Annual Financial Report

RNS Number : 7735H

LMS Capital PLC

15 March 2018

LMS Capital plc

Preliminary Results for year ended 31 December 2017

The Board of LMS Capital plc, ("LMS Capital" or "the Company"), is pleased to announce the Company's annual results for the year ended 31 December 2017, the first complete year under the new management arrangements with Gresham House Asset Management.

· Return of capital completed ahead of expectation - the tender offer in August 2017, which returned £11 million to shareholders, satisfied in full the undertaking to return further capital to shareholders, which was set out in the circular to shareholders dated 27 July 2016.

· The portfolio performed well during the year with NAV per share rising 12.7%:

o Net gains on the investment portfolio were £9.9 million (2016: losses of £16.2 million);

o The profit for the year was £7.6 million (2016: loss of £20.8 million); and

o Realisations for the year totalled £21.7 million (2016: £10.6 million).

· The net asset value at 31 December 2017 was £64.5 million, 80p per share (31 December 2016: £68.1 million, 71p per share).

· The improvement in NAV per share includes, significant value increase from the Yes To partial realisation, and further value potential exists.

· Overhead costs for the year (including amounts incurred by subsidiaries) were £2.7 million significantly lower than last year (2016: £3.3 million, excluding reorganisation costs), reflecting the impact of planned cost savings with further savings expected in 2018. Overheads in 2017 include costs of approximately £1.0 million which are not expected to recur now that the transition to external management is complete.

· The Company is now focused on re-investing future realisation proceeds in line with the new investment policy overseen by the Investment Committee.

· The Board and the Manager continue to evaluate strategic options for the Company to enable greater scale and enhance shareholder value.

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

For further information, please contact

LMS Capital plc

Martin Knight, Chairman

020 3837 6275

Gresham House Asset Management Limited

Graham Bird

020 3837 6275

J.P. Morgan Cazenove

Michael Wentworth-Stanley

020 7742 4000

Chairman's statement

I am pleased to report that 2017 was a year of progress for the Company - the previous realisation strategy, with its related commitment to make further returns of capital to shareholders, was successfully concluded and good progress was made in implementing the revised investment strategy under the leadership of the new Investment Manager, Gresham House Asset Management Limited ("GHAM").

In the circular to shareholders dated 27 July 2016 the Company announced a tender offer to return £6 million to shareholders and undertook to make two further returns of capital to shareholders by way of tender offers for a maximum of £11 million. After a successful period for realisations in the first half of 2017 the Company undertook a tender offer in August 2017 which returned the full £11 million to shareholders ahead of the expected schedule.

Performance review

Net Asset Value per share at 31 December 2017 was 80p, slightly higher than announced on 8 February, a 12.7% increase from 71p at the end of 2016.

Portfolio gains (realised and unrealised) for the year before carried interest charges were £10.5 million (2016: losses of £16.2 million), the key elements of which were:

· The net gain on the funds' portfolio of £10.1 million (2016: £1.0 million) is principally a function of the strong performance during the year by investments held within San Francisco Equity Partners;

· The net loss on the unquoted investments of £0.6 million (2016: net loss of £15.9 million) includes:

o Gains on the sale of 365iTMS and the partial sale and recapitalisation of Yes To (a co-investment with San Francisco Equity Partners);

o An unrealised gain on the Company's interest in Brockton Capital LLP, reflecting the sale of that business which is expected to complete in March 2018; and

o Write downs on Medhost and Elateral;

· The gain on the quoted portfolio of £1.0 million (2016: loss of £1.3 million) includes a gain of £1.6 million in the value of the Company's interest in Gresham House plc, offset by losses on IDE Group Holdings and Weatherford International.

The portfolio gains for the year are stated after the impact of exchange losses of £3.2 million (2016: gains of £11.6 million), primarily due to the strengthening of sterling against the US dollar during 2017.

Overhead costs were £2.7 million, lower than the previous year (2016: £3.3 million). In line with the new Manager's plans, overheads in 2017 include costs of approximately £1.0 million which are not expected to recur now that the transition to external management is complete.

Conclusion and outlook

With the final commitment to return capital to shareholders fulfilled, the Company is now focused on implementing the new investment policy and growing net asset value for shareholders. As part of this implementation the Board and GHAM continue to evaluate strategic options for the Company to enable greater scale for the business and enhance shareholder value.

Tony Sweet is leaving GHAM and I would like, on behalf of the whole Board, to acknowledge our appreciation of his contribution to the Company. Tony was CFO from the time of the Company's beginnings in 2006 until August 2016, at which time he joined the Gresham House team and has overseen the transfer of the Company's finance and administration to the new externally managed structure. He will relinquish his role during the first half of 2018. As well as ensuring a sound financial management for the Company, Tony has been a valued source of support and guidance to the Board in many ways over the years. We wish him well in the future.

Martin Knight

Chairman

15 March 2018

Strategic Report

LMS Capital plc is an investment company whose shares are traded on the Main Market of the London Stock Exchange.

Investment objective and strategy

Until 16 August 2016 the Directors of the Company were conducting an orderly realisation of the assets of the Company. At a general meeting on 16 August 2016 shareholders voted to change the Company's investment policy from the realisation strategy to a new policy focused predominantly on private equity investment. At the same time Gresham House Asset Management Limited ("GHAM" or "the Manager") was appointed by the Board to manage the Company's assets.

With the final commitment to return capital to shareholders fulfilled, the Company is now focused on re-investing future realisation proceeds in line with the new investment policy, including private equity and alternative, specialist asset classes. The Company's investment objective is to achieve total returns over the medium to longer term, principally through capital gains and supplemented with the generation of a longer term income yield. The Company is targeting a return on equity, after running costs, of between 12% and 15% per annum over the long term on new capital invested.

The investment strategy is now focused predominantly on private equity investment and alternative, specialist asset classes using the experience of the GHAM team in asset management, private equity and public markets:

· The Manager will invest in and partner with management teams of profitable and cash generative businesses and investments to create value, targeting an annual return on equity of 12% -15% net of costs over the long term;

· The focus will primarily be on smaller private investment opportunities below £50 million value where the Manager believes there to be significant market inefficiencies which create opportunities for superior long term returns and to leverage the experience of the investment team;

· Investments may include alternative, specialist asset classes which target long term, illiquid strategies both through co-investment and fund opportunities on preferred terms; and

· The focus is also on optimising the value of existing holdings and, where growth prospects are clear, to preserve and support longer term value creation.

No investment in any single company will (at the time of investment) represent more than 15% of the Company's net assets. Any investment in securities of a single company or investment fund, which represents more than 10% of the Company's net assets at the time the investment is made, requires the Board's approval.

The Company may invest in public or private securities; investments may be made in the form of, inter alia, equity, equity-related instruments, derivatives and indebtedness. The Company may hold controlling or non-controlling positions and may invest directly or indirectly. The Company may also invest in Gresham House plc, to benefit from the potential growth of GHAM.

The Company is not restricted to specific sectors; its assets are and will continue to be predominantly invested in the United Kingdom, Europe and North America, with an increasing focus on the United Kingdom. Indebtedness of the Company will not exceed 25% of net assets measured at the time of drawdown. The Company had no indebtedness at 31 December 2017 or at the date of this report.

Portfolio management

GHAM manages the Company's assets and investments in accordance with guidelines determined by the Directors and as specified in a formal portfolio management agreement. Further information about GHAM can be found in the Manager's Review.

In order to comply with the requirements of the Alternative Investment Fund Managers Directive 2011, the Company has appointed an alternative investment fund manager ("AIFM"). In due course, the Company's AIFM will be GHAM, once GHAM has obtained a variation of its permissions under Part 4A of the Financial Services and Markets Act 2000 to enable it to act as a full-scope UK AIFM. For an initial period, however, before GHAM has obtained this permission, the Company has appointed G10 Capital Limited ("G10 Capital"), a specialist provider of regulated services, as its initial AIFM and G10 Capital has delegated certain functions in relation to the portfolio management of the Company's assets to GHAM. The Company has appointed Ipes (UK) Limited as its depositary.

Under the AIFM and portfolio management agreement, the Manager is entitled to an annual management fee as follows:

a) 1.50% of the net asset value of the Company, to the extent that the Company's net assets under management are £100 million or less;

b) 1.25% of the net asset value of the Company, to the extent that the Company's net assets under management exceed £100 million but are £150 million or less: and

c) 1.00% of the net asset value of the Company to the extent that Company's net assets under management exceed £150 million.

The Manager is also entitled to a performance fee on new investments which is designed to align the interests of GHAM, as portfolio manager, with those of the Company. If certain hurdle return requirements are satisfied, GHAM earns a performance fee of 15% of the gain in the net asset value of new investments made after 16 August 2016. No performance fee will be payable in respect of investments held at the date of GHAM's appointment.

