Annual Financial Report

HgCapital Trust plc Final results for the year ended 31 December 2011 London, 16 March 2012: HgCapital Trust plc (the "Trust"), which provides investors with a listed vehicle to invest in all private equity deals managed by HgCapital, today announces its full year results for the year ended 31 December 2011. HGCAPITAL TRUST PLC CONTINUES TO DELIVER LONG TERM OUTPERFORMANCE Summary performance 31 December 31 December % % Total 2011 2010 Change return* Share price 970.0p 1,006.0p -3.6% -1.2% NAV per share (diluted) 1,069.3p 1,090.7p -2.0% +0.5% (basic) 1,089.9p 1,118.8p -2.6% -0.2% FTSE All-Share -3.5% Index Movement Net Asset Â£346.8m Â£348.0m -Â£1.2m Value * Assuming reinvestment of all dividends Financial Highlights * Sales and EBITDA growth from top 20 buyout investments of +13% and +10% respectively over last 12 months to 31 December 2011. * Valuation multiple of 10.2x EBITDA (Dec 10: 9.7x) and debt multiple of 4.0x EBITDA (Dec 10: 3.6x) as at 31 December 2011. * Total available liquid resources were Â£94m (27% of NAV) with outstanding commitments of Â£195m (56% of NAV). * +15.7% p.a. 10-year compound annual growth rate of the share price on a total return basis vs. 4.8% p.a. from the FTSE All-Share Index on a total return basis to 31 December 2011. Operational Highlights * Â£87m deployed over the period, principally in five new buyout investments. * Â£62m of cash proceeds from 2011 realisations; full exits achieved in aggregate at a 56% uplift to 31 December 2010 book value. * The Trust was chosen, for the seventh consecutive year, as Private Equity Investment Trust of the Year in the `Investment Week' awards. Events since 31 December 2011 * Proposed final dividend for the year of 10.0 pence per ordinary share to be paid on 10 May 2012, subject to shareholder approval. * NAV per share at 29 February 2012 was 1,080.2p (diluted) and 1,102.7p (basic); movement from December mainly due to foreign exchange fluctuations. Outlook * 80% of the balance sheet invested in buyouts of which c. 80% is in companies with a low exposure to the weak macro-economic cycle and only 20% is in companies where ratings and earnings are sensitive to the economy. * Market leading businesses, with low gearing in growth segments, well placed for platform builds. * Interest in a number of our businesses may result in successful realisations over the next 12 months. * New investment will continue to be highly selective by only investing in businesses that meet our thematic criteria and can be bought for value. * Owning a portfolio of quality companies run by talented managers should build significant shareholder value over the medium-term. Long Term Total Return Performance* 1 3 5 7 10 year years years years years % % % % % p.a. p.a. p.a. p.a. Ordinary share price (1.2) 16.4 8.6 14.2 15.7 Net asset value (diluted) 0.5 7.6 10.2 14.4 13.2 FTSE All-Share Index (3.5) 12.9 1.2 6.1 4.8 Share price outperformance p.a. against the FTSE 2.3 3.5 7.4 8.1 10.9 All Share Index * Assuming reinvestment of all dividends Roger Mountford, Chairman of the Trust, commented: "The Trust has protected shareholder value during a poor year in equity markets. The portfolio is trading well, the top 20 buyouts having delivered double digit revenue and profit growth over the year. The Trust continues to deliver long-term outperformance and offers the prospect of renewed growth in value for shareholders." The Trust's 2011 Annual Report and a webcast from the Manager to accompany the results are available to view at: http://www.hgcapitaltrust.com/. For further details: HgCapital Ian Armitage (Chairman, HgCapital) +44 (0)20 7089 7888 Roger Mountford (Chairman, HgCapital Trust +44 (0)7799 662601 plc) Maitland +44 (0)20 7379 5151 Rowan Brown George Hudson About HgCapital Trust plc HgCapital Trust plc is an investment trust whose shares are listed on the London Stock Exchange. The Trust gives investors exposure, through a liquid vehicle, to a portfolio of high-growth private companies, managed by HgCapital, an experienced and well-resourced private equity firm with a long-term track record of delivering superior risk-adjusted returns for its investors. For further details, see www.hgcapitaltrust.com and www.hgcapital.com HgCapital Trust plc Annual report and accounts 31 December 2011 HgCapital Trust plc announces that the annual report and accounts of the Trust for the year ended 31 December 2011 have been published. The full annual report and accounts can be accessed via the Trust's website at http://hgcapitaltrust.com/sites/default/files/HgT2011.pdf or by contacting the Trust's Registrar (Computershare Investor Services plc) on telephone number 0870 707 1037. In order to meet the disclosure requirements of DTR 6.3.5(2), this announcement includes certain extracts from the annual report below. Any references to page numbers, sections or notes in the following text are references to the annual report and accounts, which can be accessed via the Trust's website as noted above. The financial information set out below does not constitute the Company's statutory accounts for the years ended 31 December 2011 or 2010. Statutory accounts for 2010 have been delivered to the registrar of companies, and those for 2011 will be delivered in due course. The auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. References in the annual report and accounts and this announcement to HgCapital Trust plc have been abbreviated to `HgCapital Trust' or the `Trust'. HgCapital refers to the trading name of HgPooled Management Limited and HgCapital LLP, who act as the `Manager'. The objective of the Trust is to provide shareholders with long-term capital appreciation in excess of the FTSE All-Share Index by investing in unquoted companies. The Trust provides investors with exposure to a diversified portfolio of private equity investments primarily in the UK and Continental Europe. FINANCIAL HIGHLIGHTS 2011 PERFORMANCE MARKET CAPITALISATION Â£309 MILLION The ordinary share price fell from Â£10.06 to Â£9.70 over the year. A decrease (on a total return basis) of -1.2% NET ASSET VALUE (`NAV') Â£347 MILLION The NAV (diluted) per ordinary share fell from Â£10.91 to Â£10.69 over the year, following the payment of a 28p dividend. A total return performance of +0.5% CASH DEPLOYED Â£87 million - The amount of capital deployed in 2011, primarily in five new buyout investments. CASH REALISED Â£62 million - Cash realised in 2011, primarily from the sale of SLV and Mondo Minerals at an average uplift on book value on full realisations of 56%. LONG-TERM PERFORMANCE -â€‚10 YEAR TOTAL RETURNS COMPOUND ANNUAL GROWTH RATE 15.7% p.a. - The compound annual growth rate of the HgCapital Trust plc ordinary share price over the last 10 years. 10 YEAR RETURN ON Â£1,000 Â£4,289 - How much an investment of Â£1,000 made ten years ago in HgCapital Trust plc would now be worth.* An equivalent investment in the FTSE All-Share Index would be worth Â£1,595. *Assuming reinvestment of all dividends BALANCE SHEET ANALYSIS Â£347 million - The net assets of HgCapital Trust plc as at 31 December 2011. Â£94 million - The liquid resources available (including a Â£40 million undrawn bank facility) for deployment as at 31 December 2011 representing 27% of NAV. Â£195 million - The amount of outstanding commitments as at 31 December 2011 representing 56% of NAV. THE PORTFOLIO HgCapital Trust plc gives investors access to a private equity portfolio of currently 31 companies, run by an experienced and well-resourced Manager that makes investments in private companies across Northern Europe in the Healthcare, Industrials, Services and TMT sectors. An investment in HgCapital Trust plc primarily provides exposure to a portfolio of fast growing companies. The top 20 buyout investments currently account for nearly 87% of the portfolio value. These companies have aggregate revenues of Â£ 2.0 billion and profits of Â£480 million. In addition, the Trust has made a commitment to small-cap TMT deals, where it has many years of experience, through HgCapital's Mercury fund. Finally, it also holds investments in the Manager's two renewable energy funds. +13% p.a. revenue growth The average growth in revenues of the top 20 buyout investments over the last year. +10% p.a. profit growth The average growth in profits (EBITDA) of the top 20 buyout investments over the last year. 10.2x EV/EBITDA multiple The average valuation multiple used to value the top 20 buyout investments at 31 December 2011. 4.0x net debt/EBITDA The average net debt/EBITDA multiple of the top 20 buyout investments at 31 December 2011. CHAIRMAN'S STATEMENT With a portfolio of businesses that continue to trade well, the Trust has preserved value for shareholders in a year when equity markets have been weak and volatile. The Manager's active engagement with each of our businesses helps them to grow sales and profits, despite challenging macro-economic prospects. The year in review 2011 was a volatile and disappointing year for investors in equity markets, with the overall modest gains of the first half more than reversed in the second. Against a total return of -3.5% in the FTSE All-Share Index, the Trust's diluted NAV per share, after payment of a 28 pence dividend, was down only marginally at Â£10.69 (31 December 2010: Â£10.91, both fully diluted). After adjusting for movements in foreign exchange, the Trust's diluted NAV at 29 February 2012 had increased to Â£10.80. Share price performance At Â£9.70 (31 December 2010: Â£10.06) the Trust's ordinary share price was slightly lower at 31 December 2011 than a year before, a decrease on a total return basis (taking into account the dividend paid during the year) of -1.2%, reflecting a modest widening of the discount to diluted NAV. However, the Trust's shares continue to stand at a much smaller discount to NAV than those of its direct peers. The modest widening in discount has little impact on returns to a patient, long-term investor. The Trust's ten-year total return to shareholders was again more than 10% p.a. in excess of the FTSE All-Share Index. An investment of Â£ 1,000 made in the Trust ten years earlier, with dividends reinvested, would now have a value of Â£4,289, compared with Â£1,595 if invested in the FTSE All-Share Index. With the reduction in the remaining period for exercise of the Trust's subscription shares, and weak market conditions generally, their market price in the early part of the year was not sustained in the second half, closing in December 2011 at 53 pence. However, the price has increased by some 34% to 70 pence in the first two months of 2012. I remind shareholders that each subscription share entitles the holder to subscribe to one new ordinary share, on 31 May or 31 October 2012, or on the final exercise date of 31 May 2013. If exercised in 2012 the subscription price will be Â£9.50 per share; if exercised in 2013 the price will be Â£10.25. During 2011, 718,415 subscription shares, representing 12% of all subscription shares in issue, were exercised raising nearly Â£7 million. If all the remaining subscription shares are exercised it will raise new funds of between Â£52 million and Â£56 million for the Trust to deploy and will further enhance the liquidity of the market in the Trust's shares. Dividend The Trust is managed with the objective of achieving capital growth, not to deliver any target earnings or dividend. For the first time since 1994, earnings were negative in the year. This has been due to a number of factors, most notably from the relatively immature Hg6 vintage portfolio where income has not yet been recognised on all the investments, and the majority of the income recognised during the current year has been offset by the cumulative investment management costs, charged since 2009 on the Hg6 commitment made by the Trust. In addition, accrued income that had been recognised since March 2007 on our investment in Americana has required a provision through the Income Statement. Finally, in a low interest rate environment, negligible yield has been generated on our liquid resources which averaged Â£90 million in the year (26% of NAV). Taking account of the one-off nature of factors that depressed income in the year, the Board has decided to recommend that a dividend of 10.0 pence (2010: 28.0 pence) be paid. Portfolio Following a record year for investment in 2010, the Trust deployed Â£87 million in the year under review, including Â£70 million in five new acquisitions. Realisations generated proceeds of Â£62 million for the Trust. This included the sale of five companies that in aggregate were achieved at prices 56% above the valuations adopted in the Trust's accounts at 31 December 2010 and the sale of two residual holdings. Total realisations added some Â£20 million to NAV. This was partially offset by the unrealised revaluation of portfolio investments and accrued income, which reduced shareholder value by a net total of Â£7.5 million. The Manager's attribution analysis indicates that the growth in profits of the businesses in the Trust's buyout portfolio was more than offset by adverse movements in ratings. The effect of changes in the value of sterling against the currencies in which some investments are held was broadly neutral. Despite challenging economic conditions, during 2011 most of the companies making up the top 20 buyout investments continued to trade well. In aggregate, the top 20, representing 87% of the total portfolio value, grew revenues