longstanding and trusted supplier of talc for paper producers in the Nordic region and Northwestern Europe. Mondo's high quality products also hold a strong market position in the paint, plastic, food, cosmetics and ceramics industries where Mondo's quality, reliability of supply and technical support are pivotal to its success. Why did we invest? - Mondo's core customer base offers long-term demand. The product is a critical but relatively low cost technical component of its customers' manufacturing processes. - Due to the specific chemical characteristics of talc, there exists an opportunity to push into other high margin applications and increase the size of the non-paper business. - Opportunity for margin improvement through changes in processes. How do we intend to create value? Grow sales in higher margin applications, reduce costs through better procurement and process and enter new expanding BRIC geographies through acquisition and joint ventures. What has been achieved? Increasing sales in higher margin, non-paper applications, the significant process improvements, switching of milling operations from oil to electricity, and expanding alongside our customers to serve their global needs. How is it performing? Strong performance through the recession with margins holding up due to strict cost control and operational improvements. How will we crystalise value? Mondo's business and financial characteristics make it an attractive target for both private equity and trade buyers. Company's Investment - Mondo Year of Residual Unrealised Accrued Total Valuation Sector Location investment cost value interest value methodology Â£'000 Â£'000 Â£'000 Â£'000 Industrials Nordic 2007 7,004 8,091 2,343 10,434 Earnings-based region 5 Sporting Index www.sportingindex.com Date Invested: November 2005 Original Enterprise Value: Â£73 million Total HgCapital Clients' Equity: 70% Business description Sporting Index ('SPIN') is the largest sports spread betting firm in the world. It offers more markets, in larger size than its competitors, serving a niche market, which is currently largely limited to the UK. It also uses its unrivalled pricing ability to offer other betting firms "in running" prices on a range of sports, thereby helping them serve their fastest growing market segment. Why did we invest? The core business is robust, cash generative and provides a base from which to expand the group by launching new products and services and attacking new geographies. How do we intend to create value? - Develop new distribution channels for SPIN's spread betting product through the sale of pricing to fixed-odds bookmakers, lottery operators and online casinos. - Expand SPIN's proprietary trading capability via betting exchanges. - Develop its online marketing abilities and customer database to increase retention and usage. What has been achieved? - Four accounts for SPIN's pricing service have been won and a strong pipeline built. - A new IT platform under development will deliver significant productivity improvements. How is it performing? In spite of the downturn that has adversely affected SPIN's customer base; sales and profit are level with last year as it wins share from smaller competitors. How will we crystalise value? The company will be positioned for a sale to an international gaming firm or system provider. Company's Investment - Sporting Index Year of Residual Unrealised Accrued Total Valuation Sector Location investment cost value interest value methodology Â£'000 Â£'000 Â£'000 Â£'000 Consumer & UK 2005 7,186 4,405 3,616 8,021 Earnings-based Leisure 6 Schleich www.schleich-s.com Date Invested: December 2006 Original Enterprise Value: â‚¬165 million Total HgCapital Clients' Equity: 76% Business description - Schleich is the leading producer of low price classic toy figurines, such as farm and wildlife animals, historical characters and The Smurfs. - It has international distribution in over 30 countries with market leading positions in Germany, the UK, France and a growing presence in the USA. Why did we invest? - Schleich's figurines are attractive to retailers, given their low seasonality, high sales and attractive margins. - The company benefits from relatively high barriers to entry given its wide product range, brand, established retailer network and a high quality, low cost supply base. - Revenue growth is supported by continual innovation in the product range. How do we intend to create value? - Plan: Drive sales growth organically in existing markets and through international expansion. Penetrate large key accounts. Capture margin improvement through increased scale. - Initiatives: Revised in-store displays and pricing structure; positioned manufacturing and logistics for future growth. What has been achieved? Schleich has rolled out 8,000 metres of new shelf space, introduced a new pricing policy and acquired major key accounts, including ELC, Edeka and Toys 'R' Us. How is it performing? Current trading: Continued growth in both revenues and EBITDA during the year despite the impact of the financial crisis. North America sales grew at 8% on a constant currency basis as per December 2009. How will we crystalise value? Several multi-national toy makers represent natural trade buyers; stable profits and risk profile could also support an IPO or a secondary buyout. Company's Investment - Schleich Year of Residual Unrealised Accrued Total Valuation Sector Location investment cost value interest value methodology Â£'000 Â£'000 Â£'000 Â£'000 Consumer & Germany 2006 4,634 6,413 1,581 7,994 Earnings-based Leisure 7 SLV www.slv.com Date Invested: August 2007 Original Enterprise Value: â‚¬280 million Total HgCapital Clients' Equity: 65% Business description - SLV is a fast growing German designer and supplier of decorative and technical lighting products and systems. - The company has established a competitive business model focused on the B2B market with sales made via catalogues, backed by a well-invested global logistics function, best-in-class service levels and a highly competitive pricing strategy. Why did we invest? SLV's fast, profitable growth, strong cash flow and competitive business model give it the clear potential to increase market share in Germany, to grow strongly in other European countries and to enter other markets. How do we intend to create value? Our plan is to grow sales and gain market share in existing European markets, professionalise co-operation with partners, enter new markets and reduce leverage quickly. What has been achieved? - Strengthened management team. - Developed US market entry strategy and implementation plan. - Redefined relationship with partners and added new partners in Europe to support growth. How is it performing? Current trading: In spite of a declining market, SLV managed to grow sales and profits in 2009 and thereby gained significant market share. EBITDA has improved significantly since we acquired the business and cash flow generation has been ahead of plan. How will we crystalise value? SLV has the size, growth and potential to make a viable IPO candidate. It is also an attractive target for both private equity and trade buyers. Company's Investment - SLV Year of Residual Unrealised Accrued Total Valuation Sector Location investment cost value interest value methodology Â£'000 Â£'000 Â£'000 Â£'000 Industrials Germany 2007 5,962 5,307 1,639 6,946 Earnings-based 8 Americana www.bench.co.uk Date Invested: March 2007 Original Enterprise Value: Â£180 million Total HgCapital Clients' Equity: 45% Business description - Americana is a branded apparel business, designing and marketing the Bench casual clothing brand targeted at the youth market. - The company achieves UK-wide distribution through multiple UK retailers as well as its own small UK retail presence. It has entered the German market successfully, employing a wholesale distribution strategy. Why did we invest? - Bench is a strong brand that can be developed internationally. - A high margin, cash generative business underpinned by a strong supply chain based in China. How do we intend to create value? - Management's plan is to build Bench's brand equity and value by growing revenues internationally, both in Germany and in less established territories, whilst at the same time refreshing its credentials in the mature UK market. - Success in both areas will increase profits as well as improve the rating we can attain on exit. What has been achieved? - Substantially strengthened the management team; improved management reporting and business planning. - Entered Germany and built a small but highly profitable and growing business. How is it performing? The UK market has been tough but this has been compensated for by German performance. Higher investment in brand building being covered by increased sales leaving profits broadly flat year-on-year. How will we crystalise value? Interest is anticipated from trade buyers or private equity. Company's Investment - Americana Year of Residual Unrealised Accrued Total Valuation Sector Location investment cost value interest value methodology Â£'000 Â£'000 Â£'000 Â£'000 Consumer & UK 2007 4,625 4,483 2,068 6,551 Earnings-based Leisure 9 Epyx www.epyx.co.uk Date Invested: June 2009 Original Enterprise Value: Â£96 million Total HgCapital Clients' Equity: 49% Business description - Epyx provides a private electronic marketplace serving the vehicle contract hire and leasing market. The Epyx service enables both customers and suppliers to reduce costs and increase efficiency across multiple business processes. - The Epyx marketplace connects over 60 of the UK's largest vehicle fleet operators and 9,000+ suppliers of critical services to these fleets. The company is very well established in the UK and is now investing in European growth. Why did we invest? - We like companies which possess resilient growth characteristics and high levels of revenue visibility, which operate in business-critical niche markets, and which have the potential to generate high cashflow margins. Epyx fits this model perfectly. - The company's applications are embedded in its customers' business processes, offering a low-cost and highly reliable method of administering the servicing, relicensing, hire and disposal of fleet vehicles. - The company uses its high level of cash generation to continually invest in growth. Epyx provides its customers with a stream of innovative products, and is further investing in development and sales to win new business in Europe. How do we intend to create value? Value is being created by selling more services to the existing customer base and by expanding internationally. What has been achieved? A strategic business review has been implemented to decide on core focus areas in a highly selective manner. We are working to identify and approach potential acquisition targets. How is it performing? The company completed 2009 on plan. Sales grew at 15% and EBITDA grew at 25% on an organic basis. The outlook for 2010 remains sound. How will we crystalise value? Epyx will make a viable IPO candidate but it will also attract significant trade interest. Company's Investment - Epyx Year of Residual Unrealised Accrued Total Valuation Sector Location investment cost value interest value methodology Â£'000 Â£'000 Â£'000 Â£'000 TMT UK 2009 5,942 5,942 - 5,942 Cost 10 Achilles www.achilles.com Date Invested: July 2008 Original Enterprise Value: Â£75 million Total HgCapital Clients' Equity: 79% Business description - Achilles is a global leader in buyer-sponsored supplier data management and validation services. - The company has 22 offices worldwide and has more than 40,000 customers, with focus on industries with "high cost of supplier failure" (e.g. oil & gas, construction). Why did we invest? - Achilles is a global market leader in a market with high barriers to entry. - The company enjoys high visibility of future earnings and shows strong organic growth rates. - The market offers multiple expansion opportunities both into new industries and new geographies. How do we intend to create value? Plan: Extract more value from existing schemes through product additions, roll out existing schemes in new geographies and industries and drive margin expansion. What has been achieved? - Implementation of best practice review across business and rolled out across geographies. - Strengthened management team How is it performing? Current trading: Performance in the first eight months of the year-ending April 2010 was strong with significant growth on prior year in both sales and EBITDA. The business is forecasting to end the financial year ahead of their original plan. How will we crystalise value? Another attractive IPO candidate or target for a business process outsourcer or business-to-business exchange. Company's Investment - Achilles Year of Residual Unrealised Accrued Total Valuation Sector Location investment cost value interest value methodology Â£'000 Â£'000 Â£'000 Â£'000 TMT UK 2008 5,226 5,226 - 5,226 Cost Renewable energy Hg Renewable Power Partners LP In June 2006, the Company made a commitment of â‚¬21 million to Hg Renewable Power Partners LP ('RPP 1'), a fund dedicated to investments in renewable power generation assets in Western Europe. The Fund's investment strategy is to invest primarily in controlling stakes of European renewable energy projects using proven technologies, seeking out superior resource and technologies. HgCapital also invests in project developers on a selected basis. At â‚¬303 million RPP1 is one of the largest funds of its kind in Europe and today the management team has seven investment professionals with over 55 years of renewable and conventional energy investment experience between them. The attractions of the renewable energy market arise from its predictable - non-GDP-linked - cash flows. Investors enjoy both current income from operating projects and long-term capital appreciation while demand is expected to grow as carbon reduction and the security of the primary methods of power supply become increasingly pressing issues. As of 31 December 2009, RPP 1 has invested in a total of 19 power plants: eight wind projects in construction or operation totalling 262.0MW; four biogas projects in operation totalling 1.4MW, and seven solar photovoltaic plants totalling 61.0MW. Overall the Hg Renewable Power Partners' portfolio is performing according to plan, with construction projects to date completed on time and on budget, operating assets performing within the expected range and one realisation completed ahead of original plan. As of 31 December 2009, the fund was 81% committed. The bulk of the fund's investments have been in three main platforms: UK onshore wind, Swedish onshore wind and Spanish photovoltaic. Other investments have been made in France, Italy and Germany. Platform: UK Onshore Wind Tir Mostyn A 21.3MW wind farm in North Wales that has been in operation for over four years. Sorne Wind A 32.0MW operating wind farm in Donegal, Ireland. On 5 March 2009 the Fund sold its interests for a gross price of â‚¬10 million, with net proceeds of â‚¬9.88 million to the fund. This represents a gross multiple of 2.3x the Fund's investment and an IRR of 43%. RidgeWind A UK wind farm developer with more than 250.0MW of wind farms in development, including two projects totalling 54.0MW that have secured planning permission and the 16.0MW Bagmoor project in Lincolnshire, which entered full operation one