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Schroder UK Pub.P.T. (SUPP)

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Friday 01 May, 2020

Schroder UK Pub.P.T.

Annual Financial Report

RNS Number : 5812L
Schroder UK Public Private Tst plc
01 May 2020
 

 

 

Schroder UK Public Private Trust plc (the Company)

Annual Report 

 

1 May 2020

 

Schroder UK Public Private Trust plc (formerly Woodford Patient Capital Trust plc) hereby submits its Annual Report for the year ended 31 December 2019 as required by the UK Listing Authority's Disclosure Guidance and Transparency Rule 4.1.

 

The Company's Annual Report and Accounts for the year ended 31 December 2019 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's website www.schroders.com/publicprivatetrust . Please click on the following link to view the document:

 

http://www.rns-pdf.londonstockexchange.com/rns/5812L_1-2020-4-30.pdf

The Company has submitted its Annual Report and Accounts to the National Storage Mechanism and it will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism .

 

Enquiries:

Benjamin Hanley

Schroder Investment Management Limited

Tel: 020 7658 3847

 

 

CHAIRMAN'S STATEMENT

 

Performance

The year to 31 December 2019 was disappointing for investors. The net asset value fell 49.3% from 97.61p to 49.46p during the year and the share price fell 53.3%, from 82.10p to 38.35p. World economies are currently being severely disrupted by the COVID-19 pandemic and this may create opportunities for some of the many healthcare companies in the portfolio but will also put pressure on other aspects of their activity, such as fundraising.

 

The board has followed the guidance issued on 21 March 2020 by the Financial Conduct Authority (FCA) and on 23 March 2020 by the Financial Reporting Council (FRC) that public companies should delay the announcement of their results in order to give themselves more time to ensure the challenges caused by the COVID-19 virus are fully reflected in their reporting.

 

In light of the above, while the Company had intended to announce its audited annual results for the year ended 31 December 2019 in early April 2020, the Company has deferred the publication of its audited annual results to today.

 

The board has been encouraged by the appointment of Schroders Investment Management Limited (Schroders) as Portfolio Manager since December. The team at Schroders, backed by its deep resource in both private and public investments, is well placed to maximise value in the portfolio, notwithstanding the continued uncertainty of the LF (formerly Woodford) Equity Income Fund assets sale, and the wider market uncertainty of the COVID-19 pandemic. In the future, Schroders will use its dedicated teams to rebalance the portfolio towards what they believe is a more sustainable risk/reward profile. 

 

A more detailed comment on performance and investment policy may be found in the Portfolio Manager's Review.

 

Gearing
The Company's borrowings have continued to be an area of focus during the year. In December 2019, coinciding with the appointment of Schroders, the board announced that the revolving credit facility with The Northern Trust Company had been extended until 15 January 2021. The current level of gearing stands at £107.0 million.

The commitment under the facility was reduced to £112.9 million, in-line with the amount drawn under the facility at that time and consistent with the Company's intention to reduce borrowings. In addition, the borrowing base, which limits borrowings to an amount based on the value of both the quoted and unquoted holdings, was removed, providing the Company with greater flexibility while it seeks to reduce gearing. The annual interest rate remains unchanged at LIBOR + 1.5 per cent. 

 

The Company will work with Schroders to reduce the level of borrowings, although the board would like to reiterate that it is important that Schroders is provided with time to achieve this objective while protecting shareholder value.

 

Investment Policy

When Schroders was appointed in December 2019, the board indicated that the portfolio would continue to be managed in accordance with the Company's existing investment objective and investment policy in all material respects.

 

It is expected that over time, Schroders will seek to increase the overall liquidity of the portfolio and the level of diversification within it. However, in light of the composition of the existing policy Schroders is restricted from: (i) raising capital though disposals as a result of the requirement to have a minimum of 40 holdings; and (ii) making further investments into existing assets, as a result of the current restriction that no more than 80% of the Company's assets may be held in unquoted holdings, measured at the time of investment.

 

The board is therefore proposing to make a number of minor changes to the investment policy and restrictions to reflect the strategy that Schroders will deploy in managing the portfolio and to provide the necessary flexibility in the short term with regards to the minimum number of holdings and the mix of private and public assets. The full details of the proposed changes are set out on pages 70 and 71 of the Annual Report and a resolution seeking shareholder approval to these amendments will be put to shareholders at the forthcoming Annual General Meeting (AGM).

 

Valuation Frequency

I indicated in my Interim Statement that the board was considering moving from daily to periodic NAV reporting, bringing the Company more in line with peers. Following Schroders' appointment we have taken soundings from a numbers of investors, and on 26 March the board announced that the Company will move to a quarterly NAV reporting schedule.

 

This will enable the Company to undertake a review of the portfolio at the time of each NAV publication, which will be announced following each quarter end, and will provide a more representative valuation for investors. The first NAV to be published under the new reporting regime will be the 31 March 2020 NAV which is expected to be published before the end of June 2020. We will review every year whether a quarterly NAV reporting cycle remains appropriate.

 

The board also provided an update on the nature of information that will be released to the market under the new quarterly valuation cycle. In addition to announcements arising from developments within portfolio companies that have a material impact on the NAV, the board will make announcements relating to new private investments, realisations of any nature in private investments (including partial realisations), and material updates from private companies in the portfolio.

 

The board believes this quarterly NAV reporting cycle will provide shareholders with a clear framework for the release of information on the portfolio. This is in line with trusts with similar assets, and we would encourage all investors to sign up to receiving these updates each quarter, as they are released. This can be done on the Company's website,  www.schroders.com/publicprivatetrust .

 
Discount management

At the last AGM, the Company was given the authority to purchase up to 14.99% of its issued share capital. We propose that share buyback authorities be renewed at the forthcoming AGM and that any shares so purchased be cancelled or held in treasury for potential reissue. Although the Company is restricted in the amount of capital it could put to use for these purposes for the immediate future, share buybacks remain an important tool and the board will look to consider buy backs once it is in a position to do so.

 

Board composition and Chair succession

The composition of the board has materially changed since the start of 2019. The board would like to thank Dame Louise Makin, Steven Harris, Carolan Dobson and Alan Hodson for their contributions to the Company. Stephen Cohen, Jane Tufnell and Raymond Abbott all joined the board and their elections will be proposed at the AGM.

 

Our new board members bring significant skills and specific investment trust experience to the deliberations of the board.