GHAM is the regulated subsidiary of Gresham House plc, the specialist asset manager quoted on the Alternative Investment Market of the London Stock Exchange. Its investment team has a successful track record, underpinned by proven operating and technical expertise. GHAM adopts a differentiated and rigorous approach to private and public equity investments through its specialist asset management strategies which are focused on capitalising on the growth in demand for alternative investment strategies, illiquid assets and for discretionary co-investments.

A dedicated investment committee of GHAM is responsible for the Company's portfolio and oversees the investment appraisal process in relation to investments made in respect of the Company's portfolio. The Company has the right to nominate a member to this committee and as at the date of this report has exercised that right.

The committee assesses existing assets and new investment opportunities and is also responsible for approving due diligence costs, abort costs exposure, capital allocation and appropriate risk management.

All investment opportunities are appraised by the investment team and a short list of deals progresses for review by the investment committee. The investment committee assist in due diligence, investment appraisal and the team can leverage their extensive network as required.

Representatives of GHAM are available to attend all meetings of the Board and provide regular reports on the investment portfolio and the affairs of the Company generally. The performance of each underlying investment is monitored regularly with commentary on trends and risks both company specific and market related. GHAM may also have representatives on the boards of portfolio investment companies.

Distribution policy

In future the Company intends to return in the region of 30% of annual cash realised profits from new investments and in so doing, to generate a dividend yield over the longer term.

Performance

The following are the key performance indicators ("KPIs") considered by the Board and the Manager in assessing the Company's performance against its objectives. These KPIs are:

Return on equity over the long term

The Company's objective is to achieve a return on equity (on new investments) of between 12% and 15% per annum over the long term.

NAV per ordinary share total return

The Company's net asset value per share total return was 12.7% for the year ended 31 December 2017. This compared with 9% for the FTSE All-Share Index.

Share price total return

The Company's share price total return was negative 12.6% for the year ended 31 December 2017.

Further information on the Company's performance is given in the Chairman's Statement and the Manager's Review.

Personnel

The average number of Directors and staff was as follows:

	2017			2016
	Male	Female	Total	Male	Female	Total
Directors	4	-	4	6	-	6
Senior management	-	-	-	-	-	-
Other employees	1	1	2	1	3	4
	5	1	6	7	3	10

Environment

The Company has a limited direct impact upon the environment and there are few environmental risks associated with the Company's activities. Information on greenhouse gas emissions are set out in the Directors' Report.

Risk management and principal risks and uncertainties

The Company has appointed G10 Capital, an independent investment manager, as its AIFM to act in accordance with the Company's investment objective and the AIFMD rules. This includes portfolio management and risk management services. At the same time GHAM was appointed to perform on behalf of G10 Capital day-to-day portfolio management services.

GHAM is responsible for the ongoing process of identifying, evaluating, monitoring and managing the risks facing the Company. The Board keeps G10 Capital's and GHAM's performance in all areas under review as part of its overall responsibility for ensuring that the Company has an effective risk management and internal control framework.

On behalf of the Board, the Audit Committee has responsibility for ensuring that the Company has an effective process to identify, document and assess those risks, which might impact the Company's performance and its achievement of its strategy.

Throughout the year ended 31 December 2017, the Board has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. A summary of the principal risks and uncertainties that could have a material adverse effect on the Company's strategy, performance and financial condition is set out below.

Principal risks	Consequences	Company procedures
Market risk
Economic instability, political uncertainty and low growth in the markets where the Company's investments operate. Lack of liquidity in capital markets.	Economic conditions may result in reduced demand for the products and services supplied by investee companies. Such a negative impact on performance and growth rates may result in lower individual company valuations resulting in a decline of the Company's NAV and its failure to meet its return targets and investment objective.	Regular monitoring of the trading, cash flows and prospects (including exit opportunities) of the investment portfolio to identify the impact on individual investments and on the Company's strategy.

Volatility in listed equity prices, foreign currency rates and interest rates.	At 31 December 2017 64% of the Company's investment portfolio was denominated in US dollars. Movements in the USD/GBP exchange rate have a significant impact on the Company's NAV.	The Board regularly receives reports on the Company's foreign currency exposure in its investment portfolio. The Company does not currently hedge its underlying non-sterling investments.

Investment risk
The Company may not be able to implement the strategy approved by shareholders in August 2016 if it has insufficient available funds or is unable to find suitable deals.	The Company may not be able to meet the strategic objectives in its investment strategy resulting in a decline in its net asset value and share price.	The Board has retained the services of an experienced investment manager to source and execute deals to meet the Company's strategic objectives. The investment manager will also assist the Board in seeking opportunities to scale the business and ensure the necessary funds for investment are available.
Investments fail to perform in line with original expectations or management's plans. Investment performance may be impacted by competition, regulatory changes or other market developments.	Poor performance by portfolio companies may result in the Company not meeting its investment return objectives or its realisation and cash distribution plans. This could impact the NAV and the market's view of the Company's prospects, with a consequent negative impact on its share price	Regular monitoring of the trading of individual companies in the investment portfolio as well as of the Company's overall investment performance.

Where the Company has only minority stakes in investments it may not be able to influence performance initiatives or exit strategy.

Financial risk
Many of the Company's investments produce little or no recurring income and the timing of realisations to provide working capital cannot be ascertained with certainty.	Failure to meet future financial obligations (including capital calls to funds) could expose the Company to potential legal action and/or loss of value (to a fund investment).	Working capital requirements (including exposure to uncalled fund commitments) are reviewed regularly.

The Company has made investments in private equity funds under the terms of which it may be obliged to make further capital contributions. Whilst the maximum amount of the future commitment is known, the timing of such capital contributions cannot be predicted with certainty.

Operational risk
Failure of the Company's internal processes and systems to ensure that it complies with all legal, regulatory and financial reporting obligations.	Reputational damage and/or financial loss.	The Audit Committee, on behalf of the Board, regularly reviews the systems in respect of the principal operational risks, as well as reports on the Company's related risk management procedures.

Viability statement

The Directors have assessed the Company's current position and prospects as described in the Chairman's Statement and the Manager's Review, as well as the principal risks and uncertainties set out above. The Directors concluded that the appropriate period for this assessment should be the three years commencing 1 January 2018 since this timeframe reflects the Company's internal planning horizon as well as that of most of the companies in which it is invested. Given the illiquid nature of much of its investment portfolio, investment/divestment decisions tend to reflect a time period which can be up to three years.

In performing their assessment, the Directors considered principally:

1. The Company's liquidity forecast for the three years from 1 January 2018; and

2. The Manager's latest report on the investment portfolio which includes (for every Board meeting) an assessment of operational issues as well as broader market factors and each asset's cash needs (if any) and likely future cash generation (amount and timing).

The Directors' consideration of these reports was made against the background of the following:

· Many of the Company's investments are in private companies for which the timing and amount of income and/or realisation is uncertain;

· The Board has reviewed the liquidity of the Company and considered commitments to private equity investments, long term cash flow projections and the potential availability of gearing. It has also satisfied itself that assumptions regarding future cash inflows are reasonable;

· The Board has also considered likely downside risk in the value of marketable securities where realisations of these form part of the liquidity forecast. This risk typically includes factors impacting the price of the security and the exchange rate against sterling of the currency in which it is denominated; and

· In making its assessment, the Board has taken into account the threats to the Company's solvency or liquidity incorporated in the principal risks and uncertainties and satisfied itself that they are being addressed as outlined above.

Taking account of the above factors, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of this assessment.

For and on behalf of the Board.

Martin Knight

Chairman

15 March 2018

Manager's Review

Transition to external manager

GHAM has made significant progress since being appointed investment manager in August 2016. With input from the LMS Capital Board it has carried out a staged approach towards achieving the objectives outlined in 2016.

The 'first stage' has been to transition to external management, including:

· Implementing a new investment process and governance structure, including the newly appointed Investment Committee;

· Detailed review of portfolio holdings to frame future strategy and drive potential growth and liquidity opportunities;

· Significant engagement with the management teams of underlying portfolio investments in order to identify catalysts for stabilisation, value creation and long term growth. This includes members of GHAM joining the boards of Entuity, Elateral, Nationwide Energy Partners and 365iTMS; and

· Appointing external administrators and driving targeted annualised cost savings.

The 'second stage' of development was focused on realisation and return of capital to shareholders alongside investing appropriately to optimise the value of the portfolio where there is a clear plan for longer term value creation with portfolio companies.

The 'third stage' is focused primarily on new investment in direct private equity opportunities at the smaller end of the market, leveraging the expertise, experience and network of the investment team and newly formed Investment Committee.

Investment approach

The investment approach is now focused predominantly on private equity investment and alternative, specialist asset classes using the experience of the GHAM team in asset management, private equity and public markets:

· Investments may include alternative, specialist asset classes which target long term, illiquid strategies both through co-investment and fund opportunities on preferred terms; and

· The focus is also on optimising the value of existing holdings and, where growth prospects are clear, to preserve and support longer term value creation.

