Final Results

Strategic Equity Capital plc

 

Final Results for the year ended 30 June 2008

 

The Full Annual Report and Accounts can be accessed via the Company's website
at: http://www.strategicequitycapital.com or by contacting the Company
Secretary on telephone [phone].

 

Chairman's Report

 

In the last 12 months we have experienced an extraordinary economic backdrop,
which has severely affected valuations of quoted equities, most notably in the
small and mid-cap arena.  The 'credit crunch' was officially recognised during
the third quarter of 2007 as we witnessed the first run on a UK bank in
decades, the rescue of Bear Stearns in the US and a severe tightening of credit
conditions across the world.  The financial market woes have continued since
then and contagion into other sectors and the broader economy has become
increasingly apparent.  This has led to a significant reduction in the number
of large private equity deals, although smaller buy-outs are continuing, as we
have witnessed in the Company's portfolio.  At the same time, record high oil,
food and other commodity prices are fuelling inflation providing further gloom
for consumers and businesses alike.  The market reaction to this has been a
significant reduction in risk tolerance with ratings on companies and sectors
falling to, in many cases, historically low levels.

 

As at 30 June 2008, the FTSE SmallCap (excluding Investment Companies) Index
had fallen by 39.0% from its high a little over 12 months earlier.  In the same
period, the FTSE All-Share Index fell only 17.9%, helped by the strength of the
resources sector, but also illustrating well, the perceived premium placed on
'liquid' investments.

 

Within the broader indices, performance across sectors has varied
considerably.  Companies exposed to consumer spending, consumer finance,
housing and construction have been hit most heavily.  Companies with higher
levels of debt have likewise been significantly de-rated. 

 

In this investment environment, arguably not seen since the early 1990's or
even the 1970's, it has been extremely difficult to generate absolute returns.
However, the private equity style, project-based investment philosophy that the
Company pursues enables a focus on opportunities aimed at realising value over
the period of the project.  The attraction of this type of investment has been
illustrated by high IRR's generated on exits during the life of the Company,
which have continued in the last six and twelve months.  We believe that the
focus on catalysts and a clear management plan in each investment will mean
that value can be generated over the life of specific investments, independent
of market performance.  Consequently, we remain confident in the investment
approach and the opportunities offered to the Company.

 

Performance

At 30 June 2008 the Company had net assets of £54.9 million, which equates to a
net asset value ("NAV") per share of 77.2p, a decrease of 32.2% since 30 June
2007 (NAV of 113.9p per share).  The absolute performance is clearly
disappointing, but should be seen in the context of a market where the FTSE
SmallCap Index (excluding Investment Companies) fell by 39.0% in 12 months and
18.9% in the last six months, illustrating the impact that the overall fall in
the small cap market has had on the Company.  In contrast to the NAV
performance, over the last 12 months, in aggregate, fully realised exits have
achieved good returns.  On this basis, the money weighted average IRR on these
realisations have been 40.2%.

 

The unaudited NAV per share as at 12 September 2008 was 73.28p.

 

Investment Manager

The Company's portfolio is managed by SVG Investment Managers Limited.  Its
investment processes and techniques are modelled on that of successful private
equity investors, focusing on companies that can benefit from strategic,
operational and management initiatives.

 

Investment strategy

The Company's investment strategy remains to achieve absolute returns for
shareholders through a strategy of using private equity techniques and a
practice of constructive corporate engagement.   Investment is based around a
value creation plan which typically is expected to take three to five years to
execute.

 

The Board

In the Report of the Directors we have presented a review of the business which
looks at the principal risks and uncertainties it faces, an analysis of its
performance during the financial period and its position at the year end.

 

Two changes to the Board took place during the year: Michael Phillips joined
the Board as a non-executive Director with effect from 9 August 2007 and
Jonathan Morgan stood down from the Board at the last AGM held on 6 November
2007.  Jonathan has joined the board and investment committees of SVG
Investment Managers Limited and is also involved in other SVG initiatives. 
Jonathan's extensive private equity experience is anticipated to be of
significant value to the Investment Manager's process.

 

Dividend

The Directors expect that any returns for shareholders will derive primarily
from the capital appreciation of the Ordinary shares rather than from
dividends.  The Directors intend only to declare final dividends and then to
the extent necessary to maintain investment trust status. Accordingly, the
Board does not intend to declare a final dividend to shareholders for the year
ended 30 June 2008.

 

AGM

The AGM of the Company will be held at 11.30am on 11 November 2008 at 111
Strand, London, WC2R OAG. In addition to the formal business of the meeting,
the Investment Manager will provide an update on the Company's investment
portfolio and answer any questions from shareholders.

 

Discount management

The Board has a policy of active discount management.  Given the wide discount
that the Company reached in November and December 2007, the Board decided to
use its authority to enact an ad hoc buy back programme.  The programme
commenced shortly before Christmas and has been used tactically since then.  As
at 30 June 2008, the Company had bought back 1.6 million shares at an average
price of 65.5p per share, representing a weighted average discount of 20.8% to
NAV and during the period, the discount narrowed from its lowest levels of over
23.0% in January 2008 to 14.2% as at 30 June.  Shares bought back are held in
treasury.  The Board believes that the policy and tactics adopted have been
effective and expects to continue with the current policy.  The target over a
reasonable time period is to attempt a discount of no more than 10% and the
Board continually assesses the most appropriate way in which this might be
achieved, recognising that discounts on investment trusts, particularly those
of a specialist nature and those exposed to the UK small cap universe, have
widened significantly since the onset of the credit crunch.  It is therefore
important to highlight that the Board will continue with a share buy-back
programme when it believes it is in the shareholders best interests.

 

Outlook

Within the context of an uncertain macroeconomic outlook that has driven equity
values down, there are some very attractive opportunities for investors
prepared to take a longer term view and to support good management teams. 
Discerning and exploiting the difference between 'market price' and 'value' is
one of the things private equity has been good at historically, and I believe
the Company's investment style is well suited to be able to benefit from the
same opportunity.  The portfolio characteristics and success in realisations to
date together demonstrate that the Company is well positioned to take advantage
of opportunities as they arise.  The Board remains confident in the outlook and
the investment approach.

 

 

John Hodson

22 September 2008

 

 

 

 

 

 

Investment Manager's Report

 

Portfolio review

At 30 June 2008 the Company had net assets of £54.9 million (77.2p per share),
held 5% cash and a portfolio of 25 companies. The investment strategy remains
highly focused, with the top 10 holdings accounting for 69% of the portfolio at
the end of the financial year.  Investments are typically made on the basis of
a three to five year plan, and the weighted average period during which
investments have been held in the portfolio stood at 1.7 years.  Whilst the
current economic environment is expected to slow the speed at which the plans
are likely to be achieved, we remain pleased that the majority of operating and
strategic plans are on track.

 

Private equity activity has slowed noticeably since the onset of the credit
crunch, although this slow down has affected larger deals more than smaller
buy-outs.  Despite this, within the portfolio there has been a relatively high
level of ongoing private equity interest.  Two portfolio companies, Civica and
Northgate Information Solutions, were bought out by private equity in the last
six months and a further three portfolio companies announced that they had
received approaches.  We believe this level of activity illustrates the
attractiveness of the Company's investments, and should continue to act as a
catalyst for future value realisation.

 

Our ability to engage directly with companies has increased in the current
financial environment.  Bank debt is more difficult and expensive to raise and
equity markets are extremely unpredictable, meaning new equity issues are
difficult and uncertain. Our private equity style approach to investing offers
public companies an alternative source of financing which can enable them to
implement value creation plans and access new investment opportunities without
having to privatise.

 

A detailed review of the Company's investment activity over the first six
months of the period was presented in the interim report of 31 December 2007.
The following comments relate to investment activity over the first half of
2008.

 

Performance

The period's performance has been overshadowed by significant macroeconomic
uncertainty and financial market contraction in the UK. Our approach of
applying private equity techniques in the public markets has proved successful
where we have been able to follow an investment from inception through to
completion and exit, as evidenced by the achievement of on average 31% IRR on
fully realised exits since inception of the Company (1.2x cash multiple)..
Management teams in the underlying investments continue to work on their
operational and strategic plans, the majority of which remain firmly on track. 
Whilst not the Company's objective, performance in the context of the market
difficulties has to an extent been heartening in that since the Company became
fully invested, around the end of 2006, the NAV has performed ahead of the FTSE
SmallCap (excluding Investment Companies) Index whether measured over three,
six, nine, 12 or 18 months.  We remain focused on generating absolute returns
over the medium term and remain confident that with time, the plans in place
will deliver the desired returns.

 

Realisations

The project-based investment style dictates that, over time, performance will
be driven by realisations.  The Company exited three investments in the period
and has substantially reduced a fourth.  The returns generated on exits in the
period gives confidence in the underlying value of the portfolio,
notwithstanding current market prices.  As explained more fully below, we
supported an offer by 3i for Civica.  The sale generated an IRR over the life
of the investment of 63.7%, representing 1.32x money.  Northgate Information
Solutions was likewise the subject of a management buy-out announced in
December 2007 and backed by private equity house Kohlberg Krans Roberts & Co.
(KKR).  The IRR on exit was 28.4%, a 1.16x money multiple.  Redhall was a
relatively small investment which we had made to support two strategic
acquisitions in early 2007.  The shares performed very well following the
successful integration of the acquisitions.  The plan had been to support
further acquisitions, but as the share price had approached our target price,
we made the decision to exit, realising an IRR of 31.6% and 1.33x money.  We
have also substantially reduced our holding in Evolution Group as management's
strategy has deviated from our original thesis.  The expected slow down in new
issues and other corporate finance activity in the UK small cap market was also
a determining factor.  IRR over the life of the investment to date on Evolution
shows a loss of 10.5%, representing 0.78x money.

 

Performance attribution

The most significant positive contributors in the last six months were Civica, 
Vintage I, Intec and Filtronic.

 

Civica is a software company focusing on public sector applications.  Our
initial investment was made with a view to supporting the management team in a
strategy of consolidation and business transformation integrating software and
outsourced services supplied to the public sector.  The share price had fallen
significantly from its highs.  With a general uncertainty surrounding the
ability to raise new capital in the public markets at a reasonable valuation,
we supported management's alternative route to funding their strategy in the
private markets.  The business was bought by 3i.