 

In view of these board changes, the challenges of the portfolio and the transition to Schroders, it is not thought to be beneficial to investors to make further changes at this stage and, therefore, I have agreed to continue to serve as Chairman for a time to support the transition to Schroders.  In line with the board's agreed succession plans, and subject to shareholders' continued support at the forthcoming AGM, I will be retiring at the 2021 AGM.

 

The board has formed a Nominations Committee to be chaired by Jane Tufnell, and the Committee will lead the selection process for my successor. The board believes that it is important for appropriate new skills to be brought to the board and will continue to look to refresh one director every two to three years. All directors will continue to be subject to re-election each year at the AGM and will not serve for a period over nine years.

 

Outlook

I would like to reiterate our thanks to shareholders for their continued patience and understanding as we move ahead with Schroders. We believe that their appointment is a major step forwards and we remain focused on maximising value and restoring confidence in the Company and its portfolio.

 

Challenges remain. The continuing delays in the sale of the assets from the LF Equity Income Fund, whilst an entirely separate entity from the Company will, nevertheless, continue to cause disruption to a number of investee companies. This, together with the current general market conditions created by the outbreak of the COVID-19 pandemic, may impact the private equity market and may further affect our ability to pay down the gearing within the timeframe that the board would like.

 

Schroders have provided an update on the portfolio in their report which reflects the current environment. The possible impact from COVID-19 on the Company's NAV per share after the balance sheet date has been recorded as a post-balance sheet event in Note 23 to the Accounts below.

 

AGM

The AGM will be held at 10.30 a.m. on Friday, 5 June 2020 at Schroders' offices at 1 London Wall Place, London EC2Y 5AU. In light of the rapidly evolving situation and recent government guidance regarding the outbreak of COVID-19, the board has taken the decision to alter the format of the Company's AGM.

 

The formalities of the meeting, as required by the Companies Act 2006 and the Company's Articles of Association, will still take place. The safety and security of our shareholders, service providers, officers, and guests is of paramount importance to us. While the Government's "Stay at Home Measures" are in force public gatherings of more than two people are prohibited.

 

Shareholders are therefore asked not to attend the AGM in person but instead to vote by proxy.   We also ask shareholders to follow the current advice of the Government and Public Health England, noting the current guidance on travel and the limits on numbers at public gatherings.

 

All shareholders should vote by proxy. Proxy votes can be submitted electronically through the registrar's portal. Details are included with the proxy forms and on the Company's webpages.

 

In the event that shareholders have a question for the board, please email ([email protected]), and we will arrange for a response to be provided to you.

 

Web Conference - Update from Schroders

Please join managers, Ben Wicks and Tim Creed, for a webconference in which they will introduce Schroders as Portfolio Manager and outline their thoughts on the future direction of the portfolio. The presentation will be followed by a live Q&A session.

 

The webconference will take place 14 May 2020 at 10:00 am. Register for the event at

http://www.schroders.com/publicprivatetrust/updates .

 

Last year was exceptionally challenging, but I am proud of the work we have all done in the last 12 months and wish to thank all my colleagues as well as the Company's many service providers. With the appointment of Schroders, the portfolio should now have the time, the care and the stability it needs to survive and prosper.

 

Susan Searle

Chairman

 

30 April 2020

 

 

REVIEW OF 2019

 

Woodford Investment Management (Woodford) resigned as Portfolio Manager of the Company on 13 December 2019. Schroders were appointed the same day. Thus, the 2019 performance was in effect the responsibility of Woodford rather than Schroders. Woodford are not able to complete a Manager's Review section for this Annual Report and Schroders had no involvement prior to 13 December 2019, so the Directors are providing their own short summary of key events. Most of these are already covered in the Half-Yearly Report which was published on 30 September 2019. The most significant events for the Company are set out below.

 

In March 2019, the Company purchased further positions in five existing holdings in Atom Bank, Carrick Therapeutics, Cell Medica, RateSetter and Spin Memory for £73 million from the Woodford Equity Income Fund (WEIF). This was funded through the issue of 81.6 million new shares at the then prevailing NAV. This transaction had taken almost a year to negotiate and given the discount the shares were trading at, at the time the transaction was agreed, namely -13%, the net effect to shareholders was regarded by the board and by advisers as beneficial.

 

Woodford, as Portfolio Manager, had begun the year with high levels of optimism (gearing was 18.6%) about the likely 2019 performance for the Company's holdings including the expectation that it would be possible for some of these companies to IPO or to achieve a trade sale. This would have helped finance the ongoing funding requirements that investee companies were facing and to which the Portfolio Manager had in some cases legally committed the Company.

 

However, many factors came together to undo this outlook. The IPOs and trade sales did not transpire. There was ongoing deterioration in the performance and liquidity of Woodford's open-ended funds which were facing increasing redemption demands and consequent downward pressure on the value of its holdings. Several holdings in the open-ended funds were also held by the Company.

 

On 3 June 2019, Link Fund Solutions Limited (LFS), as AIFM, announced the suspension of dealing in the Woodford open-ended funds and later that month the board instructed the Portfolio Manager to seek to reduce gearing by the end of 2019, which the Portfolio Manager indicated was eminently achievable. This was done to reduce risk in the Company and to seek to enable funding commitments to be met. However, the absence of any mooted IPO's or trade sales rendered the Portfolio Manager unable to reduce gearing in the second half of 2019.

 

As set out on pages 29 and 30 of the Annual Report the board initiated a process to identify a new Portfolio Manager in July 2019 following the crisis in Woodford and the deterioration in performance. The board also initiated direct discussions with the lender in August 2019 to renegotiate the terms of the loan agreement as a number of the covenant terms had become onerous. This was a lengthy process which was subsequently successfully taken on by Schroders as the new Portfolio Manager culminating in the signing of a new agreement on 13 December 2019.

 

There were significant extra costs incurred by the Company during the year. Legal costs associated with the transaction in March 2019, the Portfolio Manager search and transfer, debt renegotiation and advice to the board were much higher than usual. In addition, the board appointed FTI Consulting (FTI) to advise and help with press and public relations during a period when there was coverage of Woodford's problems in the media almost every day and a deluge of enquiries. Finally, the board engaged its broker to provide a much higher level of service than in normal circumstances in order to advise on the multiple RNS' issued, the Portfolio Manager search and to advise the board generally. All three service providers were invaluable during this very difficult period, especially in the second half of 2019, when 16 board meetings proved necessary, plus multiple meetings of the board sub-group responsible for the search for a new Portfolio Manager. FTI were invaluable in helping to correct misapprehensions that had arisen in the press and helping to reinforce the clear difference between WEIF, which had faced redemptions it was unable to meet, and the closed-ended Company, whose shares were actively traded.