Market background

The first half of 2017 was characterised by uncertainty with several significant political events in the UK, Europe and the US. Investors had to navigate continued uncertainty over the terms of Brexit, the impact of the US presidential election as well as pockets of uncertainty in Europe and the snap election in the UK. The latter part of 2017 was one defined by eventual progress on Brexit and the global growth story. The FTSE All-Share rose 4.2% in the final 3 months of the year, finishing the year up 8.7% whilst the International Monetary Fund (IMF) upgraded its global growth forecast for 2017 from 3.2% to 3.6% reflecting improved expectations for the global economy. Commodities and Equities were both stand-out performers - with Oil & Gas a particularly strong sector; sentiment was driven by the generally favourable economic conditions and positive data for natural resources demand that emerged in the period, particularly from China.

The first two months of 2018 saw a bullish start to the year, notably in US markets, followed by a correction and return of volatility in February as markets reacted to rising inflation and the prospect of rising interest rates and also the threat of increased tariffs. The domestic environment continues to be dominated by Brexit.

High valuations, fund raising and increased competition for deals means private equity firms have high levels of uninvested funds, particularly for the larger enterprise value deals. We believe there are significant inefficiencies at the smaller end of the market, focusing on established smaller private companies below £50 million enterprise value where there can be less competition for deals and valuations are more attractive. This segment of the market tends to be off radar for venture and early stage funding providers and sub-threshold for mid-market private equity investors, creating an opportunity to generate superior long term returns.

Performance review

The movement in Net Asset Value during the year was as follows:

	2017	2016
	£'000	£'000

Opening Net Asset Value	68,116	95,091
Return on investments	9,898	(16,161)
Overheads, net of interest received	(2,298)	(4,670)
	75,716	74,260
Tender offer, including costs	(11,228)	(6,144)
Closing Net Asset Value	64,488	68,116

Cash realisations from the portfolio in 2017 were as follows:

	Year ended 31 December
	2017	2016
	£'000	£'000
Sales of investments	6,812	5,927
Distributions from funds	14,902	4,675
Total - gross	21,714	10,602
Follow-on investments	(550)	(851)
Fund calls	(68)	(438)
Carried interest payments	(417)	(273)
Total - net	20,679	9,040

The follow-on investments are in respect of working capital for Elateral, a UK direct investment.

Realisations in 2017 include:

· A distribution from San Francisco Equity Partners of £9.0 million following the recapitalisation and partial realisation of its portfolio company, YesTo;

· Distributions from other funds of £5.9 million;

· £3.6 million forming the stage one payment on the sale of Nationwide Energy Partners;

· Proceeds of £1.1 million from the sale of 365iTMS; and

· The sale of 176,850 shares in Weatherford International for net proceeds of £0.7 million.

After a successful period for realisations in the first half of 2017 the Company undertook a tender offer in August 2017 which returned £11 million to shareholders, thereby discharging in full the undertaking given to shareholders in July 2016 to make further returns of capital up to this amount.

Below is a summary of the investment portfolio of the Company and its subsidiaries:

	31 December
	2017			2016
Asset type	UK £'000	US £'000	Total £'000	UK £'000	US £'000	Total £'000
Quoted	6,874	1,770	8,644	2,481	2,995	5,476
Unquoted	8,400	14,504	22,904	9,384	21,987	31,371
Funds	7,806	24,464	32,270	11,149	25,436	36,585
	23,080	40,738	63,818	23,014	50,418	73,432

The principal investments at 31 December 2017 comprising 80% of the total portfolio were:

Name	Geography	Sector	Book value 31 December		% of Net asset value
			2017	2016	31 December 2017
			£'000	£'000
Quoted investments
Gresham House PLC	UK	Financial	4,123	2,481	6.4%
IDE Group Holdings (formerly Coretx Holdings)	UK	Technology	2,751	-	4.3%
Unquoted investments
Medhost Inc	US	Technology	8,183	12,070	12.7%
Entuity	UK	Technology	3,600	3,000	5.6%
Elateral	UK	Technology	2,300	3,900	3.6%
Fund investments
San Francisco Equity Partners
Penguin Computing*	US	Technology	12,895	10,133	20.0%
YesTo, Inc*	US	Consumer	9,437	8,387	14.6%
Others
Brockton Capital	UK	Property	4,603	6,651	7.1%
Opus Capital Venture Partners	US	Technology	3,671	4,505	5.7%

*includes holdings by SFEP and co-investments held by the Company

Basis of valuation:

· Quoted investments - bid price of security quoted on relevant securities exchange;

· Unquoted investments - multiple of revenues or earnings of comparable quoted companies with appropriate discounts for marketability; and

· Fund interests - based on amounts reported by the general partner unless the reported value is not in line with the Company's valuation policy.

Performance of the investment portfolio

The return on investments for the year ended 31 December 2017 was as follows:

	Year ended 31 December
	2017			2016
	Realised gains/(losses)	Unrealised gains/(losses)	Total	Realised gains/(losses)	Unrealised gains/(losses)	Total
Asset type	£'000	£'000	£'000	£'000	£'000	£'000

Quoted	190	787	977	9	(1,291)	(1,282)
Unquoted	2,488	(3,077)	(589)	-	(15,879)	(15,879)
Funds	3,595	6,472	10,067	491	492	983
	6,273	4,182	10,455	500	(16,678)	(16,178)
(Charge)/credit for incentive plans			(44)			737
			10,411			(15,441)
Operating and similar expenses of subsidiaries			(513)			(720)
			9,898			(16,161)

The (charge)/credit for incentive plans includes £44,000 (2016: credit of £737,000) for carried interest.

Approximately 64% of the portfolio at 31 December 2017 is denominated in US dollars (31 December 2016: 69%) and the above table includes the impact of currency movements. In the year ended 31 December 2017, the strengthening of sterling against the US dollar (year on year) resulted in an unrealised foreign currency loss of £3,248,000 (2016: unrealised gain of £11,319,000). As is common practice in private equity investment, it is the Board's current policy not to hedge the Company's underlying non-sterling investments.

Quoted investments

		31 December
		2017	2016
Company	Sector	£'000	£'000
Gresham House PLC	UK financial	4,123	2,481
IDE Group Holdings (formerly Coretx Holdings)	UK technology	2,751	-
Weatherford International	US energy	1,669	2,909
Others	-	101	86
		8,644	5,476

The net gain on the quoted portfolio arose as follows:

	Year ended 31 December
Gains/(losses), net	2017 £'000	2016 £'000
Realised
Solaredge	155	(29)
Weatherford International	35	(158)
Bond International	-	155
Other quoted holdings	-	39
Dividend income	-	2
	190	9
Unrealised
Gresham House	1,642	-
IDE Group Holdings	(344)	-
Weatherford International	(331)	(1,781)
Bond International	-	71
Other quoted holdings	24	(205)
Unrealised foreign currency (losses)/gains	(204)	624
	787	(1,291)

Total net gain/(loss)	977	(1,282)

During the year the Company received distributions of shares in Solaredge Inc, from its fund investment, Opus Capital Venture Partners. These shares were all sold for net proceeds of £1,015,000.

The Company also sold 176,850 shares (2016: 700,000 shares) of its holding in Weatherford International for net proceeds of £751,000 (2016: £3,820,000). The unrealised losses during the period reflect the continuing pressure on this company's share price in 2017.

The shares in IDE Group Holdings were received in part consideration for the sale of 365iTMS.

Unquoted investments

		31 December
		2017	2016
Company	Sector	£'000	£'000
Medhost Inc	US technology	8,183	12,070
Entuity	UK technology	3,600	3,000
Elateral	UK technology	2,300	3,900
Nationwide Energy Partners	US energy	2,960	7,703
Brockton Capital LLP	UK Property	2,500	97
Penguin Computing*	US technology	1,747	1,449
ICU Eyewear	US consumer	740	-
Yes To*	US consumer	874	765
365iTMS	UK technology	-	2,100
Other interests	-	-	287
		22,904	31,371

*These are co-investments with SFEP

The net gain on the unquoted portfolio arose as follows:

	Year ended 31 December
	2017	2016
Gains/(losses), net	£'000	£'000
Realised
365ITMS	1,932	-
YesTo	556	-
	2,488	-
Unrealised valuation adjustments
Medhost	(2,969)	(4,878)
Brockton Capital LLP	2,403	-
Elateral	(2,275)	(650)
Nationwide Energy Partners	(785)	(3,521)
ICU Eyewear	740	(9,165)
Entuity	671	(1,878)
Penguin Computing	441	-
YesTo	445	-
365ITMS	-	(1,400)
Others	(266)	(841)
Unrealised foreign currency (losses)/gains	(1,482)	6,454
	(3,077)	(15,879)

Total net losses	(589)	(15,879)

In April the Company's investment in 365ITMS was sold to IDE Group Holdings plc. The Company received gross cash proceeds of £1.1 million plus 9,826,400 shares in IDE Group Holdings with a value on completion of £3.0 million. The shares are subject to a 24-month orderly market agreement.