 

Vintage I is a structured private equity fund of funds which invests in private
companies that exhibit similar characteristics to what the Company looks for in
the public markets.  The positive attribution generated came from further write
ups in the net asset value and a currency benefit, as Vintage I is a Euro
denominated investment.  The investment has been a strong performer to date,
and is now valued at 4.4x cost.  We believe that one of the benefits of the
Company's mandate is the ability to access these types of opportunities which
are not available to the general public.

 

Intec is a global leader in the provision of billing, interconnect and
mediation software to the telecoms industry.  During the period the company
announced a number of significant contract wins, the most notable of which was
its largest ever billing contract, won from Antel in Uruguay in a tender in
which the other major global players competed.  Intec subsequently announced
that it had received a very preliminary approach from a potential buyer.  As at
30 June, the company remained in talks, although the share price had fallen
back to a similar level to what it had traded at prior to the announcement of
the bid approach.

 

Filtronic benefitted from the final resolution of two significant
uncertainties: the sale of the Newton Aycliffe semi-conductor plant, completed
in February 2008; and the settling of the contingent pension liability where a
buy-out of the remaining pension obligations was agreed and settled.  As a
result, the company was able to pay a substantial special dividend which
returned approximately two thirds of the market capitalisation to
shareholders.  Subsequent to the special dividend, the company announced that
it was in talks to dispose of one of its two remaining businesses, UK defence,
and then also that it had been approached by a private equity group which was
considering bidding for the whole company.  On 1 August 2008, the company
announced that it had signed a definitive agreement for the sale of its UK
defence business.  It remained in talks with a private equity group.  Since our
initial investment, we have supported and worked closely with the management
team which has successfully split up the business and sold off the component
parts.

 

The most significant negative contributors in the last six months were 
Thorntons, Entertainment Rights, Mecom and Payzone.

 

Thorntons is a vertically integrated chocolate brand manager and retailer which
has been going through a substantial operational improvement programme under
new management.  The business has performed strongly as the strategic plan has
been rolled out.  However, the share price fell heavily in the third quarter
driven by concerns about the UK retail sector which have overshadowed the
positive operational improvements made in the business.  Management has a clear
plan to continue to grow the business and develop the Thorntons brand into new
categories and we remain confident of the underlying business performance. 
Consequently, we have taken advantage of what we believe to be an extremely low
rating and share price, and acquired more shares.

 

Entertainment Rights is the owner of a number of classic children's media
rights including Postman Pat, Lassie, Casper the Ghost, and many others.  The
company exploits these rights in conjunction with television channels, home
entertainment and merchandise companies around the world.  The company acquired
Classic Media, a similar US-based business, in January 2007 using a combination
of equity and debt, leaving the company with relatively high gearing. The
integration of the acquisition has gone well, with Classic demonstrating
significant growth under Entertainment Rights' ownership.  However, concerns
over exposure to the US consumer and US dollar, relatively high debt levels and
a one-off operational issue in the UK led to a significant de-rating.  After
the share price fell, the company announced that it had received an approach
and entered a process to evaluate all potential offers. We engaged closely with
management and the company's advisers during this period and concluded that the
price range proposed was significantly below the intrinsic value of the
business.  Talks were terminated and a number of changes have since been made
to the board, both at executive and non-executive level.  In the Investment
Manager's view, the successful integration of Classic has demonstrated the
opportunity in Entertainment Rights and under a refreshed management team the
value creation plan remains intact. 

 

Mecom's share price has fallen further since January against continued concerns
over the advertising backdrop in Europe, comparatively high debt levels and a
string of downgrades from UK listed newspaper groups.  The company has
announced significant rationalisation benefits from the integration of Wegener,
its Dutch subsidiary acquired in December 2007, and the business improvement
plans remain on track.  Whilst the outlook for advertising has undoubtedly
worsened, the Investment Manager believes Mecom is well positioned relative to
its peers with a higher level of subscription based revenues and much lower
exposure to recruitment and housing advertising.

 

Payzone experienced a turbulent six months.  The merger between Cardpoint and
Alphyra to create Payzone was completed in December 2007 and shortly thereafter
significant management conflict emerged, caused, it appears, by operational
issues in the business.  This culminated in an EGM being called to remove the
incumbent CEO and CFO as well as a suspension in the trading of the company's
shares.  In the process, nervousness from the company's bankers and suppliers
led to a squeeze on cash and we entered a dialogue with interim management as
to how the situation could be remedied.  The EGM was successful and a new CEO
has since been appointed.  The company raised further equity capital to provide
a cushion against the relatively high debt levels and the shares have since
resumed trading.  The share price fell heavily when the suspension was lifted. 
The company has a unique European cash payment and cash acceptance network
which we believe is valuable.  Management is focused on returning the
operational performance of the business to target levels.  Whilst this is
ongoing, the investment remains under review.

 

Corporate activity

Our policy of ongoing corporate engagement has been very much in evidence
during the last six months with a number of meaningful changes taking place,
for example in RPC, Entertainment Rights and Journey Group, formerly
Watermark..

 

On 4 July 2007 SVGIM announced that it was acting in concert with North
Atlantic Value in connection with its holdings in RPC.  In the Investment
Manager's view, RPC's operational and share price performance has been
disappointing.  After a period of concerted shareholder engagement conducted
away from the media, the incumbent chairman stepped down and a new chairman has
now been appointed.  The company also announced that it would be conducting a
comprehensive strategic review with a view to maximising shareholder value.

 

SVGIM also had regular and ongoing dialogue with Entertainment Rights in
relation to the approaches by potential buyers of the business (although
interaction in such circumstances is limited by the Takeover Panel rules) and
subsequently in relation to the ongoing strategy and board composition.

 

There has also been activity at Journey Group, where the company has recently
been awarded a very substantial contract in the US which requires funding. 
SVGIM has been instrumental in co-ordinating a fund raising, bringing in new
investors and negotiating with the company's bankers.

 

In the case of Payzone, the Investment Manager was a party to the requisition,
calling an EGM to remove the incumbent CEO and CFO.  Thereafter, we also
engaged regularly with the company's interim and then new management to discuss
the funding and ongoing management issues.

 

We remain in active discussion with management teams of other investments as,
in the current environment, companies face interesting strategic options.

 

 

Top 10 holdings

A summary of the top 10 investments at 30 June 2008, which represent
approximately 66% of net assets, is given below:

 

                                              % of invested    % of invested         
                                             portfolio 2008   portfolio 2007         
            Sector                                                                   
            classification                                                           
Company                     Cost Valuation                                   % of net
                                                                               assets
                                                                                     
                           £'000     £'000                                           
                                                                                     
Redstone    Telecoms       6,949     7,677           14.60%           14.60%   14.00%
                                                                                     
Pinewood                                                                             
Shepperton  Media          3,929     4,650            8.84%            8.40%    8.48%
                                                                                     
Spirent                                                                              
Telecom     Telecoms       3,522     4,099            7.80%            5.50%    7.47%
                                                                                     
Intec                                                                                
Telecom     Telecoms       2,962     3,621            6.88%            4.40%    6.60%
                                                                                     
Thorntons   Retail         4,037     3,229            6.14%            4.30%    5.89%
                                                                                     
            Support                                                                  
4Imprint    services       4,868     2,883            5.48%            3.20%    5.26%
                                                                                     
RPC Group   Industrials    3,437     2,639            5.02%            3.30%    4.81%
                                                                                     
Renold*     Industrials    3,392     2,538            4.83%            4.50%    4.63%
                                                                                     
            Investment                                                               
Vintage I   Companies        541     2,385            4.54%            1.80%    4.35%
                                                                                     
Mecom       Media          3,890     2,340            4.45%            5.30%    4.27%
                                                                                     

 

* Includes placing which listed on 8 August 2008.

 

New investments

 

No significant new investments were made during the period.

 

Outlook

Moving into the third quarter of 2008, we have witnessed a continued
deterioration in macroeconomic data both in the UK and globally.  Continued
credit shortages, high fuel costs, weak housing data and rising inflation are
all contributing to weak consumer and business sentiment which will undoubtedly
affect underlying operations in most businesses.  Companies face significant
capital constraints, with bank lending contracting rapidly and equity markets
remaining highly volatile, particularly towards new equity issues.  However, in
many cases share prices seem already to be factoring in a very substantial
deterioration in financial performance.  Furthermore, for those companies with
strong management and a clear strategic direction, there are undoubtedly
opportunities to take advantage of low asset prices.  The challenge will be
funding the opportunities.  We believe that a strategy which aims to work with
management teams can add real value in these conditions.  This ought to put the
Company in a good position over the coming months.  We believe that there is
substantial value in the existing portfolio and, more importantly, there are
plans in place in the case of each investment to access that value.  The
quality of the portfolio and the inherent opportunity therein is well
illustrated when its characteristics are compared to the overall FTSE SmallCap
(excluding Investment Companies) Index.

 

                           Strategic Equity Capital    FTSE Small Cap (excl    
                           portfolio (money weighted)  Investment Trust) Index 
                                                                               
Historic Price / Earnings              7.8                       10.0          
ratio                                                                          
                                                                               
Price / Book ratio                     0.4                       1.2           
                                                                               
Historic earnings growth              44.6                       12.9          
(%)                                                                            
                                                                               
Consensus forecast (one               23.5                       9.3           
year) earnings growth (%)                                                      
                                                                               
Consensus forecast (one               26.8                       5.1           
year) dividend growth (%)                                                      
                                                                               
Return on equity (%)                   9.5                       12.0          
                                                                               

Source: UBS Portfolio Analysis System

 

In the Investment Manager's view, these characteristics highlight the
opportunity within the existing portfolio, which exhibits higher growth
expectations at a lower price than the comparable market.  Furthermore, the
lower than average return on equity exhibited by the portfolio illustrates that
the portfolio companies are not generating peak returns and have improvement
potential.  In most cases, this is the key subject of the value creation plan.

 

By taking a longer term approach, which is not clouded by short-term share
price volatility, and applying a disciplined investment process, we remain
confident that the investment strategy will deliver strong returns over the
medium term.

 

SVG Investment Managers Limited

22 September 2008

 

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.