 

Performance

This was clearly very disappointing with the NAV falling by 49.3% from 97.61p to 49.46p. The top 5 contributors to this negative return were as follows:

 

Benevolent AI: -7.67% - the company has made good progress via collaborations with AstraZeneca and Novartis, a new funding round took place at a lower level, albeit the funding was provided by Temasek who should prove a strong future cornerstone investor.

 

Industrial Heat: -7.44% - mainly as a result of technology development delays.

 

Autolus Therapeutics: -4.45% - as a result of a more sceptical background for listed biotech companies and then delays in constructing a technical facility.

 

Kuur Therapeutics (previously called Cell Medica): -3.29% - as a result of a lower valuation for new funds.

 

Rutherford Health (previously called Proton Partners): -3.07% - as a result of delays in the ramp-up of new centres.

 

Portfolio Activity

The major sales were as follows -

 

Oxford Sciences Innovation plc - £41.4m - sold, at a small premium (1.5%) to the then valuation.

 

Autolus Therapeutics - £32.1m - sold given its liquidity.

 

Ultrahaptics - £19.0m - sold profitably to a London private equity fund.

 

Sensyne Health - £17.9m - sold given its liquidity.

 

Prothena - £17.5m - sold given its liquidity.

 

All of the above were completed in order to raise cash to finance funding requirements and to seek to manage gearing.

 

The major purchases were as follows -

 

Atom Bank - £44.4m - as part of the transaction with WEIF referred to above and then a further funding commitment, alongside other shareholders, Toscafund and BBVL.

 

Rutherford (previous called Proton Partners) - £35m - acquired as a primary issue, linked to the Woodford commitment entered into at the time of IPO.

 

Benevolent AI - £15m - as part of a previously committed funding.

 

 

RateSetter - £14.3m - as part of the transaction with WEIF

 

Spin Memory (previously called Spin Transfer Tech) - £13.2m - as part of the transaction with WEIF.

 

Henceforth, Schroders, as Portfolio Manager, will naturally be reporting to shareholders in the Half-Yearly and Annual Reports on both portfolio activity and performance. They will also be producing quarterly NAV reports with a portfolio update of top ten holdings and commentary on activity and performance.

 

 

PORTFOLIO MANAGER'S REVIEW

 

Market background

2019 was a year of significant volatility and change for the Company and its portfolio. The portfolio experienced a meaningful decline in value, leading to the renegotiation of the Company's lending facility and a change of Portfolio Manager. A review of 2019 can be found above.

 

Concerns over the spread of coronavirus and its potential impact on global growth have dominated financial markets recently, with public equity markets falling sharply.

 

COVID-19 has started to negatively impact the real economy globally and has the potential to cause more economic disruption. The main cause-effect relationship between the virus and the economy is that, due to the rapid exponential spread of the virus, governments are forced to enact decisive countermeasures to slow down transmission, so health systems are able to cope with the situation.  It is these countermeasures, including travel restrictions and partial lock-downs, as well as changing consumer behaviour targeted at social distancing, which can lead to economic disruption. Any disruption is likely to be temporary. Either countermeasures are successful, or seasonal weather changes might have a positive impact, or treatments and vaccines will be available at some point in time or the virus will run its course.

 

For existing investments, the impact varies mainly by region and industry, the specific business model of a company and its financing situation. The portfolio has a high proportion of healthcare companies, which is a key strength at this point in time. This includes a number of companies in the Trust that are actively working on COVID-19. As well as providing an overview of the top 10 portfolio companies, we have provided an update on the impact of the situation, where relevant, in the next section.

 

We have taken on this portfolio because we believe it contains many attractive holdings and are confident that our experience and resources will afford us the opportunity to re-position the portfolio toward creating long-term value for shareholders.

 

 

Top 10 portfolio holdings

 

Atom Bank (14.4% of the portfolio)

Atom Bank is the UK's first bank built exclusively for mobile. It is redefining what a bank should be, making things easier, more transparent and better value in a world of finance. Currently the bank offers savings accounts, mortgages and business loans. During 2019 Atom has been investing into its infrastructure and technology platform. The Company was awarded a £10m Banking Competition and Remedies grant to drive competition in lending to SMEs, and also successfully completed its second mortgage securitisation of over £500m. This followed the successful £50m fundraising round completed earlier in the year with participation from BBVA,

Toscafund, Perscitus LLP, alongside SUPP.

 

In early March, Atom invoked full contingency and moved swiftly to complete implementation of homeworking for all roles by the end of the month. Throughout, it has maintained strong customer service levels while responding to Government initiatives in support both of mortgage customers and SMEs. Strongly capitalised and highly solvent Atom plans to launch new savings products in Q2 and to continue lending to the real economy throughout 2020 and beyond.

 

Rutherford Health (14.4% of the portfolio)

Rutherford operates three innovative cancer treatment centres in Newport (South Wales), Northumberland and Thames Valley, with a fourth centre in Liverpool recently handed over for commissioning of equipment. The service offering is extensive and covers: imaging, chemotherapy, immunotherapy, radiotherapy and high energy proton therapy. Over 300 patients have been treated across all services including 100 patients treated with high energy proton beam therapy. In 2019, the company listed on the NEX Growth Exchange raising £20m on listing and a further £70m through the year.

 

Rutherford Health has partnered with the NHS to provide cancer care to patients in times in which many NHS healthcare facilities are burdened with a high number of COVID-19 patients. Cancer patients receiving chemo-, radio- or proton beam therapy are particularly vulnerable to COVID-19 infections due to their weakened immune system and Rutherford outpatient facilities focused on cancer care only ensure a safe and prioritised treatment.

 

Oxford Nanopore (13.3% of the portfolio)

Oxford Nanopore has developed a new generation of DNA sequencers, which uniquely scale from small portable formats to ultra-high throughput. They are unique in combining this scalability with real-time data streaming and the ability to sequence very long fragments of DNA / RNA, which provides very rich biological data. The Company now has customers in about 100 countries, using its technology for a range of scientific research including pathogen analysis, cancer research, agriculture, human genetics and environmental research. During the year Oxford Nanopore raised £109.5m in investment from new and existing investors from the US, Europe and Asia/Pacific. This brings total primary investment into the company to £481m.

 

Oxford Nanopore is providing support on the frontline of the coronavirus outbreak through their MinION sequencers, which allow rapid and decentralized genome sequencing, enabling an improved surveillance of the coronavirus outbreak and better understanding of the disease and its development, including potential mutations. Oxford Nanopore has partnered with global public health scientists and public health authorities in more than 30 countries, with another 40+ countries preparing to use MinION sequencers.