In June, YesTo (a portfolio company of SFEP) was the subject of a recapitalisation and partial sale. The amounts in the above table for YesTo reflect the gains resulting from this transaction for the Company's co-investment. More detail on YesTo is provided within the commentary on SFEP below

Valuations are sensitive to changes in the following two inputs:

· The operating performance of the individual businesses within the portfolio; and

· Changes in the revenue and profitability multiples and transaction prices of comparable businesses, which are used in the underlying calculations.

In most cases the multiples used at 31 December 2017 are similar to those prevailing at the end of 2016 and therefore the unrealised gains or losses set out in the table above arise principally as a result of the companies' performance.

Comments on other individual companies are set out below.

Medhost

Medhost is a co-investment with one of the Company's fund interests, Primus Capital, which is the lead investment manager. Medhost has announced that an advisor has been appointed to find a buyer for the business. The Company has based its carrying value on the carrying value reported by the general partner.

Brockton Capital LLP

In 2006 the Company, together with 3 other cornerstone investors, backed the establishment of Brockton Capital LLP, a private equity real estate investment adviser, and became an investor in Brockton Capital Fund I LP ("the Fund"), a real estate investment fund. The investment in Brockton Capital LLP gave the Company the right to participate in entities that would receive a share of any carried interest in relation to the performance of the Fund and subsequent Brockton-advised funds.

The interests in Brockton Capital LLP and the carried interest entities were previously reported at cost, this was equivalent to fair value. Early in February 2018 the majority owners of Brockton Capital LLP agreed terms for the sale of the business, completion of which is conditional on customary conditions including obtaining regulatory approval. Assuming the conditions are met, the sale will result in the realisation by the Company of its minority investment for proceeds expected to be in the region of £2.5 million. The carrying value at 31 December 2017 reflects the expected outcome for the Company of this transaction.

ICU Eyewear

The Company fully wrote off its interest at the end of 2016. During 2017 the company's financial position improved following a restructuring of its liabilities and a programme of cost reductions. As a result LMS Capital has recognised a small positive carrying value for the business at 31 December 2017.

Nationwide Energy Partners ("NEP")

In January 2017 the Company reached agreement to sell its interest back to the founder in a two stage transaction. The stage one payment of US$4.5 million was received in January 2017. The second and final stage has been settled through the issue to LMS Capital of a US$5.0 million loan note repayable (with interest) in instalments over 4 years. The carrying value is the present value of the Company's current estimate of amounts receivable from the loan note.

Entuity

Following completion of the strategic review in 2016 a new CEO was appointed and took up his post in February 2017. The new team is performing satisfactorily and is focussed on future value growth.

Elateral

Elateral has invested heavily in recent years to re-engineer and upgrade its technology platform as a precursor to retaining and growing its multinational client base. There have been changes in the leadership team during 2017 and the company is looking to grow its revenues and improve profitability. The write down in 2017 reflects the need to provide additional working capital to provide a platform for future growth.

Penguin Computing

This is a co-investment with SFEP. The business has made good progress in the last 18 months and the improved results are reflected in the write up of its carrying value.

Fund interests

		31 December
		2017	2016
General partner	Sector	£'000	£'000
San Francisco Equity Partners	US consumer & technology	20,048	16,748
Brockton Capital Fund 1	UK property	4,603	6,651
Opus Capital Venture Partners	US venture capital	3,671	4,505
Weber Capital Partners	US micro-cap quoted stocks	599	3,784
Eden Ventures	UK venture capital	1,883	2,964
Other interests	-	1,466	1,933
		32,270	36,585

Gains and losses on the Company's funds portfolio for the year ended 31 December 2017 were as follows:

	Year ended 31 December
Gains/(losses), net	2017 £'000	2016 £'000
Realised
San Francisco Equity Partners (partial sale to Yes To)	3,576	-
Other funds	19	491
	3,595	491

Unrealised valuation adjustments
San Francisco Equity Partners	8,748	1,993
Eden Ventures	(1,128)	(1,189)
Brockton Capital	362	(2,518)
Simmons Parallel Energy	(180)	(439)
Opus Capital Venture Partners	315	(1,613)
Weber Capital	30	459
Others (net)	(113)	(441)
Unrealised foreign currency (losses)/gains	(1,562)	4,240
	6,472	492

Total net gains	10,067	983

San Francisco Equity Partners ("SFEP")

LMS Capital is the majority investor in SFEP (as opposed to the other fund interests where the Company has only a minority stake).

SFEP has two remaining investments:

· Penguin Computing - fund carrying value £11,148,000. The company continues to make good progress and is performing ahead of expectations; and

· YesTo - fund carrying value £8,563,000. The above table includes the gains arising as a result of the recapitalisation and partial sale in June of SFEP's interest at a significant premium to the previous book value. Total proceeds to the Company were £9.0 million, of which £8.2 million was received in respect of the Company's interest in SFEP and £0.8 million in relation to the Company's co-investment with SFEP.

In addition to the fund investments noted above the Company has a co investment in Penguin of £1,747,000 and in YesTo of £874,000. Together with its fund interests described above the Company's total investment in Penguin is £12,895,000 and in YesTo is £9,437,000.

Other fund interests

· Eden Ventures' portfolio performed below expectations during the year and this is reflected in the reduction in the carrying value of the Company's interest;

· Brockton Capital - the overall decrease reflects distributions received in the first half of the year. The Company's valuation methodology for this investment results in a small uplift for its remaining interest;

· Opus Capital, a US venture fund, made stock distributions in kind during 2017 totalling £860,000; and

· During 2017 the Company liquidated substantially all of its positions in the Weber Capital funds, leaving only a small interest in one fund.

Overhead costs

Overhead costs for the year (including amounts incurred by subsidiaries) were £2,731,000 - significantly lower than last year (2016: £3,301,000). Overheads in 2017 include costs of approximately £1.0 million which are not expected to recur now that the transition to external management is complete.

Taxation

The Company has no tax charge for the year (2016: nil) - in both years tax deductible expenses exceeded taxable income. The excess of these tax-deductible expenses will be surrendered to subsidiaries of the Company to offset taxable income in those companies.

Financial resources and commitments

Including cash in subsidiaries, cash holdings were £3,960,000 (31 December 2016: £1,632,000) with no debt.

At 31 December 2017 subsidiary companies had commitments of £3,133,000 (31 December 2016: £3,577,000) to meet outstanding capital calls from fund interests.

Outlook

GHAM has engaged with portfolio companies and is working with the management teams to identify catalysts for growth and to drive long term value; we are also focused on progressing and initiating sale processes for certain holdings. We are looking to access and reinvest in direct private equity opportunities at the smaller end of the market and alternative asset classes targeting long term, illiquid strategies in each case leveraging the within GHAM. The Board and the Manager continue to evaluate strategic options for the Company, to enable greater scale and enhance shareholder value

Gresham House Asset Management Limited

15 March 2018

Income Statement

For the year ended 31 December 2017

		Year ended 31 December
		2017	2016
	Notes	£'000	£'000
Net gains/(losses) on investments	2	9,898	(16,161)
Directors' and other fees from investments		-	48
Interest income	3	66	20
		9,964	(16,093)
Operating expenses	4	(2,364)	(4,738)
Profit/(loss) before tax		7,600	(20,831)
Taxation	6	-	-
Profit/(loss) for the year		7,600	(20,831)

Attributable to:
Equity shareholders		7,600	(20,831)

Earnings/(loss) per ordinary share - basic	7	8.4p	(20.6)p
Earnings/(loss) per ordinary share - diluted	7	8.4p	(20.6)p

Statement of Other Comprehensive Income

For the year ended 31 December 2017

	Year ended 31 December
	2017	2016
	£'000	£'000
Profit/(loss) for the year	7,600	(20,831)
Other comprehensive income	-	-
Total comprehensive profit/(loss) for the year	7,600	(20,831)

Attributable to:
Equity shareholders	7,600	(20,831)

Statement of Financial Position

As at 31 December 2017

		31 December
		2017	2016
	Notes	£'000	£'000
Non-current assets
Property, plant and equipment	8	-	32
Investments	9	141,964	148,312
Non-current assets		141,964	148,344

Current assets
Operating and other receivables	10	281	248
Cash and cash equivalents	11	2,283	1,249
Current assets		2,564	1,497

Total assets		144,528	149,841

Current liabilities
Operating and other payables	12	(1,292)	(4,078)
Amounts payable to subsidiaries		(78,748)	(76,743)
Current liabilities		(80,040)	(80,821)

Non-current liabilities
Provisions and other liabilities	13	-	(904)
Non-current liabilities		-	(904)

Total liabilities		(80,040)	(81,725)