 

Report of the Directors

 

The Directors present their report and financial statements for the year to 30
June 2008.

 

The Company has been incorporated with an indefinite life.

 

Business review

 

Review of the business of the Company

The principal business 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.

The Company has received approval from HM Revenue & Customs as an authorised
investment trust under Section 842 of the Income & Corporation Taxes Act 1988
for the year ended 30 June 2007. Under Section 842 companies can obtain
'approved' status for tax purposes, meaning that such companies do not pay
capital gains tax on any profits arising on disposals of their investments and
in turn shareholders are only subject to capital gains tax on the disposal of
their shares in the investment trust. The principal requirements for retaining
'approved' status are: no single holding, at the time of investment, may exceed
15% of gross assets; 70% of total income must constitute investment income from
securities; and no more than 15% of such investment income may be retained.

It is the opinion of the Directors that the Company has directed its affairs so
as to enable it to continue to qualify for such approval and the Company will
continue to seek approval under Section 842 each year. Accordingly the Company
will not retain more than 15% of eligible investment income.

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 and up to 20% of the Company's
gross assets at the time of investment in unquoted securities, including any
class of debt or equity-related instrument.  No single investment at the time
of investment will exceed 15% of the Company's total investments and aggregate
investments in certain other UK investment companies at the time of investment
will not exceed 10% of the Company's gross assets.

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 £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 SVG Investment Managers
Limited ("SVGIM"). Established in 2002, the Public Equity Team of SVGIM were
one of the first in the UK to invest in publicly traded equities using private
equity techniques.  The team now consists of seven investment professionals who
combine a number of complementary skill sets, including corporate finance,
traditional fund management, research and private equity disciplines. The
Public Equity Team of SVGIM currently has funds under management of over £400
million.

Performance

Over the year to 30 June 2008, net assets have decreased by 33.7% to £54.9
million. Further information on the performance of the Company's portfolio is
contained in the Investment Manager's report.

As stated in the Chairman'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 only intends to declare final
dividends and then to the extent necessary to maintain investment trust status.
Accordingly, the Board does not intend to declare a final dividend to
shareholders for the year ended 30 June 2008.

Performance analysis using key performance indicators

At each quarterly Board meeting the Directors consider a number of key
performance indicators ("KPIs") to assess the Company's success in achieving
its objectives, principally: the NAV, the movement in the Company's share price
and the discount of the share price in relation to the NAV.

-    The Company's Income statement is set out in later in this announcement.

-    The NAV per Ordinary share at 30 June 2008 was 77.21p.

-    The mid market share price at 30 June 2008 was 66.25p.

-    The discount to NAV at 30 June 2008 was (14.20%).

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 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 portfolio 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.

The Board has an active discount management policy, details of which are
contained in the Chairman's report on page 3. During the year 1,582,500
Ordinary shares were bought back at prices ranging from 61p to 70p per Ordinary
Share at discounts to NAV of between 13.70% and 26.60%. All these shares were
placed into treasury.

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 stockmarket index. As a result
there will be periods when the Company's performance will not correlate with
such indices.

Borrowing and gearing

At 30 June 2008, the Company had nil drawn down under a revolving credit
facility of £15,000,000 with The Royal Bank of Scotland, details of which can
be found in note 17 of the financial statements. The use of gearing can magnify
both gains and losses in the asset value of the Company, dependent on the value
of the portfolio at the time.

Unlisted investments

The Company may invest up to 20% 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; more volatile than
investments of larger, longer-established businesses; and will not for the
purposes of the net asset value calculation be valued more than once every six
months.

Overseas investments

The Company may invest up to 20% of its gross assets in companies listed or
traded on other recognised stock exchanges.  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.

Debt investments

Any debt securities that may be held by the Company will be affected by any
changes to interest rates.

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 FSA/London Stock Exchange rules may
result in the Company being liable to fines or the suspension of the Company
from 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 Section 842, 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 Section 842 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.

 

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.

Directors

The Directors in office during the year were:

                   Date of appointment Date of resignation
                                                          
J Hodson                   1 July 2005                   -
                                                          
Sir Clive Thompson         1 July 2005                   -
                                                          
J W Morgan                 1 July 2005     6 November 2007
                                                          
J E Cornish           6 September 2006                   -
                                                          
M C Phillips             9 August 2007                   -
                                                          

 

 

Under the Articles of Association, one-third of the Directors are required to
retire annually by rotation; accordingly Mr Cornish will offer himself for
re-election.  Mr Morgan resigned on 6 November 2007.  The Board has taken this
opportunity to review its composition and assess each Director individually.
 The Board believes its composition provides a diversity of specialist
knowledge and expertise relevant to the Company's affairs.  The Board
recommends that shareholders vote for Mr Cornish's re-election, as it believes
that his performance is effective and that he demonstrates commitment to his
role as non-executive Director and Audit Committee Chairman and has actively
contributed during meetings throughout the year.

None of the Directors has a contract of service with the Company nor has there
been any other contract or arrangement between the Company and any Director at
any time during the year.  An agreement exists between the Company and Storm
Financial Limited for the provision to the Company of the services of Sir Clive
Thompson as a Director.

Directors' beneficial and family interests

The interests of the Directors and their families in the Ordinary shares of the
Company are set out below:

                   At 30 June 2008                   At 1 July 2007

                                   or date of appointment, if later
                                                                   
J Hodson                    50,000                           50,000
                                                                   
Sir Clive Thompson       3,000,000                        3,000,000
                                                                   
J E Cornish                      -                                -
                                                                   
M C Phillips                     -                                -
                                                                   

 

There have been no changes to any of the above holdings between 30 June 2008
and the date of this report.

Substantial shareholdings

The Directors had been notified of the following voting rights in the shares of
the Company at 12 September 2008:

 

                                   Number of          % of
                             Ordinary shares voting rights
                                                          
SVG Capital plc                   18,293,606         26.29
                                                          
Schroders & Co                     7,584,635         10.90
                                                          
East Riding Pension Fund           6,775,000          9.74
                                                          
Midas Capital Partners             5,522,000          7.94
                                                          
SVM Asset Management               4,200,000          6.04
                                                          
Rathbone                           3,163,550          4.55
                                                          
Sir Clive Thompson                 3,000,000          4.31
                                                          
Progressive Asset Management       2,550,000          3.66
                                                          

 

 

Net asset value

The net asset value at 30 June 2008 was 77.21p per Ordinary share.

Investment Management agreement

The Company's investments are managed by SVG Investment Managers Limited
("SVGIM") under an agreement dated 12 July 2005.

The Investment Manager's appointment was for an initial term of two years,
subject to termination by the Company on 12 months' notice given at any time
thereafter. Similarly the Investment Manager can terminate the agreement on 12
months' notice.

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.

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 SVG Investment Managers Limited as Investment Manager is in the
best interests of shareholders as a whole. During the year the Investment
Manager has added professional staff to its team to further enhance its
expertise and operates a robust investment process, which the Board believes
will serve in delivering the Company's investment objective of capital growth.

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

A basic management fee is payable to the Investment Manager at the annual rate
of 1% of the net asset value of the Company (adjusted, for the period from
Admission to 30 June 2008, so that the lower rate of 0.5% is payable in respect
of cash amounts raised in the Placing until those amounts are applied in
acquiring an interest in investee companies). The basic management fee accrues
daily and is payable quarterly in arrears.

Performance fee

In addition, the Investment Manager will be entitled to a performance fee in
certain circumstances. This fee is payable by reference to the increase in
adjusted net asset value per share over the course of a 'performance period'.
The first performance period began on Admission and ended on 30 June 2007; each
subsequent performance period is a period of six months. The Investment Manager
will become entitled to a performance fee in respect of a performance period
only if two criteria are met.

First, a performance hurdle test must be met. The performance hurdle is that
the adjusted net asset value per share at the end of the relevant performance
period exceeds a target adjusted net asset value per share for that performance
period of an amount equal to the net asset value per share on the date of
Admission, increased at a rate of 7% per annum on a compounding basis.

The second test to be met (a 'high watermark' test) is that the adjusted net
asset value per share at the end of the relevant performance period is higher
than the highest previously recorded adjusted net asset value per share at the
end of a performance period in relation to which a performance fee was earned
(or if no performance fee has been earned since Admission, is higher than the
net asset value per share on the date of Admission).

If the performance hurdle is met, and the high watermark exceeded, the
performance fee will be an amount equal to 15% of the increase, since the
performance period in respect of which a performance fee was last earned (or
since Admission, if no performance fee has yet been earned), in the adjusted
net asset value per share of the time weighted average of the total number of
shares in issue.

Payment of a performance fee that has been earned will be deferred to the
extent that making payment would cause the performance hurdle or high watermark
not to be met - 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 the
performance hurdle or high watermark test not to be met. A performance fee is
not payable in respect of the year ended 30 June 2008 (2007: £2,209,000).

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") for a fee for the year to 30 June 2008 of £76,000.
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 to the other not less than
six months' notice at any time.

Payment of suppliers

It is the Company's policy to obtain the best possible terms for all business
and therefore there is no consistent policy as to the terms used. The Company
agrees with its suppliers the terms on which business will take place and it is
our policy to abide by those terms. There were no trade creditors at 30 June
2008 (2007: nil).

Annual General Meeting

At the Annual General Meeting to be held on 11 November 2008, the Notice of
which is set out on pages 39 to 41, resolutions will be proposed as items of
special business as set out below.

(i) To authorise the allotment of shares (Resolution 5)

The purpose of Resolution 5 is to grant the Directors' power to allot shares.
The Directors have no present intention of exercising the authority conferred
by this resolution and will only do so on the basis that the allotment and
issue of shares does not dilute the net asset value per existing share.

Section 80 of the Companies Act 1985 provides that the Directors may not allot
new shares (other than for employee share schemes) without shareholder
approval. Resolution 5 empowers the Directors to allot shares with an aggregate
nominal value of up to £2,420,867, being approximately one-third of the
Company's issued Ordinary share capital. The authority would last until the
earlier of the Annual General Meeting in 2009 and 11 February 2010.