 

BenevolentAI (6.0% of the portfolio)

BenevolentAI creates and applies artificial intelligence (AI) and machine learning to transform the way medicines are discovered and developed. Benevolent integrates its technology into every step of the drug discovery process from hypothesis generation to late-stage clinical development. The Benevolent Platform® is used by scientists and technologists to find new ways to treat disease, improve the efficacy and lower the development time and costs of new treatments. During 2019, as well as advancing its internal R&D pipeline, the company announced collaborations with AstraZeneca and Novartis, and a $90m investment from Temasek, a Singapore-headquartered investment company.

 

Benevolent AI has been providing important insight in the global effort to combat the COVID-19 outbreak. In February 2020, Benevolent published two papers in The Lancet outlining how its proprietary knowledge graph, queried by a suite of AI algorithms, enabled the rapid identification of a potential therapeutic candidate for COVID-19. Its scientists re-examined the affinity and selectivity of all the drugs in its knowledge graph to identify already approved drugs with both anti-viral and anti-inflammatory properties. Its research suggests that Baricitinib, an already approved drug for rheumatoid arthritis, could be used to inhibit both viral entry into cells and the human inflammatory response strongly associated with the terminal phase of COVID-19 infection. It could also be used in combination with the directly acting antivirals currently being used in the COVID-19 outbreak. A leading example of how AI is being applied to accelerate the drug discovery process.

 

Immunocore (4.3% of the portfolio)

Immunocore is a pioneering T cell receptor biotechnology company, working to develop and commercialise a new generation of transformative medicines to address unmet needs. The Company's most advanced programmes are in oncology and it has a rich pipeline of programmes in infectious and autoimmune diseases. Its lead programme, Tebentafusp (IMCgp100), has entered pivotal clinical studies as a treatment for patients with metastatic uveal melanoma. During the year, two additional programmes entered the clinic and one was approved by the US FDA.

 

Autolus (3.3% of the portfolio)

Autolus Therapeutics is at the forefront of a revolutionary immuno-oncology treatment that is offering new hope to patients suffering from cancers. In 2019, Autolus continued to demonstrate good proof of concept data for its "chimeric antigen receptor T cell therapy" (CAR-T) platform in several of its key clinical programmes. At the American Society of Haematology (ASH) conference in December, the company provided additional compelling patient data for its clinical programme.

 

During 2019, Autolus did experience one setback - a five month construction-related delay to its new semi-automated UK manufacturing facility in Stevenage. This negatively impacted progress of its clinical trials. However, as of September, the facility became operational and is now delivering clinical products for patients in both Europe and the US. Autolus' proprietary ability to produce products in a semi-automated closed system is a major milestone that should offer a distinct competitive advantage relative to competitors, in terms of both efficiency and quality control.

 

Autolus' manufacturing facility has continued to operate uninterrupted despite the outbreak of COVID-19, which is a major achievement for the firm given how critical this supply is to key therapeutic programmes for the year ahead.

 

Inivata (3.2% of the portfolio)

Inivata is a leader in liquid biopsy, a transformative approach that identifies tiny amounts of cancer DNA in the blood of patients with cancer. The Company's technology is based on pioneering research from the Cancer Research UK Cambridge Institute, at the University of Cambridge and is reinforced by multiple high calibre publications. Its lead product, InVisionFirst®-Lung, is commercially available and helps clinicians to make informed treatment decisions for patients with Lung cancer. Further products in development help to manage patients with early stage cancer. The Company has a CLIA certified, CAP accredited laboratory in Research Triangle Park, NC and laboratories in Cambridge, UK.

 

Inivata is actively engaging with thoracic oncology experts on how they are modifying their patient care practices and adapting to the current COVID-19 crisis. Inivata has also engaged mobile blood draw services to enable patients to have blood drawn and their cancer profiled via the InVisionFirst test without needing to visit a healthcare facility.

 

Carrick Therapeutics (3.1% of the portfolio)

Carrick Therapeutics is a biopharmaceutical company focusing on targeting key pathways in cancer progression and adaptive resistance. During 2019 Carrick hired a new CEO to transition the company and drive the next growth phase. For their lead asset, targeting a receptor on cancer cell, Carrick Therapeutics completed a phase 1a dose escalation and safety study with positive results and started enrolling the phase 1b trial.

 

Carrick is actively managing the COVID-19 situation to ensure the safety of clinical trial patients, their continued access to study therapy and high data quality. The company is providing a nurse-led dispensing service with direct-to-home delivery to trial patients.

 

Mission Therapeutics (2.8% of the portfolio)

Mission Therapeutics has built a leading platform for the discovery and development of first-in-class, small molecule drugs that selectively target deubiquitylating enzymes (DUBs) - an emerging drug class that is attracting significant commercial interest in the area of protein homeostasis. The company focuses on treatment of kidney disease, fibrosis, rare mitochondrial diseases, and neurodegenerative. Mission Therapeutics has a major collaboration with AbbVie in the Alzheimer's Disease and Parkinson's Disease area.

 

It has been shown in the literature that a Mission asset could potentially enhance autophagy and reduce replication of MERS-CoV up to 28,000-fold. Mission has approached selected pharma companies to develop compounds to reduce replication of the related virus SARS-CoV-2.

 

Evofem Biosciences (2.8% of the portfolio)

Evofem Biosciences is a clinical-stage biopharmaceutical company that is focused on non-hormonal contraceptive products and products for the prevention of sexually transmitted infections. The company's primary candidate, Phexxi, is currently undergoing review by the U.S. Food and Drugs Agency (FDA), and if approved will be directly marketed to consumers by the company during the latter half of 2020 and early 2021. Evofem Biosciences is listed on

the US Nasdaq exchange.

 

Evofem is not directly affected by COVID-19, with its main product awaiting FDA approval at the time of writing. However, generalised social lockdowns will make commercialisation and further product trials more difficult until the situation returns to normal.

 

The following charts provide an overview of the Company's positioning as at 31 December 2019. One important note, looking at the chart that illustrates the portfolio's sector positioning, is that the portfolio has a high proportion of healthcare companies, as mentioned earlier. Over the long term, we expect to provide a more diversified portfolio by sector.

 

Portfolio by geography

 

Country

 

UK

87%

US

7%

Luxembourg

3%

Switzerland

2%

Norway

1%

 

Source: LFS, as at 31 December 2019. Geographic split based on market listing for quoted companies and by country of domicile for unquoted companies.