month early, on 31 July 2009. Scout Moor A 65.0MW operating wind farm in Lancashire. Wind Direct A business that installs, owns and operates wind turbines on UK industrial sites, providing its customers with low cost, direct energy supplies. The investment was made in 2006 and includes two sites in operation with the option to acquire two further permitted projects. Platform: Swedish Onshore Wind HavsnÃ¤s The 95.4MW project will be the largest on-shore wind farm in Sweden. Commercial operation is expected to commence in April 2010. Platform: Spanish Photovoltaic Mercurio Platform The Mercurio portfolio consists of seven operating Spanish solar photovoltaic projects totalling 61.0MW. Fuente Alamo, an 8.0MW construction project in Murcia, is expected to be commissioned in April 2010. Other Investments Picardy Wind A portfolio of two wind farms in Northern France in operation with a total capacity of 23.5MW. The fund has the right to acquire two further farms which would double the capacity of this investment. Rewind An investment of â‚¬2.1 million was made in August 2006 to develop a 120.0MW portfolio of wind farms in Italy. In October 2007 this agreement was terminated on terms that give the fund the right to success fees or acquisition rights if the projects achieve planning permission. Bayern Energie Four operating anaerobic digestion (biogas) plants with a combined capacity of 1.4MW in Germany. RPP's involvement in the development of further biogas projects has been terminated with no further costs. Cost and valuation of the Company's holding Residual Valuation Valuation Company Deal type cost Â£'000 Methodology* Â£'000 Hg Renewable Power Partners Renewable 11,987 11,620 Fund net LP energy assets The difference between cost and valuation is due to establishment and running costs, fees, foreign exchange movements in the fund and the revaluation of investments. *The primary valuation methodology applied to the fund's investments is a discounted cash flow basis for operating assets and cost for non-operational assets. Investment portfolioâ€ Principal Residual Total Year of Portfolio Cum. Company Sector location cost valuation investment Value Value Â£'000 Â£'000 % % 1 VISMA TMT Nordic 14,609 27,729 2006 18.8% 18.8% Holdings + region Pulse 2 Staffing Ltd Healthcare UK 6,131 24,597 1999 16.5% 35.3% + Hg Renewable Renewable 3 Power energy Europe 11,987 11,620 2006 7.9% 43.2% Partners LP + Goldshield 4 Group (Midas Healthcare UK 11,275 11,299 2009 7.7% 50.9% Equityco) + Mondo Nordic 5 Minerals Industrials region 7,004 10,434 2007 7.1% 58.0% Co-op + Sporting Consumer & 6 Index Group Leisure UK 7,186 8,021 2005 5.4% 63.4% Ltd + Schleich Consumer & 7 Luxembourg SA Leisure Germany 4,634 7,994 2006 5.4% 68.8% + SLV 8 Electronik Industrials Germany 5,962 6,946 2007 4.7% 73.5% SARL + Americana Consumer & 9 International Leisure UK 4,625 6,551 2007 4.4% 77.9% Holdings Ltd Epyx 10 Investments TMT UK 5,942 5,942 2009 4.0% 81.9% Limited + Achilles 11 Group TMT UK 5,226 5,226 2008 3.5% 85.4% Holdings Limited + 12 Elite Holding TMT Benelux 5,749 5,196 2005 3.5% 88.9% SA + Voyage Group 13 Ltd (formerly Healthcare UK 8,755 3,736 2006 2.5% 91.4% Paragon) + 14 Casa Reha Healthcare Germany 8,151 2,872 2008 1.9% 93.3% SARL + SHL Group 15 Holdings 1 Services UK 7,991 2,587 2006 1.8% 95.1% Ltd + 16 Hoseasons Consumer & UK 2,197 2,473 2003 1.7% 96.8% Group Ltd + Leisure Software 17 (Cayman), LP TMT UK 530 1,586 2006 1.1% 97.9% - re Blue Minerva Cornish 18 Bakehouse Consumer & UK 4,200 1,221 2007 0.8% 98.7% Investments Leisure Ltd + Weston 19 Presidio Fund North 2,320 1,041 1998 0.7% 99.4% Capital III, America LP Software 20 (Cayman), LP TMT UK 253 735 2007 0.5% 99.9% - re Guildford 21 Tiger Capital TMT UK 632 254 2008 0.2% 100.1% Ltd 22 Doc M SARL Healthcare Germany - 122 2004 0.1% 100.2% Hirschmann 23 Electronics Industrials Germany - 112 2004 0.1% 100.3% Holdings SA + 24 Tribal Group Healthcare UK 573 77 2009 0.1% 100.4% plc 25 ACT Venture Fund Ireland 38 42 1994 - 100.4% Capital Ltd 26 Atlas Energy Services UK 8,153 - 2007 - 100.4% Group Ltd + W.E.T Holding 27 Luxembourg SA Industrials Germany 7,709 - 2003 - 100.4% + 28 BMFCO UA (t/a Services Benelux 7,474 - 2007 - 100.4% Fabory) + 29 FTSA Holdings Industrials North 6,813 - 2006 - 100.4% Ltd + America King 30 Luxembourg Industrials Switzerland 5,827 - 2008 - 100.4% Sarl (t/a KVT) SGI 31 (Holdings) Services UK 1,669 - 1999 - 100.4% Ltd + 32 Crest Avenue Fund Ireland 9 - 1992 - 100.4% Ltd Wand / North 33 Yankelovich Fund America 5 - 1992 - 100.4% LP Addison 34 Luxembourg SA TMT Germany - - 2005 - 100.4% + 35 Hofmann M.M. Industrials Germany - - 2005 - 100.4% SA + Lantor plc 36 (formerly Industrials Ireland - - 1992 - 100.4% South Wharf plc) 37 PBR Holding Healthcare Europe - - 2002 - 100.4% SA + NOK / GBP n/a n/a 1,699 1,322 2009 0.9% 101.3% Hedge Hg5 Euro n/a n/a - (1,917) 2008 (1.3%)100.0% Hedge Total All investments 165,328 147,818* 100.0% 100.0% (38) +Through its management of the Company and other funds, HgCapital holds more than 50% of the voting equity shares *Comprising investment valuation of Â£127,204,000 and accrued interest of Â£ 20,614,000. See notes 9 and 11 to the financial statements â€ The above investments, other than Hg Renewable Power Partners LP, are held through the Company's investment in HGT LP and HGT 6 LP. See note 1 of the financial statements. Income statement for the year ended 31 December 2009 Revenue return Capital return Total return Note 2009 2008 2009 2008 2009 2008 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Gains/(losses) on investments and government 10 - - 5,211 (4,491) 5,211 (4,491) securities Loans to General Partner 3(b) - - ( 4,737) - (4,737) - Net income 2 8,018 12,068 - - 8,018 12,068 Investment management fee 3(a) 208 (643) 625 (1,930) 833 (2,573) rebate/(charge) Other expenses 4(a) (1,078) (932) - - (1,078) (932) Net return/(deficit) on ordinary activities before 7,148 10,493 1,099 (6,421) 8,247 4,072 taxation Taxation on ordinary 6(a) - (3,048) - 550 - (2,498) activities Transfer to/(from) reserves 7,148 7,445 1,099 (5,871) 8,247 1,574 Return/(deficit) per 7 28.38p 29.56p 4.36p (23.31p) 32.74p 6.25p ordinary share The total return column of this statement represents the Company's income statement. The supplementary revenue and capital return columns are both prepared under guidance published by the Association of Investment Companies ('AIC'). All recognised gains and losses are disclosed in the revenue and capital columns of the income statement and as a consequence no statement of total recognised gains and losses has been presented. The movements in reserves are set out in note 17 to the financial statements. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The notes below form part of these financial statements. Balance sheet as at 31 December 2009 2009 2008 Note Â£'000 Â£'000 Fixed assets Investments held at fair value Quoted at market valuation 76 - Unquoted at Directors' valuation 127,128 94,732 9 127,204 94,732 Current assets - amounts receivable after one year Accrued income on fixed assets 11 20,614 14,196 Current assets - amounts receivable within one year Debtors 11 4,623 2,062 Government securities 12 84,526 124,014 Cash 13(a) 2,873 5,841 Total current assets 112,636 146,113 Creditors - amounts falling due within one year 14 (3,796) (6,751) Net current assets 108,840 139,362 Net assets 236,044 234,094 Capital and reserves Called up share capital 16 6,296 6,296 Share premium account 17 14,123 14,123 Capital redemption reserve 17 1,248 1,248 Capital reserve - realised 17 242,015 238,606 Capital reserve - unrealised 17 (43,253) (40,943) Revenue reserve 17 15,615 14,764 Total equity shareholders' funds 236,044 234,094 Net asset value per ordinary share 7 937.2p 929.4p The financial statements were approved and authorised for issue by the Board of Directors on 4 March 2010 and signed on its behalf by: Roger Mountford, Chairman Richard Brooman, Director The following notes form part of these financial statements. Cash flow statement for the year ended 31 December 2009 2009 2008 Note Â£'000 Â£'000 Net cash (outflow)/inflow from operating activities 4(b) (3,439) 1,550 Taxation paid (1,149) (5,514) Capital expenditure and financial investment Purchase of fixed asset investments (29,863) (25,987) Proceeds from the sale of fixed asset investments 5,467 86,027 Net cash (outflow)/inflow from capital expenditure and (24,396) 60,040 financial investment Equity dividends paid 8 (6,297) (6,297) Net cash (outflow)/inflow before management of liquid (35,281) 49,779 resources Management of liquid resources Purchase of government securities 12 (242,339) (185,679) Sale/redemption of government securities 12 274,652 141,624 Net cash inflow/(outflow) from management of liquid 32,313 (44,055) resources (Decrease)/increase in cash in the period 13 (2,968) 5,724 (a) Reconciliation of movements in shareholders' funds for the year ended 31 December 2009 Called Share Capital Capital Revenue Total up share premium redemption reserves reserve Note capital account reserve Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 At 31 December 2008 6,296 14,123 1,248 197,663 14,764 234,094 Net return from ordinary - - - 1,099 7,148 8,247 activities Dividends paid 8 - - - - (6,297) (6,297) At 31 December 2009 16,17 6,296 14,123 1,248 198,762 15,615 236,044 At 31 December 2007 6,296 14,123 1,248 203,534 13,616 238,817 Net (deficit)/return - - - (5,871) 7,445 1,574 from ordinary activities Dividends paid 8 - - - - (6,297) (6,297) At 31 December 2008 16,17 6,296 14,123 1,248 197,663 14,764 234,094 The following notes form part of these financial statements. Notes to the financial statements 1. Principal activity and accounting policies The principal activity of the Company is that of an investment trust company. The Company is an investment company as defined by section 833 of the Companies Act 2006 and an investment trust within the meaning of section 842 of the Income and Corporation Taxes Act 1988. Basis of preparation The accounts have been prepared in accordance with applicable UK law and Accounting Standards ('GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies' ('SORP'), dated January 2009. All of the Company's operations are of a continuing nature. Further details on going concern are provided in the Directors' Report. Organisational structure In May 2003 (subsequently revised in January 2009) and January 2009, the Company entered into two separate partnership agreements with general and founder partners, at which point investment holding limited partnerships were established to carry on the business of an investor, with the Company being the sole limited partner in these entities. Under the partnership agreements, the Company made capital commitments to HGT LP and HGT 6 LP ('funds'), with the result that the Company now holds direct investments in the funds and an indirect investment in the fixed asset investments that are held by the funds as it is the sole limited partner. The fixed asset investments on the Balance Sheet (excluding the investment in Hg Renewable Power Partners LP) and the Investment portfolio present the underlying investments held by the funds. The Company also entered into a partnership agreement and made a capital commitment alongside other limited partners to Hg Renewable Power Partners LP ('HgRPP') and has direct investment in HgRPP, which is shown on the Balance Sheet and the Investment portfolio. Priority profit share and carried interest Under the terms of the limited partnership agreements of funds, the general partner is entitled to appropriate, as a first charge on the gross income of the funds, an amount equivalent to its priority profit share ('PPS'). The funds' income, after payment of the PPS, are distributed to the Company. In years in which the funds have not yet earned sufficient net income to satisfy the PPS, the entitlement is carried forward to the following years. The PPS is payable quarterly in advance, even if insufficient net income has been earned. Where the cash amount paid exceeds the net income, an interest free loan is advanced to the general partner by the funds, which is funded via a loan from the Company. This loan is only recoverable from the general partner by an appropriation of net income; until net income is earned, no value is attributed to this loan. The founder partner is entitled to a carried interest distribution once certain preferred returns are met. The agreements stipulate that the funds' income and capital gains, after payment of the carried interest, are distributed to the Company. Consequently these amounts (including the associated cash flows) are shown in the appropriate lines within the Income Statement, Cash Flow Statement and the related notes, to then reflect the income and gains appropriated to the general and founder partner in satisfaction of the PPS and carried interest, so as to reflect the Company's proportion of net income and capital gains in the funds that have been paid to the general and founder partner as its PPS and carried interest. The PPS paid from net income is charged to the revenue account in the income statement, whereas the PPS paid as an interest-free loan, is charged as an unrealised depreciation to the capital return on the income statement. The carried interest paid from net income and capital gains are charged to the revenue and capital account respectively on the income statement. Investment income and interest receivable As stated above, all income of HGT LP and HGT 6 LP is distributed to the Company and this income is recognised and shown as income in the financial statements of the Company. The accounting policies below apply to the income of HGT LP and HGT 6 LP. Income from listed equity investments, including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend. Where the Company elects to receive dividends in the form of additional shares rather than cash dividends, the equivalent of the cash dividend is recognised as income in the revenue account and any excess in the value of the shares received over the amount of the cash dividend is recognised in Capital reserve - realised. Interest income on non-equity shares and fixed income securities are recognised on a time apportionment basis so as to reflect the effective yield when it is probable that economic benefit will flow to the Company. Premiums paid or discounts received with the acquisition of government securities are amortised over the remaining period up to the maturity date and is recognised in interest income on government securities. Dividends receivable on equity shares where there is no ex-dividend date and on non-equity shares are brought into account when the Company's right to receive payment is established. Management fee and finance costs The annual investment management fee and finance costs are charged 75% to Capital reserve - realised and 25% to the revenue account. This is in line with the Board's expected split of long-term returns, in the form of capital gains and income respectively, from the investment portfolio of the Company. Expenses All expenses are accounted for on an accruals basis. All administrative expenses, excluding the management fee, are charged wholly to the revenue account. Expenses that are incidental to the purchase or sale of an investment are included within the cost or deducted from the proceeds of the investment. Dividends Dividend distributions to shareholders are recognised as a liability in the year that they are approved unconditionally. Current and other non-current assets Financial assets and financial liabilities are recognised in the Company's balance sheet when the Company becomes a party to the contractual provisions of the instrument. Trade receivables are stated at nominal value. Appropriate allowances for estimated irrecoverable amounts are recognised in the revenue return on the income statement. Government securities are short term investments made in fixed rate government gilts. Cash comprises current accounts with banks. Foreign currency All transactions in foreign currencies are translated into sterling at the rates of exchange ruling at the dates of such transactions. Foreign currency assets and liabilities at the balance sheet date are translated into sterling at the exchange rates ruling at that date. Exchange differences arising on the translation of foreign currency assets and liabilities are taken to Capital reserve - realised. Taxation Income taxes represent the sum of the tax currently payable, withholding taxes suffered and deferred tax. Tax is charged or credited in the income statement. Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future, or the right to pay less, have occurred at the balance sheet date. This is subject to deferred assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences between the Company's taxable profits and its results, as stated in the financial statements, which are capable of reversal in one or more suitable periods. Investments The general principle applied is that investments should be reported at "fair value" in accordance with FRS26 and the International Private Equity and Venture Capital ('IPEV') Valuation Guidelines, September 2009 edition. Where relevant, the Company applies the policies stated below to the investments held by HGT LP and HGT 6 LP, in order to determine fair value of its investments in HGT LP and HGT 6 LP. Quoted: Quoted investments are designated as held at fair value, which is deemed to be bid market prices. Unquoted: Unquoted investments are also designated as held at fair value and are valued using the following guidelines: (i) initially, investments are valued at the price of recent investment including fees and transaction costs, unless the prevailing market conditions and/or trading prospects of the investment result in this price being an inappropriate measure of fair value and (ii) or (iv) below is required; (ii) after the receipt of the first audited financial statements following initial investment, companies are valued based on the level of maintainable earnings and an appropriate earnings multiple, unless (iv) is required; (iii) where more appropriate, investments are valued with reference to their net assets rather than to their earnings; and (iv) appropriate provisions are made against all individual valuations where necessary to reflect unsatisfactory financial performance or a fall in comparable ratings, leading to an impairment in value. Limited partnership funds: These are investments that are set up by a third party where the Company does not hold a majority share and are at fair value, based on the third party manager's valuation after any required adjustment by the Directors. Government securities: These are short term investments made in fixed rate government gilts and are valued at the current fair value of the gilt. Derivative financial instruments: Derivative financial instruments are held at fair value and are valued using quoted market prices or dealer price quotations for financial instruments traded in active markets. Both realised and unrealised gains and losses arising on investments are taken to capital reserves. Capital reserves Capital reserve - realised The following are accounted for in this reserve: (i) gains and losses on the realisation of investments; (ii) attribution of gains to founder partner for carried interest; (iii) losses on investments within the portfolio where there is little prospect of realisation or recovering any value; (iv) realised exchange differences of a capital nature; and (v) expenses, together with the related taxation effect, charged to this reserve in accordance with the above policies. Capital reserve - unrealised The following are accounted for in this reserve: (i) increases and decreases in the valuation of investments held at the year end; (ii) increases and decreases in the valuation of the loan to general partner; and (iii) unrealised exchange differences of a capital nature. 2. Income 2009 2008 Â£'000 Â£'000 Income from investments held by HGT LP and HGT 6 LP UK unquoted investment income 2,218 4,387 Foreign unquoted investment income 4,776 2,728 UK dividends 2,278 11 Gilt interest 322 4,704 Priority profit share attribution (1,664) - 7,930 11,830 Other income Deposit interest 46 119 Other interest income 42 119 88 238 Total net income 8,018 12,068 Total income comprises: Dividends 2,278 11 Interest 5,740 12,057 8,018 12,068 3. Fees, priority profit share and carried interest paid to Manager Revenue return Capital return Total return (a) Investment management fee 2009 2008 2009 2008 2009 2008 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Investment management fee - 935 - 2,805 - 3,740 VAT recovered (208) (292) (625) (875) (833) (1,167) (208) 643 (625) 1,930 (833) 2,573 From 1 January 2009, no further investment management fee is payable as the Manager is receiving a priority profit share from that date. Details of the investment management, custodian and administration contracts are disclosed in the Directors' report. The investment management fee was levied quarterly in arrears and was charged 75% to capital and 25% to revenue. For details regarding the VAT recovery, see note 19. (b) Priority profit share 2009 2008 Priority profit share to General Partners funded by via: Â£'000 Â£'000 Investment income attribution 1,664 - Loan to General Partner 4,737 - Total priority profit share charge 6,401 - The priority profit share payable on HGT LP and HGT 6 LP rank as a first appropriation of gross income from investments held in HGT LP and HGT 6 LP respectively and is deducted prior to such income being attributed to the Company in its capacity as a Limited Partner. The net income of HGT LP and HGT 6 LP earned during the year, after the deduction of the priority profit share, is shown on the Income Statement. Details of the contract are disclosed in the Directors' report below. 4. Other expenses 2009 2008 (a) Operating expenses Â£'000 Â£'000 Custodian and administration fees 268 260 Directors' remuneration (note 5) 179 170 Current Auditors' remuneration - audit services 58 32 - taxation, 41 6 interim review and other services Previous Auditors' remuneration - audit services - - - taxation and - 5 interim review Legal and other administration costs 532 459 1,078 932 The Company's total expense ratio ('TER'), calculated as total expenses including the priority profit share but before any recovery 3.18% 1.98% of VAT on management fees, as a percentage of average net assets was: (b) Reconciliation of net revenue return before taxation to net cash flow from operating activities 2009 2008 Â£'000 Â£'000 Net return before taxation 8,247 4,072 Gains on investments held at fair value (1,536) (641) Priority profit share advanced (4,737) - Movement on carried interest (4,070) (1,057) Amortisation of premium on government securities 5,372 - Increase in prepayments and accrued income (5,101) (1,904) (Increase)/decrease in debtors (2,708) 5 Increase in creditors 1,115 1,076 Tax on investment income included within gross income (21) (1) Net cash (outflow)/inflow from operating activities (3,439) 1,550 5. Directors' remuneration The aggregate remuneration of the Directors for the year to 31 December 2009 was Â£179,000 (2008: Â£170,000). Further information on the Directors' remuneration is disclosed in the Directors' remuneration report. 6. Taxation on ordinary activities Revenue return Capital Total return return (a) Analysis of charge in the year 2009 2008 2009 2008 2009 2008 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Current tax: UK corporation tax 1,997 2,988 - (550) 1,997 2,438 Income streaming relief (see note 6 (1,997) - - - (1,997) - (b)) Prior year adjustment - 60 - - - 60 Total current tax (note 6b) - 3,048 - (550) - 2,498 (b) Factors affecting current tax charge for the year The tax assessed for the year is lower than the standard rate of corporation tax in the UK for a large company (28%; 2008: 28.5%). The differences are explained below: 2009 2008 Â£'000 Â£'000 Net revenue return on ordinary activities before taxation 7,148 10,493 UK corporation tax at 28% thereon (2008: 28.5%) 2,001 2,991 Effects of: Non taxable UK dividends (179) (3) Tax relief from interest distribution (1,997) - Taxable rebate/(deductible expenses) in capital 175 (550) Tax credit to the capital account - 550 Tax in relation to the prior year - 60 (2,001) 57 Current revenue tax charge for the year (note 6a) - 3,048 In the opinion of the Directors, the Company has complied with the requirements of Section 842 ICTA 1988 and will therefore be exempt from corporation tax on any capital gains made in the year. The Company has elected to designate all of the interim dividend declared on 17 February 2010 (see note 8) as an interest distribution to its shareholders. This distribution is treated as a tax deduction against taxable income and resulting in no corporation tax payable by the Company at 31 December 2009. 7. Return and net asset value per ordinary share 2009 2008 Revenue and capital returns per share are shown below and have been calculated using the following: Net revenue attributable to equity shareholders after Â£7,148,000 Â£7,445,000 taxation Net capital gains/(deficit) for the year Â£1,099,000 (Â£5,871,000) Total return Â£8,247,000 Â£1,574,000 Number of shares in issue 25,186,755 25,186,755 Revenue return Capital return Total return 2009 2008 2009 2008 2009 2008 Return/(defecit) per ordinary share 28.38p 29.56p 4.36p (23.31p) 32.74p 6.25p The net asset value per share of 937.2p (2008: 924.4p) was calculated by dividing equity shareholders' funds of Â£236,044,000 (2008: Â£234,094,000) by the number of shares in issue at the year-end of 25,186,755 (2008: 25,186,755). 8. Dividends on ordinary shares Register Payment 2009 2008 Company date date Â£'000 Â£'000 Final dividend of 25.0p for the year ended 31 27 March 11 May - 6,297 December 2007 2008 2008 Final dividend of 25.0p for the year ended 31 2 April 11 May 6,297 - December 2008 2009 2009 6,297 6,297 An interim dividend for the year ended 31 December 2009 of 25.0p per ordinary share was declared by the Board of Directors on 17 February 2010. This will be paid on 31 March 2010 to shareholders on the register of members at the close of business on 26 February 2010. The dividend has not been included as a liability in these financial statements. A final dividend for the year ended 31 December 2009 has not been proposed. The total dividends payable in respect of the financial year, which form the basis of the retention test as set out in section 842 of the Income and Corporation Taxes Act 1988, are set out below: 2009 Â£'000 Revenue available for distribution by way of dividend for the year 7,148 Proposed interim dividend of 25.0p for the year ended 31 December 2009 (6,297) (based on 25,186,755 ordinary shares in issue at 31 December 2009) Undistributed revenue for section 842 purposes * 851 *Undistributed revenue comprises 10.6% of income from qualifying investments of Â£8,001,000 (including tax credit on UK dividend income) (see note 2). 9. Fixed assets investments 2009 2008 Â£'000 Â£'000 Investments held at fair value through profit and loss Investments held by HGT LP Investments quoted on the London or Dublin Stock Exchanges 76 - Unquoted investments 98,291 90,413 Investments held by HGT 6 LP Unquoted investments 17,217 - Other investments held by the Company Unquoted investments 11,620 4,319 127,204 94,732 Equity shares 30,774 19,501 Non-equity shares 34,211 7,569 Fixed income securities 62,814 70,463 Derivative instruments (595) (2,801) 127,204 94,732 Quoted Unquoted Total Â£'000 Â£'000 Â£'000 Opening valuation as at 1 January 2009 - 94,732 94,732 Opening unrealised depreciation - investments - 38,798 38,798 - - 2,801 2,801 financial derivative instruments Opening book cost as at 1 January 2009 - 136,331 Movements in the year: Additions at cost - 29,863 Transfer from Unquoted to Quoted 573 (573) - Disposals - proceeds (34) (5,433) - realised gains on sales 34 4,567 Closing book cost of investments 573 164,755 165,328 Closing unrealised depreciation - investments (497) (35,333) (35,830) - - (2,294) (2,294) financial derivative instruments Closing valuation of investments as at 31 December 2009 76 127,128 127,204 The investments included in the above, excluding the investment in Hg Renewable Power Partners LP, are indirectly held by the Company through its investment in HGT LP and HGT 6 LP, as set out in note 1. 10. Gains/(losses) on investments and government securities 2009 2008 Â£'000 Â£'000 Realised gains on sales 3,846 47,266 Carried interest attribution (1,062) (5,132) Change in unrealised appreciation/(depreciation) - investments and government 1,920 securities (43,824) 507 (2,801) - financial derivative instruments 5,211 (4,491) 11. Debtors 2009 2008 Â£'000 Â£'000 Amounts receivable after one year Accrued income on fixed assets 20,614 14,196 Amounts receivable within one year Taxation recoverable 1,623 453 Prepayments and other accrued income 292 1,609 Other debtors 2,708 - 4,623 2,062 Total debtors 25,237 16,258 12. Government securities 2009 2008 Â£'000 Â£'000 Investments held at fair value through profit and loss Opening valuation 124,014 79,723 Purchases at cost 242,339 185,679 Sales and redemptions (274,652) (141,624) Movement in unrealised capital (losses)/gains (1,048) 799 Amortisation of premium on acquisition (5,372) - Realised capital losses (755) (563) Closing valuation 84,526 124,014 13. Movement in net funds 2009 2008 (a) Reconciliation of net cash flow to movement in net funds Â£'000 Â£'000 Change in net funds (2,968)5,724 Net funds at 1 January 5,841 117 Net funds at 31 December 2,873 5,841 At 1 Jan Cash At 31 Dec (b) Analysis of changes in net funds 2009 flows 2009 Â£'000 Â£'000 Â£'000 Cash 5,841 (2,968) 2,873 14. Creditors - amounts falling due within one year 2009 2008 Â£'000 Â£'000 Carried interest 1,062 5,132 Premium payable on financial derivative instruments 1,699 - Sundry creditors 1,035 1,619 3,796 6,751 15. Financial risk The following disclosures relating to the risks faced by the Company are provided in accordance with Financial Reporting Standard 29, "Financial instruments: disclosures". The reference to investments in this note is in relation to the Company's direct investments in HgRPP and the underlying investments in HGT LP and HGT 6 LP as detailed in note 1. Financial instruments and risk profile As a private equity investment trust, the Company's primary investment objective is to achieve long-term capital appreciation by indirectly investing in unquoted companies, mostly in the UK and Europe. Additionally, the Company holds Government gilts and cash and items such as debtors and creditors arising directly from its operations. In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction of the Company's net assets or a reduction in the profits available for distribution by way of