(ii) To disapply Section 89 of the Companies Act 1985 (Resolution 6)

Under Section 89 of the Companies Act 1985, if the Directors wish to allot any
equity securities, or sell any treasury shares (should they elect to hold any),
for cash (other than in connection with an employee share scheme), they must
first offer them to existing shareholders in proportion to their shareholdings.
The purpose of Resolution 6 is to allow the Directors to allot shares, or sell
any treasury shares, for cash other than in accordance with Section 89 in
connection with:

(a) rights issues and other pre-emptive offers; or

(b) otherwise up to a maximum aggregate nominal amount of £363,130,
representing approximately 5% of the Company's issued Ordinary share capital as
at 22 September 2008 (being the latest practicable date prior to publication of
this document).

The Directors consider the authority referred to in paragraph (a) is
appropriate in order to give the Company flexibility to deal with legal or
other difficulties should it decide to offer further shares to shareholders by
way of a rights issue or other pre-emptive offer.

The Directors consider the authority referred to in paragraph (b) above
desirable in order to have the flexibility to issue shares, for example to take
advantage of further investment/business opportunities as they arise. Shares
would not be issued out of treasury at less than NAV.

These authorities will last until the earlier of the Annual General Meeting in
2009 and 11 February 2010.

(iii) To authorise the Directors to purchase the Company's own ordinary shares
(Resolution 7)

The purpose of Resolution 7 is to authorise the Company to purchase its own
shares. As stated in the prospectus issued by the Company in connection with
its listing on the London Stock Exchange in July 2005, the Company may purchase
shares in the market in order to address any imbalance between the supply of
and demand for shares and to increase the net asset value per share. Subject to
any applicable insider dealing rules, if the market price of the shares has
been (and continues to be) at a discount of more than 10% to net asset value
per share for a continuous period of six months, and if sufficient cash
resources are available, the Directors would expect the Company to seek to
reduce the discount to a level of 10% or less through the purchase of its own
shares. Since the Company is now fully invested, the Directors consider that it
is no longer appropriate to prevent such purchases being made with borrowed
monies. Accordingly the Company may, in the future, use borrowed monies to
finance purchases of its own shares. The Company may also purchase shares in
other circumstances at the discretion of the Directors.

The Company would make such purchases only where the Directors believed that to
do so would result in an increase in the net asset value per share for
remaining shareholders and is in the best interests of shareholders generally.

The authority is limited to 10,430,116 Ordinary shares, representing
approximately 14.99% of the Company's shares in circulation as at 22 September
2008 (being the latest practicable date prior to publication of this document).

The Company may purchase Ordinary shares at prices which are below the last
published net asset value per Ordinary share. The maximum price (exclusive of
expenses) payable per Ordinary share under this authority is the higher of (i)
5% over the average of the middle market prices of the Ordinary shares
according to the Daily Official List of the London Stock Exchange for the five
business days immediately before the date on which the Company agrees to buy
the shares, and (ii) the price stipulated by Article 5(1) of the buy back and
Stabilisation Regulation (EC No. 2273/2003). The minimum price payable per
Ordinary share under this authority is the nominal value of that Ordinary
share. Any purchases of Ordinary shares made pursuant to this authority will be
market purchases.

Any such purchases would be made during the period commencing at the close of
the Annual General Meeting and ending on the earlier of the date of the
Company's Annual General Meeting in 2009 and 11 May 2010.

The Company is allowed to purchase its own shares either for holding in
"treasury", or for subsequent cancellation. Shares held in treasury will have
no voting, dividend or other rights. The Directors consider that the purchase
of shares into treasury could be beneficial to shareholders in the long term.
Up to 10% of the issued share capital can be purchased and held in treasury. As
stated in the prospectus issued by the Company in connection with its listing
on the London Stock Exchange, shares held in treasury may be resold by the
Company at a narrower discount to net asset value per share than the discount
at which they were purchased. The disapplication of pre-emption provisions
pursuant to the proposed Resolution 6 above, if approved by shareholders, will
also apply to shares held in treasury which are to be sold.

As at 22 September 2008 (being the latest practicable date prior to publication
of this document), the Company held 3,045,500 shares in treasury.

Details of any Ordinary shares purchased pursuant to this authority will be
notified to a Regulatory Information Service of the London Stock Exchange.
Details will also be included in the Company's Annual Report and Accounts in
respect of the financial period in which any such purchase takes place.

(iv) To adopt new articles of Association

The Directors are asking shareholders to approve a number of amendments to the
Company's Articles of Association, primarily to reflect the provisions of the
Companies Act 2006 that came into force on or before
6 April 2008, and to reflect the provisions of the Companies Act 2006 which are
coming into force in October 2008. An explanation of the main changes between
the proposed and existing Articles of Association is set out on pages 42 to 44
of this document.

International Financial Reporting Standards ("IFRS")

The Company has prepared its financial statements in accordance with IFRS.

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 to the financial statements.

 

Section 992 Companies Act 2006

The following information is disclosed in accordance with Section 992 of the
Companies Act 2006.

-    The Company's capital structure and voting rights are summarised on page 1
of the Annual Report.

-    Details of the substantial shareholders in the Company are listed on page
13 of the Annual Report.

-    The rules concerning the appointment and replacement of Directors are
contained in the Company's Articles of Association and are discussed on page 17
of the Annual Report.

-    Amendment of the Company's Articles of Association and the giving of
powers to issue or buy back the Company's shares require a special resolution
to be passed by shareholders.

-    There are: no restrictions concerning the transfer of securities in the
Company; no special rights with regard to control attached to securities; no
agreements between holders of securities regarding their transfer known to the
Company; and no agreements which the Company is party to that might affect its
control following a successful takeover bid.

-    There are no agreements between the Company and its Directors concerning
compensation for loss of office.

Auditors

Ernst & Young LLP have expressed their willingness to continue in office as
Auditor and a resolution proposing their re-appointment will be submitted at
the forthcoming Annual General Meeting.

 

By order of the Board

Capita Sinclair Henderson Limited

Secretary

22 September 2008

Statement on Corporate Governance

The Company is committed to high standards of corporate governance. The Board
is accountable to the Company's shareholders for good corporate governance.
This statement describes how the principles of corporate governance will be
applied to the Company and the Company's compliance with the Code provisions.

Compliance with the 2006 Combined Code ("the Code")

The Board has considered the principles and recommendations of the AIC Code of
Corporate Governance ("AIC Code") by reference to the AIC Corporate Governance
Guide for Investment Companies ("AIC Guide"). The AIC Code, as explained by the
AIC Guide, addresses all the principles set out in section 1 of the Combined
Code, as well as setting out additional principles and recommendations on
issues that are of specific relevance to Strategic Equity Capital plc.

The Board considers that reporting against the principles and recommendations
of the AIC Code, and by reference to the AIC Guide (which incorporates the
Combined Code), will provide better information to shareholders.

The Company has complied with the recommendations of the AIC Code and the
relevant provisions of Section 1 of the Combined Code, except as set out below.

-    Given the size and nature of the Board it is not appropriate to appoint a
senior independent Director and this is non-compliant with the Code Provision
A.3.3.

-    No formal induction for the Board was deemed necessary due to the wide
range of skills and experience of the Directors selected. (Code provision
A.5.1).

-    The Directors do not have service contracts, but all are required to
retire and seek re-election at least every three years. The recommendation of
the Code is for fixed term renewable contracts (B.1.6).

-    As the Company has had no staff, other than Directors, there are no
procedures in place in relation to whistle-blowing (C.3.4).

For the reasons set out in the AIC Guide and in the pre-amble to the AIC Code,
the Board considers these provisions are not relevant to the position of the
Company, being an externally managed investment company. The Company has
therefore not reported further in respect of these provisions.

Board responsibilities

The Board consists of four Directors, all of whom are non-executive and with
the exception of Sir Clive Thompson are independent of the Investment Manager.
Biographies of the Directors appear on page 4 of the Annual Report. Sir Clive
Thompson is deemed non-independent by virtue of his position on the Strategic
Advisory Board.

The Directors review at each Board Meeting the Company's investments and all
other important issues to ensure that control is maintained over the Company's
affairs. The procedures were formalised in July 2005 in a schedule of matters
specifically reserved for the Board's approval, which has been adopted since
then for all Meetings.

During the year ended 30 June 2008 the Board held quarterly Board Meetings. All
Directors were in attendance. Two Audit Committee Meetings were held with all
committee members present. Members of the Board also meet with representatives
of the Investment Manager on an informal and regular basis.

The Board is responsible for all matters of control and direction of the
Company, including its investment policy. The Directors possess a wide range of
financial, business and legal expertise relevant to the direction of the
Company and consider that they commit sufficient time to the Company's affairs.

The Company does not have a chief executive officer, but by appointing a
management company the roles of Chairman and chief executive officer are
effectively separated.

Board responsibilities and relationship with the Investment Manager

The Board is responsible for the determination and implementation of the
Company's investment policy and for monitoring compliance with the Company's
objectives. The Company's main functions have been subcontracted to a number of
service providers, each engaged under separate legal agreements. At each Board
meeting the Directors follow a formal agenda, which is circulated in advance by
the Company Secretary. The Board's main roles are to create value to
shareholders, to provide leadership to the Company and to achieve the Company's
strategic objectives. Specific responsibilities of the Board include: reviewing
the performance of the Company's Investment Manager, in particular in relation
to asset allocation, gearing policy, cash management, investment outlook and
revenue forecasts. In order to meet these objectives the Company Secretary and
Investment Manager provide financial information on a regular basis, together
with briefing notes and papers in relation to changes in the Company's economic
and financial environment, statutory and regulatory changes and corporate
governance best practice.

The Investment Manager is able, as part of the investment process, to make use
of industry experts, such as utilising the Strategic Advisory Board. The
Strategic Advisory Board was established to provide advice to SVG in relation
to the strategy, operations and management of potential investee companies
(note 18).

The management of the Company's assets is delegated to SVG Investment Managers
Limited who have discretion to manage the assets of the Company in accordance
with the Company's objectives and policies. At each Board meeting, a
representative from the Investment Manager will be in attendance to present
verbal and written reports covering its activity, portfolio and investment
performance over the preceding period. Ongoing communication with the Board is
maintained between formal meetings. The Board and the Investment Manager
operate in a supportive, co-operative and open environment.