 

Portfolio by sector

 

Sector

 

Health Care

58%

Financials

19%

Industrials

11%

Technology

11%

Consumer staples

1%

 

Source: LFS, as at 31 December 2019.

 

Split between public and private companies

 

Private

76%

Public

24%

 

Source: LFS, as at 31 December 2019.

 

Revenue-generating vs pre-revenue

 

Revenue Generating

82%

Pre Revenue

18%

 

Source: LFS, as at 31 December 2019.

 

History

On 24 October 2019 the board announced Schroders' appointment as Portfolio Manager for the Company, which subsequently came into effect on 13 December 2019. We are proud to have the opportunity to use our extensive investment experience and resources to realign the portfolio and seek to deliver growth for the long-term benefit of the shareholders.

 

We believe that we are well-positioned to execute on the expectations outlined by the Board and have deployed significant resources in our initial due diligence and current monitoring of the portfolio companies. Already by the time of our appointment on December 13th, we had accomplished the work needed to gain a strong understanding of the portfolio, positioning us for a running start to manage the portfolio going forward.

 

Schroders' expertise

As we take the helm of the portfolio, we believe it is important for shareholders to understand why we believe we are suitable to manage the portfolio and how we intend to drive the Company's long-term value creation.

 

Schroders is a well-established UK based investment manager. The firm's £500.2 billion under management (as at 31 December 2019) and over 200 years serving our clients from our now 32 offices around the world has positioned us among the leaders in institutional investment management globally. In 2017, Schroders acquired Adveq Management (now known as Schroder Adveq), a global private equity firm with more than 115 professionals with a significant focus on investing in emerging companies and financing their technology development and commercial growth. Managing the Company's portfolio is, thus, an ideal match with the heritage, experience and ongoing commitment of Schroders and in particular Schroder Adveq.

 

Sustainable investment

As a firm we have long recognised both the importance of examining the impacts of social and environmental trends on the companies we invest in, and the role investors can play in helping to address those challenges. The investment team of the Company will proactively incorporate significant aspects of the UN SDGs (United Nations Sustainable Development Goals) into our investment strategy, as described later in the report.

 

Outlook

We will be focusing on two key objectives in 2020: ensuring that the key value-creating portfolio companies receive the appropriate level of financial and strategic support to maximize the Company's investment return and to seek proactively to pay down the debt obligations. We recognize that at times these two objectives may be conflicting, however the long-term success of the Company will serve as the guiding principle by which individual key decisions will be made.

 

Beyond these two objectives and over the next few years, we will seek to re-balance the exposure between private and public companies in a manner commensurate with the risks posed. In the private portion of the portfolio we will continue to focus on high growth, developing and innovative companies. This will likely entail reducing the average investment exposure per company and the maximum allowable investment cost to any one company to a level that will ensure the Company's ability to provide financial support to all of its portfolio companies. For the publicly-traded portion of the portfolio, we will sustain the focus on innovative growth companies but will seek to increase the exposure over time towards companies with good trading liquidity and proven business models.

 

 

Schroder Investment Management Limited

 

30 April 2020

 

 

 

PRINCIPAL RISKS AND UNCERTAINTIES

 

The board has carried out a robust assessment of its principal and emerging risks during the period under review, including those that would threaten its business model, future performance, solvency, liquidity or reputation. This review has been done after reviewing the risks identified in the disclosures in the 2019 Interim Report as well as taking into account recent developments, especially those related to the appointment of the new Portfolio Manager and the impact of COVID-19. The process involves the maintenance of a risk register, which identifies the risks facing the Company and assesses each risk on a scale, classifying the likelihood of the risk and the potential impact of each risk to the Company. This helps the Audit, Risk and Valuation Committee and the board focus on any identified risk of particular concern and aids the development of the board's risk appetite. In developing the risk management process, the board took into consideration the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting issued by the Financial Reporting Council (FRC).

 

The board has established controls to mitigate the risks faced by the Company, which are reviewed on a regular basis to ascertain the effectiveness of each control.

 

The Company's operations are undertaken by third-party service providers who have established controls to mitigate against risks identified by the board. The controls and operations of each service provider, other than the Company Secretary and Portfolio Manager, are subject to a detailed analysis of their operations, which includes testing their key systems to identify any weaknesses, by independent auditors on at least an annual basis. The findings of each review are detailed in Assurance Reports, copies of which are provided to the Audit, Risk and Valuation Committee for its review, so that it can gain a greater understanding of the risk management processes and how they apply to the Company's business. For this Company the Portfolio Manager operates a partially outsourced operational business model and the relevant assurance reports are the audited Annual Report of the Portfolio Manager where the auditor will have reviewed financial controls as well as the Portfolio Manager's own Internal Controls and Compliance reports, together with evidence of the relevant Business Continuity Plans and Disaster Recovery Plans.

 

The principal and emerging risks and uncertainties faced by the Company are set out below. The risks arising from the Company's financial instruments are set out in note 20 on pages 63 to 68 of the Annual Report.

 

The board has determined that the key risks for the Company are COVID-19 risk, gearing risk, performance risk, general valuation risk, portfolio specific valuation risk; investee company specific risk; portfolio concentration risk; Portfolio Manager and key man risk; outsourced service provider model risk; currency risk and cyber risk. The new Portfolio Manager was appointed in December 2019 and the debt facility was renegotiated which the board believes have both served to mitigate the risks set out in the Interim Report. These risks below are therefore forward looking from the establishment of these new agreements.

 

Risk

Mitigation

1. COVID-19

The COVID-19 pandemic will clearly have a very general widespread economic impact. This may well possibly be quite extreme in the shorter term depending on the scale of the response by governments. The longer-term impacts could also be significant, although these are unclear at the time of writing. The consequences for the Company may well be lower valuation levels and greater difficulty in realising disposals and/or lower prices realised on disposal.

 

Individual investee companies may be impacted by cash flow and funding difficulties and/or lower prices when so doing . This in turn could impact valuations. Their day-to-day business could also be impacted by travel restrictions and staffing issues.

 

Besides the general economic impact, problems arising from the COVID-19 pandemic could result in specific supply-chain problems for individual investee companies and for pharmaceutical companies, in particular delays for clinical trials as a result of difficulties in recruiting patients.

 

A few companies in the portfolio may prove to be beneficiaries as they are involved in diagnostics and advanced therapies.

 

Risks 2-6 listed below are all likely exacerbated by the COVID-19 pandemic.

 

The staff of the Company's service providers and of the investee companies may be unduly impacted by the disease resulting in difficulties for them in delivering their functions or in developing their businesses.