dividends. These risks being valuation risk, market risk (comprising currency risk and interest rate risk) and liquidity risk and the Directors' approach to the management of them, are set out below. The Board and the Manager coordinate the Company's risk management. The objectives, policies and processes for managing the risks, and the methods used to manage the risks, that are set out below, have not changed from the previous accounting period. Valuation risk The Company's exposure to valuation risk comprises mainly movements in the value of the investments held through fund partnerships, the majority of which are unquoted. A breakdown of the Company's portfolio is given in the investment portfolio table above. In accordance with the Company's accounting policies, the investments in fund limited partnerships are valued by reference to all underlying unquoted investments which are valued by the Directors following the IPEV guidelines. The Company does not hedge against movements in the value of these investments, apart from foreign exchange movements as explained below. The Company has exposure to interest rate movements, through cash and gilt holdings. In the opinion of the Directors, the diversified nature of the Company's portfolio significantly reduces the risks of investing in unquoted companies. The Company adopted the amendment to FRS 29, effective 1 January 2009. This requires the Company to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: - Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1). - Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2). - Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3). The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability. The determination of what constitutes 'observable' requires significant judgement by the Company. The Company considers observable data to investments actively traded in organised financial markets, fair value is generally determined by reference to Stock Exchange quoted market bid prices at the close of business on the Balance sheet date, without adjustment for transaction costs necessary to realise the asset. The following table analyses, within the fair value hierarchy, the Fund's financial assets and liabilities (by class) measured at fair value at 31 December 2009 Level Level Level Total Financial assets 1 2 3 Â£'000 Â£'000 Â£'000 Â£'000 Investments held at fair value through profit and loss Unquoted Investments - Investment in HGT LP - - 98,367 98,367 - Investment in - - 17,217 17,217 HGT6 LP - Investment in - - 11,620 11,620 Hg RPP LP - Government 84,526 - - 84,526 securities Other assets Accrued income 260 - 20,614 20,874 Cash 2,873 - - 2,873 87,659 - 147,818 235,477 Investments whose values are based on quoted market prices in active markets, and therefore classified within level 1, include active listed equities. The Fund does not adjust the quoted price for these instruments. Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within level 2. As level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information. Investments classified within level 3 have significant unobservable inputs. Level 3 instruments include private equity and corporate debt securities. As observable prices are not available for these securities, the Fund has used valuation techniques to derive the fair value. In respect of unquoted instruments, or where the market for a financial instrument is not active, fair value is established by using recognised valuation methodologies, in accordance with International Private Equity and Venture Capital ('IPEV') Valuation Guidelines. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. There were no transfers of assets from level 1 to level 2 or 3, level 2 to level 1 or 3 and level 3 to level 1 or 2. The following table presents the movement in level 3 investments for the period ended 31 December 2009 by class of financial instrument. Accrued Investments in income on Limited Unquoted investments investments Partnerships Total 2009 2009 2009 Â£'000 Â£'000 Â£'000 Opening balance 14,196 94,732 108,928 Purchases - 29,863 29,863 Realisations at 31 December 2008 valuation (230) (4,219) (4,449) Total gains for the year included in the 6,648 6,828 13,476 income statement Closing valuation of Level 3 investments 20,614 127,204 147,818 Total gains for the year included in the income statement for investments held at 6,994 6,828 13,822 the end of the year Market risk The fair value of future cash flows of a financial instrument held by the Company may fluctuate due to changes in market prices. This market risk comprises: currency risk, interest rate risk and equity price risk. The Board of Directors reviews and agrees policies for managing these risks. The Manager assesses the exposure to market risk when making each investment decision, and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis. Currency risk and sensitivity The Company is exposed to currency risk as a result of investing in fund partnerships that invest in companies in foreign currencies. The sterling value, being the Company's functional currency, of these assets can be significantly influenced by movements in foreign exchange rates. The Company is partially hedged against Euro currency movements affecting the value of its investments, as explained below. The Manager monitors the Company's exposure to foreign currencies and reports to the Board on a regular basis. The following table illustrates the sensitivity of the Revenue and Capital return for the year in relation to the Company's year-end financial exposure to movements in foreign exchange rates against the Company's functional currency. The rates represent the high and low positions during the year for the currencies listed. Revenue return Capital return NAV per NAV per ordinary ordinary share share (pence) (pence) Â£'000 Â£'000 Low Swiss Franc (1.5303) - - - - Euro (1.0343) 531 2.1 4,534 18.0 Euro forward contract (1.0343) - - (1,558) (6.2) Euro option contract (1.0343) - - (109) (0.4) Norwegian Kroner (8.8758) 136 0.5 1,415 5.6 Norwegian Kroner option contract ( - - (351) (1.4) 8.8758) US Dollar (1.3669) 379 1.5 1,131 4.5 1,046 4.1 5,062 20.1 High Swiss Franc (1.8032) - - - - Euro (1.1834) (295) (1.2) (2,516) (10.0) Euro forward contract (1.1834) - - 903 3.6 Euro option contract (1.1834) - - 93 0.4 Norwegian Kroner (10.7197) (345) (1.4) (3,598) (14.3) Norwegian Kroner option contract - - 1,240 4.9 (10.7197) US Dollar (1.6965) (101) (0.4) (300) (1.2) (741) (3.0) (4,178) (16.6) In the opinion of the Directors, the above sensitivity analysis may not be representative of the year as a whole, since the level of exposure changes as the portfolio changes through the purchase and realisation of investments to meet the Company's objectives. Portfolio hedging The Company uses derivative financial instruments such as forward foreign currency contracts and option contracts to manage the currency risks associated with its underlying investment activities. The contracts entered into by the Company are denominated in the foreign currency of the geographic areas in which the Company has significant exposure against its reporting currency. The contracts are designated as a hedge and the fair value thereof is recorded in the balance sheet as investments held at fair value. Unrealised gains and losses are taken to capital reserves. At the balance sheet date, the notional amount and value of outstanding forward foreign exchange contracts and option contracts are as follows: 2009 2008 Currency No. '000 Â£'000 No. '000 Â£'000 Forward foreign currency contracts Euro 25,040 (2,121) 25,040 (3,186) Currency option NOK 251,448 1,322 - - Forward foreign currency contracts Euro 25,040 (2,121) 25,040 (3,186) The Company does not trade in derivatives, as they are held for hedge specific exposures and have maturities designed to match the exposures they are hedging. It is the intention to hold both the financial investments giving rise to the exposure and the derivatives hedging them until maturity and therefore no net gain or loss is expected to be realised. The derivatives are held at fair value which represents the replacement cost of the instruments at the balance sheet date. Movements in the fair value of derivatives are included in the income statement. The Company does not include hedge accounting in the financial statements. Interest rate risk and sensitivity The Company has exposure to interest rate movements as this may affect the fair value of funds awaiting investment, interest receivable on liquid assets and short-dated government securities and interest payable on borrowings. The Company has little immediate direct exposure to interest rates on its fixed assets as the majority of these are fixed rate assets and equity shares that do not pay interest. Therefore, and given that the Company has no borrowings and maintains low cash levels, the Company's revenue return is not materially affected by changes in interest rates. However, funds awaiting investment are invested in Government securities and, as stated above, the valuation is affected by movements in interest rates. The sensitivity of the capital return of the Company to movements in interest rates has been based on the UK base rate. With all other variables constant, a 0.5% decrease in the above should increase the capital return in a full year by Â£ 415,000, with a corresponding decrease if the UK base rate were to increase by 0.5%. In the opinion of the Directors, the above sensitivity analyses may not be representative of the year as a whole, since the level of exposure changes as investments are made and repaid throughout the year. Liquidity risk Investments in unquoted companies, which form the majority of the Company's investments, may not be as readily realisable as investments in quoted companies, which might result in the Company having difficulty in meeting obligations associated with financial liabilities. Liquidity risk is currently not significant as more than 37% of the Company's net assets at the year-end are invested in liquid funds. The Board gives guidance to the Manager as to the maximum amount of the Company's resources that should be invested in any one company. For details refer to the investment policy. Equity price risk Equity price risk is the risk that the fair values of equities (including loans) decrease as a result of changes in the values of underlying businesses. The Board manages the risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Manager. The Board meets regularly and at each meeting reviews investment performance. The Board monitors the Manager's compliance with the Company's objectives, and is responsible for investment strategy. The Manager's best estimate of the effect on the net assets and total return due to a reasonably possible change in the value of unquoted securities, with all other variables held constant, is as follows: % NAV per ordinary share change Â£'000 (pence) Unquoted 10% 12,720 50.5 Financial assets of the Company 2009 2008 Fixed Floating Non Fixed Floating Non interest- interest- rate rate bearing Total rate rate bearing Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Sterling 121,711 2,873 26,105 150,689 164,415 5,841 10,672 180,928 Euro 38,238 - 13,179 51,417 31,348 - 7,708 39,056 Euro - - (1,917) (1,917) - - (2,801) (2,801) hedge Norwegian - - 27,729 27,729 7,838 - 6,553 14,391 Kroner Norwegian Kroner - - 1,322 1,322 - - - - hedge Swiss - - - - 1,428 - - 1,428 Franc US Follar 5,196 - 1,041 6,237 5,211 - 2,137 7,348 Total 165,145 2,873 67,459 235,477 210,240 5,841 24,269 240,350 The fixed rate assets comprise gilts and fixed rate lendings to investee companies. Fixed rate lendings relating to fixed asset investments have a weighted average interest rate of 11.1% per annum (2008: 10.9%) and a weighted average life to maturity of 7.5 years (2008: 7.9 years). Fixed rate assets comprise a gilt with an interest rate of 4.75% per annum and which matures on 7 June 2010. It is the intention to re-invest the proceeds at maturity in a gilt with a similar short dated profile. The floating rate assets consist of cash. The non interest-bearing assets represent the equity content of the investment portfolio and the financial derivative instruments. The Company did not have any outstanding borrowings at the year-end (2008: Â£ nil). The numerical disclosures above exclude short-term debtors and creditors. Capital management policies and procedures The Company's capital management objectives are to ensure that it will be able to finance its business as a going concern and to maximise the revenue and capital return to its equity shareholders, through an appropriate balance of equity capital and debt. The Company's capital at 31 December comprises: 2009 2008 Â£'000 Â£'000 Equity: Equity share capital 6,296 6,296 Share premium 14,123 14,123 Capital redemption reserve 1,248 1,248 Retained earnings and other reserves 214,377 212,427 Total capital 236,044 234,094 As stated above, the Company did not have any outstanding borrowings at the year-end. The Board with the assistance of the Manager monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review covers: - the planned level of gearing, which takes into account the Manager's projections of cash flow; - the desirability of buying back equity shares, either for cancellation or to hold in treasury, balancing the effect (if any) this may have on the discount at which shares in the Company are trading against the advantages of retaining cash for investment; - the need to raise funds by an issue of equity shares, including issues from treasury; and - the extent to which revenue in excess of that which is required to be distributed should be retained, whilst maintaining its Section 842 status. The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period. 