by 13% and EBITDA by 10%. The Manager monitors the trading of every portfolio company on a monthly basis and reports in detail on the latest trading figures to the Board of the Trust at every meeting. The Manager has continued to build the in-house resources available to work with the management of each business in the portfolio, to develop and implement strategic and operational change so as to assist in meeting the economic headwinds and increasing challenges in their markets. Executives of HgCapital's specialist teams act as board members of every investment, supporting management in setting the direction of the business, and where appropriate provide skilled hands-on support in implementing change, often drawing on the experience gained in earlier investments. The Board recognises this commitment to achieving strategic and operational improvement in the businesses acquired as the most important driver of value creation, which will be increasingly important in a low-growth environment with less use of leverage than in prior years. Corporate developments During the year we announced that the Board had agreed to co-invest up to Â£60 million alongside HgCapital's Mercury fund. This fund will invest exclusively in the TMT sector in the UK and Continental Europe, with a focus on smaller companies, with an enterprise value at acquisition of between Â£20 million and Â£ 80 million. This is the segment of the buyout market where HgCapital originally established itself as a successful investor. The Board is pleased to note that, although HgCapital has like other managers moved up in the scale of its activities and deals, it has not vacated this profitable segment of the market. For the first time, the Trust acquired a Â£15 million limited partnership interest in Hg6 from an investor in HgCapital funds who decided to withdraw entirely from investment in private equity. The transaction comprised a payment of Â£7.8 million for funds already invested, with the balance by way of investment in future deals. The acquisition from other investors of interests in funds managed by HgCapital, with which the Trust's Board is of course very familiar, represents a further means to optimise the deployment of the Trust's resources. The Board may from time to time make further such acquisitions, or indeed might sell an interest, if this were appropriate in the strategic management of the Trust. In parallel with these new deployments of the Trust's resources, the Board decided to gain further flexibility in managing its cash flows by arranging a facility with its bankers. The Trust now has in place a Â£40 million three-year standby facility with Lloyds TSB Bank plc, on an unsecured basis. Reporting Over several years we have continually sought to improve the transparency and clarity of our reporting. In the annual report we describe in some detail all the top 20 companies we own and last year we introduced into our report a case study of one investment, to describe its history throughout the period of ownership by HgCapital. Another case study is set out in the annual report, and a library of these case studies is available at www.hgcapitaltrust.com. Late in 2011 we achieved a further advance in enhancing the Trust's reporting, with a complete redesign of the Trust's website, www.hgcapitaltrust.com, which we hope investors and analysts will find useful. In line with this policy of transparency, the Manager also publishes a pre-close statement on its website just prior to the half-year and year-end dates. Prospects The Trust began 2012 with a relatively young portfolio and less exposure to cyclical businesses than before. The geographic balance of the buyout portfolio has shifted back towards the UK, with a smaller portfolio focused on northern Europe and Germany, and one investment in Italy. At 31 December the Trust held some Â£54 million in cash and liquid resources and had access to a Â£40 million undrawn bank facility. The prospects for all forms of equity investment are vulnerable, of course, to instability in European economies and low economic growth. However, a number of our businesses are attracting interest that may result in successful realisations in the next twelve months. The Trust's portfolio appears well positioned and, with the Manager's commitment to active engagement with the businesses we own, the Board considers that the Trust offers an attractive investment opportunity. As a listed investment trust, HgCapital Trust provides an attractive vehicle for investors to gain access to private equity. I am pleased to report that, in the Investment Week awards, the Trust was again chosen, for the seventh consecutive year, as Private Equity Investment Trust of the Year. Roger Mountford Chairman 15 March 2012 MANAGER'S REVIEW OF THE YEAR Summary In 2011 the diluted NAV per share increased by 0.5% on a total return basis and the total share price return declined by 1.2%. This static picture fails to reflect significant activity in buying and selling assets as well as in the necessary work to build companies which we believe, after taking account of setbacks some have experienced, will be rewarded in future periods. New investment activity, whilst lower than in 2010, a record year, included five new buyouts following three well established HgCapital investment themes. In total, we invested Â£521 million, including Â£87.1 million for the Trust. The above mentioned new investments were: ATC, a Dutch fiduciary business; Mainio Vire, a Finnish care home operator; the public-to-private acquisition of Group NBT plc, a provider of internet domain name management; IAS, the UK's leading provider of application software for accountants; and ISG, a provider of software for lawyers and for charities. In total, realisations produced Â£442 million, of which the Trust's share amounted to Â£62.4 million. The full realisations produced a 56% uplift over the December 2010 book value, the largest being the sale of SLV discussed as a case study in the annual report, which produced cash proceeds of Â£24.2 million for the Trust. The next most significant was the sale of Mondo Minerals, a talc mining operation, where the Trust's share of proceeds was Â£13.0 million. Elite contributed Â£9.4 million, with the balance of Â£7.3 million coming from the sale of smaller and residual holdings in companies and Â£8.5 million from the re-financing of recent buyouts with new debt facilities, improving the capital efficiency of these businesses. Our top 20 investments, which represent 87% of the portfolio value, grew solidly during the year, recording average growth in revenue and EBITDA of over 13% and 10% respectively. Our renewable power generating assets, which represent 7% of the portfolio value, generated cash, repaid debt and recorded growing earnings. At the year-end, the Trust had available liquid resources (including a debt facility of Â£40 million) of Â£94 million. Outstanding commitments to HgCapital funds amounted to Â£195 million. Performance Share price performance over the year has been marginally negative, albeit outperforming public markets again. It is our belief that listed private equity funds are better measured over periods of three, five and ten years consistent with the long-term nature of private equity investment in generating returns for clients. Over three years, the share price of the Trust (on a total return basis) has out-performed the FTSE All-Share Index by 3.5% p.a., over five years by 7.4% p.a., and over ten years by 10.9% p.a., net of all costs. Â£1,000 invested in December 2001 would be worth Â£1,595 in December 2011 if invested in the FTSE All-Share Index and Â£4,289 if invested in the Trust. As for 2011, the total return to shareholders was -1.2%, which compared with -3.5% for the FTSE All-Share Index. The growth in NAV per share is a lead indicator and driver of share price performance over the long run; during the year it rose modestly by 0.5% (total return on a diluted basis). Gains made at the half year were driven primarily by realisations in the first half of 2011 delivering cash proceeds in excess of the 31 December 2010 book value; these were eroded in the second half of the year due to mark downs in the buyout portfolio. This unrealised depreciation is mostly due to falling ratings and in a few cases declining earnings (see below). TOTAL RETURN* OUTPERFORMANCE AGAINST THE FTSE ALL SHARE INDEX FTSE All-Share Index HgCapital Trust plc % per Current value of Â£1,000 % per Current value of Â£1,000 year invested at the year invested at the beginning beginning of the period of the period with with reinvestment of reinvestment of dividends dividends 1 year (3.5) Â£965 (1.2) Â£988 3 years 12.9 Â£1,438 16.4 Â£1,579 5 years 1.2 Â£1,062 8.6 Â£1,513 7 years 6.1 Â£1,513 14.2 Â£2,526 10 year 4.8 Â£1,595 15.7 Â£4,289 *Total return assumes all dividends have been reinvested. Trading performance The top 20 companies, which represent 87% of the total portfolio value, grew revenues by 13% and EBITDA by 10% during the year: a healthy growth rate but slower than 2010 when the top 20 grew EBITDA at 16%. A backdrop of a slowing economy partially explains this reduction in rates of growth. The balance may be attributed to some companies investing in their business in advance of delivering revenues from new products and markets. These additional expenditures also partially explain revenue growth out-stripping profit growth. However, it is clear that tougher market conditions have limited the ability of some companies to raise prices in line with costs, particularly those in the long-term care sector and in consumer-facing businesses. Average net margins of 24%, healthy growth rates and good market positions indicate that these companies have, for the most part, been robust. They are managed by talented managers, who are very committed, with every manager having a significant part of their net worth invested in the companies they run. The tables below show the revenues and earnings for the last twelve months to 31 December 2011 for the top 20 buyout portfolio companies, expressed in growth bands. Over half of the portfolio by value has seen profits grow by more than 10%. 15% of portfolio companies by value have seen a decline in profits in the year. Our portfolio companies are exposed to comfortable levels of gearing (see below). The average gearing in the top 20 is 4.0x EBITDA. We have taken advantage of the highly predictable earnings and free cash flows generated by some businesses (IAS, Group NBT, TeamSystem, JLA, Voyage and Manx Telecom) to use cheap debt to gear our returns. In others, such as Achilles, Epyx, SHL and Goldshield, the balance sheets are under-geared and the companies have the financial flexibility to make acquisitions, expand more aggressively or to refinance and return capital. In addition, during the year, we took the opportunity to refinance both Lumesse and SimonsVoss, where both investments were initially completed on an all equity basis. TOP 20 LAST TWELVE MONTHS (`LTM') SALES GROWTH Exposure to Â£2.0 billion of sales that have grown on average at 13% over the last 12 months to December 2011 Sales growth bands LTM Sales Number of % of top 20 investments portfolio by Â£' million within value within associated associated band band (13%) - (5%) pa 119 2 7% (5%) - 0% pa 153 2 5% 0% - 10% pa 374 5 26% 10% - 15% pa 312 3 25% >15% pa 1,037 8 37% TOP 20 LAST TWELVE MONTHS (`LTM') PROFIT GROWTH Exposure to Â£480 million of EBITDA that have grown on average at 10% over the last 12 months to December 2011 EBITDA growth bands LTM EBITDA Number of % of top 20 investments portfolio by Â£' million within value within associated associated band band (38%) - (15%) pa 7 1 1% (15%) - (10%) pa 31 2 7% (10%) - 0% pa 76 3 7% 0% - 10% pa 99 4 30% 10% - 20% pa 150 3 21% >20% pa 117 7 34% Valuation and Concentration Analysis The portfolio is valued consistently from year to year, applying the IPEV Valuation Guidelines. Our valuation of each company has produced an average EBITDA multiple for the top 20 buyout investments of 10.2x. We continue to take a considered and prudent approach in determining the level of maintainable earnings to use in each investment valuation. Where companies have a December year end and we are confident that they will continue to see growth in 2012, we have used full year earnings for 2011 to derive the value. Where we anticipate future earnings for companies to be below 2011 levels we have used the lower forecast figure. In selecting an appropriate multiple to apply to the company's earnings, we look for a basket of comparable companies primarily from the quoted sector, but where relevant and recent, we will also use private M&A data. During the course of the year, strong profit growth and cash generation in a number of businesses within the portfolio has led to an increase in their value, most notably SHL, ATC, Goldshield, Epyx and Achilles. At Teufel and SPIN, planned expenditure, designed to grow earnings in subsequent years, has reduced profits. At Americana and Schleich, softer consumer demand has taken its toll on earnings. At Mainio Vire, we paid a premium price to buy the business and acquire a platform for growth. To date, we haven't completed any acquisitions and have therefore written the holding value down. At FrÃ¶sunda, poor execution of an acquisition programme has reduced the equity value. Fair value classification* 58% Earnings 16% Price of recent investment 15% Written