 

 

The board receives regular updates from the Portfolio Manager regarding the impact of the disease in terms of both portfolio management activities, the impact on investee companies and their responses to the pandemic.

 

The board receives assurances that service providers have implemented Business Continuity Plans.

 

2. Gearing risk

The Company has the ability to employ gearing up to a maximum of 20 per cent of NAV, calculated at the time of borrowing. The Company has utilised its gearing facility in order to invest further behind specific portfolio companies which means there is less flexibility to make new investments and provide follow-on funding to the portfolio companies. A higher level of gearing may have a significant downside effect on the Company's NAV during a period of poor performance or decline in the market and may impact the Company's debt covenants.

 

Other market participants may infer the Company may need to sell certain listed equity positions and choose to sell or short these securities. Or investors in investee companies held by the Company may infer the Company has difficulty making further funding decisions and may only offer funding at valuations less attractive to the investee companies or seek to attach terms to such funding which is unattractive to the Company.

 

In as much as the Portfolio Manager needs to make disposals in order to reduce gearing over a relatively short time horizon, the prices achieved may be below the prices which the positions are carried in the portfolio, on a fair value basis, per International Private Equity and Venture Capital (IPEV) guidelines.

 

There may be difficulties when companies have funding requirements and the Company wishes to participate, given the terms of the debt facility and a need to seek approval from the lender to provide funding.

 

In late 2019, the board and the Portfolio Manager entered into a revised loan agreement with the debt provider. This rolled over the previous cost of the debt funding but laid down a schedule of repayments arising from disposals during 2020. This constrains the Portfolio Manager from making new investments and failure to meet this schedule could mean that the agreement could be terminated or need to be renegotiated, possibly at less favourable terms or that alternative capital providers would need to be sought, which might also be at less favourable terms. The intention is to seek to have repaid this debt facility by January 2021.

 

A significant downturn in the values of equity market assets, which also impacts the valuations of unquoted assets, could mean it is significantly more difficult to realise disposals or that the prices that can be realised are materially below the current carrying values. Thus, this may also trigger a need to renegotiate the debt facility or simply affect valuation levels.

 

Such an event could be triggered by an economic correction, for instance as a result of COVID-19, although as a result of the length of the current economic cycle and of the current equity market a wide variety of possible triggers may also cause such a correction.

 

 

The board receives regular reports from the Administrator on the outstanding amount of the debt and regular reports from the Portfolio Manager on the programme of disposals. Gearing is reviewed by the board at each board meeting and more often, as necessary. The Portfolio Manager provides weekly updates to the debt provider.

 

The board monitors the progress of the reduction in gearing and seeks to confirm with the Portfolio Manager that this process is nevertheless preserving shareholder value.

 

The Portfolio Manager also provides a thorough analysis of any anticipated funding decisions and possible liquidity events of the portfolio companies. This allows the board to assess the Company's ability to meet its commitments and maintain its financing facility.

 

Any time the loan facility terms are being reconsidered, the board works very closely with the Portfolio Manager to optimise any agreement.

 

The board discusses with the Portfolio Manager the principles behind balancing a more rapid disposal programme at perhaps less favourable prices with one of greater patience which might mean better disposal prices albeit with the risk of needing to renegotiate the debt agreement.

 

 

 

3. Performance risk

There is always, for any investment portfolio, the generic risk of poor performance arising as a result of poor decisions made by the Portfolio Manager. In addition, given the long-term nature of this investment strategy (up to 10 years) and the absence of a clear benchmark, it is not necessarily easy to make an evaluation of the Portfolio Manager based simply on returns over shorter periods.

 

 

This risk is mitigated by the board monitoring the performance of the portfolio and the decisions made by the Portfolio Manager through detailed reporting on the decisions. The board seeks to evaluate the general quality and nature of portfolio decisions as well as the performance. Where the board determines that the Portfolio Manager is not performing to a satisfactory standard, the board, together with AIFM for the portfolio, LFS may decide to terminate the appointment of the Portfolio Manager under the terms of its contract.

 

4. General valuation risk

The valuation of unquoted early stage companies is inherently subjective. Valuation at a fixed point in time may not be representative of the medium or longer term.

Particular events at a company or particular funding rounds may have a significant impact. Information may not be as widely available as with public companies. Companies may not yet have meaningful revenues or profits. Considerable uncertainty may exist around the eventual feasibility and value of a particular technology or its commercialisation.

 

 

 

The Company employs LFS, the AIFM, who has been delegated responsibility for the valuation of the assets in the portfolio. LFS, in turn, uses extensive research and input from its own valuation specialist provider, IHSMarkit. They conduct a regular rolling review of the valuation of all portfolio assets and also review their valuations in the event of any significant triggers at individual investee companies. They follow the widely respected and widely followed IPEV guidelines in executing these valuations; these processes are explained on pages 54 and 55 of the Annual Report.

5. Portfolio specific valuation risk

Where other portfolio managers seek to make disposals of securities held in portfolios they manage and these securities are also held by the Company, the valuation of these securities may thereby be affected. Equally, simply market anticipation of these disposals may also impact valuations.

 

As the new Manager of the LF Equity Income Fund (Fund), formerly the LF Woodford Equity Income Fund, which used to be managed by the Company's previous Portfolio Manager, seeks to make disposals of unquoted positions in the Fund, in order to return capital to investors, these disposals may also, indirectly, when the Company's independent valuation agent, LFS, references prices of recent transactions, lead to downward revaluation of some of the Company's holdings, unless under IPEV guidelines the sales were categorised as not being "orderly" in the judgment of the independent valuation agent. International Financial Reporting Standards (IFRS) guidelines and their interpretation may mean that sales regarded as not being "orderly" under IPEV guidelines may nevertheless be so regarded under IFRS.

 

And, in as much as the wider market and other investors in the Company's investee companies are also aware of the disposal process of the Fund they may seek more demanding terms on any future funding rounds which may also in turn impact valuations.

 

 

The board receives updates from the Portfolio Manager regarding disposal, investment and funding plans. In as much as the Portfolio Manager is aware of the holdings the Fund is seeking to sell (because these were publicly disclosed), the Portfolio Manager can adjust the divestment plan accordingly. In addition, where necessary and possible, the Portfolio Manager can seek to postpone or avoid further funding. The Portfolio Manager regularly categorises the Company's positions in terms of relative

future importance, which helps the board assess divestment and funding decisions.