16. Share capital 2009 2008 Nominal Nominal No.'000 Â£'000 No.'000 Â£'000 Authorised: 40,000,000 ordinary shares of 25p each 40,000 10,000 40,000 10,000 Allotted, called up and fully paid: Ordinary shares At 1 January & 31 December 25,187 6,296 25,187 6,296 17. Share premium account and reserves Share Capital Capital Capital premium redemption reserve reserve Revenue account reserve realised unrealised reserve Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 As at 1 January 2009 14,123 1,248 238,606 (40,943) 14,764 Transfer on disposal of - - 3,353 (3,353) - investments Losses on government securities - - (755) (1,048) - Net gain on sale of fixed asset - - 1,248 - - investments Net movement in unrealised appreciation of fixed asset - - - 6,828 - investments Dividends paid - - - - (6,297) Net revenue for the year after - - - - 7,148 tax Priority profit share loan to - - - (4,737) - General Partner Carried interest to Founder - - (1,062) - - Partner Management fee charged to - - 625 - - capital, after taxation As at 31 December 2009 14,123 1,248 242,015 (43,253) 15,615 18. Commitment in fund partnerships and contingent liabilities The Company has committed through HGT 6 LP to invest Â£250 million alongside the Manager's latest buyout fund, HgCapital 6, increasing to a maximum of Â£300 million if the size of the funds raised for HgCapital 6, including the Company's commitment, reaches Â£2 billion. The Company's commitment at the Manager's current fund size is over Â£280 million. The Company has agreed to pay fees on its commitment, whereas management fees were previously based on its NAV. The Company will be entitled, without penalty, to opt out of any investment which could cause the Company to lose its status as an investment trust, result in the Company not having the cash resources to meet any of its projected liabilities or expenses, or result in it not being able to pay dividends or undertake any intended share buy-back. At 31 December 2009, Â£ 21,970,000 of this commitment was called. The Company has also committed through HGT LP to invest Â£120 million alongside the Manager's previous buyout fund, HgCapital 5. At 31 December 2009, Â£ 26,160,000 of this commitment was uncalled. As at 31 December 2009, investment purchases of Â£5,557,000 (31 December 2008: Â£ 14,760,000) had been authorised and contractually committed, including the uncalled commitment to Hg Renewable Power Partners LP but excluding any uncalled commitment in HGT LP and HGT 6 LP. In addition, the Company's derivative financial instruments held through HGT LP expire on 29 August 2012. In order to meet any potential liability arising on this date, an amount of Â£ 6,260,000 million has been reserved for this purpose. This amount is therefore callable from the Company at this or any earlier date. 19. VAT recoverable On 28 June 2008, the European Court of Justice announced that it had found in favour of the Association of Investment Companies and JPMorgan Claverhouse Trust plc in declaring that management expenses of investment trusts should be exempt from VAT. Her Majesty's Revenue and Customs ('HMRC') has since announced that it has accepted that fund management services are exempt from VAT and it has withdrawn from the appeal in the JPMorgan Claverhouse Trust case. The Company will therefore no longer be charged VAT on management expenses and it was able to recover some or all of the VAT previously charged on management fees. During the current year, the Company, through its previous Manager, recovered a further Â£833,000 of VAT (see note 3) on management expenses charged by the previous Manager during the period February 2001 and April 2003 in addition to the Â£1,167,000 of VAT recovered in the prior year in relation to VAT charged by the current Manager during the period May 2003 to September 2008. Any further potential recovery relating to these or any earlier periods is deemed to be immaterial and therefore no recovery of VAT has been recognised in these financial statements. 20. Post balance sheet event The Company announced on 17 February 2010 that it is considering raising additional equity capital by means of a placing and offer of new ordinary shares, with subscription shares attached. If the Company decides to proceed with the fundraising, it proposes that there will also be a bonus issue of subscription shares to existing shareholders. The proposed fundraising, which will be conditional on shareholder approval, is subject to prevailing market conditions. If the Company decides to proceed with the fundraising, it is expected that the issue price for the new ordinary shares will be at or around the current market price. A further announcement will be made if the Board decides to proceed. 21. Related party disclosure HgCapital and its subsidiaries, acting as Manager of the Company through a management agreement and participating through limited partnership agreements as General and Founder partners of the fund partnerships that the Company invests in, are considered to be related parties by virtue of the above agreements. During the year, management fees and priority profit shares allocated to HgCapital were Â£6,401,000 (31 December 2008: Â£3,740,000) and a carried interest profit attribution of Â£1,062,000 (2008: Â£5,132,000) was made to HgCapital during the year. HgCapital also acts as secretary and administrator of the Company. Total fees for the year amounted to Â£232,000 (2008: Â£249,000). At 31 December 2009, the amount due to HgCapital relating to above, disclosed under creditors, was Â£1,942,000 (31 December 2008: Â£6,178,000). Where applicable, amounts are inclusive of VAT. Top ten investments % of total share capital income held by accrued the % of Accounting Turnover PBIT* 2009 company total date Currency (millions) (millions) Â£'m 2009 2008 Achilles Group Apr 2009 Â£ 31.1 7.3 - 7.9 3.5 4.8 Holdings Limited Americana International Jun 2009 Â£ 109.3 20.6 2.1 5.7 4.4 5.3 Holdings Limited Epyx Dec 2008 Â£ 15.3 6.9 - 6.8 4.0 - Investments Goldshield Mar 2009 Â£ 96.2 24.2 - 7.4 7.7 - Group Mondo Minerals Dec 2008 â‚¬ 132.1 31.3 2.3 11.4 7.1 9.0 Co-op Pulse Staffing Dec 2008 Â£ 137.8 6.6 - 41.8 16.5 11.8 Limited Schleich GmbH Dec 2008 â‚¬ 90.0 26.2 1.6 9.5 5.4 8.0 SLV Electronik Dec 2008 â‚¬ 104.0 38.9 1.6 8.1 4.7 3.5 SARL Sporting May 2009 Â£ 25.3 8.8 3.6 13.4 5.4 6.1 Index Visma Dec 2008 NOK 3,045.6 555.4 2.7 8.5 18.8 13.2 Holdings * Profit Before Interest, Taxation, Depreciation and Amortisation of goodwill This table does not form part of the financial statements. Significant equity holdings of indirect investments The Company had indirect equity holdings of 10% or more of the equity shares in the companies listed below: Company Country of Number of equity Effective incorporation shares equity % Atlas Energy Group Ltd UK 4,706,450 47.1% Cornish Bakehouse UK 382,170 38.2% Investments Ltd Elite Holding SA (t/a The Netherlands 4,884 15.6% SiTel) FTSA Holdings Ltd UK 1,129,812 19.5% Hoseasons Group Ltd UK 267,358 12.2% Mondo Minerals Co-op Finland 1,252,217 11.4% Pulse Staffing Ltd UK 31,229,096 41.8% SGI (Holdings) Ltd UK 3,432,784 16.2% Sporting Index Group Ltd UK 136,751 13.4% Further information on those investments which, in the opinion of the Directors, have a significant effect on the Company's financial statements, is contained in the Review of principal investments. This table does not form part of the financial statements. Analysis of registered shareholders as at 31 December 2009 Number of % of total Number of % of total By type of holder shares holders 31 Dec 31 Dec 31 Dec 31 Dec 2009 2008 2009 2008 Nominee companies 23,693,682 94.07 91.32 380 58.28 55.10 Direct private 992,180 3.94 4.58 234 35.89 36.89 investors others 500,893 1.99 4.10 38 5.83 8.01 Total 25,186,755 100.00 100.00 652 100.00 100.00 By size of Number of % of total Number of % of total holding shares holders 31 Dec 31 Dec 31 Dec 31 Dec 2009 2008 2009 2008 1 - 5,000 597,738 2.37 2.32 445 68.25 68.13 5,001 - 50,000 2,086,558 8.28 8.83 129 19.79 20.72 50,001 - 2,387,224 9.48 7.96 33 5.06 4.24 100,000 over 100,000 20,115,235 79.87 80.89 45 6.90 6.91 Total 25,186,755 100.00 100.00 652 100.00 100.00 This table does not form part of the financial statements. Governance and other information Board of Directors Roger Mountford (Chairman of the Board) Aged 61, Roger Mountford was appointed to the Board in 2004 and became Chairman in April 2005. He spent 30 years as a merchant banker in the City of London and in the Far East, latterly as Managing Director in the Corporate Finance Department of SG Hambros, leading the Bank's practice in the private equity market. He now serves on several boards, including the Civil Aviation Authority, where he is chairman of the CAA Pension Scheme. He is Chairman of The Housing Finance Corporation, the Dover Harbour Board and LSE Enterprise Limited, the commercial subsidiary of the London School of Economics. Timothy Amies Aged 71, Timothy Amies was appointed to the Board in 1991. He is a chartered accountant with over 30 years' experience of working in the City. He was a partner at Laurie Milbank & Co, stockbrokers for 16 years prior to its acquisition by Chase Manhattan Bank. He then became a director of Chase Investment Bank involved in mergers and acquisitions. Piers Brooke Aged 69, Piers Brooke was appointed to the Board in 2001. He worked for 38 years in both commercial and merchant banking, holding a variety of general management positions in the UK, Continental Europe, the Far East and North America. Most recently he was Director of Financial Strategy at National Westminster Bank. He has been a director of a number of companies. He is currently a non-executive director of Lothbury Property Trust plc. Richard Brooman Aged 54, Richard Brooman was appointed to the Board in 2007. He is a chartered accountant and is Deputy Chairman and Chairman of the Audit Committee of Invesco Perpetual UK Smaller Companies Investment Trust plc, and a non-executive Director of the Camden & Islington NHS Foundation Trust, where he chairs the Audit & Risk Committee. He was formerly Chief Financial Officer of Sherwood International plc and Group Finance Director of VCI plc. Prior to this, he served as CFO of the global Consumer Healthcare business of SmithKline Beecham and held senior financial and operational positions at Mars after qualifying with Price Waterhouse. He is Chairman of the Audit and Valuation Committee of the Company. Peter Gale Aged 54, Peter Gale was appointed to the Board in 1991 and is Deputy Chairman of the Company. He has worked in many divisions of National Westminster Bank, specialising in investment management. In 1990 he became responsible for the investment management of National Westminster Bank Group Pension Funds, which subsequently became RBS Pension Trustee Ltd. Upon the purchase of Gartmore Investment Management plc in 1996, he became a principal of the enlarged fund management company and in 2003 became Managing Director of Gartmore Private Equity. He is a non-executive director of Lothbury Property Trust plc and advisor to the West Midlands Metropolitan Authorities Pension Fund as well as several other large Pension and Investment Funds. Andrew Murison Aged 61, Andrew Murison was appointed to the Board in 2004. He was Senior Bursar of Peterhouse, Cambridge for nine years and spent the previous twelve years as a principal in private equity partnerships in the USA. Prior to that he was a fund manager, financial journalist and investment banker in the City of London. He now serves on the boards of Maven Income and Growth VCT 3 plc (formerly Aberdeen Growth Opportunities Venture Capital Trust), Brandeaux Student Accommodation Fund Limited and Brandeaux US Dollar Fund Limited and is Chairman of JPMorgan European Investment Trust plc. All Directors are members of the Audit and Valuation, Nomination, Directors' Remuneration and Management Engagement Committees. All Directors are non-executive. Directors' report The Chairman's Statement forms part of this Directors' Report The Directors present the annual report and financial statements of HgCapital Trust plc (Reg. No. 1525583) for the year ended 31 December 2009. BUSINESS REVIEW Background The purpose of the Business Review is to provide an overview of the business of the Company by: - Analysing development and performance using appropriate key performance indicators ('KPIs') - Outlining the principal risks and uncertainties affecting the Company - Describing how the Company manages these risks - Explaining the future business plans of the Company - Setting out the Company's environmental, social and ethical policy - Providing information about persons with whom the Company has contractual or other arrangements which are essential to the business of the Company - Outlining the main trends and factors likely to affect the future development, performance and position of the Company's business. Principal activity and business review The principal activity of the Company is to operate as an investment trust providing access to a diversified portfolio of private equity investments. A review of the development and performance of the business for the year ended 31 December 2009 is given in the Chairman's statement, which forms part of this Directors' report, and in the Manager's report. Status of the Company HMRC has accepted the Company as an investment trust for the purposes of section 842 of the Income and Corporation Taxes Act 1988 ('ICTA') for the year ended 31 December 2008. In the opinion of the Directors, the Company has conducted its affairs so as to enable it to continue to maintain acceptance as an investment trust since that date. It is the Company's intention to continue to seek authorisation under section 842 of ICTA. The Company is not a close company within the meaning of the provisions of ICTA. The Company is an investment company within the meaning of section 833 of the Companies Act 2006. The Company's shares are eligible investments within the stocks and shares component of an Individual Savings Account ('ISA'). Going concern The Company's business activities, together with the factors likely to affect its future development, performance and position are described in the Chairman's statement and in the Manager's report. The financial position of the Company, its cash flows, liquidity position and borrowing facilities are described in the Directors' report. In addition note 15 to the financial statements includes the Company's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk. The Company has considerable financial resources and as a consequence, the Directors believe that the Company is well placed to manage its business risks successfully despite the current uncertain economic outlook. After making enquiries, the Directors have a reasonable expectation that the Company will have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts. Business and strategy The objective of the Company is to provide shareholders with long-term capital appreciation in excess of the FTSE All-Share Index by investing in unquoted companies. The strategy of the Manager is to maximise returns from mid-market private equity investments through sector specialisation and proactive work with portfolio companies. It concentrates on buyouts in Europe with enterprise values between Â£50 million and Â£500 million and renewable energy projects through RPP1. No material change will be made to the investment policy without shareholder approval. The Companyâ€™s Investment Policy The principal policy of the Company is to invest in a portfolio of unlisted companies that are expected to grow organically or by acquisition. Any material change to the Company's investment policy will be made only with the approval of Shareholders. The Company's maximum exposure to unlisted investments is 100 per cent. of gross assets. At the time of acquisition no single investment will exceed a maximum of 15 per cent. of gross assets. The Company may invest in assets other than companies where the Manager believes that its expertise in private equity investment can be profitably applied. The Company may invest in unlisted funds, whether managed by HgCapital or not, up to a maximum at the time of acquisition of 15 per cent. of gross assets. The Company may invest in other listed investment companies, including investment trusts, up to a maximum at the time of acquisition of 15 per cent. of gross assets, although it has no current intention to do so. The Company invests its liquid funds in government or corporate securities, or in bank deposits, in each case with an investment grade rating, or in managed funds with a similar investment policy. Range and diversification The Company invests primarily in companies whose operations are headquartered or substantially based in or which serve markets in Europe. The Company invests in companies operating in a range of countries, but there is no policy of making allocations to specific countries or markets. The Company invests across a range of sectors, but there is no policy of making allocations to sectors. Gearing Underlying