Net assets		64,488	68,116

Equity
Share capital	14	8,073	9,644
Share premium		508	508
Capital redemption reserve		24,949	23,378
Retained earnings		30,958	34,586
Total equity shareholders' funds		64,488	68,116

Statement of Changes in Equity

For the year ended 31 December 2017

			Capital
	Share	Share	redemption	Retained	Total
	capital	premium	reserve	earnings	equity
	£'000	£'000	£'000	£'000	£'000
Balance at 1 January 2016	10,358	508	22,664	61,561	95,091
Total comprehensive income
for the year
Loss for the year	-	-	-	(20,831)	(20,831)
Transactions with owners,
recorded directly in equity
Repurchase of shares	(714)	-	714	(6,144)	(6,144)
Balance at 31 December 2016	9,644	508	23,378	34,586	68,116
Total comprehensive income
for the year
Profit for the year	-	-	-	7,600	7,600
Transactions with owners,
recorded directly in equity
Repurchase of shares	(1,571)	(-)	1,571	(11,228)	(11,228)
Balance at 31 December 2017	8,073	508	24,949	30,958	64,488

Cash Flow Statement

For the year ended 31 December 2017

		Year ended 31 December
		2017	2016
	Notes	£'000	£'000
Cash flows from operating activities
Profit/(loss) for the year		7,600	(20,831)
Adjustments for:
Depreciation	4	32	233
(Gains)/losses on investments		(9,898)	16,161
Interest income		(66)	(20)
		(2,332)	(4,457)
Change in operating and other receivables		(33)	(92)
Change in operating and other payables		(3,690)	(120)
Change in amounts payable to subsidiaries		18,296	9,585
Net cash from operating activities		12,241	4,916

Cash flows from Investing activities
Interest received		21	19
Purchase of investments		-	(1,621)
Acquisition of property, plant and equipment		-	(4)
Net cash from/(used in) investing activities		21	(1,606)

Cash flows from financing activities
Repurchase of own shares		(11,000)	(6,144)
Transaction costs relating to tender offer		(228)	-
Net cash used in financing activities		(11,228)	(6,144)

Net increase/(decrease) in cash and cash equivalents		1,034	(2,834)
Cash and cash equivalents at the beginning of the year		1,249	4,083
Cash and cash equivalents at the end of the year		2,283	1,249

Notes to the Financial Statements

1. Principal accounting policies

Reporting entity

LMS Capital plc ("the Company") is domiciled in the United Kingdom. These financial statements are presented in pounds sterling because that is the currency of the principal economic environment of the Company's operations.

The Company was formed on 17 March 2006 and commenced operations on 9 June 2006 when it received the demerged investment division of London Merchant Securities.

Basis of preparation

These financial statements have been prepared in accordance with International Financial Reporting Standards as adopted for use in the European Union ("Adopted IFRSs"). These financial statements were authorised for issue by the Directors on 15 March 2018.

The financial statements have been prepared on the historical cost basis except for investments which are measured at fair value, with changes in fair value recognised in the income statement.

The Company's business activities and financial position are set out in the Strategic Report on pages 6 to 11 and in the Manager's Review on pages 13 to 24. In addition, note 16 to the financial information includes a summary of the Company's financial risk management processes, details of its financial instruments and its exposure to credit risk and liquidity risk. Taking account of the financial resources available to it, the Directors believe that the Company is well placed to manage its business risks successfully. After making enquiries the Directors have a reasonable expectation that the Company has adequate resources for the foreseeable future.

Accounting for subsidiaries

The Directors have concluded that the Company has all the elements of control as prescribed by IFRS 10 "Consolidated Financial Statements" in relation to all its subsidiaries and that the Company satisfies the criteria to be regarded as an investment entity as defined in IFRS 10, IFRS 12 "Disclosure of Interests in Other Entities" and IAS 27 "Consolidated and Separate Financial Statements". Subsidiaries are therefore measured at fair value through profit or loss, in accordance with IFRS 13 "Fair Value Measurement" and IAS 39 "Financial Instruments: Recognition and Measurement".

The Company's subsidiaries, which are wholly-owned and over which it exercises control, are listed in note 21.

New standards and interpretations not yet applied

The International Accounting Standards Board has issued the following standards, which are relevant to the Company's reporting but which have not yet been applied and have an effective date after the date of these financial statements:

· IFRS 9 "Financial instruments" addresses the classification, measurement and recognition of financial assets and financial liabilities. The standard is effective for accounting periods beginning on or after 1 January 2018. It will not have a material impact on the Company's classification, measurement or disclosure of its financial assets and financial liabilities.

· IFRS 15, 'Revenue from Contracts with Customers' will supersede all current revenue recognition requirements under IFRS. It is effective for periods beginning on or after 1 January 2018. The Company is not exposed to IFRS 15 given its business model and it is not expected to have any impact.

· IFRS 16 "Leases" primarily affects accounting by lessees and will result in the recognition of most leases in the statement of financial position. The standard removes the current distinction between operating and finance leases and requires recognition of an asset (the right to use the leased item) and a financial liability to pay rentals for virtually all lease contracts. The standard is effective for accounting periods beginning on or after 1 January 2019. The Company's lease of its premises at 100 George Street, London W1U 8NU would fall to be accounted for under the new requirements but that lease expires on 24 March 2018. At 1 January 2019 the Company is not expected to have any leases and for the 2018 comparative period the amount will be insignificant in terms of impact.

Use of estimates and judgements

The preparation of financial statements in conformity with Adopted IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis; revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements is included in note 1 - valuation of investments.

Investments in subsidiaries

The Company's investments in subsidiaries are stated at fair value which is considered to be the carrying value of the net assets of each subsidiary. On disposal of such investments the difference between net disposal proceeds and the corresponding carrying amount is recognised in the income statement.

Valuation of investments

The Company and its subsidiaries manage their investments with a view to profit from the receipt of dividends and changes in fair value of equity investments. Therefore all quoted, unquoted and managed fund investments are designated at fair value through profit and loss and carried in the Statement of Financial Position at fair value.

Fair values have been determined in accordance with the International Private Equity and Venture Capital Valuation Guidelines. These guidelines require the valuer to make judgments as to the most appropriate valuation method to be used and the results of the valuations.

Each investment is reviewed individually with regard to the stage, nature and circumstances of the investment and the most appropriate valuation method selected. The valuation results are then reviewed and any amendment to the carrying value of investments is made as considered appropriate. Where the value of an investment is considered to be impaired, it is written down to its expected recoverable amount as part of the determination of its fair value.

Quoted investments

Quoted investments for which an active market exists are valued at the closing bid price at the reporting date.

Unquoted direct investments

Unquoted direct investments for which there is no ready market are valued using the most appropriate valuation technique with regard to the stage and nature of the investment.

Valuation methods that may be used include:

· Investments in which there has been a recent funding round involving significant financing from external investors are valued at the price of the recent funding, discounted if an external investor is motivated by strategic considerations;

· Investments in an established business are valued using revenue or earnings multiples depending on the stage of development of the business and the extent to which it is generating sustainable profits or positive cash flows;

· Investments in a business the value of which is derived mainly from its underlying net assets rather than its earnings are valued on the basis of net asset valuation;

· Investments in an established business which is generating sustainable profits or positive cash flows but for which other valuation methods are not appropriate are valued by calculating the discounted cash flow of future cash flows or earnings; and

· Investments in early stage businesses not generating sustainable profits or positive cash flows and for which there has not been any recent independent funding are valued by calculating the discounted cash flow of the investment to the investors.

Funds

Investments in managed funds are valued at fair value. The general partners of the funds will provide periodic valuations on a fair value basis which the Company will adopt, provided it is satisfied that the valuation methods used by the funds are not materially different from the Company's valuation methods.

Property, plant and equipment

Property, plant and equipment is stated at cost less accumulated depreciation and any impairment loss. Cost includes expenditure that is directly attributable to the asset, including where appropriate the cost of materials, direct labour and any other costs directly attributable to bringing the asset to a working condition for its intended use.

Depreciation is charged using the straight-line method over the estimated useful lives of the assets as follows:

Plant and equipment 3 years

Fixtures and fittings 3 - 7 years

When parts of an item of property, plant and equipment have different useful lives, these components are accounted for as separate items of property, plant and equipment. The useful lives of the items within property, plant and equipment are reviewed regularly, including at each reporting date.

Impairment of financial assets

Loans and receivables are considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.

An impairment loss in respect of loans and receivables measured at amortised cost is calculated as the difference between their carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Individually significant loans and receivables are tested for impairment on an individual basis. The remaining loans and receivables are assessed collectively in groups that share similar credit risk characteristics.

An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised.

Foreign currencies

Transactions in foreign currencies are recorded at the rate of exchange at the date of transaction. Monetary assets and monetary liabilities denominated in foreign currencies at the reporting date are reported at the rates of exchange prevailing at that date and exchange differences are included in the income statement.

Operating and other receivables

Operating and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment losses.

