Annual Financial Report

STRATEGIC EQUITY CAPITAL PLC ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2013 The full Annual Report and Accounts can be accessed via the Company's website at: www.strategicequitycapital.com or by contacting the Company Secretary by telephone on 01392 412122. INVESTMENT OBJECTIVE The investment objective of the Company is to achieve absolute returns (i.e. growth in the value of investments) rather than relative returns (i.e. attempting to outperform selected indices) over a medium-term period, principally through capital growth. The Company's investment policy can be found within the Extracts from the Report of the Directors, below. INVESTMENT MANAGER'S STRATEGY The Investment Manager, SVG Investment Managers Limited ("SVGIM"), employs a strategy to invest in publicly quoted companies which create value through strategic, operational and management change. SVGIM follows a practice of constructive corporate engagement and aims to work with management teams in order to enhance shareholder value. A more detailed explanation can be found in the Investment Manager's Report below. FINANCIAL SUMMARY At 30 June 2013 2012 % change Performance Total return (1) 25.40% (0.92%) Capital return Net as set value (statutory) per Ordinary 126.36p 101.96p 23.93% share Ordinary share price (mid-market) 104.25p 82.00p 27.13% Discount of Ordinary share price to net 17.50% 19.58% asset value Average discount of Ordinary share price to net asset value for year 17.71% 17.65% Total assets (Â£'000)(2) 79,791 69,074 15.52% Equity shareholders' funds (Â£'000) (2) 78,396 68,639 14.21% Ongoing charges (3) 1.16% 1.15% Revenue return per Ordinary share 1.45p 1.61p Dividend yield (4) 1.44% 1.83% Proposed final dividend for year 1.50p 1.50p n/a Ordinary shares in issue with voting rights (2) 62,039,682 67,317,324 (7.84%) Year's Highs/Lows High Low Net asset value per Ordinary share 127.25p 100.57p Ordinary share price 106.50p 81.25p (1) Total return is the increase/decrease per share in net asset value plus dividends paid. (2) Semi-annual tender offers took place in November 2012 and May 2013 resulting in 5,277,642 shares being bought back for cancellation during the year, at a cost of Â£5,645,000 (including stamp duty). Further information on the tender offer process can be found below. (3) The ongoing charges figure has been calculated using the Association of Investment Companies' ("AIC's") recommended methodology and relates to the ongoing costs of running the Company. Non-recurring fees are therefore excluded from the calculation. (4) Dividend yield is calculated using the proposed dividend for the year and the closing share price. CHAIRMAN'S REPORT Introduction I am pleased to report that over the financial year the Company continued to see healthy gains in the value of its portfolio companies. In addition realisations significantly reduced its exposure to unlisted investments. The Manager's focus on high quality smaller companies with strong competitive positions in growing niche markets led to the majority of the increase in portfolio value being driven by sustainable earnings growth rather than re-rating and market sentiment. Performance As at 30 June 2013 the Company had net assets of Â£78.4 million (126.4p per share). This represented an increase of 23.9% over the previous year on a net assets per share basis and 14.2% growth in net assets. Including dividends the Company delivered a total return to shareholders of 25.4% over the 12 months. In addition, the Company has returned 8% of its capital to shareholders through tender offers at a premium to market value. The Company's NAV per share has delivered a total return of 92.7% over the past three years, significantly exceeding the 61.6% return from the FTSE Smaller Companies ex Investment Trust index, delivering attractive absolute returns and outperforming on a rolling three year basis. The five year NAV per share return is also comfortably ahead of the index. This long term performance partially reflects the refinements made to the investment process following the financial crisis, and continues to confirm my confidence in the Company's investment strategy. Although the growth of the Company's NAV lagged the FTSE Smaller Company index over the past year, this has been a direct result of the clearly stated policy of the Manager to only invest for the long term in higher quality companies with strong balance sheets and limited exposure to discretionary consumer spending. In comparison, much of the return of the index was driven by a short term re-rating of higher risk, highly indebted, typically lower quality companies. Some of these companies, such as Thomas Cook, were larger constituents of the index which saw astonishing rises in their share prices, leading to a disproportionate impact on the total index return. Notably, the Company's NAV growth over the year was delivered with lower volatility than the market and very low beta, leading to a steady increase in value driven by company performance rather than market sentiment. This is reflected in the Company having been awarded a maximum 5 Crown rating by Trustnet for its risk adjusted performance. Tender Mechanism The average discount to NAV at which the Company's shares traded remained unchanged at 17.7% over the year. It is worth noting that the level of the discount has been narrowing since the end of 2009. The discount narrowed significantly in the run up to the tender offers. The Board At the last AGM I gave notice of my intention to step down as Chairman of your Company at the forthcoming AGM. During the year it became apparent that there was a possibility of a change in the ownership of our Manager following the new relationship of SVG Capital (the owner of our Manager) and Aberdeen. This change of ownership has now been announced. Your Board agreed that it would be in the best interests of your Company for the Board to remain unchanged until the acquisition is completed and the new arrangements are working satisfactorily. The Board will then take the necessary steps to recruit a replacement Chair and refresh Board membership as we think appropriate. Investment Manager The various improvements made to the investment process since the financial crisis has led to a clear improvement in the Company's performance and consistency of returns. I remain confident that the Manager's approach to investment should create value for shareholders over the long term. Having reviewed the Investment Manager's reports I can confirm that it has complied with our investment restrictions and the Financial Conduct Authority ("FCA") rules. Hansa Aktiengesellschaft ("Hansa"), a Swiss-based international investment and holding company with total assets of approximately US$1.8 billion, has entered into an agreement to acquire the Manager, SVG Investment Managers Limited ("SVGIM"), from SVG Capital plc. This has been approved by the FCA. Hansa will be the majority owner of SVGIM; the senior management of SVGIM will purchase a significant minority stake in SVGIM on the same terms as Hansa. SVGIM will retain its successful investment culture and process within the new structure but with significantly greater assets to manage or advise. The current investment managers of Strategic Equity Capital will be unchanged, and retain complete investment autonomy, ensuring continuity of approach. Banking Arrangements The Company does not currently maintain a bank facility and does not operate with any leverage. The Board and the Manager reviews the appropriateness of the Company's banking and leverage arrangements on a periodic basis. Dividend The Directors continue to expect that returns for shareholders will derive primarily from the capital appreciation of the shares rather than from dividends. The Board is proposing a final dividend of 1.50p per Ordinary share for the year ending 30 June 2013, payable on 15 November 2013 to holders on the register as at 18 October 2013. AGM The Annual General Meeting of the Company will be held at 11.30am on Tuesday 5 November 2013 at the offices of Canaccord Genuity Limited, 1st Floor, 41 Lothbury, London EC2R 7AE. Shareholders are asked to register at 1st Floor Reception upon arrival. Continuation Vote At each AGM of the Company, shareholders are given the opportunity to vote on an ordinary resolution that the Company continues as an investment trust. The Company's net asset value performance, on a total return basis, has been strong, up 25.4% over the year to 30 June 2013 (albeit lagging the FTSE Small Cap ex Investment Companies Index for the year), and outperforming the FTSE Small Cap ex Investment Companies Index on this basis over three and five years. In addition, your Board is of the opinion that there remain attractive investment opportunities in selected companies. Accordingly, the Board is recommending that shareholders should vote in favour of the continuation resolution. AIFMD The Alternative Investment Fund Managers' Directive came into force in July of this year. Alternative Investment Fund Managers ("AIFMs") have until 22 July 2014 to obtain the relevant authorisation or registration under the Directive. We expect that the Company will not fall within the full scope of the Directive due to its size and lack of gearing but the question of who should be the Company's AIFM remains, and the Board is considering the various options. Marketing Activities The Manager and the Company's broker continue to work together to broaden the shareholder base. I am optimistic that the Company's narrowing discount, long term track record and SVGIM's increased marketing resource should all combine to make further progress over the next year. Outlook The Board shares the Manager's belief that the prospects for the Company remain good. The valuation of the portfolio remains attractive. The underlying companies are performing well and have strong balance sheets. The efficacy of the Manager's improved investment process has become increasingly visible in the Company's track record, which has continued to lead to interest from potential new shareholders as well as awards from external market rating agencies. J Hodson 12 September 2013 Directors John Hodson (Chairman) Sir Clive Thompson (Deputy Chairman) John Cornish Ian DighÃ© Michael Phillips INVESTMENT MANAGER'S REPORT Investment Strategy Our strategy is to invest in above average quality publicly quoted companies which will create capital growth through strategic, operational or management change. We follow a practice of constructive corporate engagement and aim to work with management teams in order to enhance shareholder value. We aim to build a consensus with other stakeholders, and prefer to work alongside like-minded co-investors as leaders, followers or supporters. We try to avoid confrontation with investee companies as we believe that there is strong evidence that overtly hostile activism generally generates poor returns for investors. We are long term investors; we typically aim to hold companies for the duration of three-year investment plans that include an entry and exit strategy and a clearly identified route to value creation. The duration of these plans can be shortened by transactional activity or lengthened by adverse economic conditions. Before investing we undertake an extensive due diligence process, assessing market conditions, management and stakeholders. Our investments are underpinned by buying at a discount to fundamental value, which we derive using private equity-based techniques. These include a focus on cash flows, the potential value of the company to trade or financial buyers and potentially beneficial changes in capital structure over the investment period. Our typical investee company has a market capitalisation of under Â£150 million at the time of initial investment. We believe that smaller companies provide the greatest opportunity for our investment style as they are relatively under-researched, often have more limited resources, and frequently can be more attractively valued. We believe that this approach, if properly executed, will generate favourable risk adjusted returns for shareholders over the long term. Market Background In contrast to the turbulence of the prior year, stock markets rallied strongly over the financial period, pausing only for breath in late November and May. The FTSE Indices have delivered unusually strong returns; 17.9% for the FTSE All Share, 32.8% for the FTSE 250 and 38.6% for the FTSE Small Cap Index. Risk appetite is clearly returning, as witnessed by the out performance of FTSE Small Cap compared with other indices. However, the stellar performance of the Small Cap Index was not uniform, with the median small cap stock only returning 15% over the period, less than 40% of the return of the index. A handful of larger constituents, typically highly indebted and exposed to discretionary UK spending, drove the market. The four sectors of Travel & Leisure, General Retail, Real Estate Investment & Services and Construction & Materials sectors, accounting for 28% of the Index constituents in June 2012, delivered 56% of the total index performance over the year, with Thomas Cook alone delivering 4.9% points of the index performance across the year (Source: Factset Portfolio Analysis System). Re-rating in general has been a major driver of the market over the past year, with the forward p/e multiple of the Small Cap Index increasing from 9.6x to 11.7x. The average price to book ratio has also increased from 1.0x to 1.4x over the last year. Many share prices have been driven by momentum and not fundamentals. In some areas of the market, we perceive this has led to some pockets of overvaluation and complacency, masked by the overall rating of the market. In particular, we do not believe that the recovery in consumer cyclicals, and the associated re-ratings will prove to be sustainable over the medium term due to (a) continued real wages decline and (b) ultra (and unsustainably) low interest rates. The "feel-good" factor may have returned, but the inevitable medium term rise in interest rates