investments or funds are typically leveraged to enhance value creation, but it is impractical to set a maximum for such gearing. The Company may over-commit to invest in underlying assets in order to maintain the proportion of gross assets that are invested at any time. The Company has the power to borrow against its portfolio, although it has no current intention of doing so (save in respect of temporary borrowing to cover its short term cash flow needs). The Articles currently restrict the Company's ability to borrow no more than, broadly, twice the aggregate of the Company's paid up share capital and reserves (without shareholder approval). Hedging The Company may use derivatives to hedge its exposure to interest rates, currencies, equity markets or specific investments for the purposes of efficient portfolio management. Borrowing facility The Company had no borrowing facility at the end of the year. The Board regularly reviews cash flow and the use of gearing. Performance In the year to 31 December 2009, the Company's net asset value per share (including dividends re-invested) increased by 3.6%. This compares with an increase in the FTSE All-Share Index (total return) of 30.1%. The Company's ordinary share price increased by 30.2% on a total return basis. Results and dividend The total return for the Company is set out in the Income statement. The total return for the year, after taxation, was Â£8,247,000 (2008: Â£1,574,000) of which Â£7,148,000 is revenue return (2008: Â£7,445,000). The Directors declared an interim dividend of 25.0p per ordinary share for the year ended 31 December 2009 on 17 February 2010. The interim dividend will be paid on 31 March 2010 to shareholders on the register of members at the close of business on 26 February 2010. The interim dividend is an interest distribution as defined by regulation 5(2) of the Investment Trusts (Dividends) (Optional Treatment as Interest Distributions) Regulations 2009. No final dividend is proposed. Key performance indicators Each Board meeting conducts a detailed review of the portfolio and reviews a number of indices and ratios to understand the impact on the Company's performance of the individual portfolio holdings. The KPIs used to measure the progress and performance of the Company over time and which are comparable to those reported by other investment trusts include net asset value per share, share price, earnings per share, average monthly trading volumes and cash flow. The Directors recognise that it is in the long-term interest of shareholders that shares do not trade at a significant discount to the prevailing NAV and they also monitor the Company's discount or premium regularly. Principal risks The key risks faced by the Company are set out below and in note 15 to the financial statements. The Board regularly reviews and agrees policies for managing each risk, as summarised below. Performance risk The Board is responsible for deciding the investment strategy to fulfil the Company's objectives and for monitoring the performance of the Manager. An inappropriate strategy may lead to poor performance. To manage this risk the Manager provides an explanation of all investment decisions and the rationale for the composition of the investment portfolio. The Manager monitors and maintains an adequate spread of investments, based on the diversification requirements inherent in the Company's investment policy, in order to minimise the risks associated with particular countries or factors specific to particular sectors. Income/distribution risk The amount of distributions (including dividends) and future distribution levels will depend on the income received and receivable from the Company's underlying portfolio. Regulatory risk The Company operates as an investment trust in accordance with section 842 of ICTA. As such, the Company is exempt from corporation tax on any capital gains realised from the sale of its investments. The Manager monitors investment movements, the level and type of forecast income and expenditure, and the amount of retained income (if any) to ensure that the provisions of section 842 are not breached. The results are reported to the Board at each meeting. Operational risk In common with most other investment trust companies, the Company has no employees. The Company therefore relies upon the services provided by third parties and is dependent upon the control systems of the Manager and the Company's other service providers. The security, for example, of the Company's assets, dealing procedures, accounting records and maintenance of regulatory and legal requirements, depend on the effective operation of these systems. These are regularly tested and monitored and an internal control report, which includes an assessment of risks together with procedures to mitigate such risks, is prepared by the Manager and reviewed by the Audit and Valuation Committee twice a year. Financial risks The Company's investment activities expose it to a variety of financial risks that include valuation risk, liquidity risk, market price risk, foreign exchange risk and interest rate risk. Further details are disclosed in note 15, together with a summary of the policies for managing these risks. Liquidity risk The Company, by the very nature of its investment objective, invests in unquoted companies, and liquidity in their securities can be constrained, potentially making the investments difficult to realise at, or near, the Directors' published valuation at any one point in time. The Manager has regard to the liquidity of the portfolio when making investment decisions, and the Company manages its liquid resources to ensure sufficient cash is available to meet its contractual commitments. Social, environmental and ethical policy HgCapital Trust seeks to invest in companies that are well managed, with high standards of corporate governance. The Directors believe this creates the proper conditions to enhance long-term shareholder value. In aiming to achieve a high level of corporate performance, the Company adopts a positive approach to corporate governance and engagement with companies. Socially responsible investment The Company committed to invest in the first Hg Renewable Power Partners fund, which the Board believes offers a profitable route for the Company to participate in efforts to combat climate change and is minded to invest in the Manager's second renewable energy fund. The Manager addresses other investment opportunities on a sector basis. The sectors chosen do not generally raise ethical issues. FUTURE PROSPECTS The Board's main focus is on the achievement of capital growth and the future of the Company is dependent upon the success of the investment strategy. The outlook for the Company is discussed in the Chairman's statement and the Manager's report. DERIVATIVE TRANSACTIONS On 27 August 2008, the Manager, on behalf of the Company, entered into a â‚¬25 million forward foreign exchange contract and a â‚¬12.5 million option contract with a duration of 4 years, in order to partially offset the effect of sterling exchange rate movements on euro currency exposure. The contract secures a sterling/euro exchange rate of â‚¬1.24 on the forward contact and a strike price of â‚¬1.40 on the option contract compared with an average exchange rate of â‚¬1.42 at which euro-denominated assets in HgCapital 5 were acquired. The current write-down of Â£1.9 million is more than offset by unrealised foreign exchange gains on the euro-denominated assets. The contract requires no cash funding until expiry, by which time the Manager expects to be in a position to cover any funding requirement from euro proceeds from the sale of investments. Further details are provided in note 18 of the financial statements. In December 2009, the Manager, on behalf of the Company, entered into two option contracts of NOK126 million each expiring in two and four years respectively which are exercisable at a strike price of NOK10.50 to sterling. Total premiums of Â£1.7 million were paid. The current write-down of Â£ 0.4 million reflects currency changes and other market factors impacting on the value of the options since the acquisition date. DIRECTORS The Directors in office during the year and at the date of this report are listed above. Membership of the Board's committees is detailed in the Corporate Governance Statement, beginning below. The Board has noted the recommendation in the AIC Code of Corporate Governance that non-executive directors serving longer than nine years since election should be subject to annual re-election. Accordingly, Mr Gale will offer himself for re-election at this year's Annual General Meeting. Mr Amies will retire at this year's Annual General Meeting but will not seek re-election. The Board wishes to convey its gratitude for Mr Amies' considerable contribution to the Board and the Company. In accordance with the Articles of Association, Mr Mountford, having most recently been re-elected in 2007, will retire by rotation at the Company's AGM and, being eligible, offer himself for re-election. The Board has considered the retiring Directors' performance as part of its evaluation process and recommends that both Mr Mountford and Mr Gale be proposed for re-election, based on the following assessment of their contribution to the operation of the Board. Mr Roger Mountford Mr Mountford has proven business and leadership skills, which he has exercised over a long career in merchant banking both in the UK and Far East. In addition, he has excellent knowledge of financial markets and corporate governance. Through his role as Chairman, Mr Mountford uses this experience and skill to ensure that the Board discharges its duties in an effective manner at all times. Mr Peter Gale Mr Gale is professionally responsible for the selection and monitoring of a wide range of private equity managers on behalf of a major institutional investor. His extensive knowledge of the private equity industry and of trends in this market is of great value to the Board, especially when considering the strategy of the Company and of the Manager. None of the Directors has a service contract with the Company. Directors' interests The interests of those persons who were Directors at the end of the year in the ordinary shares of the Company were as follows (all holdings are beneficial unless stated otherwise): 31 December 2009 1 January 2009 T J Amies 15,000 15,000 P L Brooke 2,000 2,000 R J Brooman 1,200 1,200 P Gale 9,996 9,996 R P Mountford 10,607 10,289 A H Murison 8,000 8,000 Substantial interests The Company is aware that the following persons had an interest in 3% or more of the voting rights of the Company on 2 March 2010, being the latest practical date prior to publication of this report: Ordinary shares % of voting rights Rowan Nominees Ltd*â€ 3,130,395 12.4 Oxfordshire County Council 1,782,500 7.1 The Co-operative Asset Management 1,290,200 5.1 Legal & General Group Plc 1,009,318 4.0 * Of the shares held by Rowan Nominees Limited 2,110,776 shares (representing 8.4% of the voting rights) are managed by Hg Investment Managers Ltd on behalf of HgCapital staff, including 1,359,301 shares (representing 5.4% of the voting rights) managed on behalf of Mr Ian Armitage. â€ Of the shares held by Rowan Nominees Limited 1,019,619 shares (representing 4% of the voting rights) are managed by Hg Pooled Management Ltd on behalf of RW SPLP LP, where the beneficial owner is the BBC Pension Trust Limited Fund RW. The Company is not aware that any other person had an interest of 3% or more in the Company's ordinary share capital as at 2 March 2010. Investment management and administration Throughout 2009, the Company's assets were managed by Hg Pooled Management Ltd and HgCapital LLP, both trading as HgCapital, under management arrangements implemented in January 2009. Under these arrangements, the Company no longer pays management fees to HgCapital in respect of its portfolio holdings or cash and liquid assets. The Company pays a priority profit share of 1.5% per annum on the current value of its pre-HgCapital 6 private equity portfolio, excluding investments in other collective investment funds and investments made alongside HgCapital 6 as described below. The Company pays a priority profit share in respect of its commitment to invest alongside HgCapital's new buyout fund, HgCapital 6. This share is the same as those payable by all institutional investors in the new fund. An amount of 1.75% per annum is payable on the commitment during the investment period of the fund, which is expected to last for between four and five years. The amount will then reduce to 1.5% per annum calculated on the basis of the original cost of the assets, less the original cost of any assets which have been realised or written off. The incentive scheme introduced in May 2003 remains in place for the Company's investments other than those made alongside HgCapital 6. Under this scheme, the Manager is entitled to a carried interest, in which the executives of HgCapital participate, in order to provide an incentive to deliver good performance. This arrangement allows for a carried interest of 20% of the excess annual growth in average NAV over an 8% preferred return, based on a three-year rolling average NAV, calculated half-yearly and aggregated with any dividends declared by the Company in respect of that financial year. For the Company's investment alongside HgCapital 6, this incentive scheme has been replaced by a carried interest arrangement identical to that which applies to all other investors in HgCapital 6. Under this arrangement, HgCapital receives 20% of aggregate profits after the repayment to the Company of its invested capital payable once investors have received a preferred return thereon of 8% per annum. No priority profit share or carried interest will apply to any investment alongside HgCapital 6 in excess of the Company's pro-rata commitment. HgCapital has been appointed as Secretary and administrator of the Company for a fee equal to 0.1% of NAV. Hg Investment Managers Limited is the custodian of the Company's assets and its fees and expenses are met by HgCapital. VAT recovery In common with other investment trusts, the Company has, through its Manager, pursued the recovery of VAT previously charged on investment management fees. During the year the Company received Â£833,000 (2008: Â£1,167,000). Continued appointment of the Manager The Board has concluded that it is in shareholders' interests that HgCapital should continue as Manager of the Company on the existing terms. The Board considers the arrangements for the provision of investment management and other services to the Company on an ongoing basis and a formal review is conducted annually. As part of this review, the Board considered the quality and continuity of the Manager's personnel, succession planning, sector and geographic coverage, investment process and the results achieved to date. The Board also considered the Manager's ongoing commitment to the promotion of the Company's shares. The principal contents of the agreement with the Manager have been set out in the previous section. Having considered the terms of this agreement and those of other private equity investment trust companies, the Board considers that the terms of the agreement represent an appropriate balance between cost and incentivisation of the Manager. Voting policy The exercise of voting rights attached to