Cash and cash equivalents

Cash, for the purpose of the cash flow statement, comprises cash in hand and cash equivalents, less overdrafts payable on demand.

Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Financial liabilities

The Company's financial liabilities include operating and other payables. They are measured at cost which is the fair value of the consideration to be paid in the future for goods and services received.

Provisions

A provision is recognised if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the liability.

Income

Gains and losses on investments

Realised and unrealised gains and losses on investments are recognised in the income statement in the period in which they arise.

Interest income

Interest income is recognised as it accrues using the effective interest method.

Directors' and other fees from investments

These principally comprise investment management fees receivable from portfolio companies.

Expenditure

Employee benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related services are provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or carried interest incentive arrangements if the Company has a present legal or constructive obligation to pay the amount as a result of past service provided by the employee and the obligation can be estimated reliably.

Payments to defined contribution pension schemes are charged as an expense as they fall due.

Share-based payments

The Company has issued share options and awards of performance shares to certain employees. Such options and awards are treated as equity-settled share-based payments and measured at fair value at the date of grant and the fair value is recognised as an expense with a corresponding increase in equity on a straight-line basis over the vesting period.

Fair value is calculated by use of a binomial option valuation model taking into account the terms and conditions under which the equity-settled share-based payments were issued. Service and non-market performance conditions attached to transactions are not taken into account in determining fair value.

Operating lease payments

Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense over the term of the lease. Provision is made for all or part of an operating lease if it is considered to be onerous.

Income tax expense

Income tax expense comprises current and deferred tax. Income tax expense 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 as other comprehensive income.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognised using the balance sheet liability approach, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which temporary differences can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2017 or 2016 but is derived from those accounts. Statutory accounts for 2016 have been delivered to the registrar of companies, and those for 2017 will be delivered in due course. The auditor has reported on those accounts; their report on the accounts for 2017 was (i) unqualified and (ii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. The auditor's report on the accounts for 2016 was (i) unqualified (ii) drew attention by way of emphasis without qualifying their report to the accounts not being prepared on a going concern basis and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

2. Net gains/(losses) on investments

Gains and losses on investments were as follows:


			Year ended 31 December
		2017			2016
	Realised	Unrealised	Total	Realised	Unrealised	Total
Asset type	£'000	£'000	£'000	£'000	£'000	£'000
Quoted	190	787	977	9	(1,291)	(1,282)
Unquoted	2,488	(3,077)	(589)	-	(15,879)	(15,879)
Funds	3,595	6,472	10,067	491	492	983
	6,273	4,182	10,455	500	(16,678)	(16,178)

(Charge)/credit for incentive plans			(44)			737
			10,411			(15,441)
Operating and similar
expenses of subsidiaries*			(513)			(720)
			9,898			(16,161)

* Includes operating and legal costs and taxation charges of subsidiaries.

3. Interest income

Interest income comprises interest receivable on bank deposits.

4. Operating expenses

Operating expenses comprise administrative expenses and include the following:

	Year ended 31 December
	2017	2016
	£'000	£'000
Depreciation	32	127
Personnel costs (note 5)	421	1,198
Operating lease expense	(22)	269
Reorginsation costs	-	2,157
Management fees	1,055	573
Other administrative expenses	350	471
Foreign currency exchange differences	420	(202)
Auditor's remuneration
Fees to Group auditor
- parent company	32	27
- subsidiary companies	76	63
Non-audit related services
- other assurance services*	-	55
	2,364	4,738

* relates to non-audit services provided by the previous auditor, KPMG LLP.

The reorganisation costs in 2016 comprised the following:

· Professional charges in connection with the circular to shareholders dated 27 July 2016 - £866,000

· Severance costs for Executive Directors and staff - £712,000

· Premises costs for property that was surplus to requirements - £579,000 (including £105,000 accelerated depreciation on fixtures and fittings).

5. Personnel expenses

	Year ended 31 December
	2017	2016
	£'000	£'000
Wages and salaries	323	1,010
Compulsory social security contributions	79	125
Contributions to defined contribution plans	19	63
	421	1,198

The wages and salaries expense includes a credit of £nil (2016: credit of £179,000) in relation to carried interest.

The wages and salaries expense is shown in the income statement as follows:

	Year ended 31 December
	2017	2016
	£'000	£'000
Gains on investments	-	(179)
Operating expenses	323	1,189
	323	1,010

The executive incentive plan is described in the Remuneration Committee Report. The scheme was linked to amounts returned to shareholders as a consequence of the Company's realisation strategy and £nil is accrued at 31 December 2017 (31 December 2016: £904,000) in respect of amounts due to the former Executive Directors.

The Company operates carried interest arrangements in line with normal practice in the private equity industry, calculated on the assumption that the investment portfolio is realised at its year-end carrying amount. As at 31 December 2017, £nil has been accrued (2016: £nil)

The average number of Directors and staff was as follows:

	31 December 2017			31 December 2016
	Male	Female	Total	Male	Female	Total
Directors	4	-	4	6	-	6
Senior Management	-	-	-	-	-	-
Other employees	1	1	2	1	3	4
	5	1	6	7	3	10

6. Taxation

	Year ended 31 December
	2017	2016
	£'000	£'000
Current tax expense
Current year	-	-
Total tax expense	-	-

Reconciliation of tax expense

	Year ended 31 December
	2017	2016
	£'000	£'000
Profit/(loss) before tax	7,600	(20,831)
Corporation tax using the Company's domestic tax rate - 19.25% (2016: 20%)	1,463	(4,166)
Fair value adjustments not currently taxed	516	3,811
Non-deductible expenses	6	(212)
Non-taxable income	(3,139)	27
Deferred tax asset not recognised	230	686
Group relief	924	(204)
Overseas tax paid	-	39
Prior year adjustment	-	19
Total tax expense	-	-

7. Earnings/(loss) per ordinary share

The calculation of the basic and diluted earnings per share, in accordance with IAS 33, is based on the following data:

	Year ended 31 December
	2017	2016
	£'000	£'000
Earnings

Earnings/(loss) for the purposes of earnings/(loss) per share being
net profit/(loss) attributable to equity holders of the parent	7,600	(20,831)

	Number	Number
Number of shares
Weighted average number of ordinary shares for the
purposes of basic earnings/(loss) per share	90,457,391	101,203,640

Effect of dilutive potential ordinary shares:
Share options and performance shares*	-	-
Weighted average number of ordinary shares for the
purposes of diluted earnings/(loss) per share	90,535,922	101,203,640

Earnings per share	Pence	Pence
Basic	8.4	(20.6)
Diluted	8.4	(20.6)

* There were no potentially dilutive shares in 2016 since the Company made a loss.

8. Property, plant and equipment

	Plant and	Fixtures
	equipment	and fittings	Total
	£'000	£'000	£'000
Cost
Balance at 1 January 2016	329	1,023	1,352
Additions	4	-	4
Balance at 31 December 2016	333	1,023	1,356

Balance at 1 January 2017	333	1,023	1,356
Additions	-	-	-
Balance at 31 December 2017	333	1,023	1,356

Depreciation and impairment losses
Balance at 1 January 2016	325	766	1,091
Depreciation charge for the year	3	230	233
Balance at 31 December 2016	328	996	1,324

Balance at 1 January 2017	328	996	1,324
Depreciation charge for the year	5	27	32
Balance at 31 December 2017	333	1,023	1,356

Carrying amounts
At 31 December 2016	5	27	32
At 31 December 2017	-	-	-

9. Investments

The Company's investments comprised the following:

	Year ended 31 December
	2017	2016
	£'000	£'000
Total investments	141,964	148,312

Investment portfolio of the Company	4,123	2,481
Investment portfolio of the subsidiaries	59,695	70,951
Investment portfolio - total	63,818	73,432
Other net assets of subsidiaries	78,146	74,880
	141,964	148,312

The carrying amounts of the Company's and its subsidiaries' investment portfolios were as follows:

	31 December 2017			31 December 2016
	UK	US	Total	UK	US	Total
Asset type	£'000	£'000	£'000	£'000	£'000	£'000
Quoted	6,874	1,770	8,644	2,481	2,995	5,476
Unquoted direct	8,400	14,504	22,904	9,384	21,987	31,371
Funds	7,806	24,464	32,270	11,149	25,436	36,585
	23,080	40,738	63,818	23,014	50,418	73,432

The movements in the investment portfolio were as follows:

	Quoted	Unquoted
	securities	securities	Funds	Total
	£'000	£'000	£'000	£'000
Carrying value
Balance at 1 January 2016	9,761	46,112	39,770	95,643
Purchases	2,618	852	438	3,908
Reclassification	(286)	286	-	-
Disposals	(5,326)	-	-	(5,326)
Distributions from partnerships	-	-	(4,779)	(4,779)
Fair value adjustments	(1,291)	(15,879)	1,156	(16,014)
Balance at 31 December 2016	5,476	31,371	36,585	73,432

Balance at 1 January 2017	5,476	31,371	36,585	73,432
Purchases	3,957	675	68	4,700
Disposals	(1,576)	(6,331)	-	(7,907)
Distributions from partnerships	-	-	(11,313)	(11,313)
Fair value adjustments	787	(2,811)	6,930	4,906
Balance at 31 December 2017	8,644	22,904	32,270	63,818

The following table analyses investments carried at fair value at the end of the year, by the level in the fair value hierarchy into which the fair value measurement is categorised. The different levels have been defined as follows:

Level 1: quoted prices (unadjusted) in active markets for identical assets;

Level 2: inputs other than quoted prices included within level 1 that are observable for the asset, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

Level 3: inputs for the asset that are not based on observable market data (unobservable inputs such as trading comparables and liquidity discounts).