down 10% Net assets 1% Other * Percentages are based on fixed assets (excluding hedges) and accrued interest and are shown by value TOP 20 DEBT TO EBITDA RATIO Average debt ratio of the top 20 buyout investments of 4.0x Debt to EBITDA bands Number of % of top 20 investments portfolio by within value within Debt associated associated Â£' million band band (1.0)x - 0x (3) 1 3% 0x - 2.0x 97 4 25% 2.0x - 3.0x 87 2 8% 3.0x - 4.0x 211 4 17% 4.0x - 5.0x 745 5 22% 5.0x - 6.0x 359 2 13% 6.0x - 7.0x 464 2 12% TOP 20 EV TO EBITDA VALUATION MULTIPLE Average ratings multiple of 10.2x EV to EBITDA bands Number of % of top 20 investments portfolio by within value within Debt associated associated Â£' million band band 6.0x - 7.0x 99 5 16% 7.0x - 10.0x 121 6 22% 10.0x - 12.0x 156 4 23% 12.0x - 15.0x 94 3 27% 15.0x - 16.0x 22 2 12% Balance sheet Over the course of 2011, the net assets of the Trust decreased by Â£1.2 million (0.3%) from Â£348.0 million to Â£346.8 million at the year end. During the year we continued to put money to work, so that 85% of net assets were invested as at 31 December 2011, up from 74% last year. ATTRIBUTION ANALYSIS OF CURRENT YEAR MOVEMENTS IN NAV Revenue return Capital return Total return Opening NAV as at 1 January 2011 19,371 328,622 347,993 Dividend paid (8,709) - (8,709) Proceeds from exercise of - 6,825 6,825 subscription shares Gross revenue 17,159 - 17,159 Government securities realised and - (329) (329) unrealised net losses Realised capital proceeds from - 16,528 16,528 investment portfolio in excess of 31 December 2010 book value Net unrealised capital - (20,769) (20,769) depreciation of investment portfolio Expenditure and taxation (2,597) - (2,597) Investment management costs: Priority profit share - current (7,190) - (7,190) year charge Priority profit share - net loan (8,017) 8,017 - recovery Carried interest - (2,079) (2,079) Closing NAV as at 31 December 2011 10,017 336,815 346,832 REALISED AND UNREALISED MOVEMENTS IN INVESTMENT PORTFOLIO (INCLUDING INTEREST) FOR THE YEAR ENDED 31 DECEMBER 2011 Investment name and Net unrealised Realised proceeds in ranking within investment appreciation/ excess of 31 December 2010 portfolio at 31 December (depreciation)of book value (includes gross 2011 investments revenue) SLV (sold) - 9.6 SHL (4) 6.8 - ATC (9) 4.4 - Elite (sold) - 4.3 Goldshield (7) 4.0 - Other 2.0 1.5 Epyx (10) 2.9 - Mondo (sold) - 2.4 RPP1 and RPP2 2.4 - IRIS and CSG (sold) - 1.8 Achilles (8) 1.6 - Cornish Bakehouse (sold) - 0.7 Atlas (23) (2.2) - JLA (12) (2.4) - Teufel (17) (3.2) - SPIN (20) (3.9) - Mainio Vire (14) (4.7) - Americana (24) (6.5) - FrÃ¶sunda (16) (8.7) - ANALYSIS OF NAV MOVEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 Over the course of the year, the NAV of the Trust decreased by 0.3% from Â£348.0 million to Â£346.8 million. There were a number of underlying factors contributing to the movement in the NAV. Positive impacts on the NAV were: the exercise of 12% of the subscription shares in issue (+Â£6.8 million); income net of expenses from the underlying portfolio and gilts (+Â£14.2 million); and uplifts on the realisation of investments compared to their carrying value at the start of the year (+Â£16.5 million). Reductions in the NAV were caused by: the payment of a dividend to shareholders (-Â£8.7 million); the Manager's remuneration totalling Â£9.3 million for both the annual management of the portfolio (-Â£7.2 million) and long term performance incentives (-Â£2.1 million); and the movement in value of the unrealised portfolio (-Â£20.8 million). ATTRIBUTION ANALYSIS OF UNREALISED MOVEMENTS IN THE INVESTMENT PORTFOLIO (INCLUDING ACCRUED INTEREST MOVEMENT OF Â£4.3 MILLION) FOR THE YEAR ENDED 31 DECEMBER 2011 During the period, the value of the unrealised portfolio increased by Â£37.5 million. This change can be attributed primarily to the following factors: net investment activity (+Â£45.0 million); profit growth in the underlying portfolio (+Â£18.5 million); and a decrease in ratings during the year on those assets not held at cost (-Â£20.9 million). In July the Trust took the opportunity to increase its exposure to the HgCapital 6 vintage investments by acquiring a secondary fund interest commitment of Â£15million in HgCapital 6 E LP. In addition, a commitment of Â£60 million was made to the Manager's new Mercury Fund, specialising in TMT investments in the Â£20-Â£80 million Enterprise Value range. The year ended with available liquid resources totalling Â£94 million (comprising Â£54 million of cash and government securities and a Â£40 million undrawn standby bank facility), which compares with outstanding but undrawn commitments of Â£195 million on Hg5, Hg6, RPP1, RPP2 and Mercury. Total outstanding commitments less available liquid resources represent 29% of NAV (35% at 31 December 2010). OUTSTANDING COMMITMENTS OF THE TRUST Fund Vintage Original Outstanding Outstanding commitment commitments as at commitments as at Â£'million 31 December 2011 31 December 2010 Â£ % of NAV Â£ % of NAV 'million 'million HGT pre-2009 120.0 17.1 4.9% 22.3 6.4% HGT 6(1) 2009 285.0 85.9 24.8% 155.9 44.8% HgCapital 6 E LP(2) 2009 15.0 4.7 1.4% - - Mercury 2011 60.0 59.0 17.0% - - RPP LP 2006 18.1(3) 1.2 0.3% 1.8 0.5% RPP2 C LP 2010 33.4(4) 27.2 7.8% 32.0 9.2% Total outstanding 195.1 56.2% 212.0 60.9% commitments Liquid resources 53.5 15.4% 90.2 25.9% Bank facility 40.0 11.5% - - Total available liquid 93.5 26.9% 90.2 25.9% resources Net outstanding 101.6 29.3% 121.8 35.0% commitments less available liquid resources 1 HgCapital Trust plc has the benefit of an investment opt-out provision in its commitment to invest alongside HgCapital 6, so that it can opt out of a new investment without penalty should it not have the cash available to invest. 2 Partnership interest acquired during 2011. 3 Sterling equivalent of â‚¬21.6m. 4 Sterling equivalent of â‚¬40.0m Portfolio of Investments The Trust's strategy is to invest in five sectors, four of them by way of buyouts of businesses (representing 93% of the portfolio by value at year-end). Investment in the fifth sector, renewable power generation (7%), is made into projects through RPP1 and RPP2. Buyout portfolio As at 31 December 2011, the Trust's buyout portfolio comprised 31 investments including a small number of residual interests in companies we had sold, which were mostly valued at, or close to, zero. The Trust held investments, included above, which had performed poorly and been written down to zero in previous periods. This report covers only those companies with value. TMT represented 57% of the primary buyout portfolio (42% at 31 December 2010). The majority of this value was represented by companies that are all users of technology, rather than developers of technology with the associated frequent challenges of new product development. The common themes that run through each one are highly visible revenues, strong market positions and strong cash conversion that permits debt repayment, whilst the businesses expand and grow. Achilles and Epyx, two electronic market place investments, continue to grow strongly, delivering double digit growth year on year. Visma and TeamSystem are both providers of business software and services to small and medium sized enterprises in the Nordic region and Italy respectively. Both benefit from high recurring revenues, a very large and diversified customer base and they continue to grow through a combination of organic growth and acquisitions. Manx Telecom is the incumbent integrated fixed and mobile telecom operator on the Isle of Man. It has generated cash ahead of expectation, reducing its debt each year. Three new investments were made in this sector during the year, representing nearly 16% of the overall portfolio value: IAS, the number one provider of core application software to the UK Accountancy Practice market; ISG, a software provider to the UK's legal and not-for-profit sectors; and Group NBT, an internet domain name manager and online brand protection service provider. Services investments represented 18% of the primary buyout portfolio (11% at 31 December 2010). Following the merger with PreVisor at the beginning of the year, SHL, the global leader in psychometric assessment services, has delivered strong double digit revenue and profit growth. SHL benefited from the successful completion of an ambitious restructuring exercise which cut costs, increased productivity and accelerated innovation and sales growth. ATC, a new investment in early 2011, has delivered a strong trading performance in 2011 with double digit profit growth and strong cash generation. JLA, a provider of equipment, finance and maintenance to laundries had a disappointing 2011, recording a flat level of profits compared with 2010. There are signs that a new management team has improved performance with profits growing in the second half of the year. Healthcare represented 14% of the primary buyout portfolio (14% at 31 December 2010). We are invested in two areas: long-term care where the payer risks are low, with a preference for specialist care of people with acute disabilities; and low cost pharmaceuticals. Sector by value of primary buyout portfolio1 57% TMT 18% Services 14% Healthcare 7% Industrials 4% Consumer & Leisure Deal type by value(1) 93% Buyout 7% Renewable Energy Sector by class(2) 86% Unquoted 14% Cash & other assets 1 Percentages are based on fixed assets (excluding hedges) and accrued interest and are shown by value 2 Percentages are based on net assets We own long-term care assets in the UK, Germany, Sweden and Finland. In the UK, the Government's fiscal consolidation translates into a reduction in fees that local authorities and social services will pay for care. This resulted in a squeeze on margins and therefore ratings across the sector have fallen to historic lows. Voyage, which has a more defensible business model, has managed to maintain profits and repay debt; however, low ratings have taken their toll on our book value. In Germany, labour shortages have increased labour cost and squeezed margins. Casa Reha has maintained earnings through expanding its estate. At FrÃ¶sunda, based in Sweden, a poorly executed acquisition programme, which coincided with an operational improvement project, damaged margins and revenues, leading to a reduction in the holding value. Our Finnish investment, Mainio Vire, has traded to plan, although a significant bolt-on acquisition, lined up when we completed this investment, was not concluded. Accordingly, the premium paid to obtain this platform company has not been recouped from expected synergies arising from the further acquisition. We have therefore marked our investment down and written off this premium completely. Goldshield, a pharmaceutical company, continued to grow its core business after selling, as planned, a weak and declining consumer business. It has seen earnings rise and debt reduce rapidly; it is now well placed to make acquisitions and/or commence paying dividends. Industrials represented 7% of the primary buyout portfolio (18% at 31 December 2010). Here, the common theme is that we are backing companies that own and develop high quality products based on technologically advanced German design but manufactured in low cost locations. During 2011 we realised both SLV and Mondo at healthy uplifts to their carrying values and delivered overall investment returns on these investments of 4.0x and 2.1x original cost respectively. No new investments were made in this sector during the year. SimonsVoss, the German developer and manufacturer of digital battery powered locking and access control systems, grew very strongly in 2011 and enjoyed record levels of order intakes. New product innovation is being positively received by customers and the company is now focusing on expanding into adjacent countries. Finally, our legacy Consumer and Leisure portfolio represented 4% of the primary buyout portfolio (9% at 31 December 2010). 