will come and dampen enthusiasm. We also believe that the premium rating of the FTSE 250 Index relative to the FTSE Small Cap Index looks increasingly anomalous, given its slowing earnings growth. Performance Review Performance over the period continued to be driven by stock specific factors, with many of the self-help and recovery situations continuing to play out. Self-help at Lavendon, CVS and Wilmington to re-align costs and resources helped deliver strong returns. Holdings with a high proportion of sales to the recovering North American market performed well, notably Tyman and 4imprint. Whilst the level of absolute NAV growth was strong, the Company's lack of exposure to domestic earners in the Travel & Leisure, General Retail, Real Estate Investment & Services and Construction & Materials sectors tempered the performance relative to the FTSE Small Cap Index, a reversal of previous years. It is also notable that many other fund managers shared our views on these sectors, with the average IMA UK Smaller Companies fund significantly underperforming over the year. In the autumn of 2012, we recognised that the headline multiples of many companies in these sectors looked low. In our opinion these companies have impaired business models, are over geared, and have other specific investment risks (e.g. high pension deficits; structurally unattractive markets; poor return on capital). As an example, we reviewed Thomas Cook in October, when the share price was heavily depressed and the equity priced on c.35% free cash flow yield and the company heavily indebted with a poor trading history. Whilst we felt that there could be good upside in the share price, it was dependent on (a) successfully convincing the banks to support a period of stability and (b) a recovery plan driven by a management team with limited experience in the sector. We concluded that we could not accurately assess the likelihood of success and that purchasing the shares would have been akin to taking a bet rather than making an investment decision. The Company's NAV growth has been delivered with lower volatility than the market and a low beta of 0.3x (Source: Numis Securities), and we believe that the risk adjusted return is highly favourable. The risk statistics also indicate that a high proportion of the portfolio absolute returns over the year were driven by stock specific events, rather than merely the market re-rating. Since we set out to improve the investment process in 2009, we have specifically decided to only invest in companies of above average quality, with strong business models, where our co-ownership can influence and help positive change, and where none of our "blacklist" criteria are present. We continue to believe that the tactic of investing in these highly cash generative, niche market leaders, with a high proportion of overseas earnings and avoiding companies with exposure to discretionary UK public or consumer spending, with added corporate engagement will deliver attractive absolute returns over the medium to long term. However, the unconstrained and concentrated nature of the Company's portfolio is likely to lead to uncorrelated performance relative to comparative indices, and potentially periods of underperformance against specific indices. Top 5 contributors to performance Period Valuation attribution at period end (basis points) Company Â£'000 % Tyman 9,335 +763 4imprint 7,175 +639 Lavendon 6,529 +471 CVS Group 4,388 +193 Wilmington 3,839 +186 Of the 23 positions held over the year, eight delivered returns higher than the Small Cap Index. 18 delivered positive returns. Large holdings Tyman, 4imprint, Lavendon, CVS and Wilmington delivered market beating returns of 67%, 84%, 60%, 46% and 103% over the year, materially outperforming the 38.6% rise in the Small Cap Index. The Tyman management team has positioned the group well for the recovery in the North American market. The transformational $200m acquisition of Truth in May 2013 will increase this exposure- we estimate 75% of group sales and a higher proportion of group profits are derived from North America following the deal. It remains the largest holding in the portfolio. The move from AIM to the main market in July 2013 is likely to increase liquidity and drive a re-rating of the shares. We believe there is considerable scope for earnings upside due to the high operational gearing. 4imprint continues to deliver low teens growth from its disruptive business model in North America. Again, it has a high proportion of sales derived from North America-c.90%. We continue to believe it can generate mid teens earnings growth for the foreseeable future. The company has re-rated significantly over the past year. Lavendon continued to perform well, as end markets improved in the Middle East and self-help initiatives in Europe more than offset lacklustre end markets. CVS continued to re-rate over the year, as the underlying sales performance improved and the company continued to reduce its gearing. Wilmington recovered significantly from a depressed level last year, helped by a return to earnings growth and the appointment of a highly regarded new Finance Director. It still looks attractively priced given the improved double digit earnings growth outlook and the c.9% combined annualised return and from the dividend de-gearing. Unlike past years, the portfolio did not benefit from new takeover approaches to individual holdings, or significant divisional disposals. We continue to believe that the valuation and business model characteristics of the portfolio holdings make them susceptible to M&A activity. In addition, the strong balance sheets of the portfolio companies enable them to execute value enhancing M&A of their own. Bottom 5 contributors to performance Period Valuation attribution at year end (basis points) Company Â£'000 % E2V Technologies 9,061 (170) Mecom Sold (60) Optos Sold (45) Andor 1,633 (5) Kewill Sold (1) On the negative side, E2V Technologies released disappointing news flow through the year, leading to earnings downgrades. Whilst some defence and industrial markets deteriorated, we believe that some of the underperformance was driven by suboptimal operational management, especially in the imaging division. The company has some excellent market positions, world leading technology and enjoys high margins. Notwithstanding the restructuring since 2009, we felt that the company was failing to deliver to its full potential - with respect to organic growth, margins and cash flow. In addition, we had some lingering governance concerns. Following intervention by SVGIM and other shareholders, a new chairman was appointed in April 2013. He has acted quickly and decisively to date and we believe this will herald a sustained period of improved financial and shareholder returns. Even on depressed earnings, the shares trade at a considerable discount to what we believe to be fair value today. Mecom's disappointing streak continued through the year, driven predominately by advertising revenues deteriorating faster than anticipated in its key Dutch markets. Operating gearing in the business model led this to have a severely negative impact on profits. Following a meeting with the management team in March, we decided to exit the position. The company is clearly heading down a break up route. However, we believe that there are fewer potential buyers for the remaining assets. This low competitive tension, combined with continued poor outlook for the end markets, led us to believe that the company would struggle to deliver the 7x EBITDA multiples achieved from past disposals in 2009. With the break up process elongating, deteriorating cash flows and weakening M&A comparatives, we decided to exit the position. This was largely complete by the time of the latest profits warning in April 2013. We established a small position in Optos in late Q2 2012. We were attracted to its market leading technology and the growth prospects from the launch of a new product family. However, we exited the position before building it to a major weight for two key reasons. Firstly, our due diligence had highlighted that the changing business model might lead to a short term deterioration in the proportion of profits which turn into cash. The first trading statement following our initial investment showed cash conversion significantly below our expectations and the explanations for this posed more questions than they answered. Secondly, we were unable to complete a key part of our remaining due diligence. Andor released a brace of disappointing trading updates during the year. This was not unexpected and we had started to build the position cautiously. The company is suffering from a hiatus in end markets, leading to some pressure on the release of customers' R&D budgets which ultimately drive its sales. We believe this hiatus is temporary, and will clear within the next year or so. Neither R&D nor sales budgets have been cut and as a result margins and earnings have fallen by a significant degree over the year. The market is pricing in no return to growth, or margin expansion back to historic levels which we believe is very conservative. The lack of short term earnings momentum has also acted as a drag on the rating. Kewill was acquired by Francisco Partners in Q3 2012, having announced bid talks in Q2 2012. A number of other stocks underperformed, largely due to the lack of earnings momentum rather than fundamental overvaluation. This did lead to a number of opportunities to add to positions at compelling valuations. Strategic Recovery Fund II returned less than the aggregate portfolio, mainly due to the relatively high weighting in E2V. Dealing activity The level of portfolio turnover was 20.9% with disposals of Â£14.9m (excluding distributions from unlisted investments) in the period representing around 22.9% of the weighted average NAV. In addition Â£11.5m of distributions were received from unlisted investments. Â£14.1m of purchases were made with the vast majority of purchases representing additional investment into existing holdings. Strong performances from 4imprint, Tyman and Lavendon necessitated some taking of profits, raising Â£2.1m, Â£3.3m and Â£2.3m respectively. In addition, funds were raised from investments which had disappointed, and mature investments, partial or full exits in other holdings where these were complete, or where the risk adjusted return was unattractive. The final holding in Statpro was sold in a mini-block, raising Â£1.4m. The toe hold positions in Avingtrans and Brewin Dolphin were sold, achieving good returns. We deployed the proceeds into enlarging existing holdings and establishing small to medium weights in three new investments. Existing positions in Allocate, CVS, Goals Soccer and Gooch & Housego were increased. We continue to believe that the growth outlook will improve substantially for Allocate and Gooch & Housego. In our opinion, the former is very modestly rated given the strong medium term growth prospects and cash generation and one of our most undervalued holdings. Â£4.4m was deployed in new investments, mainly Andor Technology (Â£2.2m), Northbridge Industrial Services (Â£0.8m) and XP Power (Â£1.4m). All were made through market purchases. Andor is a global leader in the design and manufacture of high performance digital cameras. Originally spun out of Queen's University in Belfast, it has become the market leading product in a number of high end niche applications. We believe that considerable growth opportunities remain over the medium to long term, driven by modest end market growth, further share gain through the launch of a new mid-market model, and leveraging the company's IP by entry into new market niches. It trades at a considerable EV/Sales discount to the level which we believe trade acquirers would be prepared to pay to acquire the business. There is substantial cash on the balance sheet. The tough end market conditions are well known, albeit some short term risk still exists. A reversal in market conditions, when it occurs, is likely to deliver substantial step up in earnings. Judged on short term performance, our initial purchases have proven to be a little premature. However, they should deliver a good medium term return. There is considerable scope to increase the weight on completion of our due diligence. Northbridge Industrial Services is a specialist equipment hire company, supplying loadbanks, transformers and specialist oilfield equipment. It is one of the few global designers and manufacturers of loadbanks and also manufactures its own transformers. It is a global business, with exposure across all five continents. XP Power is a leading designer, engineer and manufacturer of power supplies and converters. It focuses on the low volume/high value market segment, where the end products tend to be business machines with multi year product life cycles, in comparison to supplying high volume/low value consumer electronics customers, typically operating on 9-12 month product life cycles. Over the past decade, it has transformed from distributor to integrated designer and manufacturer. It sells to a very broad global customer base. The company suffered from a weak start to 2012, which led to earnings downgrades and a significant de-rating. The company has a very high return on capital employed, is strongly cash generative and has good growth prospects across the cycle. Given the high operational gearing in the business, recovering end markets from mid 2013 should drive substantial medium term growth in earnings and cashflows. We were also attracted to the strong balance sheet and shareholder friendly dividend policy. At our point of entry, the company was priced for negligible growth. When making new investments, we continue to be highly selective. We are conscious to avoid investing at close to peak multiples for peak earnings, and where valuation has neither support from precedent M&A transactions, nor underlying cash flows. However, we are still able to deploy capital which we believe should generate IRRs notably ahead of the 15% level