the Company's portfolio has been delegated to HgCapital, whose policy is to participate actively as a shareholder, reviewing each case separately. Donations The Company made no political or charitable donations during the period. Payment of suppliers It is the policy of the Company to pay for the supply of goods and services within the terms agreed with the supplier. The Company has no trade creditors. Annual General Meeting The AGM of the Company, which will include a presentation by the Manager, will be held at the offices of HgCapital, 2 More London Riverside, London SE1 2AP on Monday 10 May 2010 at 12 noon. Light refreshments will be available at the conclusion of the AGM. Notice of the AGM is given below. Authority to buy back shares The Directors' authority to buy back shares was renewed at last year's AGM and will expire on 6 November 2010. Although no shares were bought back during the year, the Directors are proposing to renew the authority at the forthcoming AGM, and are seeking authority to purchase up to 3,775,494 ordinary shares (being 14.99% of the issued share capital) as set out in Resolution 7. This authority, unless renewed, will expire at the conclusion of the AGM of 2011. The Authority will be used where the Directors consider it to be in the best interest of shareholders. Purchases of ordinary shares will only be made through the market for cash at prices below the prevailing NAV per ordinary share. Under the Listing Rules of the Financial Services Authority, the maximum price that can be paid is the higher of: (a) 105% of the average of the middle market quotations of the Ordinary Shares in the Company for the five business days prior to the date of the market purchase; and (b) the higher of the price of the last independent trade and the highest current independent bid (as stipulated by Article 5(1) of Commission Regulation (EC) No.2233/2003). The minimum price that may be paid will be 25.0p per share (being the nominal value of a share). Any shares purchased under this authority will be cancelled. In making purchases, the Company will deal only with member firms of the London Stock Exchange. Authority of Directors to allot shares The authority to allot new shares (or to grant rights over shares) was given to the Directors at the Company's annual general meeting in 2009. The authority gives the Directors, for the period until the conclusion of the AGM in 2010, the necessary authority to allot securities, up to an aggregate nominal amount of Â£314,825, which is equivalent to 1,259,300 ordinary shares of 25.0p each, or approximately 5% of the issued ordinary share capital. If the Directors determine it to be appropriate, they have been authorised to allot those securities, for cash, otherwise than to existing shareholders on a pro rata basis. Resolution 8 will, if passed, essentially renew the Directors' general authority to allot Shares that was given at the Company's AGM in 2009. This authority to allot is on broadly the same terms as last year's resolution but the resolution has been updated to reflect that authority is being given under section 551 of the Companies Act 2006 (rather than section 80 of the Companies Act 1985) and to reflect a change in the language used in the Companies Act 2006. In December 2008, the ABI revised its guidelines on directors' authority to allot shares (in line with the recommendations of the report issued in November 2008 by the Rights Issue Review Group). The guidelines state that ABI members will permit, and treat as routine, resolutions seeking authority to allot shares representing up to one-third of a company's issued share capital. In addition they will treat as routine a request for authority to allot shares representing an additional one-third of a company's issued share capital provided that it is only used to allot shares pursuant to a fully pre-emptive rights issue. In light of these guidelines, the Board considers it appropriate that the Directors should be granted ongoing authority to allot shares in the capital of the Company up to a maximum nominal amount of Â£4,197,792 representing the guideline limit of approximately 66 per cent of the Company's Ordinary Share Capital. Of this amount 8,395,585 Ordinary Shares (representing approximately 33 per cent. of the Company's Ordinary Share Capital), can only be allotted pursuant to a fully pre-emptive rights issue. The power will last until the conclusion of the AGM in 2011 or, if earlier, 1 July 2011. Resolution 9 will give the Directors authority to allot shares in the capital of the Company pursuant to the authority granted under Resolution 8 for cash without complying with the pre-emption rights in the Companies Act 2006 in certain circumstances. In the light of the ABI guidelines referred to above, the authority referred to above will permit the Directors to allot: (a) Shares up to a nominal amount of Â£4,197,792 (representing two-thirds of the Company's Existing Ordinary Share Capital) on an offer to Shareholders on a pre-emptive basis. However unless the Shares are allotted pursuant to a rights issue (rather than an open offer), the Directors may only allot shares up to a nominal amount of Â£2,098,896 (representing one-third of the Company's Existing Ordinary Share Capital) (in each case subject to any adjustments, such as for fractional entitlements and Overseas Shareholders, as the Directors see fit); and (b) otherwise than in connection with an offer to existing Shareholders, Shares up to a maximum nominal value of Â£629,668, representing approximately 10 per cent. of the Existing Ordinary Share Capital, at a price not less than the Net Asset Value per Ordinary Share as at the most recent practicable date chosen for such purposes by the Directors. The terms of Resolution 9 are broadly the same as the Board's existing authority, save that the amount of Shares that the Directors may issue on a non-pre-emptive basis has been increased from 5 per cent. of the issued share capital to 10 per cent. of the Company's Enlarged Issued Ordinary Share Capital or Existing Ordinary Share Capital. The Directors consider that the additional flexibility that this affords the Company is appropriate and intend to seek similar authorities at the Company's future annual general meetings on Ordinary Share Capital. Notice Period for General Meetings The provisions in the Companies Act 2006 permitting companies, subject to the terms of their articles of association, to call general meetings other than annual general meetings on a minimum notice period of 14 days were amended with effect from 3 August 2009 by the Shareholders' Rights Regulations. One of the amendments increased the minimum notice period for listed company general meetings to 21 clear days, but with an ability for companies to reduce this period back to 14 days (other than for annual general meetings) provided that two conditions are met: (i) that the Company offers facilities for shareholders to vote by electronic means; and (ii) that there is an annual resolution of shareholders approving the reduction in the minimum notice period from 21 clear days to 14 clear days. The Board is therefore proposing Resolution 10 as a special resolution to approve 14 clear days as the minimum period of notice for all general meetings of the Company other than annual general meetings. The approval will be effective until the Company's next Annual General Meeting, when it is intended that renewal will be sought. Section 992 Companies Act 2006 The following information is disclosed in accordance with Section 992 of the Companies Act - As at 31 December 2009 the Company had an issued share capital of Â£ 6,296,689, comprising 25,186,755 ordinary shares of 25p each, carrying one vote each. - Details of the substantial shareholders in the Company are listed above. - The rules concerning the appointment and replacement of Directors are contained in the Company's Articles of Association and are discussed below. - The giving of powers to issue or buy back the Company's shares requires a special resolution to be passed by shareholders. The Board's current powers to buy back shares are set out above. - There are: no restrictions concerning the transfer of securities in the Company; no special rights with regard to control attached to securities; no restrictions on voting rights; no agreements between holders of securities regarding their transfer known to the Company; and no agreements which the Company is party to that might affect its control following a successful takeover bid. Auditor Each of the persons who is a director at the date of approval of this report confirms that: - so far as the director is aware, there is no relevant audit information of which the Company's auditors are unaware; and - the director has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the Company's auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006. Deloitte LLP has indicated its willingness to continue in office as Auditor and a resolution proposing its re-appointment and authorising the Directors to determine its remuneration will be proposed at the AGM. By order of the Board Hg Pooled Management Ltd Secretary 4 March 2010 Statement of Directors' responsibilities in respect of the annual report and the financial statements The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing these financial statements, the directors are required to: - select suitable accounting policies and then apply them consistently; - make judgments and accounting estimates that are reasonable and prudent; - state whether applicable UK Accounting Standards have been followed; and - prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Responsibility statement We confirm that to the best of our knowledge: - the financial statements, prepared in accordance with UK Accounting Standards give a true and fair view of the assets, liabilities, financial position and profit or loss of the company; and - the directors' report, includes a fair review of the development and performance of the business and the position of the company, together with a description of the principal risks and uncertainties that it faces. By order of the Board Roger Mountford, Chairman 4 March 2010 Corporate governance statement This Corporate Governance Statement forms part of the Directors' Report. The Board of HgCapital Trust plc has considered the principles and recommendations of the AIC Code of Corporate Governance ('AIC Code') by reference to the AIC Corporate Governance Guide for Investment Companies ('AIC Guide'). The AIC Code, as explained by the AIC Guide, addresses all the principles set out in Section 1 of the Combined Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to HgCapital Trust plc. The Board considers that reporting against the principles and recommendations of the AIC Code, and by any reference to the AIC Guide (which incorporates the Combined Code), will provide better information to shareholders. The Company has complied with the recommendations of the AIC Code and the relevant provisions of Section 1 of the Combined Code, except as set out below. The Combined Code includes provisions relating to: - the role of the chief executive - executive directors' remuneration - the need for an internal audit function. For the reasons set out in the AIC Guide, and in the preamble to the Combined Code, the Board considers these provisions are not relevant to the position of HgCapital Trust plc, being an externally managed investment company. The Company has therefore not reported further in respect of these provisions. A copy of the AIC Code and the AIC Guide can be obtained via the AIC's website, www.theaic.co.uk. A copy of the Combined Code on Corporate Governance can be obtained at www.frc.org.uk. The Board The Board consists of six non-executive Directors, all of whom the Company deems to be independent of the Company's Manager. In the Board's opinion Mr Amies continues to qualify as an independent Director despite his length of service, as he is independent of the Manager and free from any business or other relationships that could materially interfere with the exercise of his judgment. For the same reasons and having considered Mr Gale's position as a senior employee of Gartmore, a shareholder of the Company, the Board considers him to be independent. Both Mr Gale and Mr Brooke are non-executive directors of Lothbury Property Trust plc. Their fellow Directors consider that each demonstrates that they are independent in character and judgment and that this common directorship of another company does not impede their independence. The Directors' biographies highlight their wide range of business experience. The Board does not feel that it would be appropriate to adopt a policy on tenure whereby Directors serve for a limited period as, with a private equity portfolio, a long-term perspective is valuable. The structure of the Board is such that it is considered unnecessary to identify a senior non-executive Director other than the Deputy Chairman. The Board is supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. Strategic issues and all operational matters of a material nature are determined by the Board. The Directors retire by rotation at every third Annual General Meeting ('AGM'), except for Directors who have served for longer than nine years, who stand for re-election annually. Any Directors appointed to the Board since the previous AGM also retire and stand for election. Accordingly, Mr Mountford is being proposed for re-election at this year's AGM. Messrs Gale and Amies were both appointed on 1 May 1991. The AIC Code recommends that any non-executive director serving for longer than nine years be subject to annual re-election. Therefore Mr Gale and Mr Amies will retire and Mr Gale will stand for annual re-election at this year's AGM. It is intended to appoint an additional member of the Board, following Mr Aimies retirement. The Board's recommendations that Mr Mountford and Mr Gale should be re-elected are set out above. The Board meets at least five times a year and there is regular contact with HgCapital between these meetings. The Directors also have access to the advice and services of the Secretary, who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. Where necessary, in the furtherance of their duties, the Directors may seek independent professional advice at the expense of the Company. The Board has responsibility for ensuring that the Company keeps proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and enable it to ensure that the financial statements comply with UK Company Law. The Board is also responsible for safeguarding the assets of the Company and for taking reasonable steps for the prevention and detection of fraud and other irregularities. Finally, it is the Board's responsibility to present a balanced and understandable assessment of the Company's position in all public communications. The Company has maintained appropriate directors' liability insurance cover throughout the year. The Company's Articles of Association take advantage of statutory provisions to indemnify the Directors against certain liabilities owed to third parties even where such liability arises from conduct amounting to negligence or breach of duty or breach of trust. In addition, under the terms of appointment of each Director, the Company has agreed, subject to the restrictions and limitations imposed by statute and by the Company's Articles