2011 proved to be a difficult trading environment for businesses exposed to the consumer and as a result we have seen a significant deterioration in the trading of Americana, which designs and sells branded clothing. Schleich, which designs and markets toy figurines, has also seen a small decline in year-on-year trading results. Sporting Index, a sports spread betting firm, experienced volume and profits decline in 2011, compared with 2010 which benefited from the Football World Cup. The scale of this event distorted year-on-year trading comparison, as do the current year costs of developing a new trading platform. Renewable energy The Trust invests in renewable energy through RPP1 and RPP2, two UK funds managed by our dedicated team of seven specialists. The underlying portfolios are divided into four platforms: UK Onshore Wind, Swedish Onshore Wind, Spanish Mini-Hydro and Spanish Solar. The assets are split into onshore wind at 63% of value, mini-hydro at 9% and solar at 28% of value. All use proven and commercially viable technologies within the framework of current power price regimes across Europe. Each of the platform's operating performance continues to be in line with our investment case since inception. The investment case for power generation remains positive as Western Europe faces both a huge need to re-equip its creaking power infrastructure and to reduce its CO2 emissions. Mercury The Trust has made a Â£60 million commitment to the Manager's new Mercury Fund, specialising in TMT investments with an Enterprise Value of between Â£20 and Â£80 million. This is an area where the Manager has historically made many profitable investments and has now set up a dedicated team focused on this niche. This dedicated fund is intended to target smaller buyouts in the same thematic TMT sub-sectors but with significant incremental resources added to the existing HgCapital sector team. The addition of Mercury alongside the existing TMT team further reinforces the scale and capability of HgCapital within this sector. Geography and vintage analysis At 31 December 2011 the geographical weighting of the total primary buyout portfolio had moved towards the UK, (up from 45% in December 2010 to 60%) and away from Germany (down from 18% in December 2010 to 9%) and the Nordic and Benelux regions (down from 22% in December 2010 to 21%). Our largest investment in the portfolio, TeamSystem, is based in Italy and accounts for about 10% of the primary buyout portfolio value. Clearly we are exposed to developments in each of these economies but also exposed to growth sectors and to the global economy too, as many of the companies within the portfolio are exporters. Prospects We saw a marked downturn in leading indicators and activity across Western Europe in the second half of 2011 and we believe that this will continue into 2012. A weakened global financial system, exposed in Europe to sovereign debt defaults, presents challenges for business and for investors. Our current expectation is that in 2012 our energies will be directed towards enhancing the value of our portfolio; making earnings enhancing acquisitions where appropriate and exploiting the strong competitive positions most of our companies have in order to gain market share. In addition, we have businesses in our portfolio that have navigated the downturn and implemented change programmes which have improved their earnings and competitive capabilities. In these cases, we will sell if we can secure attractive prices. New investment will occur, where we can secure a business that fits our thematic criteria and which can be bought for value. Our portfolio of buyouts continues to grow profits and revenues at healthy rates, even in a slowing economy. They tend not to be over exposed to cyclical trends in demand. Most, if not all, provide products or services which are differentiated, valued by and in some cases vital to their customers. Consequently, they earn healthy net margins and generate cash. Each business will continue to take measured risks in making investments to improve the pace of growth or quality of earnings, so that we can secure premium ratings on exit. Geographic spread by value of primary buyout portfolio* 60% UK 15% Nordic Region 10% Italy 9% Germany 6% Benelux Vintage by value of primary buyout portfolio* 26% 2011 32% 2010 11% 2009 7% 2008 24% pre 2008 *Percentages are based on fixed assets (excluding hedges) and accrued interest and are shown by value INVESTMENTS - Â£87 million invested in 2011 Five new primary buyout investments were made with a total enterprise value of Â£948 million, using Â£463 million (Â£521 million invested in total) of equity from our clients, with the Trust's share being Â£69.5 million. In each case, we have applied the knowledge acquired in our research into various investment themes: compliance and mission critical services; and long-term acute care. In addition, Â£17.6 million was provided to existing investments; Â£10.2 million of which was a secondary fund commitment, increasing the Trust's exposure to the HgCapital 6 fund. In the renewable power business, two new investments with total project values of Â£155 million required Â£71 million of equity from RPP2 and RPP 1. The Trust's share of these new investments, other further investments and their share of fees payable via the fund was Â£4.7 million. INVESTMENTS MADE DURING THE YEAR* Company Sector Geography Activity Deal Cost type Â£'000 IAS TMT UK Accountancy software Buyout 25,598 Group NBT TMT UK Domain name management Buyout 16,623 Mainio Vire Healthcare Nordic Specialist disability Buyout 12,330 Region care ATC Services Benelux Fiduciary management and Buyout 9,913 administration services SG TMT UK Provider of business Buyout 5,058 software New investments 69,522 HgCapital 6 E Fund UK Secondary interest in Fund 10,207 LP mid-cap buyout fund RPP2 Fund Renewable Europe Renewable energy fund Fund 4,110 energy Lumesse TMT UK Strategic HR software Buyout 1,509 JLA Services UK On-premise laundry Buyout 751 services and commercial machine sales RPP1 Fund Renewable Europe Renewable energy fund Fund 568 energy Sporting Index Consumer UK Sports spread betting Buyout 332 & Leisure firm Other 102 investments Further 17,579 investments Total 87,101 investment by the Trust *The numbers in the table relate to the Trust's share of transactions REALISATIONS Realisations of seven investments for Â£52 million at a 56% uplift over book value in December 2010 Two investments, SLV, a B2B lighting business, and SiTel Semiconductor (held under Elite), a designer of application-specific microprocessors for voice applications, were realised in the first half of 2011. Together, they returned Â£241 million of proceeds for our clients, the Trust's share being Â£33.6 million, resulting in an average life to date multiple of cost of 2.9x and a combined uplift over book value, at 31 December 2010, of 71%. In addition, the investment in Fabory, the Dutch industrial fasteners distributor, was restructured into a new holding company, in which HgCapital clients now only have a 3% equity holding, valued at nil. During July 2011, we completed the sale of Cornish Bakehouse, returning Â£0.7 million of proceeds to the Trust. This investment was previously fully written-off. In October 2011, Mondo Minerals, a talc mining company was sold, initially realising cash proceeds of Â£12.7 million with a further Â£0.3 million received in December. Further proceeds, which are currently valued at Â£2.0 million, are expected over the next two years. This represents a 2.1x return on an original cost of Â£7 million. REALISATIONS MADE DURING THE YEAR(1) Company Sector Exit Route Current Cost Proceeds(2) Cumulative year Â£'000 Â£'000 gain/ gain/ (loss)(3) (loss)(4) Â£'000 Â£'000 SLV Industrials Secondary sale 5,999 24,170 18,171 9,638 Mondo Industrials Secondary sale 6,987 13,043 6,056 2,422 Minerals Elite TMT Trade sale 3,540 9,441 5,901 4,325 Software TMT Secondary sale 530 3,420 2,890 1,197 (Cayman)- re Blue Minerva Software TMT Secondary sale 253 1,585 1,332 554 (Cayman) - re Guildford Cornish Consumer & Trade sale 4,200 672 (3,528) 672 Bakehouse Leisure Fabory Industrials Transfer for 7,474 - (7,474) - no value Full 28,983 52,331 23,348 18,808 realisations Lumesse TMT Refinancing 5,035 5,601 566 625 SimonsVoss Industrials Refinancing 2,164 2,940 776 713 Other 2,824 1,560 (1,264) 132 Partial 10,023 10,101 78 1,470 realisations Total 39,006 62,432 23,426 20,278 realisations 1 The numbers in the table relate to the Trust's share of transactions 2 Includes gross revenue received during the year 3 Realised proceeds including gross revenue received, in excess of historic cost 4 Realised proceeds including gross revenue received, in excess of 31 December 2010 book value and accrued interest INVESTMENT PORTFOLIO THE TOP 20 PRIMARY BUYOUT INVESTMENTS ACCOUNT FOR 87% OF THE PORTFOLIO BY VALUE Primary buyout Sector Location Year of Residual Total Portfolio Cum. investments investment Cost valuation value value Â£'000 Â£'000(1) % % (in order of value) 1 TeamSystem Holdco TMT Italy 2010 24,432 25,671 8.7% 8.7% SARL 2 IAS Guernsey Limited TMT UK 2011 25,598 25,598 8.6% 17.3% 3 Visma Norway Holdco TMT Nordic 2006 701 23,156 7.8% 25.1% Region 4 SHL Group Holdings 1 Services UK 2006 7,991 21,078 7.1% 32.2% Limited 5 Group NBT Limited TMT UK 2011 16,623 16,623 5.6% 37.8% 6 Lumesse Holdings TMT UK 2010 15,790 16,251 5.5% 43.3% SARL 7 Goldshield Equityco Healthcare UK 2009 8,545 16,007 5.4% 48.7% SARL 8 Achilles Group TMT UK 2008 5,226 14,418 4.9% 53.6% Holdings Limited 9 ATC Holdco SARL Services Benelux 2011 9,913 14,269 4.8% 58.4% 10 Epyx Investments TMT UK 2009 6,388 12,273 4.1% 62.5% Limited 11 Manx Telecom Limited TMT UK 2010 11,033 11,436 3.9% 66.4% 12 JLA Equityco Limited Services UK 2010 12,227 9,814 3.3% 69.7% 13 SimonsVoss Luxco Industrials Germany 2010 7,901 8,824 3.0% 72.7% SARL 14 Mainio Vire SARL Healthcare Nordic 2011 12,330 7,627 2.6% 75.3% Region 15 Schleich Luxembourg Consumer & Germany 2006 4,650 6,801 2.3% 77.6% SARL Leisure 16 FrÃ¶sunda Luxco SARL Healthcare Nordic 2010 14,296 6,692 2.3% 79.9% Region 17 Teufel Holdco SARL Industrials Germany 2010 9,428 6,449 2.2% 82.1% 18 Voyage Holdings Healthcare UK 2006 13,136 5,729 1.9% 84.0% Limited 19 ISG Bidco Limited TMT UK 2011 5,058 5,058 1.7% 85.7% 20 Sporting Index Group Consumer & UK 2005 6,503 2,777 0.9% 86.6% Holdings Limited Leisure 21 Casa Reha SARL Healthcare Germany 2008 8,296 2,235 0.8% 87.4% 22 Mondo Minerals Co-op Industrials Nordic 2007 - 2,003 0.7% 88.1% Region 23 Atlas Energy Group Services UK 2007 9,597 1,856 0.6% 88.7% Limited 24 Americana Consumer & UK 2007 4,625 1,430 0.5% 89.2% International Leisure Holdings Limited 25 Weston Presidio Fund North 1998 1,723 588 0.2% 89.4% Capital III, L.P. America 26 KVT Co-invest Sarl Industrials Switzerland 2008 5,829 523 0.2% 89.6% 27 Tiger Capital TMT UK 2008 632 417 0.1% 89.7% Limited 28 Elite Holding SA TMT Benelux 2005 - 254 - 89.7% 29 ACT Venture Capital Fund Ireland 1994 27 26 - 89.7% Limited 30 W.E.T Holding Industrials Germany 2003 7,775 - - 89.7% (Luxembourg) SA 31 BMFGH II BV Services Benelux 2007 - - - 89.7% Hg5 Euro Hedge n/a n/a n/a - (52) - 89.7% Total primary buyout 256,273 265,831 89.7% investments(2) Secondary buyout investments 1 HgCapital 6 E LP Fund UK 2011 10,087 9,444 3.2% 92.9% Total buyout 266,360 275,275 92.9% investments Renewable energy investments 1 RPP1 Fund Renewable Europe 2006 14,975 15,806 5.3% 98.3% energy 2 RPP2 Fund Renewable Europe 2010 6,424 5,202(3) 1.8% 100.0% energy Total renewable 21,399 21,008 7.1% energy investments Total all 287,759 296,283 100.0% investments (34) 1 Including investment valuation of Â£265,421,000 and accrued interest of Â£ 30,862,000. 2 Buyout investments are held through the Trust's investment in HGT LP and HGT 6 LP. 3 Reflecting the draw down of fees and fund establishment expenses in the early phase of the fund. FINANCIAL STATEMENTS INCOME STATEMENT for the year ended 31 December 2011 Note Revenue return Capital return Total return 2011 2010 2011 2010 2011 2010 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 (Losses)/gains on investments 13 - - (6,649) 63,529 (6,649) 63,529 and government securities Gains/(losses) on loans 5(b) - - 8,017 (4,199) 8,017 (4,199) recoverable from priority profit share due to General Partners Net income 4 1,952 12,165 - - 1,952 12,165 Other expenses 6 (2,597) (2,062) - - (2,597) (2,062) Net return on ordinary (645) 10,103 1,368 59,330 723 69,433 activities before taxation Taxation on ordinary 9(a) - (50) - - - (50) activities Net return on ordinary (645) 10,053 1,368 59,330 723 69,383 activities after taxation attributable to reserves Return per Ordinary share 10(a) (2.05p) 34.02p 4.34p 200.77p 2.29p 234.79p The total return column of this statement represents the Trust'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 21 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. BALANCE SHEET as at 31 December 2011 Note 2011 2010 Â£'000 Â£'000 Fixed assets Investments held at fair value Unquoted at Directors' valuation 265,421 232,184 Total fixed assets 12 265,421 232,184 Current assets -amounts receivable after one year Accrued income on fixed assets 14 30,862 26,606 Current assets -amounts receivable within one year Debtors 14 618 1,826 Government securities 15 48,497 86,498 Cash 16 4,476 3,473 Total current assets 84,453 118,403 Creditors - amounts falling due within 17 (3,042) (2,594) one year Net current assets 81,411 115,809 Net assets 346,832 347,993 Capital and reserves Called up share capital 20 8,011 7,838 Share premium account 21 68,096 61,444 Capital redemption reserve 21 1,248 1,248 Capital reserve - realised 21 282,934 274,913 Capital reserve - unrealised 21 (23,474) (16,821) Revenue reserve 21 10,017 19,371 Total equity shareholders' funds 346,832 347,993 Basic net asset value per Ordinary 10 1,089.9p 1,118.8p share Diluted net asset value per Ordinary 10 1,069.3p 1,090.7p share Ordinary shares in issue at 31 December 31,822,330 31,103,915 The financial statements were approved and authorised for issue by the Board of Directors on 15 March 2012 and signed on its behalf by: Roger Mountford, Chairman Richard Brooman, Director CASH FLOW STATEMENT for the year ended 31 December 2011 Note 2011 2010 Â£'000 Â£'000 Net cash inflow from operating activities 7 3,759 4,311 Taxation received/(paid) 1,590 (10) Capital expenditure and financial investment Purchase of fixed asset investments 12 (87,101) (111,418) Proceeds from the sale of fixed asset 12 49,623 72,600 investments Net cash outflow from capital expenditure and (37,478) (38,818) financial investment Financing activities Proceeds from issue of share capital 6,825 50,000 Fees paid on issue of share capital - (1,137) Equity dividends paid 11 (8,709) (6,297) Net cash (outflow)/inflow from financing (1,884) 42,566 activities Net cash (outflow)/inflow before management (34,013) 8,049 of liquid resources Management of liquid resources Purchase of government securities 15 (117,127) (205,535) Sale/redemption of government securities 15 152,143 198,086 Net cash inflow/(outflow) from management of 35,016 (7,449) liquid resources Increase in cash and cash equivalents in the 16 1,003 600 year Cash and cash equivalents at 1 January 3,473 2,873 Cash and cash equivalents at 31 December 16 4,476 3,473 RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS for the year ended 31 December 2011 Note Share Share Capital Capital Revenue Total capital premium redemption reserves reserve Â£'000 Â£'000 account reserve Â£'000 Â£'000 Â£'000 Â£'000 At 31 December 2010 7,838 61,444 1,248 258,092 19,371 347,993 Issue of Ordinary shares 20,21 180 6,652 - - - 6,832 Conversion of 20 (7) - - - - (7) Subscription shares Net return from ordinary - - - 1,368 (645) 723 activities Dividends paid 11 - - - - (8,709) (8,709) At 31 December 2011 20,21 8,011 68,096 1,248 259,460 10,017 346,832 At 31 December 2009 6,296 14,123 1,248 198,762 15,615 236,044 Issue of Ordinary shares 1,480 48,520 - - - 50,000 Issue of Subscription 62 (62) - - - - shares Cost of share issue - (1,137) - - - (1,137) Net return from ordinary - - - 59,330 10,053 69,383 activities Dividends paid 11 - - - - (6,297) (6,297) At 31 December 2010 20,21 7,838 61,444 1,248 258,092 19,371 347,993 The following notes form part of the financial statements. NOTES TO THE FINANCIAL STATEMENTS 1. Principal activity The principal activity of the Trust is that of an investment trust company. The Trust is an investment company as defined by Section 833 of the Companies Act 2006 and an investment trust within the meaning of Sections 1158 and 1159 of the Corporation Tax Act 2010 (`CTA 2010'). 