 

6. Investee company specific risk

The Company invests in a variety of biopharma and technology businesses, many of them relatively early stage, where the technology is not yet fully proven or commercialised. This can offer very significant financial success when the technology delivers but also carries downside risks particular to the companies concerned. The eventual outcome for some of these companies may be somewhat binary in as much as either the technology works, or it does not, resulting in the company concerned becoming worth significantly less. Failure may materialise, for instance, in the case of clinical trials for a biotechnology business, in the case of scaling up or commercialisation of an engineering business or in terms of the appearance of a new, previously unknown competitor for a software company. Leading edge commercial scientific development in many fields is by its nature risky. The performance of the Company's individual holdings, together with market events, may thus create short-term volatility in the Company's NAV .

 

 

The Portfolio Manager conducts regular reviews of these businesses through engaging regularly with all investee companies to monitor progress. The Portfolio Manager also carries out due diligence on the relevant technologies and obtains regular updates. The Portfolio Manager uses its own proprietary analytics to assess the prospects for investee companies and may also seek expert third party opinions regarding the likely success of the technology. The board seeks assurance from the Portfolio Manager through its regular portfolio review meetings that thorough research has been, and is being, conducted.

 

7. Portfolio concentration risk

Some of the Company's investments have demonstrated relatively more success and/or required more funding than others, which has led to those investments representing larger proportions of the portfolio than might be expected. While both the board and the Portfolio Manager feel that undue concentration is not desirable in the longer term, in the shorter term, portfolio concentration can be acceptable. In any event, the nature of the investments means that any rebalancing of the portfolio will likely take time, as they cannot always be sold quickly. The Portfolio Manager, under delegated authority from the board, has authority regarding portfolio construction and managing questions of portfolio concentration in the best interests of the shareholders. This approach is in line with the Portfolio Manager's investment strategy and investment philosophy. The alternative, of imposing limits on the size of any one investment, other than at the time of investment, would potentially result in the Company being a forced seller of an investment that still had further growth potential.

 

The risk linked to any portfolio concentration might be compounded due to the nature of some of the businesses and the risks associated with both commercial and technical milestones.

 

 

The Company's portfolio is monitored closely by the board, the AIFM and the Portfolio Manager. The Company seeks to invest in a diversified portfolio across a wide range of companies so as to mitigate against the risk posed by an individual early-stage or early-growth company. However, the board is mindful that the Company was established

with the aim of providing long-term growth and that concentration can be a sign of success as a result of assets backed becoming more valuable. Short-term liquidity

problems with the Company's underlying holdings, which may be compounded by market events, should be mitigated over time when such companies deliver on their milestones and value is recognised.

 

The board also considers increased specific risk that may arise from increased concentration, as the result of the relative success of certain investee companies. The board discusses this risk with the Portfolio Manager, and where appropriate with the AIFM, with a view to considering whether or not to seek to reduce the size of particularly large holdings within the portfolio. However, the board is mindful that through the AIFM it has delegated investment management decisions to the Portfolio Manager to make as it sees fit.

 

 

8. Portfolio Manager and key man risk

The Portfolio Manager operates a team approach to portfolio management and decision making so the risk arising from the departure of one or more of the Portfolio Manager's key investment professionals should not necessarily prevent the Company from achieving its investment objective.

 

The Portfolio Manager could terminate its contract with the Company. This event would have an impact on the management of the portfolio and would constitute a technical default on the debt facility, requiring renegotiation or substitution, likely on less favourable terms.

 

 

 

The Portfolio Manager has a compensation and incentive scheme to retain key staff and has developed a suitable succession planning programme, which seeks to ease the impact that the loss of a key investment professional may have on the Company's performance. The Portfolio Manager will notify any change in its key professionals to

the board at the earliest possible opportunity and the board will be made aware of all efforts made to fill a vacancy. Furthermore, investment decisions are made by a team of

professionals, mitigating the impact of the loss of any key professional within the Portfolio Manager's organisation on the Company's performance.

 

Recent experience suggests that the board would be able to identify an alternative Portfolio Manager should the need arise.

 

 

9. Outsourced service provider model risk

The Company has no employees and the Directors have been appointed on a non-executive basis. The Company is reliant upon the performance of third-party service providers for its executive function. The AIFM, the Portfolio Manager, the Depositary, the Company Secretary and the Administrator will be performing services that are integral to the operation of the Company. Failure of any of its third-party service providers to perform in accordance with the terms of its appointment could have a material detrimental impact on the operation of the Company. Furthermore, any

of the Company's service providers could terminate their contract.

 

 

The performance of the Company's service providers is monitored closely by the board and in particular by the Management Engagement Committee. The Management

Engagement Committee monitors service providers and their activities. Each of the service providers has a notice period so as to allow an alternative to be appointed.

 

10. Currency risk

In as much as the Portfolio Manager now no longer seeks to hedge non-sterling currency exposures through forward foreign exchange contracts and some of the Company's investments are based wholly or partly outside the UK or have revenues in currencies other than sterling then the value of the portfolio, in sterling terms, may be affected negatively by a rise in sterling relative to these other currencies and, equally, positively by a fall in sterling.

 

 

The Portfolio Manager regularly reports to the board and highlights any significant impacts of currency movements on the value of investments.

 

11. Cyber risk

Each of the Company's service providers is at risk of cyber attack, data theft, service disruption, etc. While the risk of financial loss by the Company is probably small, the risk of

reputational damage and the risk of loss of control of sensitive information is more significant, for instance a GDPR breach. Many of the Company's service providers and the board often have sensitive information regarding transactions or pricing and information regarded as inside information in regulatory terms. Data theft or data corruption per se is regarded as a lower order risk as relevant data is held in multiple

locations.

 

 

The board receives controls reports from its service providers which describe the protective measures they take as well as their Business Recovery Plans.

 

 

Emerging risks and uncertainties

 

During the year, the board also discussed and monitored a number of emerging risks that could potentially impact the Company's ability to meet its strategic objectives.

 

1.  Given the prolonged economic and stock market cycle, the generally high levels of equity market valuations, even following recent corrections, both global economies and/or global equity markets could be vulnerable to further significant correction as a result of various different possible trigger events, besides COVID-19. This would likely affect valuations of the portfolio holdings.

 

2.  Brexit negotiations create the possibility of a wide variety of unknown legislative and economic consequences.

 

3.  Investors generally may become disenchanted with the listed investment structure as an appropriate vehicle for investing in unquoted early-stage companies.

 

4.  While some investee companies in the portfolio are pursuing technologies that might help mitigate climate change or that might see an increase in demand as a result of climate change, the risks arising from further climate change are thought unlikely to have a direct impact on the Company over the next 5-10 years, given its investment objectives. However, investee companies generally could well be affected by various possible indirect generalised negative economic impacts arising from climate change.