Committees

An Audit Committee has been established under the Chairmanship of Mr Cornish
comprising all the independent Directors and operates within clearly written
defined terms of reference. It provides a forum through which the Company's
external Auditor reports to the Board of Directors. The primary
responsibilities of the Audit Committee are to review the effectiveness of the
internal control environment of the Company and monitor adherence to best
practice in corporate governance; to make recommendations to the Board in
relation to the re-appointment of the Auditor and to approve the remuneration
and terms of engagement; to review and monitor the Auditor's independence and
objectivity and the effectiveness of the audit process. The Committee
undertakes a formal assessment of the Auditor's independence each year, which
includes: a review of non-audit services provided to the Company and related
fees; discussion with the Auditor of a written report detailing all
relationships with the Company and any other parties that could affect
independence or the perception of independence; and obtaining written
confirmation from the Auditor that, in their professional judgment, they are
independent. The Audit Committee also has responsibility for monitoring the
integrity of the financial statements and accounting policies of the Company
and for reviewing the Company's financial reporting and internal control
policies and procedures.

The Audit Committee has direct access to the Company's Auditor, Ernst & Young
LLP, and representatives of Ernst & Young LLP attend the year end Audit
Committee meeting.
The Board recommends to shareholders that the Auditor, Ernst & Young LLP, be
re-appointed at the Annual General Meeting as set out in Resolution 4 of the
Notice of Meeting.

A Management Engagement Committee has been established under the Chairmanship
of Mr Hodson comprising all of the independent Directors and operates within
clearly defined terms of reference. The Committee is responsible for reviewing
the performance of the Investment Manager and other service providers. This
Committee met once during the year with all members present.

Review of new Board appointments is a subject for the whole Board to monitor
and consider. The Board meets as and when required for this purpose and to
ensure planned and progressive refreshing of the Board. At 30 June 2008 there
were no Directors' service agreements and no Director had been granted any
options to acquire shares in the Company.

The Board engaged an external search consultant when considering a new
appointment to the Board of Directors.  Mr Phillips was chosen as he was
considered to have suitable experience and particular expertise in the
investment trust sector.

The Board collectively reviews its effectiveness in an informal appraisal
process, following the year end.

The Board as a whole acts as a Remuneration Committee with Mr Cornish as
Chairman. Further details are given in the Directors' remuneration report on
page 20.

Terms of reference for each Committee are available for inspection at the
Company's registered office.

In addition, the Board has formalised the arrangements under which Directors,
in the furtherance of their duties, may take independent professional advice at
the expense of the Company.

The Company has arranged Directors' and Officers' Liability Insurance which
provides cover for legal expenses under certain circumstances.

Directors' service contracts

It is the Board's policy that none of the Directors has a service contract. The
terms of appointment provide that a Director shall retire and be subject to
election at the first Annual General Meeting after his/her appointment, and at
least every three years after that unless a Director has been in office more
than nine years in which case they will stand for re-election every year. The
terms also provide that a Director may resign or be removed without notice and
that compensation will not be due on leaving office.

Going concern

The Directors are of the opinion that the Company has adequate resources to
continue in operational existence for the foreseeable future and accordingly
have adopted the going concern basis in preparing the accounts.

Internal control review

The Directors acknowledge that they are responsible for the Company's systems
of internal control and for reviewing their effectiveness.

An ongoing process, in accordance with the guidance of the Turnbull Committee
on internal control, has been established for identifying, evaluating and
managing risks faced by the Company. This process is regularly reviewed by the
Board.

The risk management process and systems of internal control are designed to
manage rather than eliminate the risk of failure to achieve the Company's
objectives. It should be recognised that such systems can only provide
reasonable, not absolute, assurance against material misstatement or loss.

Internal control assessment process

Risk assessment and the review of internal controls are undertaken by the Board
in the context of the Company's overall investment objective. The review, which
has been in place for the year ended 30 June 2008 and up to the date of this
report, covers the key business, operational, compliance and financial risks
facing the Company. In arriving at its judgment of what risks the Company
faces, the Board considers the Company's objectives in light of the following
factors:

-    the nature and extent of risks which it regards as acceptable for the
Company to bear within its overall business objective;

-    the threat of such risks becoming reality;

-    the Company's ability to reduce the incidence and impact of risk on its
performance; and

-    the cost to the Company and benefits related to the Company and third
parties of operating the relevant controls.

Against this backdrop the Board has split the review into four sections
reflecting the nature of the risks being addressed. The sections are as
follows:

-    corporate strategy;

-    published information and compliance with laws and regulations;

-    relationship with service providers; and

-    investment and business activities.

Given the nature of the Company's activities and the fact that most functions
are subcontracted, the Directors obtain information from key third party
suppliers regarding the controls operated by them. To enable the Board to make
an appropriate risk and control assessment, the information and assurances
sought from third parties include the following:

-    details of the control environment;

-    identification and evaluation of risks and control objectives;

-    assessment of the communication procedures; and

-    assessment of the control procedures.

The key procedures which have been established to provide effective internal
controls are as follows:

-    investment management is provided by SVG Investment Managers Limited. The
Board is responsible for the implementation of the overall investment policy
and monitors the action of the Investment Manager at regular meetings;

-    the provision of administration, accounting and company secretarial duties
is the responsibility of Capita Sinclair Henderson Limited;

-    Custody of assets is undertaken by HSBC Bank plc;

-    the duties of investment management, accounting and custody of assets are
segregated. The procedures of the individual parties are designed to complement
one another;

-    the non-executive Directors of the Company clearly define the duties and
responsibilities of their agents and advisers in the terms of their contracts.
The appointment of agents and advisers is conducted by the Board after
consideration of the quality of the parties involved; the Board monitors their
ongoing performance and contractual agreements;

-    mandates for authorisation of investment transactions and expense payments
are set by the Board; and

-    the Board reviews detailed financial information produced by the
Investment Manager and the Secretary on a regular basis.

The Company does not have an internal audit function. All of the Company's
management functions are delegated to independent third parties whose controls
are reviewed by the Board. It is therefore felt that there is no need for the
Company to have an internal audit function. However, this need is reviewed
annually.

Company Secretary

The Board has direct access to the advice and services of the Company
Secretary, Capita Sinclair Henderson Limited, which is responsible for ensuring
that Board and Committee procedures are followed and that applicable
regulations are complied with. The Secretary is also responsible to the Board
for ensuring timely delivery of the information and reports and that statutory
obligations of the Company are met.

Dialogue with Shareholders

Communication with shareholders is given a high priority by both the Board and
the Investment Manager. Major shareholders of the Company are offered the
opportunity to meet with the Investment Manager and the Directors in order to
ensure that their views are understood. All shareholders are encouraged to
attend and vote at the Annual General Meeting, during which the Board and the
Investment Manager are available to discuss issues affecting the Company and
shareholders have the opportunity to address questions to the Investment
Manager, the Board and the Chairmen of the Board's standing committees.

 

Statement of Directors' responsibilities in respect of the accounts

 

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.

 

Company law requires the Directors to prepare financial statements for each
financial year which present fairly the financial position of the Company and
the financial performance and cash flows of the Company for that period. In
preparing these financial statements, the Directors are required to:

-    select suitable accounting policies and then apply them consistently;

-    make judgments and estimates that are reasonable and prudent;

-    present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;

-    state whether applicable International Financial Reporting Standards have
been followed, subject to any material departures disclosed and explained in
the financial statements; and

-    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 entity's
financial position and financial performance.

 

The Directors are responsible for keeping proper accounting records that
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 1985 and Article 4 of the IAS Regulations. 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:

-    the financial statements, prepared in accordance with International
Financial Reporting Standards as adopted by the European Union, give a true and
fair view of the assets, liabilities, financial position and profit/(loss) of
the Company; and

-    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.

 

By order of the Board

John Hodson

Chairman

22 September 2008

 

Income statement
for the year ended 30 June 2008
 

                                                       Year ended 30 June                    Period ended 30 June  
                                                             2008                                    2007 

                                               Revenue        Capital                   Revenue        Capital 
                                                return         return    Total           return         return   Total
                                    Note         £'000          £'000    £'000            £'000          £'000   £'000 
                                                                                                                       
Investments                                                                                                            
(Losses)/gains on investments at
fair value through profit or loss    7               -        (27,237) (27,237)               -         10,558  10,558 
                                                                                                                       
Net investment result                                -        (27,237) (27,237)               -         10,558  10,558 
                                                                                                                       
Income                                                                                                                
                                                                                                                      
Dividends                            2             792              -      792              866              -     866
                                                                                                                      
Interest                             2             187              -      187              426              -     426
                                                                                                                      
Underwriting commission              2               5              -        5                7              -       7
                                                                                                                      
Total operating income                             984              -      984            1,299              -   1,299
                                                                                                                      
                                                                                                                      
Expenses                                                                                                              
                                     
Investment Manager's fee             3            (453)             -     (453)            (892)             -    (892)
                                                                                                                       
Investment Manager's performance
fee                                  3               -            387      387                -         (2,596) (2,596)
                                                                                                                       Other expenses                       4            (372)            (3)    (375)            (297)           (40)   (337)
                                                                                                                      
Total expenses                                    (825)           384     (441)          (1,189)        (2,636) (3,825)
                                                                                                                       
                                                                                                                       
Net (loss)/return before finance
costs and taxation                                 159        (26,853) (26,694)             110          7,922   8,032 
                                                                                                                       
                                                                                                                       
                                                                                                                       
Finance Costs                                                                                                          
                                                                                                                       
Interest Payable                                  (163)             -     (163)              (4)             -      (4)
                                                                                                                       
Total finance costs                               (163)             -     (163)              (4)             -      (4)
                                                                                                                       
                                                                                                                       
                                                                                                                       
Net (loss)/return before taxation                   (4)       (26,853) (26,857)             106          7,922   8,028 
                                                                                                                       
Taxation                             5               -              -        -               17              -      17 
                                                                                                                       
                                                                                                                       
                                                                                                                       
Net (loss)/return after taxation 
for the year                         6              (4)       (26,853) (26,857)             123          7,922   8,045 
                                                                                                                       
                                                                                                                       
                                                                                                                       
Return per Ordinary share                        pence          pence    pence            pence          pence   pence
                                                                                                                       
Basic                                6           (0.01)        (37.13)  (37.14)            0.17          10.91   11.08 
                                                                                                                       
                                                                                                                       
                                                                                                                       

 

The total column of this statement is the profit and loss account of the
Company. The supplementary revenue and capital return columns are both prepared
under guidance published by the Association of Investment Companies. All items
in the above statement derive from continuing operations. No operations were
acquired or discontinued during the period.