Fair value measurements are based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's view of market assumptions in the absence of observable market information (see note 16 - Financial risk management).

The Company's investments are analysed as follows:

	31 December
	2017	2016
	£'000	£'000
Level 1	3,304	2,366
Level 2	-	-
Level 3	138,660	145,946
	141,964	148,312

Level 3 amounts include £59,695,000 (2016: £70,951,000) relating to the investment portfolios of subsidiaries (including quoted investments of £4,521,000 (2016: £2,995,000)) and £78,146,000 (2016: £74,880,000) in relation to the other net assets of subsidiaries.

10. Operating and other receivables

	31 December
	2017	2016
	£'000	£'000
Trade receivables	35	60
Other receivables and prepayments	246	188
	281	248

11. Cash and cash equivalents

	31 December
	2017	2016
	£'000	£'000
Bank balances	40	117
Short-term deposits	2,243	1,132
	2,283	1,249

12. Operating and other payables

	31 December
	2017	2016
	£'000	£'000
Trade payables	335	1,470
Other non-trade payables and accrued expenses	957	2,608
	1,292	4,078

13. Provisions and other liabilities

	31 December
	2017	2016
	£'000	£'000
Executive incentive plan (note 5)	-	904

14. Capital and reserves

Share capital

	2017	2017	2016	2016
Ordinary shares	Number	£'000	Number	£'000
Balance at the beginning of the year	96,441,735	9,644	103,584,592	10,358
Repurchase of shares	(15,714,285)	(1,571)	(7,142,857)	(714)
Balance at the end of the year	80,727,450	8,073	96,441,735	9,644

The Company's ordinary shares have a nominal value of 10p per share and all shares in issue are fully paid up.

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.

The repurchase of shares was in connection with the tender offer in August 2017 for £11 million (2016: £6 million).

Share premium account

The Company's share premium account arose on the exercise of share options in prior years.

Capital redemption reserve

The capital redemption reserve comprises the nominal value of shares purchased by the Company out of its own profits and cancelled.

Treasury shares

The Company has no shares held in treasury.

15. Share-based payments

Executive share option plan

The Company has a share option plan that entitles certain employees to purchase shares in the Company at the market price of the shares at the date of grant of the option, subject to Company performance criteria. Under the terms of the scheme, options may be exercised between three and ten years after the date of grant. At 31 December 2017 there were no option grants outstanding under this plan (2016: nil).

Deferred share bonus plan

The Company has a deferred share bonus plan for key executives. Shares awarded under this scheme are released over three or four years (depending on the size of the award) and the first release may take place no earlier than the first anniversary of the award subject to the increase in the Net Asset Value per share of the Company exceeding the increase in the Retail Prices Index ("RPI") by an average of at least 3% per annum.

At 31 December 2017 options over 49,999 ordinary shares were outstanding (2016: 49,999). There were no grants or exercises of options under this plan during 2017 (2016: nil). These options are vested and available for exercise until 12 April 2020. The weighted average exercise price of the awards outstanding at 31 December 2017 was £nil (31 December 2016: £nil).

Performance share plan

The Company has a performance share plan that entitles certain employees to receive an award of performance shares in the Company. Performance shares granted under the plan are subject to the performance criteria set out below.

For 25% of the total award to vest, Total Shareholder Return (TSR) over the-three year measurement period must exceed the median TSR of the FTSE All-Share Index. For the remaining 75% of the award, the increase in Net Asset Value per share over the period must exceed the increase in the Retail Prices Index by at least 3% per annum. At RPI plus 3%,

18.75% of the total shares that are subject to the award will vest, rising on a straight-line basis to the remaining 75% vesting if the increase in Net Asset Value per share exceeds RPI by 8% per annum.

At 31 December 2017 options over 28,352 ordinary shares were outstanding (2016: 28,352). There were no grants or exercises of options under this plan during 2017 (2016: nil). These options are vested and available for exercise until 11 April 2021. The weighted average exercise price of the awards outstanding at 31 December 2017 was £nil (31 December 2016: £nil).

Recognition and measurement

The fair value of services received in return for grants and awards under the Company's share-based incentive plans is based on their fair value measured using a binomial valuation model. There were no awards of shares under the plans in 2017 or 2016 and there was no charge or credit recognised in the income statement in respect of share based incentive plans in 2017 (2016: £nil).

16. Financial risk management

Financial instruments by category

The following tables analyse the Company's financial assets and financial liabilities in accordance with the categories of financial instruments in IAS 39. Assets and liabilities outside the scope of IAS 39 are not included in the table below:

	31 December
	2017			2016
	Fair			Fair
	Value			Value
	through	Loans		through	Loans
	profit or	and		profit or	and
	loss	receivables	Total	loss	receivables	Total
Assets	£'000	£'000	£'000	£'000	£'000	£'000
Investments	141,964	-	141,964	148,312	-	148,312
Operating and other receivables	-	281	281	-	248	248
Cash and cash equivalents	-	2,283	2,283	-	1,249	1,249
Total	141,964	2,564	144,528	148,312	1,497	149,809

	31 December
	2017			2016
	Fair			Fair
	Value			Value
	through	Loans		through	Loans
	profit or	and		profit or	and
	loss	receivables	Total	loss	receivables	Total
Liabilities	£'000	£'000	£'000	£'000	£'000	£'000
Operating and other payables	-	1,292	1,292	-	4,078	4,078
Provisions and other liabilities	-	-	-	-	904	904
Amounts payable to subsidiaries	-	78,748	78,748	-	76,743	76,743
Total	-	80,040	80,040	-	81,725	81,725

The Company has exposure to the following risks from its use of financial instruments:

· Credit risk;

· Liquidity risk; and

· Market risk.

This note presents information about the Company's exposure to each of the above risks, its policies for measuring and managing risk, and its management of capital.

Credit risk

Credit risk is the risk of the financial loss to the Company if a counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company's receivables and its cash and cash equivalents.

	31 December
	2017	2016
	£'000	£'000
Operating and other receivables	281	248
Cash and cash equivalents	2,283	1,249
	2,564	1,497

The Company limits its credit risk exposure by only depositing funds with highly rated institutions. Cash holdings at 31 December 2017 and 2016 were in funds currently rated A or better by Standard and Poor's. Given these ratings the Company does not expect any counterparty to fail to meet its obligations and therefore no allowance for impairment is made for bank deposits.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. Its financing requirements are met through a combination of liquidity from the sale of investments and the use of cash resources.

Operating and other payables are due within six months or less.

In addition certain of the Company's subsidiaries have uncalled capital commitments to funds of £3,133,000 (31 December 2016: £3,577,000) for which the timing of payment is uncertain (see note 18).

Market risk

Market risk is the risk that changes in market prices such as foreign exchange rates, interest rates and equity prices will affect the Company's income or the value of its holdings of financial instruments. The Company aims to manage this risk within acceptable parameters while optimising the return.

Currency risk

The Company is exposed to currency risk on those of its investments which are denominated in a currency other than the Company's functional currency which is pounds sterling. The only other significant currency within the investment portfolio is the US dollar; approximately 64% of the investment portfolio is denominated in US dollars.

The Company does not hedge the currency exposure related to its investments. The Company regards its exposure to exchange rate changes on the underlying investment as part of its overall investment return, and does not seek to mitigate that risk through the use of financial derivatives.

The Company is exposed to translation currency risk on sales and purchases which are denominated in a currency other than the Company's functional currency. The currency in which these transactions are denominated is principally US dollars.

The Company's exposure to foreign currency risk was as follows:

	31 December
	2017			2016
	GBP	USD	Other	GBP	USD	Other
	£'000	£'000	£'000	£'000	£'000	£'000
Investments	99,205	41,441	1,318	94,190	52,628	1,494
Operating and other receivables	281	-	-	247	1	-
Cash and cash equivalents	1,995	288		853	396	-
Operating and other payables	(80,040)	-	-	(80,821)	-	-
Gross exposure	21,441	41,729	1,318	14,469	53,025	1,494
Forward exchange contracts	-	-	-	-	-	-
Net exposure	21,441	41,729	1,318	14,469	53,025	1,494

At 31 December 2017, the rate of exchange was USD 1.35 = £1.00 (31 December 2016: USD 1.23 = £1.00). The average rate for the year ended 31 December 2017 was USD 1.32 = £1.00 (2016: USD 1.34 = £1.00).