2. Basis of preparation The accounts have been prepared under the historical cost convention, except for the revaluation of financial instruments at fair value as permitted by the Companies Act 2006, and in accordance with applicable UK law and UK Accounting Standards (`UK GAAP') and with the Statement of Recommended Practice `Financial Statements of Investment Trust Companies' (`SORP'), dated January 2009. All of the Trust's operations are of a continuing nature. The Trust has considerable financial resources and, as a consequence, the Directors believe that the Trust 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 Trust will have adequate resources to continue in operational existence for the foreseeable future. Further details are provided in the Directors' report (see below). Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts. The same accounting policies, presentation and methods of computation are followed in these financial statements as applied in the Trust's previous annual audited financial statements. 3. Organisational structure, manager arrangements and accounting policies Partnerships The Trust entered into three separate partnership agreements with general and founder partners in May 2003 (subsequently revised in January 2009), January 2009 and July 2011, at which point investment holding limited partnerships were established to carry on the business of an investor, with the Trust being the sole limited partner in these entities. The purpose of these partnerships, HGT LP, HGT 6 LP and HgCapital Mercury D LP (together the `primary buyout funds') is to hold all the Trust's investments in primary buyouts and other investments, other than liquid funds. Under the partnership agreements, the Trust made capital commitments into the primary buyout funds with the result that the Trust now holds direct investments in the primary buyout funds and an indirect investment in the fixed asset investments that are held by these funds, as it is the sole limited partner. The fixed asset investments on the balance sheet and the investment portfolio (see above) comprise the underlying investments held by these primary buyout funds. In July 2011, the Trust made a direct secondary investment into HgCapital 6 E LP (`Hg6 E LP'), one of the partnerships that comprise the Hg6 funds, in which the Trust is now a limited partner alongside other limited partners. This is a direct investment in the HgCapital 6 E LP fund, as shown on the balance sheet and the investment portfolio (see above). The Trust also entered into partnership agreements with the purpose of investing in renewable energy projects by making capital commitments alongside other limited partners in Hg Renewable Power Partners LP (`Hg RPP LP') and HgCapital Renewable Power Partners 2 C LP (`Hg RPP2 LP') (together the `renewable funds'). These are direct investments in the renewable funds, as shown on the balance sheet and the investment portfolio (see above). Priority profit share and carried interest per the primary buyout limited partnership agreements Under the terms of the primary buyout fund limited partnership agreements (`LPAs'), the general partner is entitled to appropriate, as a first charge on the net income of the funds, an amount equivalent to its priority profit share (`PPS'). The Trust is entitled to net income from the funds, after payment of the PPS. In years in which these 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 these primary buyout funds, which is funded via a loan from the Trust. Such 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. Furthermore, under the primary buyout funds' LPAs, the founder partner is entitled to a carried interest distribution once certain preferred returns are met. The LPAs stipulate that the primary buyout funds' capital gains (or net income), after payment of the carried interest, are distributed to the Trust. Accordingly, the Trust's entitlement to net income and net capital gains are shown in the appropriate lines of the income statement. Notes 4, 5 and 7 to the financial statements and the cash flow statement disclose the gross income and gross capital gains of the primary buyout funds (including the associated cash flows) and also reflect the proportion of net income and capital gains in the buyout funds that have been paid to the general partner as its PPS and to the founder partner as carried interest, where applicable. The PPS paid from net income is charged to the revenue account in the income statement, whereas PPS paid as an interest-free loan, if any, is charged as an unrealised depreciation to the capital return on the income statement. The carried interest payments made 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 that is recognised by the primary buyout funds, net of PPS, is attributed to the Trust. The Trust will recognise such net income and reflect this as income in its financial statements, once recognised in the buyout funds. Income from HgCapital 6 E LP and the renewable funds would normally consist of income distributions and these distributions are recognised as income in the financial statements of the Trust when the right to such distribution is established. The accounting policies below apply to the recognition of income by the primary buyout funds. 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 Trust. Premiums paid or discounts received with the acquisition of government securities are amortised over the remaining period up to the maturity date and are recognised in interest income on government securities. Dividends receivable on unlisted equity shares where there is no ex-dividend date and on non-equity shares are brought into account when the Trust's right to receive payment is established. 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 Trust 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. Expenses All expenses are accounted for on an accruals basis. All administrative expenses 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 Trust's balance sheet when the Trust 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 held with banks. Foreign currency All transactions in foreign currencies are translated into pounds sterling at the rates of exchange ruling at the dates of such transactions and the resulting exchange differences are taken to capital reserve - realised. Foreign currency assets and liabilities at the balance sheet date are translated into pounds sterling at the exchange rates ruling at that date and the resulting exchange differences are taken to capital reserve - unrealised. 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 Trust's taxable profits and its results, as stated in the financial statements, which are capable of reversal in subsequent periods. Investments The general principle applied is that investments should be reported at `fair value' in accordance with Financial Instruments: Recognition and Measurement (`FRS26') and the International Private Equity and Venture Capital (`IPEV') Valuation Guidelines, September 2009 edition. Where relevant, the Trust applies the policies stated below to the investments held by HGT LP, HGT 6 LP and HgCapital Mercury D LP, in order to determine the fair value of its investments in these limited partnerships. Purchases of investments are recognised on a trade date basis. Sales of investments held through the primary buyout funds are recognised at the trade date of the disposal. Sales from the investments in HgCapital 6 E LP and the renewable energy funds would normally consist of capital distributions and these distributions are recognised as a realisation when the right to such distribution is established. Proceeds are measured at fair value, which is regarded as the proceeds of sale less any transaction costs. Quoted: Quoted investments are designated as held at fair value, which is deemed to be their bid price. 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) subsequent to the initial fair value recognition in (i), 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 manager in which the Trust has a direct investment, but is not the sole limited partner and does not hold a majority share. These investments are valued at fair value, based on the 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 market value of the gilt. Derivative financial instruments: Derivative financial instruments are held at fair value and are valued using quoted market prices for financial instruments traded in active markets, or dealer price quotations for financial instruments that are not actively traded. Both realised and unrealised gains and losses arising on fixed asset investments, financial assets and liabilities and derivative financial instruments, 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 the founder partners 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 loans to general partners; and (iii) unrealised exchange differences of a capital nature. 4. Income 2011 2010 Â£'000 Â£'000 Income from investments held by HGT LP and HGT 6 LP UK unquoted investment income 4,474 7,672 Foreign unquoted investment income 12,591 6,267 UK dividends - 1,396 Gilt interest less amortisation of premium 53 (472) Total investment income 17,118 14,863 Other income Deposit interest 23 27 Other interest income 18 136 Total other income 41 163 Total income 17,159 15,026 Priority profit share charge against income Current year - HGT LP (1,357) (2,861) Current year - HGT 6 LP (4,914) - Prior year - HGT 6 LP (8,936) - Total priority profit share charge against income (15,207) (2,861) Total net income 1,952 12,165 Total income comprises: Dividends - 1,396 Interest 1,952 10,769 Total net income 1,952 12,165 5. Priority profit share and carried interest (a) Priority profit share payable to General Partners Revenue return 2011 2010 Â£'000 Â£'000 Priority profit share payable Current year amount 7,190 7,060 Less: Current year loans advanced to General Partners (919) (4,199) Current year charge against income 6,271 2,861 Add: Prior year loans to General Partners recovered from 8,936 - priority profit share Total priority profit share charge against income 15,207 2,861 The priority profit share payable on HGT LP, HGT 6 LP and Hg Mercury D LP rank as a first appropriation of net income from investments held in HGT LP, HGT 6 LP and Hg Mercury D LP respectively and is deducted prior to such income being attributed to the Trust in its capacity as a Limited Partner. The net income of HGT LP, HGT 6 LP and Hg Mercury D LP earned during the year, after the deduction of the priority profit share, is shown on the income statement. Details of these arrangements are disclosed in the Directors' report. (b) Loans to General Partners Capital return 2011 2010 Â£'000 Â£'000 Movements on loans to General Partners Losses on current year loans advanced to General Partners (919) (4,199) Gains on prior year loans to General Partners recovered 8,936 - against income Total gains/(losses) on loans recoverable from General 8,017 (4,199) Partners In years in which the funds noted in note 5(a) have not yet earned sufficient net income to satisfy the priority profit share, the entitlement is carried forward to the following years. The priority profit share 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 these primary buyout funds, which is funded via a loan from the Trust. Such 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 and hence an unrealised capital loss is recognised and reversed if sufficient income is subsequently generated. (c) Carried interest to Founder Partners Capital return 2011 2010 Â£'000 Â£'000 Carried interest payable Current year amount 2,079 1,136 Total carried interest charge against capital gains (note 2,079 1,136 13) The carried interest payable ranks as a first appropriation of capital gains on the investments held in HGT LP, HGT 6 LP and Hg Mercury D LP, limited partnerships established solely to hold the Trust's investments, and is deducted prior to such gains being paid to the Trust in its capacity as a Limited Partner. The net amount of capital gains of HGT LP, HGT 6 LP and Hg Mercury D LP during the year, after the deduction of carried interest, is shown on the income statement. Details of the carried interest contracts are disclosed in the Directors' report. 