 

 

Statement of changes in equity

for the year ended 30 June 2008

 

                                                                                                             
                                                                                                             
                                                                                         Own                 
                                                                 Capital    Capital   shares                 
                                                                 reserve    reserve  held in                 
                                                  Share                             Treasury                 
                                          Share premium Special        -          -          Revenue         
                                        capital account reserve realised unrealised          reserve    Total
                                                                                                             
                                         £'000   £'000   £'000    £'000      £'000    £'000   £'000    £'000 
                                                                                                             
For the year to 30 June 2008                                                                                 
                                                                                                             
                                                                                                             
                                                                                                             
1 July 2007                              7,262   2,070  62,282    3,553      7,208        -     377   82,752 
                                                                                                             
                                                                                                             
                                                                                                             
Return for the year                          -       -       -     (689)   (26,164)       -      (4) (26,857)
                                                                                                             
                                                                                                             
                                                                                                             
Shares purchased to be held in treasury      -       -       -        -          -   (1,044)      -   (1,044)
                                                                                                             
                                                                                                             
                                                                                                             
30 June 2008                             7,262   2,070  62,282    2,864    (18,956)  (1,044)    373   54,851 
                                                                                                             
                                                                                                             
                                                                                                             
For the year to 30 June 2007                                                                                 
                                                                                                             
                                                                                                             
                                                                                                             
1 July 2006                              7,262   2,042  62,282      383      2,456        -   1,198   75,623 
                                                                                                             
                                                                                                             
                                                                                                             
Return for the year                          -       -       -    3,170      4,752        -     123    8,045 
                                                                                                             
Dividend paid                                -       -       -        -          -             (944)    (944)
                                                                                                             
                                                                                                             
                                                                                                             
Write back of share issue expenses           -      28       -        -          -        -       -       28 
                                                                                                             
                                                                                                             
                                                                                                             
30 June 2007                             7,262   2,070  62,282    3,553      7,208        -     377   82,752 
                                                                                                             

 


Balance sheet

as at 30 June 2008

 

                                                   30 June     30 June   
                                                                         
                                                      2008        2007   
                                                                         
                                            Note     £'000       £'000   
                                                                         
                                                                         
                                                                         
Non-current assets                                                       
                                                                         
Fair value through profit or loss                                        
                                                                         
   - Investments                              7     52,588      86,100   
                                                                         
                                                                         
                                                                         
Current assets                                                           
                                                                         
Other receivables                             9        809         640   
                                                                         
Cash and cash equivalents                            2,933         918   
                                                                         
                                                                         
                                                                         
                                                     3,742       1,558   
                                                                         
                                                                         
                                                                         
Total assets                                        56,330      87,658   
                                                                         
                                                                         
                                                                         
Current liabilities                                                      
                                                                         
Other payables                               10      1,479       4,906   
                                                                         
                                                                         
                                                                         
                                                     1,479       4,906   
                                                                         
                                                                         
                                                                         
Total assets less current liabilities               54,851      82,752   
                                                                         
                                                                         
                                                                         
Net assets                                          54,851      82,752   
                                                                         
                                                                         
                                                                         
Capital and reserves:                                                    
                                                                         
Share capital                                11      7,262       7,262   
                                                                         
Share premium account                        13      2,070       2,070   
                                                                         
Special reserve                              13     62,282      62,282   
                                                                         
Capital reserve                              13    (16,092)     10,761   
                                                                         
Own shares held in Treasury                  12     (1,044)          -   
                                                                         
Revenue reserve                              13        373         377   
                                                                         
Total shareholders' equity                          54,851      82,752   
                                                                         
                                                                         
                                                                         
Net asset value per share                            pence       pence   
                                                                         
Basic                                        15      77.21      113.94   
                                                                         
                                                                         
                                                                         

 

The financial statements were approved by the Board of Directors and authorised
for issue on

22 September 2008. They were signed on its behalf by

 

J Hodson

Chairman

22 September 2008

 


Statement of cash flows

for the year ended 30 June 2008

 

                                                                                          
                                                                                          
                                                                 Year ended     Year ended
                                                                                          
                                                               30 June 2008   30 June 2007
                                                                                          
                                                          Note        £'000          £'000
                                                                                          
                                                                                          
                                                                                          
Operating activities                                                                      
                                                                                          
Net (loss)/return before finance costs and taxation                (26,694)         8,028 
                                                                                          
Adjustment for losses/(gains) on investments                        27,239        (10,518)
                                                                                          
Interest paid                                                         (165)             - 
                                                                                          
                                                                                          
                                                                                          
Operating cash flows before movements in working capital               380         (2,490)
                                                                                          
(Increase)/decrease in receivables                                    (721)           218 
                                                                                          
(Decrease)/increase in payables                                     (2,696)         2,631 
                                                                                          
Income tax recovered/(paid)                                             24           (282)
                                                                                          
Purchases of portfolio investments                                 (17,256)       (41,236)
                                                                                          
Sales of portfolio investments                                      24,327         21,535 
                                                                                          
                                                                                          
                                                                                          
Net cash inflow/(outflow) from operating activities                  4,058        (19,624)
                                                                                          
                                                                                          
                                                                                          
Financing activities                                                                      
                                                                                          
Equity dividend paid                                                     -           (944)
                                                                                          
(Repayment)/drawdown of revolving credit facility                   (1,000)         1,000 
                                                                                          
Writeback of share issue expenses                                        -             28 
                                                                                          
Purchase of Treasury shares                                         (1,043)             - 
                                                                                          
                                                                                          
                                                                                          
Net cash (outflow)/inflow from financing activities                 (2,043)            84 
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
Increase/(decrease) in cash and cash equivalents for year  14        2,015        (19,540)
                                                                                          
Cash and cash equivalents at start of the year                         918         20,458 
                                                                                          
                                                                                          
                                                                                          
Cash and cash equivalents at 30 June 2008                            2,933            918 
                                                                                          
                                                                                          
                                                                                          

 

Notes to the Financial Statements

for the year ended 30 June 2008

 

1.1 Corporate information

Strategic Equity Capital plc is a public limited company incorporated and
domiciled in the United Kingdom whose shares are publicly traded.

 

The financial statements of Strategic Equity Capital plc for the year ended 30
June 2008 were authorised for issue in accordance with a resolution of the
Directors on 23 September 2008.

 

1.2 Basis of preparation/statement of compliance

The financial statements of the Company have been prepared in accordance with
International Financial Reporting Standards ("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 Association of Investment
Companies ("AIC") in January 2003 and revised in December 2005 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.

 

Convention

The financial statements are presented in Sterling, being the currency of the
primary 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 entity'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 and fixed
income securities are designated as fair value through profit and loss or
initial recognition.  The entity manages and evaluates 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 given, excluding transaction costs associated
with the investment that are charged to the Income statement and allocated to
capital.

 

After initial recognition, investments are measured at fair value, with
unrealised gains and losses on investments and impairment of investments
recognised in the Income statement and allocated to capital.  Realised gains
and losses on investments sold are calculated as the difference between sales
proceeds and cost.

 

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 a cost, for a limited period, being the price of the most recent
investment in the investee.  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 entity 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 received from UK registered
companies are accounted for net of imputed tax credits. Income on convertible
bonds is recognised on a time appointment basis from the date of purchase so as
to reflect the effective yield on the securities.

 

Expenses

All expenses are accounted for on an accruals basis.  Transaction costs and
other expenses incurred on the acquisition of an investment classified as fair
value through profit or loss are not included within the cost of that
investment but are charged immediately through the Income statement and
allocated to capital.  The Company's investment management and administration
fees, finance costs (including interest on the bank facility) and all other
expenses are charged through the Income statement.  These expenses are
allocated 100% to the capital column of the Income statement.  In the opinion
of the Directors the fee is awarded entirely for the capital performance of the
portfolio.

 

Cash and cash equivalents

Cash in hand and in banks and short-term deposits which are held to maturity
are carried at cost.  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.

 

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 Income statement 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 Income statement 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 revenue and capital 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.

 

Dividends payable to shareholders

Interim dividends to shareholders are recognised as a liability in the period
in which they are paid.  Final dividends to shareholders are recognised as a
liability in the year in which they have been declared and approved by
shareholders.  Dividends are charged to the Statement of changes in equity.

 

Foreign currency transactions

The currency of the Primary Economic Environment in which the Company operates
is pounds Sterling (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 transaction.

 

Investments are converted to Sterling at the rates of exchange ruling at the
Balance sheet date.  Exchange gains and losses relating to investments are
taken to the capital column of the Income statement.

 

New standards not applied

The IASB have issued the following standards with an effective date of periods
beginning on or after 30 June 2008.

 

International Accounting Standards (IAS/IFRS)                       Effective  
                                                                    date       
                                                                               
IAS 1        Presentation of Financial Statements: a revised                   
(revised)    presentation                                                      
                                                                    1 January  
                                                                    2009       
                                                                               
IAS 23       Borrowing Costs                                        1 January  
(revised)                                                           2009       
                                                                               
IAS 32       Puttable financial instruments and Obligations                    
(revised)    existing on Liquidation                                           
                                                                    1 January  
                                                                    2009       
                                                                               
IFRS 2       Share based payments: vesting conditions and                      
(revised)    cancellations                                                     
                                                                    1 January  
                                                                    2009       
                                                                               
IFRS 8       Operating Segments                                     1 January  
(revised)                                                           2009       
                                                                               

 

The Directors do not anticipate that the initial adoption of the above
standards, amendments and interpretations will have a material impact in the
future periods.