we target across the cycle. The nature of the pipeline has changed since the New Year, with new prospects typically quality businesses which have lagged the markets, trading on attractive ratings, as well as the return of more interesting, quality secondary fundraisings. Unusually, we are also considering two IPOs which are special situations, and likely to happen in late Q3/early Q4 2013. One is a UK business operating in a market we know well, where the transaction is being driven by the foreign corporate owner wishing to exit overseas business activities. The other is a replacement capital fundraising for a privately owned asset, co-owned by some of the UK high street lenders. We know the markets the company operates in extremely well due to an existing successful investment in the area. Both potential investments are likely to be priced attractively. Portfolio as at 30 June 2013 Largest Investments 2012 2011 Date % of % of % of Sector of first Cost Valuation invested invested net Company classification investment Â£'000 Â£'000 portfolio portfolio assets Tyman Manufacturing Apr 2007 4,105 9,335 13.1 12.2 11.9 E2V Technologies Technology Oct 2009 3,306 9,061 12.7 10.1 11.6 4imprint Group Support Services Feb 2006 3,584 7,175 10.0 8.4 9.2 Lavendon Group Support Services Nov 2009 2,497 6,529 9.1 8.5 8.3 KCOM Group Telecoms May 2007 2,653 5,956 8.3 7.8 7.6 CVS Group Retail Oct 2010 2,513 4,388 6.1 4.3 5.6 Allocate Software Technology Dec 2009 3,534 4,206 5.9 5.7 5.4 Gooch & Housego* Technology Dec 2011 3,106 4,013 5.6 2.0 5.1 Wilmington Group Media Oct 2010 3,733 3,839 5.4 1.9 4.9 RPC Group Manufacturing Feb 2007 1,981 3,746 5.2 6.3 4.8 *Second investment following previous holding March 2010 to November 2010. Sector spilt % Technology 26.4 Support services 21.5 Manufacturing 16.7 Net cash 8.9 Telecoms 7.6 Retail 5.6 Media 4.9 Leisure 4.7 Unquoted investments 3.7 Size split (by market capitalisation) % Greater than Â£500m 4.8 Â£300m - Â£500m 19.5 Â£100m - Â£300m 46.9 Less than Â£100m 16.2 Net cash 8.9 Unquoted investments 3.7 Portfolio Review The portfolio remained highly focused, with a total of 17 holdings, with the top 10 holdings accounting for 74.4% of net assets. The portfolio remains predominantly invested in quoted equities. However, the percentage of the portfolio invested in unlisted securities changed from 19.3% to 3.7% of net assets at the end of the period largely due to the ongoing exit from SRFII. 8.9% of the portfolio was invested in cash at the period end. Operationally the portfolio is in good shape. Poor performers have been either exited, or, in the case of E2V, earnings appear to have bottomed out. The exception is the immature holding in Andor where end market conditions remain challenging, albeit the management team has taken the deliberate decision not to reduce discretionary R&D and sales force costs. We continue to believe that the majority of portfolio holdings continue to trade at significant discounts to comparable M&A trade multiples. The absolute valuation of the portfolio remains attractive given the earnings growth and dividend. The 12.6% SVG free cash flow yield* is also attractive; we tend to regard a cash yield less than 10% as a sign of valuations becoming stretched. The strong average balance sheet of portfolio holdings allows for the underlying companies to fund growth initiatives, and, if appropriate, increase cash returns to shareholders. Despite it being much less highly geared than the index, the portfolio only trades on a modest p/e premium to the FTSE Smaller Companies Index. This indicates that, on a balance sheet adjusted basis, the portfolio is trading at a discount. In addition, the portfolio is forecast to deliver both superior earnings growth and a marginally higher dividend yield than the index. *SVG free cash flow yield is equal to (operating cash flow less maintenance capex) dividend by enterprise value. Portfolio Characteristics Strategic Equity Smaller Consensus Median portfolio characteristics Capital companies Price/Earnings ratio (FY1) 12.4X 11.7X Dividend yield 3.0% 2.9% Price/Book ratio 2.2X 1.4X Price/Sales ratio 1.2X 0.5X Price/Cash flow ratio 11.8X n/a SVG Cash flow yield 12.6% n/a Forecast earnings growth (FY1) 10.6% 9.9% Forecast net debt to EBITDA 0.5X 2.5X Source: Factset Portfolio Analysis System, Investec, Peel Hunt. FY1 = forecast next 12 months. Unlisted Investments The Company's largest unlisted investment, SRFII, ended its life in June 2013. The majority of the proceeds were cash. However, remaining holdings, where we believed there was significant value, namely E2V, were transferred in specie. The SRFII investment has delivered an IRR of 36.8% and cash multiple of 2.8x cost, net of fees, since purchase in August 2009. This compares with an IRR of 13.5% for the FTSE Small Cap ex Investment Trusts Index, and the Company's net asset value total return of 25.2% IRR and 2.3x cost over the same period. Over the financial year the Company received Â£0.3m from Vintage Mizuho I, bringing the total distributions from unlisted investments to Â£11.5m for the year. The outstanding commitment relating to Vintage is â‚¬1.6m and its manager has communicated that it does not expect to make any further net draw downs. The Vintage investment has delivered an IRR of 46.1% and cash multiple of 5.7x cost since first investment in 2007. The FTSE Small Cap ex Investment Trusts Index has delivered a total return of -16.4% over the same period. Outlook We remain of the view that the outlook for UK smaller companies is positive. Forward earnings growth forecasts for the FTSE Small Cap ex Investment Trusts Index is 9.9%, and is notably higher than both the FTSE 250 and FTSE All share (7.5% and 6.3% respectively) for the first time since late 2007. Valuations are not as low as they were in 2009, however we believe in aggregate, they remain below fair value. This is in spite of the re-rating of the market over the past year - significant in the case of Small Cap which has re-rated from a forward p/e of 9.6x to 11.7x. The mix of the rating, earnings growth and dividend yield of the market suggests that mid teens total medium term returns are achievable, potentially more, if markets re-rate further. From a macro perspective, the growth and stability pictures are mixed. There is clear recovery momentum in both the UK and North American economies. To date the UK recovery appears to be the "wrong type of growth"- consumer led (unsustainable in our view given record low interest rates) rather than export led. There are some signs that industrial confidence is rising, and the depreciation of sterling experienced over the last two years could finally deliver industrial growth in the UK. In addition, there are record numbers of workers in the private sector. Two major problems remain: (a) to date, negative real wage growth and (b) government debt which remains too high, fuelled by spending, which also remains too high. The new Bank of England Governor appears likely to continue to set policy for base rates to deliver negative real interest rates. The sustainability of this low interest rate policy will be dependent on the continued support of international investors, a relatively narrow trading range for sterling, a well executed exit from QE, tolerance for gilt investors to be satisfied with negative real returns and continued political stability. Loss of one or a combination of these factors could lead to unexpected and rapid rate rises, which would quickly kill off any consumer related recovery. Interest rates must rise at some stage - we only hope that the UK consumers have deleveraged more by then. By comparison, the US recovery appears broader, with most sectors other than public spending showing growth. The US consumer has repaired its balance sheet. US manufacturers are enjoying a renaissance driven by falling energy prices (a result of shale gas) and labour rates becoming more attractive relative to cheaper offshore locations. Job shortages are reported in the construction sector, which appears to be in the foothills of a multi-year recovery. 31% of the Company's portfolio holdings' sales are derived from North America, and we believe, a higher proportion of earnings. This exposure to the US has increased substantially over the past two years and we are very comfortable with it. In comparison to the UK and North America, the outlook in Europe, Asia and the BRICs is less positive. In Europe, Mario Draghi's July 2012 commitment to "do what ever it takes" to save the Euro, with the establishment of OMT (Outright Monetary Transactions) scheme clearly placated the markets in the short term, and led to reduced borrowing costs for the endangered periphery European governments. However, we perceive that the continued policy failures of the European politicians and austerity fatigue will lead ultimately to a binary outcome. The more palatable short term, structured outcome is QE through a mechanism which will be "acceptable" to Germany, likely after the German elections. This would broadly be positive for markets and lead to a long overdue relative depreciation of the Euro. The alternative is that political instability in the peripheral countries will force an unstructured partial or full break up of the Euro, with banks across the Eurozone being forced to take losses which their balance sheets may not be able to sustain. This latter scenario could lead to significant market volatility. Fortunately, corporate balance sheets remain strong - and in some cases, companies are arguably overcapitalised. There has been some evidence of companies re-gearing and returning cash to shareholders through special dividends and buybacks. M&A activity remains low, but is building with several large deals announced at the tail end of June. Feedback from the corporate finance community is that there is significant M&A interest, but deals are taking a long time to consummate. Due diligence processes are prolonged and there are often multiple price negotiations prior to exchange of contracts. Although financial buyers are completing larger leveraged buyouts, deal activity in the small and mid cap space is sporadic, driven by limited leverage and limited sources of lending. Trade M&A appears to be ticking up and more of our portfolio companies are soliciting opinions from investors on this subject. With record low cost of borrowing, well selected and executed acquisitions have the potential to add significant value. The significant increase in activity in the small and mid cap IPO market has also been a welcome sign that equity markets are beginning to function again. We believe this trend will continue, and are willing to consider primary issues on a highly selective basis. Underlying share trading volumes remain flat, with the value statistics being inflated by the absolute rise in value of the indices. We have often spoken of the contraction in the sell side broker capacity, driven by poor trading volumes and a lack of primary and secondary equity issuance and falling margins. There is some evidence of recovery here, although we would not rule out further consolidation. To conclude: we continue to believe equities offer compelling absolute and relative medium term returns compared with other asset classes. The aggregate market rating is closer to fair value than for some time, although we believe still offers rating upside. However, there are both pockets of overvaluation in markets, as well as lingering systematic risks, which causes us to retain a level of caution. This will continue to drive our stock selection, always seeking a margin of safety in valuations as well as investing in companies with above average business models and cash generation, and geographic diversity of their sales. Adam Steiner/Stuart Widdowson SVG Investment Managers Limited 12 September 2013 All statements of opinion and/or belief contained in this Investment Manager's report and all views expressed and all projections, forecasts or statements relating to expectations regarding future events or the possible future performance of the Company represent SVG Investment Managers Limited's own assessment and interpretation of information available to it at the date of this report. As a result of various risks and uncertainties, actual events or results may differ materially from such statements, views, projections or forecasts. No representation is made or assurance given that such statements, views, projections or forecasts are correct or that the objectives of the Company will be achieved. TOP 10 INVESTEE COMPANY REVIEW 4imprint Group is the fourth largest distributor of promotional products in the world with an international network of companies in the UK, USA, Hong Kong and Europe. We have been involved with the company since a change of management in 2003. The company has benefited recently from material upgrades to forecast earnings. Following the disposal of Brand Addition, the fast growing US business accounts for virtually all of the profits of the group and the company has significant net cash balances. The rating reflects neither the growth prospects, nor the quality of the business. Funds managed by SVGIM currently hold approximately 8% of the company's equity. Allocate Software is the leading workforce optimisation software applications provider for global organisations with large, multi-skilled workforces. It is the clear European market leader in the healthcare vertical market, where the compelling return on investment for clients is driving significant growth. It is also the clear lead provider of optimisation software for the global offshore and defence markets. A strong management team is focused on delivering continued profitable growth, maximising the commercial potential of the product suite. SVGIM became a major shareholder as part of a placing to fund the acquisition of its Nordic equivalent, Timecare AB, in December 2009. The company has subsequently made three further acquisitions of complimentary businesses - Dynamic Change and Zircadian in the UK and RosterOn in Australia. The quality and