6. Other expenses Operating expenses 2011 2010 Â£'000 Â£'000 Custodian and administration fees 445 324 Directors' remuneration (note 8) 189 178 Bank facility fees and expenses 840 - Legal and other administration costs 1,053 1,432 2,527 1,934 Fees payable to the Trust's auditors Audit of the Trust's annual accounts 48 46 Tax compliance services 18 17 Tax advisory services - 24 Other non-audit services 4 41 Total fees payable to the Trust's auditors 70 128 Total other expenses 2,597 2,062 The Trust's total expense ratio (`TER'), calculated 2.82% 3.12% as total expenses including the priority profit share as a percentage of average net assets was: 7. Cash flow from operating activities Reconciliation of net return before taxation to net 2011 2010 cash flow from operating activities Â£'000 Â£'000 Net return before taxation 723 69,433 Add back: Losses/(gains) on investments held at 4,570 (64,665) fair value Increase in carried interest payable 943 74 Amortisation of premium on government securities 2,656 3,980 Increase in prepayments and accrued income (4,648) (5,919) Decrease in debtors 17 2,691 Decrease in creditors (495) (1,276) Tax on investment income included within gross (7) (7) income Net cash inflow from operating activities 3,759 4,311 8. Directors' remuneration The aggregate remuneration of the Directors for the year to 31 December 2011 was Â£189,000 (2010: Â£178,000). Further information on the Directors' remuneration is disclosed in the Directors' remuneration report. 9. Taxation on ordinary activities (a) Analysis of charge in the year 2011 2010 Â£'000 Â£'000 Current tax: UK corporation tax - 2,438 Income streaming relief - (2,438) Prior year adjustment - 50 Total current tax (note 9(b)) - 50 (b) Factors affecting current tax charge for the year The tax assessed for the year is the same as the standard rate of corporation tax in the UK for a large company (26%; 2010: 28%). The differences are explained below: 2011 2010 Â£'000 Â£'000 Net revenue return on ordinary activities before (645) 10,103 taxation UK corporation tax (credit)/charge at 26% thereon (171) 2,829 (2010: 28%) Effects of: Non taxable UK dividends - (391) Tax relief from interest distribution - (2,438) Unutilised losses arising in the year 171 - Tax in relation to the prior year - 50 171 (2,779) Current revenue tax charge for the year (note 9(a)) - 50 In the opinion of the Directors, the Trust has complied with the requirements of Section 1158 and Section 1159 of the CTA 2010 and will therefore be exempt from corporation tax on any capital gains made in the year. 10. Return and net asset value per Ordinary share (a) Return per ordinary share Revenue return Capital return Year Year Year Year ended ended ended ended 31.12.11 31.12.10 31.12.11 31.12.10 Earnings (Â£'000): Return on ordinary activities after (645) 10,053 1,368 59,330 taxation Number of shares (`000) Weighted average number of shares in 31,518 29,552 31,518 29,552 issue Return per Ordinary share (pence) (2.05) 34.02 4.34 200.77 At the beginning of the year the Trust had 6,220,783 Subscription shares in issue. On 10 June 2011 and 11 November 2011 respectively, 695,810 and 22,605 new Ordinary shares were issued pursuant to the exercise of Subscription shares. The remaining Subscription shares are convertible into Ordinary shares on 31 May 2012 and 31 October 2012, with the final exercise date on 31 May 2013. (b) Net asset value per share Year Year ended ended 31.12.11 31.12.10 Net asset value (Â£'000) Net assets 346,832 347,993 Assuming exercise of all outstanding Subscription 52,272 59,097 shares Fully diluted net asset value 399,104 407,090 Number of Ordinary shares (`000) Number of Ordinary shares in issue 31,822 31,104 Potential issue of new Ordinary shares on exercise of 5,503 6,221 Subscription shares Ordinary shares in issue following exercise of 37,325 37,325 Subscription shares Basic net asset value per share (pence) 1,089.9 1,118.8 Fully diluted net asset value per share (pence) 1,069.3 1,090.7 The diluted NAV per share is calculated by adding to the current NAV (basic) of Â£346,832,000 the proceeds of Â£52,272,000 from the exercise of Subscription shares, assuming all outstanding Subscription shares will be exercised at the minimum price of Â£9.50, and then dividing the adjusted NAV (diluted) by the adjusted number of Ordinary shares in issue (37,324,698). 11. Dividends on Ordinary shares Register Payment 2011 2010 date date Â£'000 Â£'000 Dividend of 25.0p for the year 26 February 31 March - 6,297 ended 31 December 2009 2010 2010 Dividend of 28.0p for the year 8 April 2011 13 May 8,709 - ended 31 December 2010 2011 8,709 6,297 The proposed dividend of 10.0 pence per Ordinary share for the year ended 31 December 2011 is subject to approval by the shareholders at the annual general meeting and has not been included as a liability in these financial statements. The retention test in CTA 2010, section 1159 has been met as there is no undistributed income from qualifying investments in the period. 12. Fixed asset investments 2011 2010 Â£'000 Â£'000 Investments held at fair value through profit and loss Investments held in HGT LP Unquoted investments 69,181 96,746 Investments held in HGT 6 LP Unquoted investments 165,787 121,186 Other investments held by the Trust Unquoted investments 30,453 14,252 Total fixed asset investments 265,421 232,184 Total fixed asset investments consisting of: Equity shares 32,436 15,205 Non-equity shares 56,433 13,280 Fixed income securities 176,604 204,445 Derivative instruments (52) (746) Total fixed asset investments 265,421 232,184 2011 2010 Â£'000 Â£'000 Opening valuation as at 1 January 232,184 127,204 Add back: opening unrealised depreciation - investments 5,885 35,830 - financial derivative instruments 1,595 2,294 Opening book cost as at 1 January 239,664 165,328 Movements in the year: Additions at cost 87,101 111,418 Disposals - proceeds (49,623) (72,600) - realised gains on sales 10,617 35,518 Closing book cost of investments 287,759 239,664 Less: closing unrealised depreciation - investments (22,286) (5,885) - financial derivative instruments (52) (1,595) Closing valuation of investments as at 31 December 265,421 232,184 The above investments include investments in companies that are indirectly held by the Trust through its investment in HGT LP, HGT 6 LP and Hg Mercury D LP, as set out in note 3 (see above), and investments in fund limited partnerships in HgCapital 6 E LP, Hg Renewable Power Partners LP and HgCapital Renewable Power Partners 2 C LP. 13. (Losses)/gains on investments and government securities 2011 2010 Â£'000 Â£'000 Realised Realised gains/(losses) on sales - fixed asset investments 11,455 35,518 - financial derivative instruments (838) - - government securities (517) (1,484) 10,100 34,034 Carried interest charge against capital gains (note (2,079) (1,136) 5(c)) Net realised gains 8,021 32,898 Unrealised Change in unrealised depreciation - fixed asset investments (16,401) 29,945 - financial derivative instruments 1,543 699 - government securities 188 (13) Net unrealised (losses)/gains (14,670) 30,631 Total (losses)/gains (6,649) 63,529 14. Debtors and accrued income 2011 2010 Â£'000 Â£'000 Amounts receivable after one year Accrued income on fixed assets 30,862 26,606 Amounts receivable within one year Taxation recoverable 7 1,590 Accrued income on government securities 543 181 Prepayments and other accrued income 68 38 Other debtors - 17 618 1,826 Total debtors 31,480 28,432 15. Government securities 2011 2010 Â£'000 Â£'000 Investments held at fair value through profit and loss Opening valuation 86,498 84,526 Purchases at cost 117,127 205,535 Sales and redemptions (152,143) (198,086) Movement in unrealised capital gains/(losses) 188 (13) Amortisation of premium on acquisition (2,656) (3,980) Realised capital losses (517) (1,484) Closing valuation 48,497 86,498 16. Movement in net funds Analysis and reconciliation of net funds 2011 2010 Â£'000 Â£'000 Change in cash 1,003 600 Net funds at 1 January 3,473 2,873 Net funds at 31 December 4,476 3,473 Net funds comprise: Cash 4,476 3,473 17. Creditors - amounts falling due within one year 2011 2010 Â£'000 Â£'000 Carried interest 2,079 1,136 Sundry creditors 963 1,458 3,042 2,594 The Directors consider that the carrying amount of creditors approximate their fair value. 18. Bank facility On 24 August 2011, the Trust entered into a Â£40,000,000 multicurrency revolving credit facility on an unsecured basis. The facility is available for three years. Under the facility agreement, the Company is liable to pay interest on any drawn amount at LIBOR plus a margin of 2.75%. A commitment fee of 1.1% is liable on any undrawn commitment. No amount was drawn during the current financial year. 19. Financial risk The following disclosures relating to the risks faced by the Trust are provided in accordance with Financial Reporting Standard 29, `Financial instruments: disclosures'. The reference to investments in this note is in relation to the Trust's direct investments in RPP1, RPP2, Hg6E and the underlying investments in HGT LP, HGT 6 LP and HgCapital Mercury D LP as described in note 3. Financial instruments and risk profile As a private equity investment trust, the Trust's investment objective is to achieve long-term capital appreciation by indirectly investing in unquoted companies. It does this through its investments in fund partnerships, mostly in the UK and Europe. Additionally, the Trust holds government gilts and cash and items such as debtors and creditors arising directly from its operations. In pursuing its investment objective, the Trust is exposed to a variety of risks that could result in either a reduction of the Trust's net assets or a reduction in the profits available for distribution by way of dividends. Valuation risk, market risk (comprising currency risk and interest rate risk), liquidity risk and credit risk, and the Directors' approach to the management of them, are described below. The Board and the Manager coordinate the Trust'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 Trust's exposure to valuation risk arises mainly from movements in the value of the underlying investments (held through fund partnerships), the majority of which are unquoted. A breakdown of the Trust's portfolio is given above. In accordance with the Trust'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 Trust does not hedge against movements in the value of these investments, apart from foreign exchange movements as explained below. The Trust has exposure to interest rate movements, through cash and gilt holdings. In the opinion of the Directors, the diversified nature of the Trust's portfolio significantly reduces the risks of investing in unquoted companies. The Trust adopted the amendment to FRS 29, effective 1 January 2009. This requires the Trust 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: â€¢ Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1). â€¢ 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). â€¢ 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 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 an `observable' input requires significant judgement by the Board. The Board considers observable data relating to investments actively traded in organised financial markets, in which case 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. Financial assets Level 1 Level 2 Level 3 Total Â£'000 Â£'000 Â£'000 Â£'000 Investments held at fair value through profit and loss Unquoted investments - Investment in HGT LP - - 69,181 69,181 - Investment in HGT 6 LP - - 165,787 165,787 - Investment in Hg 6 E LP - - 9,445 9,445 - Investment in Hg RPP LP - - 15,806 15,806 - Investment in Hg RPP2 LP - - 5,202 5,202 - Government securities 48,497 - - 48,497 Other assets Accrued income 543 - 30,862 31,405 As at 31 December 2011 49,040 - 296,283 345,323 Financial assets Level 1 Level 2 Level 3 Total Â£'000 Â£'000) Â£'000 Â£'000) Investments held at fair value through profit and loss Unquoted investments - Investment in HGT LP - - 96,746 96,746 - Investment in HGT 6 LP - - 121,186 121,186 - Investment in Hg RPP LP - - 12,426 12,426 - Investment in Hg RPP2 LP - - 1,826 1,826 - Government securities 86,498 - - 86,498 Other assets Accrued income 181 - 26,606 26,787 As at 31 December 2010 86,679 - 258,790 345,469 Investments whose values are based on quoted market prices in active markets, and therefore classified within level 1, include government securities and actively traded listed equities. The Trust does not adjust the quoted bid price of 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 Board 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 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 2011 by class of financial instrument. Unquoted investments Accrued Investments income on in limited investments partnerships Total 2011 2011 2011 Â£'000 Â£'000 Â£'000 Opening balance 26,606 232,184 258,790 Purchases - 87,101 87,101 Realisations at 31 December 2010 valuation (9,059) (33,095) (42,154) Total gains/(losses) for the year included 13,315 (20,769) (7,454) in the income statement Closing valuation of level 3 investments 30,862 265,421 296,283 Total gains for the year included in the 14,511 (21,436) (6,925) income statement for investments held at the end of the year Equity price risk Equity price risk is the risk that the fair values of equities (including loans) held by the Trust indirectly through its direct investments in fund limited partnerships, decrease as a result of changes in the values of underlying businesses. The Board revalues each investment twice each year. 