 

2 Income

 

                         30 June 2008 30 June 2007
                                                  
                               £'000        £'000 
                                                  
Income from investments:                          
                                                  
UK dividend income               792          866 
                                                  
Convertible bond income          122            - 
                                                  
Liquidity fund income             48          389 
                                                  
                                                  
                                                  
                                 962        1,255 
                                                  
Other income:                                     
                                                  
Bank interest receivable          17           37 
                                                  
Underwriting commission            5            7 
                                                  
                                                  
                                                  
                                  22           44 
                                                  
                                                  
                                                  
                                 984        1,299 
                                                  
Total income comprises:                           
                                                  
Dividends                        792          866 
                                                  
Interest                         187          426 
                                                  
Underwriting commission            5            7 
                                                  
                                                  
                                                  
                                 984        1,299 
                                                  

 

3 Investment Manager's fee

 

                                              30 June 2008           30 June 2007     
                                                                                      
                                          Revenue Capital       Revenue Capital       
                                                                                      
                                           return  return Total  return  return  Total
                                                                                      
                                           £'000   £'000      £  £'000   £'000  £'000 
                                                          '000                        
                                                                                      
                                                                                      
                                                                                      
Management fee                               709       -   709     759       -    759 
                                                                                      
Irrecoverable VAT thereon                      -       -     -     133       -    133 
                                                                                      
Performance fee                                -       -     -       -   2,209  2,209 
                                                                                      
Irrecoverable VAT thereon                      -       -     -       -     387    387 
                                                                                      
Refund of VAT on management/ performance                                              
fee                                                                                   
                                                                                      
                                                                                      
                                            (256)   (387) (643)      -       -      - 
                                                                                      
                                                                                      
                                                                                      
                                             453    (387)   66     892   2,596  3,488 
                                                                                      

 

A basic management fee is payable to the Investment Manager at the annual rate
of 1% of the net asset value of the Company.  The basic management fee accrues
daily 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.

 

 

4 Other Expenses

 

                                              30 June 2008          30 June 2007     
                                                                                     
                                          Revenue Capital       Revenue Capital      
                                                                                     
                                           return  return Total  return  return Total
                                                                                     
                                           £'000   £'000      £  £'000   £'000      £
                                                          '000                  '000 
                                                                                     
                                                                                     
                                                                                     
Secretarial services                          76       -    76      73       -    73 
                                                                                     
Auditors' remuneration for: Audit                                                    
services                                                                             
                                              21       -    27      17       -    17 
                                                                                     
Directors' remuneration (see the                                                     
Directors' remuneration report)                                                      
                                                                                     
                                                                                     
                                              82       -    82      80       -    80 
                                                                                     
Other expenses                               193       3   196     127      40   167 
                                                                                     
                                                                                     
                                                                                     
                                             372       3   375     297      40   337 
                                                                                     

 

5 Taxation

 

                                            30 June 2008             30 June 2007      
                                                                                       
                                      Revenue  Capital         Revenue  Capital       
                                       return   return  Total   return   return  Total
                                        £'000    £'000  £'000    £'000    £'000  £'000 
                                                                                       
                                                                                       
                                                                                       
Corporation tax at 29.5%                    -        -      -        -        -      - 
                                                                                       
Adjustment relating to prior period                                                    
                                                                                       
                                            -        -      -      (17)       -    (17)
                                                                                       
                                                                                       
                                                                                       
                                            -        -      -      (17)       -    (17)
                                                                                       

 

The taxation charge for the year is lower than the standard rate of corporation
tax in the UK (28%) (30% to 5 April 2008).  The differences are explained
below.

 

                                          30 June 2008             30 June 2007      
                                                                                     
                                   Revenue  Capital          Revenue Capital        
                                    return   return    Total  return  return   Total
                                     £'000    £'000    £'000   £'000   £'000   £'000 
                                                                                     
                                                                                     
                                                                                     
(Loss)/return on ordinary                                                            
activities before taxation                                                           
                                        (4) (26,853) (26,857)    106   7,922   8,028 
                                                                                     
                                                                                     
                                                                                     
Theoretical tax at UK corporation                                                    
tax rate of 29.5% (2007: 30%)                                                        
                                                                                     
                                                                                     
                                        (1)  (7,922)  (7,923)     32   2,377   2,409 
                                                                                     
Effects of:                                                                          
                                                                                     
- UK dividends that are not taxable                                                  
                                                                                     
                                      (234)       -     (234)   (260)      -    (260)
                                                                                     
- Losses/(gains) on investment                                                       
                                                                                     
                                         -    8,035    8,035       -  (3,167) (3,167)
                                                                                     
- Movement in unrelieved expenses                                                    
                                                                                     
                                       233     (133)    (120)    226     790   1,016 
                                                                                     
- Expenses not deductible for tax                                                    
purposes                                                                             
                                         2        -        2       2       -       2 
                                                                                     
- Adjustment relating to prior                                                       
period                                                                               
                                         -        -        -     (17)      -     (17)
                                                                                     
                                                                                     
                                                                                     
                                         -        -        -     (17)      -     (17)
                                                                                     

 

 

Factors that may affect future tax charges

The Company has £3,697,000 management expenses and loan relationship deficits
(2007: £3,308,000) 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, no deferred tax asset in respect of these amounts has 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 Return per Ordinary share

 

                                30 June 2008                      30 June 2007         
                                                                                       
                                     Weighted                         Weighted        
                                      average                          average        
                           Net      number of       Per     Net      number of     Per
                        return       Ordinary     share  return       Ordinary   share
                         £'000         shares     pence   £'000         shares   pence 
                                                                                       
Total                                                                                  
                                                                                       
Return per share       (26,857)    72,314,265    (37.14)  8,045     72,626,000   11.08 
                                                                                       
                                                                                       
                                                                                       
Revenue                                                                                
                                                                                       
Return per share            (4)    72,314,265     (0.01)    123     72,626,000    0.17 
                                                                                       
                                                                                       
                                                                                       
Capital                                                                                
                                                                                       
Return per share       (26,853)    72,314,265    (37.13)  7,922     72,626,000   10.91 
                                                                                       

 

7 Investments

                                                       30 June 2008 30 June 2007
                                                                                
                                                             £'000        £'000 
                                                                                
Investment portfolio summary                                                    
                                                                                
Listed investments at fair value through profit or          48,448       83,861 
loss                                                                            
                                                                                
Unlisted investments at fair value through profit or         4,140        2,239 
loss                                                                            
                                                                                
                                                                                
                                                                                
                                                            52,588       86,100 
                                                                                

 

                                                            30 June    30 June
                                                               2008       2007
                                                                               
                                         Listed Unlisted      Total      Total
                                                                               
                                          £'000    £'000      £'000      £'000 
                                                                               
Analysis of investment portfolio                                               
movements                                                                      
                                                                               
Opening book cost                        77,626    1,266     78,892     52,566 
                                                                               
Opening unrealised appreciation           6,235      973      7,208      2,456 
                                                                               
                                                                               
                                                                               
Opening valuation                        83,861    2,239     86,100     55,022 
                                                                               
                                                                               
                                                                               
Movements in the year:                                                         
                                                                               
Purchases at cost                        15,770    1,755     17,525     41,899 
                                                                               
Sales - proceeds                        (23,690)    (117)   (23,807)   (21,386)
                                                                               
          - realised (losses)/gains on   (1,158)      92     (1,066)     5,813 
sales                                                                          
                                                                               
Movement from unlisted to listed            700     (700)         -          - 
                                                                               
(Decrease)/increase in unrealised                                              
appreciation                                                                   
                                        (27,035)     871    (26,164)     4,752 
                                                                               
                                                                               
                                                                               
Closing valuation                        48,448    4,140     52,588     86,100 
                                                                               
                                                                               
                                                                               
Closing book cost                        69,248    2,296     71,544     78,892 
                                                                               
Closing unrealised appreciation         (20,800)   1,844    (18,956)     7,208 
                                                                               
                                                                               
                                                                               
                                         48,448    4,140     52,588     86,100 
                                                                               

 

A list of the top ten portfolio holdings by their aggregate market values is
given in the Investment Manager's report.

 

Transaction costs incidental to the acquisitions of investments totalled £
94,000 (2007: £167,000) and disposals of investments totalled £26,000 (2007: £
42,000) for the year.

 

                                   30 June 2008 30 June 2007
                                                             
                                          Total        Total
                                                             
                                          £'000        £'000 
                                                             
Analysis of capital gains                                    
                                                             
Realised gains on sales                  (1,066)       5,813 
                                                             
Foreign exchange losses                      (7)          (7)
                                                             
Movement in unrealised appreciation     (26,164)       4,752 
                                                             
                                                             
                                                             
                                        (27,237)      10,558 
                                                             

 

8 Significant interests

The Company had holdings of 3% or more that is material in the context of the
accounts in the following companies' securities:

 

Name of                            Class of    30 June 2008
investment                            share Percentage held
                                                           
                                                           
                                                           
Journey Group (formerly Watermark) Ordinary           15.37
                                                           
Redstone                           Ordinary            9.15
                                                           
4Imprint Group                     Ordinary            7.57
                                                           
Pinewood Shepperton                Ordinary            4.72
                                                           
Renold                             Ordinary            4.21
                                                           
Thorntons                          Ordinary            3.94
                                                           
Entertainment Rights               Ordinary            3.93
                                                           
Western & Oriental                 Ordinary            3.51
                                                           
Statpro                            Ordinary            3.15
                                                           
Filtronic                          Ordinary            3.07
                                                           
                                                           
                                                           

 

9 Other receivables

 

                                            30 June 2008 30 June 2007
                                                                     
                                                   Total        Total
                                                                     
                                                  £'000        £'000 
                                                                     
                                                                     
                                                                     
Amounts due from brokers                             57          583 
                                                                     
Dividends receivable                                 80           21 
                                                                     
Accrued income                                       12            6 
                                                                     
Corporation tax                                       -           25 
                                                                     
VAT recoverable on Investment Manager's fee         643            - 
                                                                     
Prepayments                                          17            5 
                                                                     
                                                                     
                                                                     
                                                    809          640 
                                                                     

 

10 Other payables

 

                             30 June 2008 30 June 2007
                                                      
                                    Total        Total
                                                      
                                   £'000        £'000 
                                                      
                                                      
                                                      
Bank loan                              -        1,000 
                                                      
Amounts due to brokers             1,260          990 
                                                      
Other creditors and accruals         219        2,916 
                                                      
                                                      
                                                      
                                   1,479        4,906 
                                                      

 

Details of the bank facility can be found in note 17.