visibility of earnings has improved materially over the company's period of ownership, but this has yet to be reflected in the rating. Funds managed by SVGIM currently hold just under 10% of the company's equity. CVS Group is the UK's leading operator of veterinary practices, with a market share of c.12%, several times the size of its nearest competitor. CVS has followed a strategy of consolidating the market through the acquisition of single and small chains of practices, largely funded by debt. Given the economics of scale in veterinary drug and products purchasing, the roll up economics are compelling. SVGIM became a shareholder following a period of disappointing trading. The shares de-rated significantly as disappointed growth investors exited and other investors concerned about the level of borrowings reduced their holdings. With limited ongoing capex requirement, we believed that the company could degear rapidly and still continue its roll up strategy. The entry valuation was undemanding on a cash flow basis and demand for its services is less discretionary than for many other retailers. Funds managed by SVGIM currently hold approximately 4% of the company's equity. E2V Technologies is a global market leader in the design and manufacture of specialist electronic components and low volume, high value, high reliability semiconductors, predominately for the medical, aerospace, defence and industrial markets. An ill-timed acquisition in September 2008 funded by debt left the balance sheet of the business over-stretched as the economic downturn began. A new Finance Director, well known to SVGIM, was appointed in May 2009. The management team acted, raising new equity to pay down debt as well as restructure the UK and French cost base, a process which is now largely complete. The Company made its initial investment during December 2009 via a placing and a deeply discounted rights issue to refinance the balance sheet. The restructuring has been executed flawlessly. The final phase was disposal of non-core assets earlier this year, which has virtually eliminated debt. We believe that the group remains materially undervalued compared to precedent M&A multiples in its sector. Funds managed by SVGIM currently hold approximately 5% of the company's equity. Gooch & Housego is a global designer and manufacturer of precision optical components and sub-systems, and light measurement instrumentation products. It has particular expertise in acousto optics, fiber optics and crystal growth technologies. Products are typically in high value, low volume applications in demanding industry verticals such as aerospace and defence, healthcare and high reliability industrials. We believe that the company has three key long term growth drivers: 1) fiber optical substitution of conventional electronics and wiring 2) new applications in medical and life science applications 3) growing sales of higher value add subsystems and modules. Funds managed by SVGIM currently hold approximately 4% of the company's equity. KCOM Group is a provider of communications solutions to businesses in the public sector in the UK. It also has a very strong regional consumer-based business based around Hull in East Yorkshire. Following discussions instigated by shareholders the company announced major changes to its management team in November 2008. Following further consultation with shareholders the company has implemented an innovative remuneration package that closely aligns shareholders and management. Since then, the company has undergone a strategic review and announced an important network sharing deal with BT Group. The positive impact of these changes and the company's growth potential has taken time to be translated into headline sales growth and many potential shareholders are sceptical that the growth will emerge. However, the company remains highly cash generative, with strong earnings visibility and the Board has committed to a further three year period of double digit dividend growth. Funds managed by SVGIM currently hold less than 3% of the company's equity. Lavendon Group is the market leader in the rental of powered aerial work platforms in both Western Europe and the Gulf States. The group entered the current downturn having over-spent on equipment, and with an overstretched balance sheet. The nature of powered access equipment is such that capital expenditures can be reduced materially for a significant amount of time without detriment to the fleet. We believed that the company would generate significant surplus cash flow over the two years following investment which would be used to pay down debt and thus create value for equity shareholders. We invested in the company via a fundraising in late 2009 which brought the company's debt down to high but manageable levels, and have been actively engaged with the board to help drive improved returns. Since 2009, the company has met its debt reduction targets, announced an operational and strategy review and executive board changes. A new group CEO was appointed in Q4 2011. Trading has been stronger in 2013 than many anticipated, with a notable recovery in the highly profitable Middle Eastern business unit. Funds managed by SVGIM currently hold approximately 4% of the company's equity. RPC Group is Europe's leading manufacturer of rigid plastic packaging. Following lobbying from SVGIM and another shareholder acting in concert, the group has initiated a strategic and operational review and made substantial changes to its board. The management team has performed well against RPC's new objectives, leading to a significant reduction in group debt and ongoing focus on improving return on invested capital. As the restructuring ended, RPC acquired its smaller Scandinavian competitor, Superfos, funded by a mixture of debt and new equity. It is clear that this acquisition has created value through substantial cost synergies, although it is too early to judge whether sales synergies will be delivered. Although the Company has been an investor for some five years, we believe that good upside still exists as the market continues to digest the improved focus on shareholder returns. The new CEO may also implement further value enhancing restructuring activities, as well as value additive M&A. Funds managed by SVGIM currently hold less than 3% of the company's equity. Funds managed by SVGIM currently hold less than 3% of the company's equity. Tyman is leading international supplier of building products to the door and window industry, and was the world's leading manufacturer of marine breakaway couplings. The company has significant operations in nine separate countries across Europe, the Americas, Asia and Australasia. The building products division enjoys clear market leadership in a number of niches, with a highly diversified customer base, serving both the new build and RMI (repair and maintenance) markets. The building products division has been adversely impacted by the significant fall in residential construction activity experienced since 2007, which, combined with a geared balance sheet, led to a material fall in the share price through 2008. We began building our stake in the company in late 2009 following the appointment of a new Chairman, who has subsequently reconstituted the executive management and non-executive Board. Since then, strong cash flows and a disposal of the non-core marine couplings business have reduced the debt burden substantially. In the period, the company acquired its closest US peer Truth. We believe this will enhance the upside from the recovery in US residential new build and RMI markets. Funds managed by SVGIM currently hold approximately 4% of the company's equity. Wilmington Group provides business information and training services to professional business customers in the financial services, legal and medical sectors. More than 76% of revenues in the main publishing and information division are delivered digitally, typically on a subscription basis, and with high levels of client retention. The company is highly cash generative. Growth has been held back over the past few years due to a significant fall, and no recovery, in its legal training market, and the decline in some legacy print publications. This has masked strong growth in the rest of the business. The declining segments have now either been exited or stabilised. The company's earnings are set to grow organically at double digit rates, as well as generating significant free cash flow, neither of which we feel are reflected in the current rating. With a stronger balance sheet, there is potential upside from targeted M&A. The management team has a good track record of creating value from M&A. Funds managed by SVGIM currently hold approximately 3% of the company's equity. EXTRACTS FROM THE REPORT OF THE DIRECTORS The Directors present their report and financial statements for the year ended 30 June 2013. The Company has been incorporated with an indefinite life but is subject to an annual continuation vote. The Company is registered in England with number 5448627. Business Review The Business Review should be read in conjunction with the Chairman's report and the Investment Manager's report above. The purpose of the Business Review is to provide an overview of the business of the Company by: â€¢ Analysing development and performance using appropriate key performance indicators ("KPIs"). â€¢ Outlining the principal risks and uncertainties affecting the Company. â€¢ Describing how the Company manages these risks. â€¢ Explaining the future business plans of the Company. â€¢ Setting out the Company's environmental, social and ethical policies. â€¢ Providing information about persons with whom the Company has contractual or other arrangements which are essential to the business of the Company. â€¢ Outlining the main trends and factors likely to affect the future development, performance and position of the Company's business. Review of the Business of the Company The principal activity of the Company is to conduct business as an investment trust. The Company is currently an investment company in accordance with the provisions of Section 833 of the Companies Act 2006. The Directors do not envisage any change in the Company's activity in the future. New regulations for obtaining and retaining investment trust status came into force for periods on or after 1 January 2012. The year ended 30 June 2013 is the first accounting period of the Company to be affected by the new regulations and approval under the new regime was granted by HMRC on 14 March 2013. Accordingly, the Company will be treated as an investment trust under Sections 1158/1159 of the Corporation Tax Act 2010 for the year ended 30 June 2013 and for each subsequent accounting period, subject to there being no subsequent serious breaches of the regulations. The Company's status as an investment trust means that the Company does not pay capital gains tax on any profits arising from the disposal of its investments. Investment objective The investment objective of the Company is to achieve absolute returns (i.e. growth in the value of investments) rather than relative returns (i.e. attempting to out-perform selected indices) over a medium term period, principally through capital growth. Investment policy The Company invests primarily in equity and equity-linked securities quoted on markets operated by the London Stock Exchange where the Investment Manager believes the securities are undervalued and could benefit from strategic, operational or management initiatives. The Company also has the flexibility to invest up to 20% of the Company's gross assets at the time of investment in securities quoted on other recognised exchanges. The Company may invest up to 20% of its gross assets at the time of investment in unquoted securities, provided that, for the purpose of calculating this limit, any undrawn commitments which may still be called shall be deemed to be an unquoted security. The maximum investment in any single investee company will be no more than 15% of the Company's investments at the time of investment. The Company will not invest more than 10%, in aggregate, of the value of its total assets at the time the investment is made in other listed closed-end investment funds provided that this restriction does not apply to investments in any such funds which themselves have published investment policies to invest no more than 15% of their total assets in other listed closed-end investment funds. Other than as set out above, there are no specific restrictions on concentration and diversification. The Board does expect the portfolio to be relatively concentrated, with the majority of the value of investments typically concentrated in the securities of 10 to 15 issuers across a range of industries. There is also no specific restriction on the market capitalisation of issues into which the Company will invest, although it is expected that the majority of the investments by value will be invested in companies with a market capitalisation of less than Â£300 million. The Company's Articles of Association permit the Board to take on borrowings of up to 25% of the net asset value at the time the borrowings are incurred for investment purposes. Investment Manager The Investment Manager appointed by the Company is SVGIM. Established in 2002, the Public Equity Team of SVGIM was one of the first in the UK to invest in publicly traded equities using private equity techniques. The team now consists of five investment professionals who combine a number of complimentary skill sets, including corporate finance, traditional fund management, research and private equity disciplines. SVGIM currently has funds under management of around Â£200m. Hansa Aktiengesellschaft ("Hansa"), a Swiss based international investment and holding company with total assets of approximately US$1.8 billion, has entered into an agreement to acquire the Manager, SVG Investment Managers Limited ("SVGIM"), from SVG Capital plc. Hansa will be the majority owner of SVGIM; the senior management of SVGIM will