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 the trading performance of the principal underlying investments. If there appears to the Board to be an impairment in value between regular valuations, it can revalue the investment. The Board also monitors the Manager's compliance with the Trust's investment objective and investment policy. 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: % change Â£'000 NAV per Ordinary share (pence) Unquoted 10% 29,628 93.1 Credit risk Credit risk is the risk of financial loss in the event that any of the Trust's market counterparties fail to fulfil their contractual obligations to the Trust. The Trust's financial assets (excluding fixed asset investments) that are subject to credit risk, are not impaired or overdue. The Trust's cash balances are held with the Bank of New York Mellon and any significant balances are invested in government securities issued by the United Kingdom. Foreign exchange forward contracts and options are held with counterparties which have credit ratings that the Board considers to be adequate. The Board regularly monitors the credit quality and financial position of these market counterparties. The credit quality of the above mentioned financial assets was deemed satisfactory. Market risk The fair value of future cash flows of a financial instrument held by the Trust may fluctuate due to changes in market prices of comparable businesses. This market risk may comprise: currency risk (see below), interest rate risk and/or equity price risk (see above). 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 Trust is exposed to currency risk as a result of investing in fund partnerships which invest in companies that operate in currencies other than sterling. The value of these assets in sterling, being the Trust's functional currency, can be significantly influenced by movements in foreign exchange rates. The Trust is partially hedged against movements in the value of the euro against pounds sterling affecting the value of its investments, as explained below. The Manager monitors the Trust'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 Trust's year-end financial exposure to movements in foreign exchange rates against the Trust's functional currency. The rates represent the range of movements against sterling over the current year for the currencies listed. In the opinion of the Directors, the sensitivity analysis below 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 Trust's objectives. Revenue return Capital return Â£'000 NAV per Â£'000 NAV per Ordinary Ordinary share share (pence) (pence) Highest value against sterling during the year Euro (1.1070) 856 2.7 9,813 30.8 Euro forward contract (1.1070) - - (143) (0.5) Norwegian kroner (8.5649) - - 1,919 6.0 Swedish kroner (9.9620) 70 0.2 465 1.5 Swiss franc (1.1744) 28 0.1 28 0.1 US dollar (1.5341) - - 8 - 954 3.0 12,090 37.9 Lowest value against sterling during the year Euro (1.2037) (57) (0.2) (655) (2.1) Euro forward contract (1.2037) - - (4) - Norwegian kroner (9.3987) - - (305) (1.0) Swedish kroner (10.8286) (16) (0.1) (108) (0.3) Swiss franc (1.5639) (8) - (8) - US dollar (1.6704) - - (41) (0.1) (81) (0.3) (1,121) (3.5) At 31 December 2011, the following rates were applied to convert foreign denominated assets into sterling: Euro (1.1972); Norwegian Kroner (9.2748); Swedish Kroner (10.6538); Swiss Franc (1.4532); and US Dollar (1.55450). Portfolio hedging The Trust 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 Trust are denominated in the foreign currency of the geographic areas in which the Trust has significant exposure against its reporting currency. The contracts are designated as a hedge and the fair values thereof are 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 are as follows: 2011 2010 Currency No. `000 Â£'000 No. `000 Â£'000 Forward foreign currency Euro 1,544 (52) 25,040 (1,384) contracts Currency option Euro - - 12,520 95 Currency option NOK - - 125,724 543 The Trust does not trade in derivatives but holds them to hedge specific exposures, they 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 Trust does not adopt hedge accounting in the financial statements. Interest rate risk and sensitivity The Trust 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 Trust has little immediate direct exposure to interest rates on its fixed assets, as the majority of these are fixed rate assets or equity shares that do not pay interest. Therefore, and given that the Trust has no borrowings and maintains low cash levels, the Trust'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 Trust to movements in interest rates has been based on the UK base rate. With all other variables constant, a 0.5% decrease in the UK base rate should increase the capital return in a full year by Â£242,000, 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 realised throughout the year. Liquidity risk Investments in unquoted companies, which form the majority of the Trust's investments, may not be as readily realisable as investments in quoted companies, which might result in the Trust having difficulty in meeting its obligations. Liquidity risk is currently not significant as about 15% of the Trust's net assets at the year-end are liquid resources and, in addition, the Trust has a Â£40 million undrawn bank facility available. The Board gives guidance to the Manager as to the maximum amount of the Trust's resources that should be invested in any one company. For details refer to the investment policy on page 9 of the Annual Report and Accounts. Currency exposure The currency denomination of the Trust's financial assets is shown below. Short-term debtors and creditors, which are excluded, are mostly denominated in pounds sterling, the functional currency of the Trust. 2011 2010 Fixed Floating Non Total Fixed Floating Non Total interest-bearing interest-bearing rate rate Â£'000 rate rate Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Pounds 160,065 6,071 34,469 200,605 159,841 5,897 16,191 181,929 sterling Euro 87,448 2,164 28,675 118,287 96,871 2,948 23,401 123,220 Euro hedge - - (52) (52) - - (1,289) (1,289) Norwegian - - 23,156 23,156 - - 23,116 23,116 kroner Norwegian - - - - - - 543 543 kroner hedge Swedish 6,692 - - 6,692 11,323 - 4,095 15,418 kroner Swiss franc 523 - - 523 - - - - US dollar - - 588 588 5,367 - 638 6,005 Total 254,728 8,235 86,836 349,799 273,402 8,845 66,695 348,942 The fixed rate assets comprise gilts and fixed rate loans to investee companies. Fixed rate loans to investee companies had a weighted average interest rate of 11.5% per annum (2010: 11.3%) and a weighted average life to maturity of 11.1 years (2010: 12.1 years). Otherwise, fixed rate assets comprised two gilts with interest rates of 5.25% and 4.50% per annum and which mature on 7 June 2012 and 7 March 2013 respectively. It is the intention to re-invest the proceeds at maturity in another short dated gilt. The floating rate assets consisted of cash. The non interest-bearing assets represented the equity content of the investment portfolio and the financial derivative instruments. The Trust did not have any outstanding borrowings at the year-end (2010: Â£nil). The numerical disclosures above exclude short-term debtors and creditors. Capital management policies and procedures The Trust'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 Trust's capital at 31 December comprised: 2011 2010 Â£'000 Â£'000 Equity: Equity share capital 8,011 7,838 Share premium 68,096 61,444 Capital redemption reserve 1,248 1,248 Retained earnings and other reserves 269,477 277,463 Total capital 346,832 347,993 As stated above, the Trust did not have any outstanding borrowings at the year-end (2010: nil). With the assistance of the Manager, the Board monitors and reviews the broad structure of the Trust's capital on an ongoing basis. This review covers: â€¢ the planned level of gearing, which takes into account the Manager's projections of cash flow; â€¢ 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 Trust are trading against the advantages of retaining cash for investment; â€¢ the need to raise funds by an issue of equity shares, including issues from treasury; and â€¢ the extent to which revenue in excess of that which is required to be distributed should be retained, whilst maintaining its status under Section 1158 of the CTA 2010. The Trust's objectives, policies and processes for managing capital are unchanged from the preceding accounting period. 20. Issued share capital 2011 2010 No.'000 Â£'000 No.'000 Â£'000 Ordinary shares of 25p each Allotted, called-up and fully paid At 1 January 31,104 7,776 25,187 6,296 Issued as part of placing and open - - 5,917 1,480 offer Issued following exercise of 718 180 - - subscription rights At 31 December 31,822 7,956 31,104 7,776 Subscription shares of 1p each Allotted, called-up and fully paid At 1 January 6,221 62 - - Issued as part of placing and open - - 6,221 62 offer and bonus issue Conversion into Ordinary shares (718) (7) - - At 31 December 5,503 55 6,221 62 Total share capital 37,325 8,011 37,325 7,838 The Trust's issued share capital at the beginning of the year consisted of 31,103,915 Ordinary shares. On 10 June 2011 and 11 November 2011 respectively, 695,810 and 22,605 new Ordinary shares were issued pursuant to the exercise of Subscription shares. The subscription price paid per Ordinary share was Â£9.50 and total proceeds of Â£6,825,000 were received by the Trust. At the beginning of the year, the Trust had 6,220,783 Subscription shares in issue. Each Subscription share entitles the holder to subscribe for one Ordinary share upon exercise of the subscription right and payment of the subscription price. The first opportunity to exercise such right was on 31 May 2011 when 695,810 Subscription shares were exercised. The Ordinary shares issued commenced trading on 15 June 2011. The second opportunity to exercise such right was on 31 October 2011 when 22,605 Subscription shares were exercised. The Ordinary shares commenced trading on 14 November 2011. The next opportunity to exercise subscription rights is on 31 May 2012 and, thereafter, 31 October 2012, at a price of Â£9.50 per Ordinary share. The final exercise date is on 31 May 2013 at a subscription price of Â£10.25 per share. Whilst the Trust no longer has an authorised share capital, the Directors will still be limited as to the number of shares they can at any time allot as the Companies Act 2006 requires that Directors seek authority from the shareholders for the allotment of new shares. 21. Share premium account and reserves Share Capital Capital Capital Revenue premium redemption reserve reserve reserve account reserve realised unrealised Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 As at 1 January 2011 61,444 1,248 274,913 (16,821) 19,371 Issue of Ordinary shares 6,652 - - - - Transfer on disposal of - - (5,911) 5,911 - investments (Losses)/gains on government - - (517) 188 - securities Net gain on sale of fixed - - 16,528 - - asset investments Net movement in unrealised - - - (20,769) - depreciation of fixed asset investments Dividends paid - - - - (8,709) Net return for the year - - - - (645) after taxation Loans to General Partners - - - 8,017 - recovered Carried interest to Founder - - (2,079) - - Partner As at 31 December 2011 68,096 1,248 282,934 (23,474) 10,017 22. Commitment in fund partnerships and contingent liabilities (a) Original and outstanding Original Outstanding Outstanding commitments in Fund partnerships Commitment at at Fund Â£'000 31 December 31 December 2011 2010 Â£'000 Â£'000 HGT LP(1) 120,000 17,094 22,350 HGT 6 LP(2) 285,029 85,888 155,884 HgCapital 6 E LP 15,000 4,732 - Hg Mercury LP 60,000 58,970 - Hg RPP LP 18,076(3) 1,236(4) 1,823 Hg RPP2 C LP 33,411(5) 27,222(6) 31,964 Total outstanding commitments 195,142 212,021 1 With effect from 21 October 2011, Â£12 million (10% of the original Â£120 million loan commitment to the Hg5 fund) was cancelled. 2 HgCapital Trust plc has the benefit of an investment opt-out provision in its commitment to invest alongside HgCapital 6, so that it can opt out of a new investment without penalty should it not have the cash available to invest. 