of Association, to indemnify each Director against all costs, expenses, losses and liabilities incurred in execution of his office as director or otherwise in relation to such office. Save for such indemnity provisions in the Company's Articles of Association and in the Directors' terms of appointment, there are no qualifying third party indemnity provisions in force. Conflicts of interest On 1 October 2008 it became a statutory requirement that a Director must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the Company's interests (a 'situational conflict'). The Company's Articles of Association were amended at the 2008 Annual General Meeting to give the Directors authority to approve such situations, where appropriate. It is the responsibility of each individual Director to avoid an unauthorised conflict situation arising. He must request authorisation from the Board as soon as he becomes aware of the possibility of a situational conflict arising. The Board is responsible for considering Directors' requests for authorisation of situational conflicts and for deciding whether or not the situational conflict should be authorised. The factors to be considered will include whether the situational conflict could prevent the Director from properly performing his duties, whether it has, or could have, any impact on the Company and whether it could be regarded as likely to affect the judgment and/or actions of the Director in question. When the Board is deciding whether to authorise a conflict or potential conflict, only Directors who have no interest in the matter being considered are able to take the relevant decision, and in taking the decision the Directors must act in a way they consider, in good faith, will be most likely to promote the Company's success. The Directors are able to impose limits or conditions when giving authorisation if they think this is appropriate in the circumstances. A register of conflicts is maintained by the Company Secretary and is reviewed at Board meetings, to ensure that any authorised conflicts remain appropriate. Directors are required to confirm at these meetings whether there has been any change to their position. The Directors must also comply with the statutory rules requiring company directors to declare any interest in an actual or proposed transaction or arrangement with the Company. Board and Audit and Valuation Committee Directors' evaluation The Board formally reviews its performance on a regular basis, together with that of the Audit and Valuation Committee. An appraisal system has been agreed by the Board for evaluation on a regular basis of the Board, the Audit and Valuation Committee, the Chairman and the individual Directors. The evaluation for the year ended 31 December 2009 has been carried out. This took the form of a detailed questionnaire followed by discussions to identify how the effectiveness of the Board's activities, including its committees, policies or processes might be improved. The results of the evaluation process were presented to and discussed by the Board and it was agreed that the current composition of the Board and its committees provided a suitable mix of skills and experience and that the Board was functioning effectively. The Board is satisfied that collectively the members of the Audit and Valuation Committee have a sufficient level of recent and relevant financial experience. Delegation of responsibilities The Board has delegated a number of areas of responsibility, outlined below. Management and administration The management of the investment portfolio has been delegated to HgCapital. HgCapital has also been appointed as Secretary and administrator to the Company: certain of its corporate secretarial duties have been delegated to Capita Company Secretarial Services Limited ('CCSS') and certain of its fund administration duties have been delegated to Capita Financial Group Limited ('CFG') who have teams specialising in providing secretarial and accounting services to investment trusts. Custody and settlement services are undertaken by Hg Investment Managers Limited (authorised and regulated by the Financial Services Authority), which in turn has appointed The Bank of New York Europe Limited ('BNYE'), a subsidiary of The Bank of New York Mellon, as sub-custodian. The Board has delegated the exercise of voting rights attaching to the securities held in the portfolio to HgCapital. HgCapital does not operate a fixed policy when voting but reviews each case separately. All other matters are reserved for the approval of the Board. Board committees All the Directors of the Company are non-executive and serve on the Nomination Committee, which meets when necessary to select and propose suitable candidates for appointment. When looking for a new Director, the Board assesses the skills of the Board as a whole, to identify any areas that need strengthening. External search consultants are also used. Separate Audit & Valuation and Management Engagement Committees have been established. These committees consist of all six Directors, each of whom has no previous or current connection with the investment management of the Company other than in their capacity as a Director of the Company. The Audit and Valuation Committee, which has written terms of reference detailing its scope and duties and which meets at least four times per year, examines the effectiveness of the control systems. All the Directors of the Company, including the Chairman, are members of this committee to enable them to be kept fully informed of any issues that may arise and to participatefully in discussions on portfolio valuation. The committee reviews the half-yearly and annual reports and also receives information from the relevant corporate audit and compliance departments. The committee reviews the scope, results, cost effectiveness, independence and objectivity of the external auditor. Semi-annually, at each balance sheet date, the committee reviews in detail the valuation of the unquoted investments within the portfolio. Non-audit fees of Â£37,000 were paid to Deloitte LLP for reviewing the half-yearly financial statements and as consultancy fees relating to the new management arrangements. Deloitte LLP has provided details of any other relationship with the Manager and confirmed to the Board that in its opinion it is independent of the Manager. Based on the review of non-audit services provided by Deloitte LLP, the Board has concluded that they are independent of the Company. The Board has considered the independence and objectivity of the Auditors and has conducted a review of non-audit services which the Auditors have provided. It is satisfied in these respects that Deloitte LLP has fulfilled its obligations to the Company and its Shareholders. The external auditor is invited to attend all Audit and Valuation Committee meetings and has the opportunity to meet with the committee without representatives of the Manager being present. The Management Engagement Committee, which also has written terms of reference detailing its scope and duties, regularly reviews the terms of the investment management and administration contracts. The Directors' Remuneration Committee, which is made up of all the Directors, meets when necessary to consider any change to the Directors' remuneration. The remuneration of the Chairman and Directors is reviewed against the fees paid to directors of other specialist investment trusts and investment trusts of a comparable size, as well as taking account of published data. The terms of reference of all the committees are available on request and will also be available at each Annual General Meeting. Membership of the Board Committees Mr Mountford is Chairman of the Directors' Remuneration Committee, the Management Engagement Committee and the Nomination Committee. Mr Brooman is the Chairman of the Audit & Valuation Committee. The composition of the Board's standing committees was considered at the year-end and it was felt appropriate that every non-executive Director should be a member of all committees. With a relatively small Board, it was deemed both proportionate and practical to involve all the independent Directors in each committee. Attendance record The following table summarises the Directors' attendance at meetings of the Board and Audit and Valuation Committee, held in the year to 31 December 2009, compared with the number they were eligible to attend. Number of meetings attended/eligible to attend Director Board A&VC Tim Amies 8/8 6/6 Piers Brooke 8/8 6/6 Richard Brooman 8/8 6/6 Peter Gale 7/8 5/6 Roger Mountford 8/8 5/6 Andrew Murison 8/8 6/6 The Management Engagement Committee, Remuneration Committee and Nomination Committee each met on one occasion during the year and all of the Directors were present at those meetings. Internal controls The Board is responsible for the internal controls of the Company and for reviewing their effectiveness, for ensuring that financial information published or used within the business is reliable, and for regularly monitoring compliance with regulations governing the operation of investment trusts. The Board continually reviews the effectiveness of the internal control system. The processes indicated below have been put in place to ensure that the Company fully complied with the AIC Code of Corporate Governance for the year ended 31 December 2009 and up to the date of this report, and will continue to do so for the year ending 31 December 2010. As part of the Board's responsibility for the internal control system, an ongoing process has been established in conjunction with HgCapital, CCSS and CFG for identifying, evaluating and managing the Company's significant risks. Controls relating to the risks identified, covering financial, operational, compliance and risk management, are embedded in the operations of HgCapital, CCSS, CFG, BNYE and other outsourced service providers. There is a monitoring and reporting process to review controls put in place to track risks identified, carried out by the compliance function within HgCapital and the auditors of the other organisations. This accords with the guidance of the Financial Reporting Council: "Internal Control: Revised Guidance for Directors on the Combined Code". HgCapital, CCSS and CFG report to the Company on their review of internal controls (which for HgCapital includes checks on the sub-custodian) formally on a semi-annual basis and orally at each Board and Audit and Valuation Committee meeting. The Board has taken actions to remedy any significant failings or weaknesses identified. The Board reviews the 'whistle blowing' procedures of HgCapital, CCSS and CFG to ensure that the concerns of their staff may be raised in a confidential manner. The Company does not have its own internal audit function, as all the administration is delegated to the Manager. This matter is kept under annual review. HgCapital prepares cash flow forecasts and management accounts, which allow the Board to assess the Company's activities and to review its performance. The Board and HgCapital have agreed clearly-defined investment criteria, specified levels of authority and exposure limits. Reports on these issues, including performance statistics and investment valuations, are submitted to the Board at each meeting. HgCapital's evaluation procedure and financial analysis of the companies within the portfolio include detailed research and appraisal, and also take into account environmental policies and other business issues. The Board recognises that these control systems can only be designed to manage, rather than eliminate the risk of failure to achieve business objectives and to provide reasonable, but not absolute, assurance against material misstatement or loss. It relies on the operating controls established by HgCapital, CCSS, CFG and BNYE. Financial statements The Board is required to ensure that the financial statements give a true and fair view of the affairs of the Company as at the end of each financial year and of the profit of the Company for that period. The Board considers that in preparing the financial statements the Company has used appropriate accounting policies, consistently applied (except where disclosed) and supported by reasonable and prudent judgments and estimates and that all accounting standards that it considers to be applicable have been followed. Relations with shareholders All shareholders have the opportunity to attend and vote at the AGM. The notice of the AGM which is sent out at least twenty working days in advance sets out the business of the meeting and any item not of an entirely routine nature is explained in the Directors' report. Separate resolutions are proposed for substantive issues. Both the Chairman of the Board and the Chairman of the Audit and Valuation Committee, together with representatives of HgCapital, are available to answer shareholders' questions at the AGM. Proxy voting figures are announced to shareholders at the AGM. HgCapital holds regular discussions with major shareholders, the feedback from which is greatly valued by the Board. In addition, the Chairman and Directors are available to enter into dialogue and correspondence with shareholders regarding the progress and performance of the Company. The section of this report, entitled "Shareholder Information", provides information useful to shareholders. Report of the independent auditors to the members of HgCapital Trust plc A copy of the unqualified report of the independent auditors to the members of HgCapital Trust plc is included in the Company's Annual Report & Accounts for the year-ended 31 December 2009 which can be found at www.hgcapitaltrust.com. Management and administration HgCapital Trust plc 2 More London Riverside London SE1 2AP www.hgcapitaltrust.com Registered office (Registered in England No. 1525583) 2 More London Riverside London SE1 2AP Manager HgCapital*â€ 2 More London Riverside London SE1 2AP Telephone: 020 7089 7888 www.hgcapital.com Secretary and administrator Hg Pooled Management Limited* 2 More London Riverside London SE1 2AP Telephone: 020 7089 7888 www.hgcapital.com Stockbroker RBS Hoare Govett Limited* 250 Bishopsgate London EC2M 4AA Telephone: 020 7678 8000www.rbs.com/hoaregovett Custodian Hg Investment Managers Limited* 2 More London Riverside London SE1 2AP Registrar Computershare Investor Services plc* The Pavilions Bridgwater Road Bristol BS99 6ZY Telephone: 0870 702 0131 www-uk.computershare.com/investor Independent auditor Deloitte LLP 2 New Street Square London EC4A 3BZ AIC Association of Investment Companies www.theaic.co.uk LPEQ Listed Private Equity www.lpeq.com HgCapital Trust is a founder member of LPEQ (formerly iPEIT). LPEQ is a group of private equity investment trusts and similar vehicles listed on the London Stock Exchange and other major European stock markets, formed to raise awareness and increase understanding of what listed private equity is and how it enables all investors - not just institutions - to invest in private equity. LPEQ provides information on private equity in general, and the listed sector in particular, undertaking and publishing research and working to improve levels of knowledge about the asset class among investors and their advisers. *Authorised and regulated by the Financial Services Authority. â€ HgCapital is the trading name of Hg Pooled Management Limited and HgCapital LLP

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