hold a significant minority stake. SVGIM will retain its successful investment culture and process within the new structure but with significantly greater assets to manage or advise. The current investment managers of Strategic Equity Capital will be unchanged, and retain complete investment autonomy, ensuring continuity of approach. Performance Over the year to 30 June 2013, net assets have increased by 14.2% to Â£78.4 million (23.9% on a per share basis). Further information on the performance of the Company's portfolio is contained in the Investment Manager's report. The Company's investment objective is one of capital growth and it is anticipated that returns for shareholders will derive primarily from capital gains. The Board intends to declare final dividends only where necessary to comply with investment trust rules. The Board recommends a final dividend of 1.50p (2012: 1.50p) per Ordinary share, amounting to Â£931,000 (2012: Â£1,010,000). Future Trends Both the Chairman's report and the Investment Manager's report contain 'Outlook' sections setting out their view of the future. Share capital At the year-end the Company's issued share capital comprised 62,039,682 Ordinary shares each with a nominal value of 10p, representing the Company's issued share capital. All shares have equal voting rights. No shares were held in treasury during the year and at the year end (2012: 67,317,324 shares in issue and no shares held in treasury). At General Meetings of the Company, the holders of Ordinary shares are entitled to one vote for every share held. At the AGM held on 1 November 2012 the Company was authorised to make market purchases of its own shares up to a limit of 10,090,866 Ordinary shares. Performance Analysis using KPIs At quarterly Board meetings the Directors consider a number of key performance indicators to assess the Company's success in achieving its objective, principally: the NAV per Ordinary share, the movement in the Company's share price, the discount of the share price in relation to the NAV and the ongoing charges. Information relating to these KPIs can be found in the financial summary above. Tender Offers In May 2012, shareholders passed a resolution introducing periodic tender offers in May and November each year, with each tender offer being for up to 4% of the issued share capital at a price equivalent to a 10% discount to the net asset value (including current period revenue and deducting the estimated tender offer costs). The periodic tenders replace the Company's annual relative investment performance and discount tests which were measured as at 30 June each year. During the financial year, two tender offers took place. As a result of the tender offer made in November 2012, 2,692,669 shares, representing 4% of the Company's issued share capital, were bought back for cancellation at a price of 101.55p per share. Following the most recent tender offer, in May 2013, the Company bought back a further 2,584,973 shares for cancellation, representing 4% of the Company's issued share capital, at a price of 111.52p per share. In total, the Company has bought back 5,277,642 shares during the year, representing 7.84% of the Company's share capital as at 1 July 2012, at a cost of Â£5,645,000 including stamp duty. Principal Risks and Uncertainties Associated with the Business General Changes in economic conditions (including, for example, interest rates, foreign exchange rates and rates of inflation), industry conditions, competition, changes in the law, political and diplomatic events and trends, tax laws and other factors can substantially affect the value, adversely or positively, of investments made by the Company and, therefore, the Company's performance and prospects, in addition to the value of the shares Market risk The Company's investments are subject to normal market fluctuations and the risks inherent in the purchase, holding or selling of equity securities and related instruments, and there can be no guarantee that the quoted value of the Company's investments will be realisable in the event of a sale. Market price and discount volatility The market price of the shares, as well as being affected by the Company's net asset value, also takes into account prevailing interest rates, supply and demand for the shares, market conditions and general investor sentiment. As a result, the total market value of the shares in the Company may vary considerably from the net asset value per share of the Company. In addition, other factors such as a concentrated shareholder base may contribute to infrequent trading or volatile share price movements. Reliance on the Investment Manager The Investment Manager has the right to resign as the Investment Manager under the Investment Management Agreement. The Investment Manager must give 12 months' written notice to the Company. Such a resignation could have an adverse effect on the Company's performance and prospects. Nature of investee companies The investment portfolio is focused towards small and mid-sized companies. These companies may involve a higher degree of risk than larger sized companies. In addition, while the investment policy of the Company is to identify and invest in companies that the Investment Manager believes are undervalued, there is a risk that the Investment Manager may be unable to deliver on the strategic, management and operational initiatives identified at the time of initial investment and, as such, companies may not prove to be capable of generating additional value for shareholders and so would not assist in achieving the Company's investment objective. Concentrated portfolio The majority of the Company's portfolio is invested in 10 to 15 companies operating in a number of industries, as was the initial intention. As a result the portfolio could carry a higher degree of risk than a more diversified portfolio. As the Company's objective is to achieve absolute returns rather than returns relative to a particular index or benchmark over a medium-term period, the portfolio is managed without comparison to any stock market index. As a result there will be periods when the Company's performance will not correlate with such indices. Borrowing and gearing The Company's revolving credit facility of Â£5 million with The Royal Bank of Scotland expired on 14 July 2012 (at which point there were no drawdowns) and was not replaced. The Company's Articles of Association permit borrowings of up to 25% of the net asset value at the time the borrowings are incurred. Debt investments Any debt securities that may be held by the Company will be affected by any changes to interest rates. Unlisted investments The Company may invest a proportion of its gross assets in companies that are not listed or admitted to trading upon any recognised stock exchange. These investments may be illiquid and difficult to realise and more volatile than investments of larger, longer-established businesses. Prior to its dissolution in July 2013, the SRF II valuation was updated monthly and other unlisted investments are updated at least once every six months. Overseas investments The Company may invest up to 20% of its gross assets in companies listed or traded on recognised stock exchanges other than the London Stock Exchange. In any instances where the Company does not hedge its currency exposure, the movement of exchange rates between sterling and any other currencies in which the Company's investments are denominated may have a material effect, unfavourable as well as favourable, on the return otherwise experienced on the investments made by the Company. Although the Investment Manager will seek to manage any foreign exchange exposure in relation to the Company, there is no assurance that this can be performed effectively. Currency hedging may force the Investment Manager to realise underlying investments as well as affecting the overall value of the portfolio and the net asset value per share. Movements in the foreign exchange rate between sterling and the currency applicable to a particular shareholder may have an impact upon that shareholder's returns in its own currency of account. Charges against capital The Company's current accounting policy is to charge its operational costs to revenue, with the exception of any performance fee, which will be charged wholly to capital. In the event of the Company making a revenue loss or becoming liable to a performance fee, it may need to liquidate some of its investments to pay operational costs or the performance fee or both. Regulatory risks A breach of Companies Act regulations and FCA/London Stock Exchange rules may result in the Company being liable to fines or the suspension of the Company from listing on the London Stock Exchange. The Board, with its advisers, monitors the Company's regulatory obligations both on an ongoing basis and at quarterly Board meetings. If the Company did not comply with the provisions of Sections 1158/1159 of the Corporation Tax Act ("CTA"), it would lose investment trust status and become subject to corporation tax on realised capital gains. In order to minimise this risk, the Directors, the Investment Manager and the Company Secretary monitor the Company's compliance with the key criteria of Sections 1158/1159 on a monthly basis. At quarterly Board meetings, compliance with these provisions is discussed in detail between the Board, the Investment Manager and the Company Secretary. The Board also regularly reviews the share register to ensure the Company is not a close company (as defined in the CTA), however, the Board acknowledges that it has no control over shareholders purchasing shares nor their concentration on the share register. Being a close company would breach the CTA rules. Financial risks The financial situation of the Company is reviewed in detail at each Board meeting, monitored and approved by the Board and the Audit Committee. The risks are expanded further in Note 17. Financial instruments As part of its normal operations, the Company holds financial assets and financial liabilities. Full details of the role of financial instruments in the Company's operations are set out in Note 17. Social, Environmental, Community and Employee Issues The Company has no employees and the Board consists entirely of non-executive Directors. As an investment trust, the Company has no direct impact on the community or the environment and as such has no policies in this area. In carrying out its activities and in relationships with suppliers, the Company aims to conduct itself responsibly, ethically and fairly. Investment Management Agreement The Company's investments are managed by SVGIM under an agreement dated 12 July 2005. The Investment Manager's appointment is subject to termination on 12 months' notice given at any time by either party. There are no specific provisions contained within the Investment Management Agreement relating to compensation payable in the event of termination of the agreement other than entitlement to fees, including performance fees, which would be payable within any notice period. However, in the event that a continuation resolution proposed at any Annual General Meeting is not passed, the Investment Management Agreement expressly permits the Company to give notice terminating the Investment Manager's appointment without any compensation being payable to the Investment Manager in lieu of any period of notice otherwise required under the Investment Management Agreement. At regular Board meetings the Directors keep under review the performance of the Investment Manager. In the opinion of the Directors the continuing appointment of SVGIM as Investment Manager is in the best interests of shareholders as a whole. Investment Manager's fees The Investment Manager is entitled to receive from the Company a basic fee together, where applicable, with a performance fee. Basic fee The basic management fee accrues weekly and is payable quarterly in arrears. The basic fee, as set out in a deed of amendment approved by shareholders in November 2010, is the lower of (i) 1.0% of the adjusted NAV of the Company and (ii) 1.0% per annum of the Company's market capitalisation. In order to avoid double charging of basic management fees payable to the Investment Manager by the Company, the NAV of the Company is reduced by the value of the Company's limited partnership interest in SRF II. Performance fee arrangements The Company's performance is measured over rolling three-year periods ending on 30 June each year, by comparing the NAV total return per share over a performance period against the total return performance of the FTSE SmallCap (ex Investment Companies) Index. A performance fee is payable if the NAV total return per share (calculated before any accrual for any performance fee to be paid in respect of the relevant performance period) at the end of the relevant performance period exceeds both: (i) the NAV per share at the beginning of the relevant performance period as adjusted by the aggregate amount of (a) the total return on the FTSE SmallCap ex Investment Companies Index (expressed as a percentage) and (b) 2.0% per annum over the relevant performance period ("Benchmark NAV"); and (ii) the high watermark (which is the highest NAV per share by reference to which a performance fee was paid previously). Currently, the Investment Manager will be entitled to 15% of the excess over the higher of the Benchmark NAV per share and the high watermark. Payment of a performance fee that has been earned will be deferred to the extent that the amount payable exceeds 1.75% per annum of the Company's NAV at the end of the relevant performance period (amounts deferred will be payable when, and to the extent that, following any later performance period(s) with respect to which a performance fee is payable, it is possible to pay the deferred amounts without causing that cap to be exceeded or the relevant NAV total return per share to fall below the relevant Benchmark NAV per share and the relevant high watermark). A performance fee of Â£1,132,000 is payable in respect of the three-year