3 Sterling equivalent of â‚¬21,640,088 4 Sterling equivalent of â‚¬1,479,000 (2010:â‚¬2,127,000) 5 Sterling equivalent of â‚¬40,000,000 6 Sterling equivalent of â‚¬32,590,000 (2010: â‚¬37,302,000) (b) Contingent liabilities The Trust'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£376,000 (2010: Â£6,260,000) has been reserved for this purpose. This amount is therefore callable from the Trust at this or any earlier date. 23. Related party transactions HgCapital and its subsidiaries, acting as Manager of the Trust through a management agreement and participating through limited partnership agreements as General and Founder partners of the fund partnerships that the Trust invests in, are considered to be related parties by virtue of the above agreements. During the year, priority profit shares allocated to HgCapital were Â£7,190,000 (2010: Â£7,060,000) and a carried interest profit allocation of Â£2,079,000 (2010: Â£1,136,000) was made to HgCapital during the year. HgCapital also acts as secretary and administrator of the Trust. Total fees for the year amounted to Â£342,000 (2010: Â£250,000). At 31 December 2011, the amount due to HgCapital relating to the above, disclosed under creditors, was Â£2,165,000 (2010: Â£1,731,000). INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF HGCAPITAL TRUST PLC The Trust's Financial Statements for the year ended 31 December 2011 have been audited by of Deloitte LLP. The text of the Auditor's report can be found on page 79 of the Trust's annual report and accounts. DIRECTORS' REPORT The Chairman's statement, the description of the Trust's investment objective, investment policy, rationale & business model, and corporate governance statement form part of this Directors' report. The Directors present the annual report and financial statements of HgCapital Trust plc (the `Trust') (Reg. No. 1525583) for the year ended 31 December 2011. BUSINESS REVIEW Background The purpose of the business review is to provide an overview of the business of the Trust by: â€¢ Analysing development and performance using appropriate key performance indicators (`KPIs'); â€¢ Outlining the principal risks and uncertainties affecting the Trust; â€¢ Describing how the Trust manages these risks; â€¢ Explaining the future business plans of the Trust; â€¢ Setting out the Trust's environmental, social and ethical policy; â€¢ Providing information about persons with whom the Trust has contractual or other arrangements which are essential to the business of the Trust; and â€¢ Outlining the main trends and factors likely to affect the future development, performance and position of the Trust's business. Principal activity and business review The principal activity of the Trust 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 2011 is given in the Chairman's statement, which forms part of this Directors' report, and in the Manager's review. Status of the Trust HMRC accepted the Trust as an investment trust for the purposes of Section 1158 of the Corporation Tax Act 2010 (`CTA 2010') for the year ended 31 December 2010. It is the intention of the Trust to continue to seek approval for classification as an investment trust under Section 1158 of the CTA 2010 for subsequent tax years. In the opinion of the Directors, the Trust continues to conduct its affairs as an investment trust within the definition prescribed by the CTA and is not a close company as defined by relevant tax legislation and provisions. Capital Structure As at 9 March 2012, the Trust had 31,822,330 ordinary shares of 25 pence each and 5,502,368 subscription shares of 1 penny each in issue. Each ordinary share has one voting right attached to it and the subscription shares carry no voting rights. Consequently, the total number of voting rights in the Trust at this date was 31,822,330. Further information on the share capital of the Trust can be found in note 20 to the financial statements. Going concern The Trust'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 review. The financial position of the Trust, its cash flows, liquidity position and borrowing facilities are described in the Directors' report. In addition, note 19 to the financial statements includes the Trust'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 Directors believe that the Trust is well placed to manage its business risks successfully, despite the current uncertain economic outlook. The Directors review cash flow projections regularly, including important assumptions as to future realisations and the rate at which funds will be deployed into new investments. The Directors have a reasonable expectation that the Trust 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. Borrowing facility The Board keeps the management of the Trust's resources under constant review and regularly considers long-term cash flow projections for the Trust and the use of gearing. During 2011 the Board finalised a Â£40 million three-year multicurrency standby facility with Lloyds TSB Bank plc, on an unsecured basis. The Directors believe the borrowing facility gives the Board further flexibility in managing the Trust's resources, without adding undue risk. The facility was unutilised as at 31 December 2011. Performance In the year to 31 December 2011, the Trust's NAV per share (including dividends re-invested) increased by 0.5%. This compares with a decrease in the FTSE All-Share Index (total return) of -3.5%. The Trust's ordinary share price decreased by -1.2% on a total return basis. Results and dividend The total return for the Trust is set out in the income statement. The total return for the year, after taxation, was Â£723,000 (2010: Â£69,383,000) of which -Â£645,000 was revenue return (2010: Â£10,053,000). The Directors recommend the payment of a dividend of 10.0p per ordinary share for the year ended 31 December 2011 (2010: 28.0p). Subject to approval of this dividend at the forthcoming annual general meeting (`AGM'), it will be paid on 15 May 2012 to shareholders on the register of members at the close of business on 10 April 2012. Key performance indicators Each Board meeting conducts a detailed review of the portfolio and reviews trading results and ratios to understand the impact on the Trust of the trading performance of the individual portfolio holdings. The KPIs used to measure the progress and performance of the Trust over time and which are comparable to those reported by other investment trusts include NAV per share, share price, return per share, average monthly trading volumes and cash flow. Further information on KPIs and the Trust's progress against these can be found in the Chairman's statement (see above) and the Manager's review (see above). 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 monitor the Trust's discount or premium regularly. PRINCIPAL RISKS The key risks faced by the Trust are set out below and in note 19 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 Trust'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 Trust's investment policy, in order to minimise the risks associated with particular countries or factors specific to particular sectors. Regulatory risk The Trust operates as an investment trust in accordance with Sections 1158 and 1159 of CTA 2010. As such, the Trust is exempt from corporation tax on any capital gains realised from the sale of its investments, so the loss of investment trust status would represent a significant risk to the Trust. 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 Sections 1158 and 1159 of CTA 2010 are not breached. The results are reported to the Board at each meeting. General changes in legislation, regulation or government policy could significantly influence the decisions of investors or impact upon the markets in which the Trust invests. Operational risk In common with most other investment trust companies, the Trust has no employees. The Trust therefore relies upon the services provided by third parties and is dependent upon the internal control systems of the Manager and the Trust's other service providers. For example, the security of the Trust'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 & Valuation Committee twice a year. The Board has considered an Assurance Report on Internal Controls (AAF 01/06) as prepared by the Manager for the year-ended 31 December 2011, and independently reviewed by Deloitte LLP, and confirms that no material issues were raised in the report. Financial risks The Trust's investment activities expose it to a variety of financial risks that include valuation risk, liquidity risk, market price risk, credit risk, foreign exchange risk and interest rate risk. Further details are disclosed in note 19 to the Financial Statements, together with a summary of the policies for managing these risks. Liquidity risk The Trust, 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 Trust manages its liquid resources to ensure sufficient cash is available to meet its contractual commitments. In the event that the Directors have any particular concerns regarding the liquidity of the Trust and its cash resources, the Trust may exercise an opt-out in respect of new buyout investments alongside HgCapital 6 in order to manage the risk of over-commitment. During 2011 the Directors also arranged a Â£40 million three-year standby facility (see above), allowing further flexibility in the management of the Trust's resources. SOCIAL, ENVIRONMENTAL & ETHICAL POLICY In 2006 and again in 2010, the Trust committed to invest in the Hg Renewable Power Partners funds, which the Board believes offer a profitable route for the Trust to participate in efforts to combat climate change. The Manager addresses other investment opportunities on a sector basis. The sectors chosen do not generally raise ethical issues. The Trust has no employees and has limited direct impact on the environment. The Trust aims to conduct itself responsibly, ethically and fairly and has sought to ensure that HgCapital's management of the portfolio of investments takes account of social, environmental and ethical factors where appropriate. Stewardship HgCapital and the Trust seek 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 Trust adopts a positive approach to corporate governance and engagement with companies. The exercise of voting rights attached to the Trust's portfolio has been delegated to HgCapital. As acknowledged by the Walker Review, the distance between owner and manager within the private equity model is relatively short and the link between the two is an important ingredient in investment performance. HgCapital has a policy of active portfolio management and ensures that significant time and resource is dedicated to every investment, with HgCapital executives typically being appointed to investee company boards in order to ensure the application of active, results-orientated corporate governance. Further information regarding the stewardship of investee companies by HgCapital can be found in the Manager's review. FUTURE PROSPECTS The Board's main focus is on the achievement of capital growth and the future of the Trust is dependent upon the success of the investment strategy. The outlook for the Trust is discussed in the Chairman's statement and the Manager's review. DERIVATIVE TRANSACTIONS On 27 August 2008, the Manager, on behalf of the Trust, entered into a â‚¬25 million forward foreign exchange contract and a â‚¬12.5 million option contract with a duration of four 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 contract 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. During the year, the option contract was realised and the forward foreign exchange contract was partially realised, reducing our exposure to â‚¬1.5 million. The current write-down of Â£52,000 on the remaining derivative 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 19 of the financial statements. *The annual report contains the following statement regarding the Directors' responsibility for preparing the annual report and financial statements. 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 Trust and of the profit or loss of the Trust for that period. In preparing these financial statements, the Directors are required to: â€¢ select suitable accounting policies and then apply them consistently; â€¢ make judgements and accounting estimates that are reasonable and prudent; â€¢ state whether applicable UK Accounting Standards have been followed; and â€¢ prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Trust will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Trusts' transactions and disclose with reasonable accuracy at any time the financial position of the Trust 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 Trust 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 Trust'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: â€¢ the financial statements, prepared in accordance with UK Accounting Standards give a true and fair view of the assets, liabilities, financial position and profit or loss of the Trust; and â€¢ the Directors' Report includes a fair review of the development and performance of the business and the position of the Trust, together with a description of the principal risks and uncertainties that it faces. By order of the Board Roger Mountford, Chairman 15 March 2012 Annual General Meeting (`AGM') The AGM of the Trust, which will include a presentation by the Manager, will be held at the offices of HgCapital, 2 More London Riverside, London SE1 2AP on Thursday 10 May 2012 at 12 noon. Light refreshments will be available at the conclusion of the AGM. Notice of the AGM is given in the annual report and accounts. National Storage Mechanism A copy of the annual report and financial statements will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at: www.hemscott.com/nsm.do. Neither the contents of the Trust's website or the Manager's website, nor the contents of any website accessible from hyperlinks in this announcement or on those websites (or any other website), is incorporated into, or forms part of, this announcement.

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