 

11 Called up share capital

 

                                                       30 June 2008 30 June 2007
                                                                                
                                                              Total        Total
                                                                                
                                                             £'000        £'000 
                                                                                
Authorised:                                                                     
                                                                                
120,000,000 Ordinary shares of 10p each                     12,000       12,000 
                                                                                
                                                                                
                                                                                
Allotted, called up and fully paid:                                             
                                                                                
72,626,000 (2007: 72,626,000) Ordinary shares of 10p         7,262        7,262 
each                                                                            
                                                                                
                                                                                
                                                                                

 

12 Own shares held in Treasury

 

                                      30 June 2008 30 June 2007
                                                               
                                             Total        Total
                                                               
                                            £'000        £'000 
                                                               
                                                               
                                                               
1,582,500 Ordinary shares of 10p each       1,044            - 
                                                               

 

The cost of the shares held in treasury has been taken to the special reserve. 
Since the year end a further 1,463,000 Ordinary shares have been purchased for
treasury.

 

13 Reserves

 

                                                      Capital     Capital        
                                      Share Special   reserve     reserve Revenue
                                    premium reserve         -           - reserve
                                                     realised  unrealised        
                                                                                 
                                     £'000   £'000     £'000       £'000   £'000 
                                                                                 
                                                                                 
                                                                                 
Opening balance                      2,070  62,282     3,553       7,208     377 
                                                                                 
Net losses on realisation of                                                     
investments                                                                      
                                         -       -    (1,066)          -       - 
                                                                                 
Exchange difference                      -       -        (7)          -       - 
                                                                                 
Decrease in unrealised appreciation      -       -         -     (26,164)      - 
                                                                                 
Costs allocated to capital               -       -       384           -       - 
                                                                                 
Retained net revenue for the period      -       -         -           -      (4)
                                                                                 
                                                                                 
                                                                                 
As at 30 June 2008                   2,070  62,282     2,864     (18,956)    373 
                                                                                 
                                                                                 
                                                                                 

 

14 Reconciliation of net cash flow to net debt

 

                                                          30 June     30 June
                                                             2008        2007
                                                                              
                                                            Total       Total
                                                                              
                                                            £'000       £'000 
                                                                              
                                                                              
                                                                              
Opening net (debt)/ funds                                     (82)     20,458 
                                                                              
Increase/(decrease) in cash and cash equivalents in         2,015     (19,540)
year                                                                          
                                                                              
Repayment/(drawdown) of bank loan                           1,000      (1,000)
                                                                              
                                                                              
                                                                              
Closing net funds/ (debt)                                   2,933         (82)
                                                                              

 

                                  At      Net           At
                        30 June 2007 cashflow 30 June 2008
                               £'000    £'000        £'000 
                                                           
                                                           
                                                           
Cash at bank                     618      115          733 
                                                           
Liquidity funds                  300    1,900        2,200 
                                                           
Debt due within one year      (1,000)   1,000            - 
                                                           
                                                           
                                                           
                                 (82)   3,015        2,933 
                                                           

 

15 Net asset value per Ordinary share

The net asset value per Ordinary share is based on net assets of £54,851,000
(2007: £82,752,000) and on 71,043,500 (2007: 72,626,000) Ordinary shares, being
the number of shares in issue at the year end, less the number of shares being
held in treasury of 1,582,500 (2007: nil).

 

16 Capital commitments and contingent liabilities

The Company has a commitment to invest €2,160,000 in Vintage I.

 

17 Analysis of financial assets and liabilities

The Company's financial instruments comprise securities, cash balance
(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.

 

The Company finances its operations through its issued capital, existing
reserves and a £15,000,000 revolving credit facility.

 

The principle risks the Company faces in its investment portfolio management
activities are:

 

- market price risk, i.e. the movements in value of investment holdings caused
by factors other than interest rate movement;

 

- interest rate risk;

 

- liquidity risk; and

 

- 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 exercise exposure to any one particular type of
security or issuer.

 

If the investment portfolio valuation fell by 5% from the June 2008 valuation,
with all other variables held constant, there would have been a reduction of £
2,629,000 (2007: £4,305,000) in the return before taxation and equity.  An
increase of 5% in the investment portfolio valuation would have an equal and
opposite effect in the return before taxation and equity.

 

(ii) Cash flow interest rate risk exposure

The investment Manager is permitted to borrow up to 20% of the Company's
adjusted portfolio valuation, and uses a £15,000,000 revolving credit facility
for this purpose, at variable rates to be determined prior to any drawdown.

 

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 1% from those obtained at 30 June 2008, it
would have the effect, with all other variables held constant, of reducing the
net revenue return before taxation by £29,000 (2007: £9,000). If there had been
an increase in interest rates of 1% there would have been an equal and opposite
effect in the net revenue before taxation.  The calculations are based on cash
at bank and liquidity funds as at 30 June 2008 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.

 

(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.

 

(iv) Foreign currency risk

The Company invests in a private equity fund denominated in Euros.  In addition
the Company's loan may be drawn down in US Dollars or Euros as well as
Sterling.  The Company is, therefore, subject to foreign currency risk.

 

If the Sterling/ Euro exchange rate had reduced by 1% from that obtained at 30
June 2008, it would have the effect, with all other variables held constant, of
increasing the equity shareholder's funds by 24,000 (2007: £15,000).  The
calculations are based on the value of the investment in Vintage I as at 30
June 2008 and this may not be representative of the year as a whole.

 

The interest rate risk profile of the Company's financial assets at 30 June
2008 was:

 

                                 No interest         Cash flow    Fixed interest
                                   rate risk     interest rate         rate risk
                                   financial    risk financial         financial
                         Total        assets            assets            assets
                         £'000         £'000             £'000             £'000 
                                                                                 
Sterling                                                                         
                                                                                 
Ordinary shares         49,133        49,133                 -                 - 
                                                                                 
Convertible bonds          813             -                 -               813 
                                                                                 
Loan notes                 257             -                 -               257 
                                                                                 
Liquidity funds          2,200             -             2,200                 - 
                                                                                 
Cash                       733             -               733                 - 
                                                                                 
Receivables*               792           792                 -                 - 
                                                                                 
                                                                                 
                                                                                 
                        53,928        49,925             2,933             1,070 
                                                                                 
                                                                                 
                                                                                 
Euros                                                                            
                                                                                 
Other investments        2,385         2,385                 -                 - 
                                                                                 
                                                                                 
                                                                                 
                         2,385         2,385                 -                 - 
                                                                                 
                                                                                 
                                                                                 
Total                   56,313        52,310             2,933             1,070 
                                                                                 
                                                                                 
                                                                                 

 

All amounts mature in less than one year, with the exception of the convertible
bond which matures in 2010.

 

* Receivable 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
2007 was:

 

                                              No interest              Cash flow
                                                rate risk          interest rate
                                                financial         risk financial
                                 Total             assets                 assets
                                 £'000              £'000                  £'000 
                                                                                 
Sterling                                                                         
                                                                                 
Ordinary shares                 84,561             84,561                      - 
                                                                                 
Liquidity funds                    300                  -                    300 
                                                                                 
Cash                               618                  -                    618 
                                                                                 
Receivables*                       635                635                      - 
                                                                                 
                                                                                 
                                                                                 
                                86,114             85,196                    918 
                                                                                 
                                                                                 
                                                                                 
Euros                                                                            
                                                                                 
Other investments                1,539              1,539                      - 
                                                                                 
                                                                                 
                                                                                 
                                 1,539              1,539                      - 
                                                                                 
                                                                                 
                                                                                 
Total                           87,653             86,735                    918 
                                                                                 
                                                                                 
                                                                                 

 

All amounts mature in less than one year.

 

* 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 2008 was:

 

                                         No interest                   Cash flow
                                           rate risk               interest rate
                                           financial              risk financial
                         Total           liabilities                 liabilities
                         £'000                 £'000                       £'000 
                                                                                 
Sterling                                                                         
                                                                                 
Creditors                1,479                 1,479                           - 
                                                                                 
                                                                                 
                                                                                 
Total                    1,479                 1,479                           - 
                                                                                 
                                                                                 
                                                                                 

 

All amounts are due in one year or less.

 

The interest rate risk profile of the Company's financial liabilities at 30
June 2007 was:

 

                                         No interest                   Cash flow
                                           rate risk               interest rate
                                           financial              risk financial
                         Total           liabilities                 liabilities
                         £'000                 £'000                       £'000 
                                                                                 
Sterling                                                                         
                                                                                 
Creditors                3,906                 3,906                           - 
                                                                                 
Bank loan                1,000                     -                       1,000 
                                                                                 
                                                                                 
                                                                                 
Total                    4,906                 3,906                       1,000 
                                                                                 
                                                                                 
                                                                                 

 

All amounts are due in one year or less.

 

The bank loan, which is a £15,000,000 revolving credit facility with The Royal
Bank of Scotland plc, bears interest at the rate of 1.0% over LIBOR or EURIBOR.
 The facility may be drawn down in Sterling, US Dollars or Euros.  The facility
was undrawn at 30 June 2008.  The undrawn balance bears interest at the rate of
0.2%.  The facility is available until 13 July 2009 and is subject to the
following covenant:

 

Gross borrowings shall not be more than 20% of the adjusted portfolio valuation
at any time.

 

Fair values of financial assets and liabilities

All of the financial assets and liabilities of the Company are held at fair
value.

 

Managing capital

 

Capital structure

The Company is funded through shareholders equity, cash reserves and an
existing £15,000,000 loan facility with the Royal Bank of Scotland plc, which
was not utilised as at 30 June 2008.  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.  Inter alia, this requires that no investment may exceed 15% by value
of the Company's portfolio at the point of investment.

 

The Company's capital requirement is reviewed regularly by the Board.

 

18 Related party transactions

The Investment Manager: SVG Investment Managers Limited is regarded as a
related party of the Company.  The Investment Manager may draw upon advice from
the Strategic Advisory Board of which Sir Clive Thompson, a Director of the
Company, is a member.  The strategic Advisory Board was established to provide
advice to SVG in relation to the strategy, operations and management of
potential investee companies.

 

The amounts paid to the Investment Manager are disclosed in the Report of
Directors and in note 3.

 

The amount due to the Investment Manager at 30 June 2008 was: £148,000 (30 June
2007: £2,828,000).