period ending on 30 June 2013. Administration Agreement Under an agreement dated 12 July 2005, company secretarial services and the general administration of the Company are undertaken by Capita Sinclair Henderson Limited ("CSH"). The fee charged in the year was Â£77,000 (2012: Â£ 77,000 of which Â£27,000 was refunded for VAT giving a net figure of Â£50,000). The fee is subject to annual review based on the UK Retail Price Index. In the event that there is an increase in the issued share capital of the Company, the fee will be adjusted upwards by agreement between the Company and CSH. The agreement may be terminated by either party giving notice of not less than six months. Going Concern The financial statements have been prepared on a going concern basis. The Directors consider this to be appropriate as the Company has adequate resources to continue in operational existence for the foreseeable future. In reaching this conclusion, the Directors took into account the value of net assets; the Company's Investment Policy; its risk management policies; the diversified portfolio of readily realisable securities which can be used to meet funding commitments; its revenue; and the ability of the Company in the light of these factors to meet all of its liabilities and ongoing expenses. In relation to the continuation vote, the Directors have consulted with a significant proportion of the Company's investors in assessing the potential outcome of the vote. The Directors have recommended that all shareholders vote in favour of the continuation vote and, based on consultation with shareholders, the Directors have no reason to believe that the proposed resolution will not be passed. On behalf of the Board John Hodson Chairman 12 September 2013 The annual report contains the following statements: STATEMENT OF DIRECTORSâ€™ RESPONSIBILITIES IN RESPECT OF THE FINANCIAL STATEMENTS The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards ("IFRS") adopted by the European Union ("EU"). Under Company law the Directors must not approve the financial statements unless they are satisfied that they present fairly the financial position, the financial performance and cash flows of the Company for that period. In preparing these financial statements, the Directors are required to: â€¢ select suitable accounting policies in accordance with IAS 8: Accounting Policies, Change in Accounting Estimates and Errors, and then apply them consistently; â€¢ present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; â€¢ provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company's financial position and financial performance; â€¢ state that the Company has complied with IFRS, subject to any material departures disclosed and explained in the financial statements; and â€¢ make judgements and estimates that are reasonable and prudent. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy, at any time, the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors, to the best of their knowledge, state that: â€¢ the financial statements, prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and â€¢ the Chairman's report, Investment Manager's report and Report of the Directors include a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that it faces. The Directors confirm that, so far as they are each aware, there is no relevant audit information of which the Company's Auditor is unaware, and each Director has taken all the steps that ought to have been taken as a Director to make himself aware of any relevant audit information and to establish that the Company's Auditor is aware of that information. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. On behalf of the Board John Hodson Chairman 12 September 2013 NON-STATUTORY ACCOUNTS The financial information set out below does not constitute the Company's statutory accounts for the year ended 30 June 2013 and 30 June 2012 but is derived from those accounts. Statutory accounts for 2013 will be delivered to the Registrar of Companies in due course. The Auditor has reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and (ii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditor's report can be found in the Company's full Annual Report and Accounts at www.strategicequitycapital.com. STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2013 Year ended 30 June 2013 Year ended 30 June 2012 Revenue Capital Revenue Capital return return Total return return Total Note Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Investments Gains/(losses) on investments held at fair value through profit or loss - 16,722 16,722 - (1,818) (1,818) 8 - 16,722 16,722 - (1,818) (1,818) Income Dividends 2 1,798 - 1,798 1,905 - 1,905 Interest 2 28 - 28 16 - 16 Underwriting commission 2 2 - 2 - - - 1,828 - 1,828 1,921 - 1,921 Expenses Investment Manager's fee 3 (539) - (539) (442) - (442) Investment Manager's performance fee 3 - (1,132) (1,132) - - - Other expenses 4 (345) (122) (467) (305) (129) (434) Total expenses (884) (1,254) (2,138) (747) (129) (876) Net return/(loss) before finance costs and taxation 944 15,468 16,412 1,174 (1,947) (773) Finance costs Interest payable - - - (48) - (48) Total finance costs - - - (48) - (48) Net return/(loss) before taxation 944 15,468 16,412 1,126 (1,947) (821) Taxation 5 - - - - - - Net return/(loss) and total comprehensive income for the year 944 15,468 16,412 1,126 (1,947) (821) pence pence pence pence pence pence Return/(loss) per Ordinary share Basic 7 1.45 23.72 25.17 1.61 (2.79) (1.18) The total column of this statement represents the Statement of comprehensive income. The supplementary revenue and capital return columns are both prepared under guidance published by the AIC. All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The notes form part of these financial statements. STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2013 Share Capital Note Share premium Special Capital redemption Revenue capital account reserve reserve reserve reserve Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 For the year ended 30 June 2013 1 July 2012 6,731 5,246 51,734 2,170 1,250 1,508 68,639 Net return and total comprehensive income for the year - - - 15,468 - 944 16,412 Dividends paid 6 - - - - - (1,010) (1,010) Shares bought back for cancellation (528) - (5,645) - (528) - (5,645) 30 June 2013 6,203 5,246 46,089 17,638 1,778 1,442 78,396 For the year ended 30 June 2012 1 July 2011 7,011 5,246 54,435 4,117 970 691 72,470 Net (loss)/return and total comprehensive income for the year - - - (1,947) - 1,126 (821) Dividends paid 6 - - - - - (309) (309) Shares bought back for cancellation (280) - (2,701) - 280 - (2,701) 30 June 2012 6,731 5,246 51,734 2,170 1,250 1,508 68,639 The notes form part of these financial statements. BALANCE SHEET AS AT 30 JUNE 2013 30 June 30 June 2013 2012 Note Â£'000 Â£'000 Non-current assets Investments held at fair value through profit or loss 8 71,414 66,648 Current assets Trade and other receivables 10 265 222 Cash and cash equivalents 14 8,112 2,204 8,377 2,426 Total assets 79,791 69,074 Current liabilities Trade and other payables 11 1,395 435 Total assets less current liabilities 78,396 68,639 Net assets 78,396 68,639 Capital and reserves: Share capital 12 6,203 6,731 Share premium account 13 5,246 5,246 Special reserve 13 46,089 51,734 Capital reserve 13 17,638 2,170 Capital redemption reserve 13 1,778 1,250 Revenue reserve 13 1,442 1,508 Total shareholders' equity 78,396 68,639 pence pence Net asset value per share Basic 15 126.36 101.96 The financial statements were approved by the Board of Directors on 12 September 2013. They were signed on its behalf by J Hodson Chairman 12 September 2013 The notes form part of these financial statements. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2013 Year ended Year ended 30 June 2013 30 June 2012 Note Â£'000 Â£'000 Operating activities Net return/(loss) before finance costs and taxation 16,412 (773) Adjustment for (gains)/losses on investments and foreign exchange (16,722) 1,818 Share buy back expenses 122 129 Interest paid - (48) Operating cash flows before movements in working capital (188) 1,126 Increase in receivables (43) (5) Increase/(decrease) in payables 1,200 (9) Purchases of portfolio investments (22,778) (6,932) Sales of portfolio investments 34,494 9,612 Net cash flow from operating activities 12,685 3,792 Financing activities Dividends paid 6 (1,010) (309) Shares bought back in the year 13 (5,645) (3,474) Share buy back expenses (122) (129) Net cash flow from financing activities (6,777) (3,912) Increase/(decrease) in cash and cash equivalents for the year 5,908 (120) Cash and cash equivalents at start of the year 2,204 2,324 Cash and cash equivalents at 30 June 14 8,112 2,204 The notes form part of these financial statements. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2013 1.1 Corporate information Strategic Equity Capital plc is a public limited company incorporated and domiciled in the United Kingdom and registered in England and Wales under the Companies Act 2006 whose shares are publicly traded. The Company is an investment company as defined by Section 833 of the Companies Act 2006. The Company carries on business as an investment trust within the meaning of Sections 1158/1159 of the Corporation Tax Act 2010. The financial statements of Strategic Equity Capital plc for the year ended 30 June 2013 were authorised for issue in accordance with a resolution of the Directors on 12 September 2013. 1.2 Basis of preparation and statement of compliance The financial statements of the Company have been prepared in accordance with IFRS issued by the International Accounting Standards Board (as adopted by the EU), interpretations issued by the International Financial Reporting Interpretations Committee, and applicable requirements of United Kingdom company law, and reflect the following policies which have been adopted and applied consistently. Where presentational guidance set out in the Statement of Recommended Practice ("SORP") for investment trusts issued by the AIC (as revised in 2009) is consistent with the requirements of IFRS the Directors have sought to prepare financial statements on a basis compliant with the recommendations of the SORP. The financial statements of the Company have been prepared on a going concern basis. Convention The financial statements are presented in Sterling, being the currency of the Primary Economic Environment in which the Company operates, rounded to the nearest thousand. Segmental reporting The Directors are of the opinion that the Company is engaged in a single segment of business, being investment business. 1.3 Accounting policies Investments All investments in the scope of IAS 39 held by the Company are classified as "fair value through profit or loss". As the Company's business is investing in financial assets with a view to profiting from their total return in the form of interest, dividends or increase in fair value, listed equities, unlisted equities and fixed income securities are designated as fair value through profit or loss on initial recognition. The Company manages and evaluates the performance of these investments on a fair value basis in accordance with its investment strategy. Investments are initially recognised at cost, being the fair value of the consideration. After initial recognition, investments are measured at fair value, with movements in fair value of investments and impairment of investments recognised in the Statement of comprehensive income and allocated to capital. Capital distributions from SRF II are accounted for on a reducing cost basis; cash received is first applied to reducing the historical cost of an investment; a realised gain will be recognised only when the cost has been reduced to nil. For investments actively traded in organised financial markets, fair value is generally determined by reference to Stock Exchange quoted market bid prices at the close of business on the Balance sheet date, without adjustment for transaction costs necessary to realise the asset. In respect of unquoted instruments, or where the market for a financial instrument is not active, fair value is established by using recognised valuation methodologies, in accordance with International Private Equity and Venture Capital ("IPEVC") Valuation Guidelines. New investments are initially carried at cost, for a limited period, being the price of the most recent investment in the investee company. This is in accordance with IPEVC Guidelines as the cost of recent investments will generally provide a good indication of fair value. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. Trade date accounting All "regular way" purchases and sales of financial assets are recognised on the "trade date" i.e. the day that the Company commits to purchase or sell the asset. Regular way purchases, or sales, are purchases or sales of financial assets that require delivery of the asset within a time frame generally established by regulation or convention in the market place. Income Dividends receivable on quoted equity shares are taken into account on the ex-dividend date. Where no ex-dividend date is quoted, they are brought into account when the Company's right to receive payment is established. Other investment income and interest receivable are included in the financial statements on an accruals basis. Dividends receivable from UK registered companies are accounted for net of imputed tax credits. Income on fixed income securities is recognised on a time apportionment basis from the date of purchase. Expenses All expenses are accounted for on an accruals basis. The Company's investment management and administration fees, finance costs (including interest on the bank facility, calculated on the effective interest rate method) and all other expenses are charged through the Statement of comprehensive income. These expenses are allocated 100% to the revenue column of the Statement of comprehensive income. The Investment Manager's performance fee is allocated 100% to the capital column of the Statement of comprehensive income. In the opinion of the Directors the fee is awarded entirely for the capital performance of the portfolio. Costs incurred in relation to the tender offer process have been allocated to the capital column of the Statement of comprehensive income. Cash and cash equivalents Cash in hand and at bank and short-term deposits which are held to maturity are carried at fair value. Cash and cash equivalents are defined as cash in hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value. Bank overdrafts that are repayable on demand which form an integral part of the Company's cash management are included as a component of cash and cash equivalents for the purpose of the Statement of cash flows and Balance sheet. Bank loans and borrowings All bank loans and borrowings are initially recognised at cost, being the fair value of the consideration received, less issue costs where applicable. After initial recognition, all interest-bearing loans and borrowings are subsequently measured at amortised cost, any difference between cost and redemption value being recognised in the Statement of comprehensive income over the period of the borrowings on an effective interest rate basis. Taxation Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the Statement of comprehensive income except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the Balance sheet date, and any adjustment to tax payable in respect of previous years. The tax effect of different items of expenditure is allocated between the revenue and capital columns of the Statement of comprehensive income on the same basis as the particular item to which it relates, using the Company's effective rate of tax, as applied to those items allocated to revenue, for the accounting year. Deferred income tax is provided on all temporary differences at the Balance sheet date between the tax basis of assets and liabilities and their carrying amount for financial reporting purposes. Deferred income tax liabilities are measured on an undiscounted basis at the tax rates that are expected to apply to the year when the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the Balance sheet date. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Dividends payable to shareholders Dividends to shareholders are recognised as a deduction from equity in the year in which they have been declared and approved by the shareholders. The final dividend is proposed by the Board and is not declared until approved by the shareholders at the Annual General Meeting following the year end. Dividends are charged to the Statement of changes in equity. Share capital transactions Incremental costs directly attributable to the issuance of shares are recognised as a deduction from equity. When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributed costs, is recognised as a deduction from equity. Repurchased shares are either classified as treasury shares and are presented as a deduction from shareholders' equity, or are cancelled. Foreign currency transactions The currency of the Primary Economic Environment in which the Company operates is Sterling which is also the presentational currency. Transactions denominated in foreign currencies are translated into Sterling at the rates of exchange ruling at the date of the transaction. Investments and other monetary assets and liabilities are converted to Sterling at the rates of exchange ruling at the Balance sheet date. Exchange gains and losses relating to investments and other monetary assets and liabilities are taken to the capital column of the Statement of comprehensive income. Use of estimates The preparation of financial statements requires the Company to make estimates and assumptions that affect items reported in the Balance sheet and Statement of comprehensive income at the date of the financial statements. Although the estimates are based on best knowledge of current facts, circumstances, and, to some extent, future events and actions, the Company's actual results may ultimately differ from those estimates, possibly significantly. Use of significant estimates - 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 IPEVC Valuation Guidelines. New investments are initially carried at cost, for a limited period, being the price of the most recent investment in the investee company. This is in accordance with IPEVC Guidelines as the cost of recent investments will generally provide a good indication of fair value. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. 1.4 New standards and interpretations not applied IASB and IFRIC have issued the following standards and interpretations which are not effective for the year ended 30 June 2013 and have not been applied in preparing these financial statements. International Accounting Standards (IAS/IFRS) Effective date* IFRS 9 Financial Instruments: Classification & Measurement 1 January 2015 IFRS 10 Consolidated Financial Statements 1 January 2013 IFRS 11 Joint Ventures 1 January 2013 IFRS 12 Disclosure of Interests in Other Entities 1 January 2013 IFRS 13 Fair Value Measurement 1 January 2013 IAS 1 Amendments resulting from annual improvements 1 January 2013 IAS 19 Employee Benefits 1 January 2013 IAS 27 Reissued as IAS 27 Consolidated and Separate Financial Statements (as amended in 2011) 1 January 2013 IAS 28 Investments in associates and joint ventures 1 January 2013 The Directors do not anticipate that the initial adoption of the above standards, amendments and interpretations will have a material impact on the Company's financial statements in the period of initial application. *Years beginning on or after 2 Income 30 June 2013 30 June 2012 Â£'000 Â£'000 Income from investments: UK dividend income 1,741 1,905 Overseas dividend income 57 - Liquidity fund income 28 11 1,826 1,916 Other income: Underwriting commission 2 - Other interest income - 5 2 5 1,828 1,921 Total income comprises: Dividends 1,798 1,905 Interest 28 16 Underwriting commission 2 - 1,828 1,921 Income from investments: Listed UK 1,741 1,905 Listed overseas 85 11 1,826 1,916 3 Investment Manager's fee 30 June 2013 30 June 2012 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Management fee 539 - 539 442 - 442 Performance fee - 1,132 1,132 - - - 539 1,132 1,671 442 - 442 A basic management fee is payable to the Investment Manager at the lower of (i) the annual rate of 1.0% of the adjusted NAV of the Company or (ii) 1.0% per annum of the market capitalisation of the Company. In order to avoid double charging of basic management fees payable to the Investment Manager by the Company, the NAV of the Company is reduced by the value of the Company's Limited Partnership interest in SRF II. The basic management fee accrues weekly and is payable quarterly in arrears. The Investment Manager is also entitled to a performance fee, details of which are given in the Report of the Directors in the full Annual Report and Accounts. 4 Other expenses 30 June 2013 30 June 2012 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Secretarial services* 77 - 77 50 - 50 Auditors' remuneration for: Audit services** 26 - 26 26 - 26 Directors' remuneration 103 - 103 95 - 95 Other expenses 139 122â€ 261 134 129â€ 263 345 122 467 305 129 434 * Included within the 2012 balance is a receipt of Â£27,000 (Â£Nil in the current year) representing a refund from H.M. Revenue & Customs of VAT on administration fees. ** No non-audit fees were incurred during the year. â€ Expenses incurred in relation to the tender offer process. 5 Taxation 30 June 2013 30 June 2012 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Corporation tax at 23.75% (2012: 25.5%) - - - - - - The Company is subject to corporation tax at 23.75%. As at 30 June 2013 the total current taxation charge in the Company's revenue account is lower than the standard rate of corporation tax in the UK (23.75%). The differences are explained below: 30 June 2013 30 June 2012 Revenue Capital Revenue Capital return return Total return return Total Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Net return/(loss) on ordinary activities before taxation 944 15,468 16,412 1,126 (1,947) (821) Theoretical tax at UK corporation tax rate of 23.75% (2012: 25.5%) 224 3,674 3,898 287 (496) (209) Effects of: - UK dividends that are not taxable (413) - (413) (486) - (486) - Overseas dividends that are not taxable (14) - (14) - - - - Unrelieved expenses 203 268 471 199 33 232 - Non-taxable investment (gains)/losses - (3,971) (3,971) - 463 463 - Disallowable expenses - 29 29 - - - - - - - - - Factors that may affect future tax charges The Company has Â£8,697,000 excess management expenses (2012: Â£6,713,000) that are available to offset future taxable revenue. It is considered too uncertain that there will be sufficient future taxable profits against which these expenses can be offset and therefore, in accordance with IAS 12, a deferred tax asset of Â£1,826,000 (2012: Â£1,712,000) in respect of these amounts has not been recognised. Deferred tax is not provided on capital gains and losses arising on the revaluation or disposal of investments because the Company meets (and intends to continue for the foreseeable future to meet) the conditions for approval as an investment trust company. 6 Dividends Under the requirements of Sections 1158/1159 Corporation Tax Act 2010 no more than 15% of total income may be retained by the Company. These requirements are considered on the basis of dividends declared in respect of the financial year as shown below. 30 June 2013 30 June 2012 Â£'000 Â£'000 Net return after taxation per Company accounts 944 1,126 Final dividend proposed of 1.50p (2012: 1.50p) per share (931) (1,010) Revenue retained for Section 1158 purposes 13 116 The following dividends were declared and paid by the Company: 30 June 2013 30 June 2012 Â£'000 Â£'000 Final dividend 1.50p per share (2012: 0.44p) 1,010 309 7 Return/(loss) per Ordinary share 30 June 2013 30 June 2012 Weighted Weighted average average Net number of Per Net number of Per return Ordinary share return Ordinary share Â£'000 shares pence Â£'000 shares pence Total Return/(loss) per share 16,412 65,215,418 25.17 (821) 69,723,696 (1.18) Revenue Return per share 944 65,215,418 1.45 1,126 69,723,696 1.61 Capital Return/(loss) per share 15,468 65,215,418 23.72 (1,947) 69,723,696 (2.79) 8 Investments 30 June 2013 Â£'000 Investment portfolio summary Listed investments at fair value through profit or loss 68,527 Unlisted investments at fair value through profit or loss 2,887 71,414 30 June 2013 Listed Unlisted Total Â£'000 Â£'000 Â£'000 Analysis of investment portfolio movements Opening book cost 50,552 4,569 55,121 Opening investment holding gains 2,882 8,705 11,527 Opening valuation 53,374 13,274 66,648 Movements in the year: Purchases at cost 22,538 - 22,538 Sales - proceeds (26,379) (8,115) (34,494) - realised gains on sales 300 3,823 4,123 Increase/(decrease) in unrealised appreciation 18,694 (6,095) 12,599 Closing valuation 68,527 2,887 71,414 Closing book cost 47,011 277 47,288 Closing investment holding gains 21,516 2,610 24,126 68,527 2,887 71,414 A list of the top 10 portfolio holdings by their aggregate market values is given in the Investment Manager's report above. Transaction costs incidental to the acquisitions of investments totalled Â£88,000 (2012: Â£47,000) and disposals of investments totalled Â£30,000 (2012: Â£17,000) for the year. 30 June 2013 30 June 2012 Total Total Â£'000 Â£'000 Analysis of capital gains/(losses) Gains on sale of investments 4,115 1,584 Foreign exchange gains 8 7 Movement in investment holding gains 12,599 (3,409) 16,722 (1,818) The Company is required to classify fair value measurements using a fair value hierarchy that reflects the subjectivity of the inputs used in measuring the fair value of each asset. The fair value hierarchy has the following levels: â— Quoted bid 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 is determined on the basis of the lowest level input that is significant to the fair value of the investment. The following table analyses within the fair value hierarchy the Company's financial assets and liabilities (by class) measured at fair value at 30 June 2013. Financial instruments at fair value through profit and loss Level 1 Level 2 Level 3 Total Â£'000 Â£'000 Â£'000 Â£'000 30 June 2013 Equity investments and limited partnership interests 68,527 931 1,956 71,414 Liquidity funds - 7,750 - 7,750 Total 68,527 8,681 1,956 79,164 30 June 2012 Equity investments and limited partnership interests 53,374 11,447 1,827 66,648 Liquidity funds - 1,800 - 1,800 Total 53,374 13,247 1,827 68,448 Investments whose values are based on quoted market prices in active markets are classified within level 1 include active listed equities. The Company does not adjust the quoted price for these instruments. Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within level 2. As level 2 investments include positions that are not traded in active markets and/or subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information. Level 3 instruments include private equity, as observable prices are not available for these securities, the Company 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 IPEVC Valuation Guidelines. There were no transfers between levels for the year ended 30 June 2013. The following table presents movements in level 3 instruments for the year ended 30 June 2013 by class of financial instrument. Total Equity Investments Â£'000 Opening balance 1,827 Disposals during the year (37) Total loss for the year included in the Statement of 166 comprehensive income Closing balance 1,956 9 Significant interests The Company had holdings of 3% or more in the following companies: Name of Class of 30 June 2013 Investment Share Percentage held Journey Group Ordinary 13.0 Allocate Software Ordinary 9.1 4imprint Group Ordinary 5.3 Goals Soccer Centre Ordinary 5.2 CVS Group Ordinary 4.2 E2V Technologies Ordinary 3.5 Gooch & Housego Ordinary 3.5 Unlisted investments: Strategic Recovery Fund II Partnership interest 33.3 10 Other receivables 30 June 2013 30 June 2012 Â£'000 Â£'000 UK Dividends receivable 235 202 Overseas dividends receivable 16 - Accrues income 3 - Other receivables and prepayments 11 20 265 222 11 Other payables 30 June 2013 30 June 2012 Â£'000 Â£'000 Amounts due to brokers for settlement of trades - 240 Amounts due to broker regarding share buy backs 1,132 - Other payables and accruals 263 195 1,395 435 12 Share capital Number Â£'000 Allotted, called up and fully paid Ordinary shares of 10p each: At 1 July 2012 67,317,324 6,731 Share buy backs (5,277,642) (528) At 30 June 2013 62,039,682 6,203 13 Reserves Capital Capital Reserve Reserve arising on arising on Capital Share Special investments investments redemption Revenue premium reserve sold held reserve reserve For the year ended 30 June 2013 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Opening balance 5,246 51,734 (9,357) 11,527 1,250 1,508 Net gains on realisation of investments - - 4,115 - - - Foreign exchange gains - - 8 - - - Increase in unrealised appreciation - - - 12,599 - - Share buy back expenses - - (122) - - - Shares bought back for cancellation - (5,645) - - 528 - Investment Manager's performance fee - - (1,132) - - - Retained net revenue for the year - - - - - 944 Dividends paid - - - - - (1,010) As at 30 June 2013 5,246 46,089 (6,488) 24,126 1,778 1,442 Capital Capital reserve reserve arising on arising on Capital Share Special investments investments redemption Revenue premium reserve sold held reserve reserve For the year ended 30 June 2012 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Opening balance 5,246 54,435 (10,819) 14,936 970 691 Net gains on realisation of investments - - 1,584 - - - Foreign exchange gains - - 7 - - - Decrease in unrealised appreciation - - - (3,409) - - Share buy back expenses - - (129) - - - Share buy backs - (2,701) - - 280 - Retained net revenue for the period - - - - - 1,126 Dividends paid - - - - - (309) As at 30 June 2012 5,246 51,734 (9,357) 11,527 1,250 1,508 14 Reconciliation of net cash flow to net funds 30 June 2013 30 June 2012 Â£'000 Â£'000 Opening net funds 2,204 2,324 Increase/(decrease) in cash and cash equivalents in year 5,908 (120) Closing net funds 8,112 2,204 At Net At 30 June 2012 cash flow 30 June 2013 Â£'000 Â£'000 Â£'000 Cash at bank 404 (42) 362 Liquidity funds 1,800 5,950 7,750 2,204 5,908 8,112 15 Net asset value per Ordinary share The net asset value per Ordinary share is based on net assets of Â£78,396,000 (2012: Â£68,639,000) and on 62,039,682 (2012: 67,317,324) Ordinary shares, being the number of shares in issue at the year end. 16 Capital commitments and contingent liabilities The Company has a commitment to invest â‚¬1,560,000 (2012: â‚¬1,560,000) in Vintage. 17 Analysis of financial assets and liabilities The Company's financial instruments comprise securities, cash balances (including amounts held in liquidity funds) and debtors and creditors that arise from its operations, for example, in respect of sales and purchases awaiting settlement and debtors for accrued income. The Company has little exposure to credit and cash flow risk. Credit risk is due to uncertainty in a counterparty's ability to meet its obligations. The Company has no exposure to debt purchases and ensures that cash at bank is held only with reputable banks with high quality external credit ratings. All the assets of the Company which are traded on listed exchanges are held by The Northern Trust Company, the Company's Custodian. Bankruptcy or insolvency of the Custodian may cause the Company's rights with respect to securities held by the Custodian to be delayed or limited. The Board reviews the Custodian's annual controls report and the Investment Manager's management of the relationship with the Custodian. The Company invests in markets that operate DVP (Delivery versus Payment) settlement. The process of DVP mitigates the risk of losing the principal of a trade during the settlement process. The Manager continuously monitors dealing activity to ensure best execution, a process that involves measuring various indicators including the quality of trade settlement and incidence of failed trades. Counterparty lists are maintained and adjusted accordingly. Due to timings of investment and distributions, at any one time the Company may hold significant amounts of surplus cash. Any funds in excess of those required to meet daily operation requirements are invested in Institutional Liquidity Funds. These are highly liquid assets that are redeemable on less than 24 hours notice. The Company only invests in funds that have a AAA rating and the fund's performance is monitored by the Investment Manager. As at 30 June 2013 the Company had Â£7.8 million (2012: Â£1.8 million) invested in such funds. The maximum exposure to credit risk is Â£8,377,000 (2012: Â£2,426,000). There are no assets past due or impaired. The Company finances its operations through its issued capital and existing reserves. The principal risks the Company faces in its investment portfolio management activities are: â— market price risk, i.e. the movements in value of investment holdings caused by factors other than interest rate movement; â— interest rate risk; â— liquidity risk; and â— foreign currency risk. The Investment Manager's policies for managing these risks are summarised below and have been applied throughout the year: Policy (i) Market price risk The Company's investment portfolio is exposed to market price fluctuations which are monitored by the Investment Manager. Adherence to the investment objectives and the limits on investment set by the Company mitigates the risk of excessive exposure to any one particular type of security or issuer. If the investment portfolio valuation fell by 20% from the 30 June 2013 valuation (2012: 20%), with all other variables held constant, there would have been a reduction of Â£14,283,000 (2012: 13,330,000) in the return before taxation and equity. An increase of 20% in the investment portfolio valuation would have had an equal and opposite effect on the return before taxation and equity. (ii) Cash flow interest rate risk exposure No amounts were drawn on the loan facility during the year (2012: Â£Nil). This facility expired on 14 July 2012 and has not been replaced. The Company's bank accounts earn interest at a variable rate which is subject to fluctuations in interest rates. The Company holds cash in liquidity funds. Income from these funds is dependent on the performance of the funds. If interest rates had reduced by 0.5% from those obtained at 30 June 2013 (2012: 0.5%), it would have the effect, with all other variables held constant, of reducing the net return before taxation and equity by Â£24,000 (2012: Â£8,000). If there had been an increase in interest rates of 0.5% there would have been an equal and opposite effect in the net return before taxation and equity. The calculations are based on average cash at bank and liquidity funds for the year ending 30 June 2013 and these may not be representative of the year as a whole. Non-interest rate risk exposure The remainder of the Company's portfolio and current assets are not subject directly to interest rate risk. Details of the risk profile of the Company are shown in the following tables. The interest rate risk profile of the Company's financial assets at 30 June 2013 was: Cash flow No interest interest rate risk rate risk financial financial Total assets assets Â£'000 Â£'000 Â£'000 Sterling Ordinary shares 68,527 68,527 - Unlisted investments 931 931 - Liquidity funds 7,750 - 7,750 Cash 362 - 362 Receivables* 254 254 - 77,824 69,712 8,112 Euros Unlisted investments 1,956 1,956 - 1,956 1,956 - Total 79,780 71,668 8,112 * Receivables exclude prepayments which under IAS 32 are not classed as financial assets. The interest rate risk profile of the Company's financial assets at 30 June 2012 was: Cash flow No interest interest rate risk rate risk financial financial Total assets assets Â£'000 Â£'000 Â£'000 Cash flow Sterling Ordinary shares 53,374 53,374 - Unlisted investments 11,447 11,447 - Liquidity funds 1,800 - 1,800 Cash 404 - 404 Receivables* 202 202 - 67,227 65,023 2,204 Euros Unlisted investments 1,827 1,827 - 1,827 1,827 - Total 69,054 66,850 2,204 * Receivables exclude prepayments which under IAS 32 are not classed as financial assets. The interest rate risk profile of the Company's financial liabilities at 30 June 2013 was: No interest rate risk financial Total liabilities Â£'000 Â£'000 Sterling Creditors 1,395 1,395 All amounts were due in three months or less for a consideration equal to the carrying value of the creditors shown above. The interest rate risk profile of the Company's financial liabilities at 30 June 2012 was: No interest rate risk financial Total liabilities Â£'000 Â£'000 Sterling Creditors 435 435 All amounts were due in three months or less for a consideration equal to the carrying value of the creditors shown above. (iii) Liquidity risk The Investment Manager may invest on behalf of the Company in securities which are not readily tradable, which can lead to volatile share price movements. It may be difficult for the Company to sell such investments. Although the Company's AIM quoted investments and unquoted investments are less liquid than securities listed on the London Stock Exchange, the Board seeks to ensure that an appropriate proportion of the Company's investment portfolio is in invested in cash and readily realisable investments, which are sufficient to meet any funding requirements that may arise. (iv) Foreign currency risk The Company invests in a private equity fund denominated in Euros, and this is the only non-sterling asset. The Company is, therefore, subject to foreign currency risk. During the year the Sterling/Euro exchange rate fluctuated 12% between a low of 1.1432 on 12 March 2013 and a high of 1.2848 on 24 July 2012, before closing at 1.1668 on Friday 28 June 2013 (2012: 1.2359). If the Sterling/Euro exchange rate had decreased by 15% from that obtained at 30 June 2013 (2012: 15%), it would have the effect, with all other variables held constant, of increasing net profit and equity shareholders' funds by Â£345,000 (2012: Â£322,000). An increase of 15% (2012: 15%) would have decreased net profit and equity shareholders' funds by Â£255,000 (2012: Â£238,000). The calculations are based on the value of the investment in Vintage as at 30 June 2013 and this may not be representative of the year as a whole. The balance exposed to foreign currency risk is Â£1,956,000 (2012: Â£1,827,000). Fair values of financial assets and financial liabilities The carrying value of the financial assets and liabilities of the Company is equivalent to their fair value. Managing Capital Capital structure The Company is funded through shareholders' equity and cash reserves. The Company's Articles of Association permit the Board to borrow up to 25% of the Company's net asset value at the time of borrowing. Capital is managed so as to maximise the return to shareholders while maintaining an appropriate capital base to allow the Company to operate effectively in the marketplace and to sustain future development of the business. The Company pays such dividends as are required to maintain its investment trust status, and may also from time to time return capital to shareholders through the purchase of its own shares at a discount to net asset value. Capital constraints The Company operates so as to qualify as a UK investment trust for UK tax purposes. This previously required that no investment exceeded 15% by value of the Company's portfolio at the point of investment. New regulations for obtaining and retaining investment trust status have been published by HM Revenue & Customs and came into force on 1 January 2012, which no longer require this 15% test to be met. It remains the Company's investment policy that the maximum investment in any single investee company will be no more than 15% of the Company's investments at the time of investment. The Company's capital requirement is reviewed regularly by the Board. 18 Related party transactions and transactions with the Investment Manager The Investment Manager may draw upon advice from the Industry Advisory Panel ("IAP") of which Sir Clive Thompson, a Director of the Company, is a member. The IAP was established to provide advice to SVGIM in relation to the strategy, operations and management of potential investee companies. The amounts payable to the Investment Manager are disclosed in Note 3 above. The amount due to the Investment Manager for management fees at 30 June 2013 was Â£157,000 (30 June 2012: Â£115,000). The amount due to the Investment Manager for performance fees at 30 June 2013 was Â£1,132,000 (30 June 2012: Â£nil). SVGIM has entered into Commission Sharing Agreements with a number of executing brokers. Under this arrangement the amount of commission received by SVGIM in relation to trading activities carried out on behalf of the Company for the period to 30 June 2013 was Â£6,600 (2012: Â£4,000). The amount outstanding to SVGIM at the year end was Â£5,600 (2012: Â£1,000). Fees paid to Directors are disclosed in the Directors' Remuneration Report and full details of Directors' interests are set out in the Report of the Directors, both of which can be found within the full Annual Report and Accounts. NOTICE OF ANNUAL GENERAL MEETING The Annual General Meeting of Strategic Equity Capital plc will be held at the offices of Canaccord Genuity Limited, 1st Floor, 41 Lothbury, London EC2R 7AE at 11.30 am on Tuesday, 5 November 2013. The notice of this meeting can be found in the Annual Report and Accounts at: www.strategicequitycapital.com 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.morningstar.co.uk/uk/NSM ENDS Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.

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Strategic Equity Capital (SEC)

Thursday, 23rd May 2024

COMPANIES COVERED:

HL. QQ. AJB

Another day and another round of takeover talk with Hargreaves Lansdown being eyed by private equity suitors. AJ Bell also advances on upbeat earnings news whilst QinetiQ upgrades its profit guidance, too.

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