A 10% strengthening of the US dollar against the pound sterling would have increased equity by £4.4 million at 31 December 2017 (31 December 2016: increase of £5.4 million) and decreased the loss for the year ended 31 December 2017 by £4.4 million (2016: decreased the loss by £5.4 million). This assumes that all other variables, in particular interest rates, remain constant. A weakening of the US dollar against the pound sterling would have decreased equity and increased the loss for the year by the same amounts.

Interest rate risk

At the reporting date the Company's cash and cash equivalents are exposed to interest rate risk and the sensitivity below is based on these amounts.

An increase of 100 basis points in interest rates at the reporting date would have increased equity by £18,000 (31 December 2016: increase of £27,000) and decreased the loss for the year by £18,000 (2016: decreased the loss by £27,000). A decrease of 100 basis points would have decreased equity and increased the loss for the year by the same amounts.

Fair values

All items not held at fair value in the Statement of Financial Position have fair values that approximate their carrying values.

Other market price risk

Equity price risk arises from equity securities held as part of the Company's portfolio of investments. The Company's management of risk in its investment portfolio focuses on diversification in terms of geography and sector, as well as type and stage of investment.

The Company's investments comprise unquoted investments in its subsidiaries and investments in quoted investments. The subsidiaries' investment portfolios comprise investments in quoted and unquoted equity and debt instruments. Quoted investments are quoted on the main stock exchanges in London, USA and Canada. A proportion of the unquoted investments are held through funds managed by external managers.

As is common practice in the venture and development capital industry, the investments in unquoted companies are structured using a variety of instruments including ordinary shares, preference shares and other shares carrying special rights, options and warrants and debt instruments with and without conversion rights. The investments are held for resale with a view to the realisation of capital gains. Generally, the investments do not pay significant income.

The significant unobservable inputs used at 31 December 2017 in measuring investments categorised as level 3 in note 9 are considered below:

1. Unquoted securities (carrying value £22.9 million) are valued using the most appropriate valuation technique such as the price of recent investment;, an earnings or revenue based approach, or a discounted cash flow approach. In most cases the valuation method uses inputs based on comparable quoted companies for which the key unobservable inputs are:

· EBITDA multiples in the range 5-9 times dependent on the business of each individual company, its performance and the sector in which it operates;

· Revenue multiples in the range 0.5-1.5 times, also dependent on attributes at individual investment level; and

· Discounts applied of up to 65%, to reflect the illiquidity of unquoted companies compared to similar quoted companies. The discount used requires the exercise of judgement taking into account factors specific to individual investments such as size and rate of growth compared to other companies in the sector.

2. Investments in funds (carrying value £32.3 million) are valued using reports from the general partners of the fund interests with adjustments made for calls, distributions and foreign currency movements since the date of the report (if prior to 31 December 2017). The Company also carries out its own review of individual funds and their portfolios to satisfy ourselves that the underlying valuation bases are consistent with our basis of valuation and knowledge of the investments and the sectors in which they operate. However, the degree of detail on valuations varies significantly by fund and, in general, details of unobservable inputs used are not available.

The valuation of the investments in subsidiaries makes use of multiple interdependent significant unobservable inputs and it is impractical to sensitise variations of any one input on the value of the investment portfolio as a whole. Estimates and underlying assumptions are reviewed on an ongoing basis however inputs are highly subjective.

If the valuation for level 3 category investments declined by 10% from the amount at the reporting date, with all other variables held constant, the loss for the year ended 31 December 2017 would have increased by £13.9 million (2016: loss increased by £14.6 million). An increase in the valuation of level 3 category investments by 10% at the reporting date would have an equal and opposite effect.

Capital management

The Company's total capital at 31 December 2017 was £64 million (31 December 2016: £68 million) comprising equity share capital and reserves. The Company had borrowings at 31 December 2017 of £nil (31 December 2016: £nil).

In order to meet the Company's capital management objectives, the Manager and the Board monitor and review the broad structure of the Company's capital on an ongoing basis. This review includes:

· Working capital requirements and follow-on investment capital for portfolio investments, including calls from funds;

· Capital available for new investments;

· The possible timing of returning capital to shareholders in line with the Company's commitment to further capital returns to shareholders; and

· The annual dividend policy.

The Company's objectives, policies and processes for managing capital reflect the change in strategy from 16 August 2016.

17. Operating leases

Leases as lessee

Non-cancellable operating lease rentals are payable as follows:

	31 December
	2017	2016
	£'000	£'000
Less than one year	139	406
Between one and five years	-	-
	139	406

The operating lease obligations are significantly reduced, due to the termination of the lease on 24 March 2018.

18. Capital commitments

	31 December
	2017	2016
	£'000	£'000
Outstanding commitments to funds	3,133	3,577

The outstanding capital commitments to funds comprise unpaid calls in respect of funds where a subsidiary of the Company is a limited partner.

19. Related party transaction

Gresham House Asset Management Limited was appointed the investment manager of LMS Capital plc on 16 August 2016. Amounts charged by the investment manager in 2017 were £1,055,000 (2016: £573,000).

With effect from January 2011 the Company entered into a lease agreement with Derwent London plc in respect of the premises comprising its head office and registered office. Under the terms of the lease the Company paid an annual rent of £406,000 (2016: £406,000) to Derwent London plc plus certain service charges. Robert Rayne is Chairman of Derwent London plc. The lease will terminate on 24 March 2018.

For a number of years, the Company has provided without charge office accommodation and services within its premises for The Rayne Foundation, a registered charity (www.raynefoundation.org.uk). The estimated monetary value of this for the first six months of 2017 was £30,000 (full year 2016: £65,000). The Company has been transitioning out of its offices during 2017 in line with the outsourcing of management and administration services and, as a result, the Rayne Foundation was required to find alternative office premises from 1 July 2017. To compensate the Foundation for the additional costs which it will incur, the Company made a one-off contribution to these additional costs of £275,000. The Company will make no further payments to the Rayne Foundation. Robert Rayne is Chairman of the Board of Trustees of The Rayne Foundation.

As part of the transition referred to above the Company gave notice on its annual contract with a financial news service. To reduce the ongoing cost to the Company of this service, SQP Limited agreed to assume the Company's obligations under its contract with the news service provider. In connection with this transfer the Company paid SQP Limited £13,000 as a contribution to the contract costs. Robert Rayne is the controlling shareholder and a director of SQP Limited

Compensation arrangements for Directors are set out in the Remuneration Committee Report on pages 40 to 43.

20. Subsequent events

In February 2018 the majority owners of Brockton Capital LLP agreed terms for the sale of the business, completion of which is conditional on customary conditions including obtaining regulatory approval. Assuming the conditions are met, the sale will result in the realisation by the Company of its minority investment for proceeds expected to be in the region of £2.5 million. The carrying value at 31 December 2017 reflects the expected outcome for the Company of this transaction.

21. Subsidiaries

The Company's subsidiaries are as follows:

Name	Country of incorporation	Holding %	Activity

International Oilfield Services Limited	Bermuda	100	Investment holding
LMS Capital (Bermuda) Limited	Bermuda	100	Investment holding
LMS Capital (ECI) Limited	England and Wales	100	Investment holding
LMS Capital (General Partner) Limited	Bermuda	100	Investment holding
LMS Capital (GW) Limited	Bermuda	100	Investment holding
LMS Capital Group Limited	England and Wales	100	Investment holding
LMS Capital Holdings Limited	England and Wales	100	Investment holding
LMS NEP Holdings Inc	United States of America	100	Investment holding
Lioness Property Investments Limited	England and Wales	100	Investment holding
Lion Property Investments Limited	England and Wales	100	Investment holding
Lion Investments Limited	England and Wales	100	Investment holding
Lion Cub Investments Limited	England and Wales	100	Dormant
Lion Cub Property Investments Limited	England and Wales	100	Investment holding
Tiger Investments Limited	England and Wales	100	Investment holding
LMS Tiger Investments Limited	England and Wales	100	Investment holding
LMS Tiger Investments (II) Limited	England and Wales	100	Investment holding
Westpool Investment Trust PLC	England and Wales	100	Investment holding

In addition to the above, certain of the Company's carried interest arrangements are operated through five limited partnerships (LMS Capital 2007 LP, LMS Capital 2008 LP, LMS Capital 2009 LP, LMS Capital 2010 LP and LMS Capital 2011 LP) which are registered in Bermuda.

The registered addresses of the Company's subsidiaries are as follows:

Subsidiaries incorporated in England and Wales: 100 George Street, London W1U 8NU.

Subsidiaries and partnerships incorporated in Bermuda: Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda.

Subsidiary incorporated in the United States of America: c/o 100 George Street, London W1U 8NU.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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