 

GOING CONCERN

The board has considered the risks arising from the need to repay the Company's bank loan, particularly in light of the reduced asset values and economic disruption caused by the COVID-19 pandemic. The board continues to hold regular and constructive discussions with the lender who remains supportive. The board has scrutinised the detailed cash flow forecast prepared by the Portfolio Manager and considered their assessment of the likelihood and quantum of funds which could be raised from sales of investments. The Portfolio Manager has also performed a range of stress tests, and demonstrated to the board that even in an adverse scenario of depressed markets and restrictions on sales in the private equity market, the Company could still, within the terms of the loan agreement, generate sufficient funds from sales of investments to meet its liabilities over the next twelve months. As a result, the board is comfortable that the Company will have sufficient liquid funds to pay operating expenses, service the loan and pay down the loan in accordance with the terms of the loan agreement.

 

The board have also considered the provisions in the new loan agreement, and have taken into account the current total debt of £107m in the context of gross assets of £563.4m at 31 December 2019, the fact that the loan is due for repayment or refinance in January 2021 and the need to seek to maintain a certain aggregate level of listed investments as a per cent of the value of the total portfolio. Recent discussions with the loan provider have demonstrated their ongoing constructive approach to working with the Company as a lender.

 

On this basis, the board considers it appropriate to adopt the going concern basis of accounting in the Company's accounts, and has not identified any material uncertainties to the Company's ability to continue as a going concern over a period of at least twelve months from the date of approval of these financial statements.

 

VIABILITY STATEMENT

In accordance with Provision 36 of the AIC Code of Corporate Governance, published in February 2019, the board has assessed the prospects of the Company over the five-year period ending 31 December 2024. The board considers a five-year period to be appropriate because it is the minimum holding period that it would recommend to a prospective investor considering purchasing shares in the Company.

 

The board has considered the Principal Risks above. The board has considered detailed cash flow forecasts prepared by the Manager, and stress case scenarios, including the possibility of breach of its loan covenants. In making its assessment, the board has also considered the positive impact of steps taken in the last ten months to secure the viability of the Company. Three new directors with diverse skills and experience have been appointed. It has appointed Schroders as Portfolio Manager as described on pages 29 and 30 of the Annual Report. Schroders is well-capitalised and resourced; has the necessary skills and experience; and uses a team-based approach. It has signed a new debt agreement which extends the timeline for the repayment of debt to January 2021. It has agreed with the new Portfolio Manager a new investment strategy and guidelines (see pages 70 and 71 of the Annual Report), which includes a move over time to having a higher percentage of the portfolio in listed securities and reducing debt.

 

The board believes that the portfolio will provide shareholders with satisfactory returns from the investment portfolio over a five-year period and that there will be continued demand for the Company's shares.

 

Although there may well be short term strains arising from the current economic crisis driven by the COVID-19 pandemic, and some companies in the portfolio may be severely affected, the portfolio's exposure to healthcare companies which may benefit from the pandemic will help to provide a balance. Based on current understanding, as with other pandemics, the impact will diminish over time and the opportunities arising from investing in new innovative businesses will remain. It should therefore be possible for the new Portfolio Manager to have moved materially to implement the new strategy within a five-year timeframe. Having considered all of the Company's resources, strategy, risks and probabilities, the board has a reasonable expectation that the Company will continue to operate and meet its liabilities as they fall due, during the five year period to 31 December 2024.

 

 

By order of the board

 

 

 

 

Link Company Matters Limited

Company Secretary

 

30 April 2020

 

 

Board of Directors

 

Susan Searle - Independent non-executive Chairman

Raymond Abbott - Independent non-executive director

Stephen Cohen - Independent non-executive director

Jane Tufnell - Senior independent non-executive director

Scott Brown - Independent non-executive director

 

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable laws and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law, the directors have elected to prepare the financial statements in accordance with UK Accounting Standards and applicable law, including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland". Under company law, the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company as at the end of each financial year and of the profit or loss of the Company for that period.

 

In preparing these financial statements, the directors are required to:

 

-  present fairly the financial position, financial performance and cash flows of the Company;

-  select suitable accounting policies in accordance with United Kingdom Generally Accepted Accounting Practice (UK GAAP) and then apply them consistently;

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

-  make judgements and estimates that are reasonable and prudent;

-  state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

-  prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business.

 

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

The directors are also responsible for preparing the strategic report, the directors' report, the directors' remuneration report and the report of the Audit, Risk and Valuation Committee in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure Guidance and Transparency Rules.

 

The directors have delegated responsibility to the Portfolio Manager for the maintenance of the Company's corporate and financial information included on its web pages. Legislation in the UK governing the preparation and dissemination of financial statements may differ from

legislation in other jurisdictions.

 

Each of the directors, whose names are listed above, confirms that, to the best of their knowledge:

 

-  the financial statements, prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit/loss of the Company; and

-  the strategic report contained in the Annual Report and financial statements 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 AIC Code of Corporate Governance requires directors to ensure that the Annual Report and financial statements are fair, balanced and understandable. In order to reach a conclusion on this matter, the board has requested that the Audit, Risk and Valuation Committee advises on whether it considers that the Annual Report and financial statements fulfil these requirements. The process by which the Audit, Risk and Valuation Committee has reached these conclusions is set out in its report on pages 35 to 37 of the Annual Report. As a result, the board has concluded that the Annual Report and financial statements for the year ended 31 December 2019, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

 

Signed on behalf of the board of directors by:

 

 

 

 

Susan Searle

Chairman

 

30 April 2020

 

 

INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2019

 

Note

Revenue 

£'000 

2019 

Capital 

£'000 

Total 

£'000 

Revenue 

£'000 

2018

Capital 

£'000 

Total 

£'000 

(Losses)/gains on investments held at fair value through profit or loss

 

(421,175) 

(421,175) 

77,089 

77,089 

Losses on foreign forward currency contracts

 

(9,373) 

(9,373) 

(21,337) 

(21,337) 

Losses on foreign exchange

 

(1) 

(1) 

Income from investments

2

281 

281 

Gross (loss)/return

 

(430,549) 

(430,549) 

281 

55,752 

56,033 

Portfolio management fee

3

Administrative expenses

4

(3,115) 

(3,115) 

(1,276) 

(1,276) 

Net (loss)/return before finance costs

and taxation

 

(3,115) 

(430,549) 

(433,664) 

(995) 

55,752 

54,757 

Finance costs

5

(2,841) 

(2,841) 

(2,852) 

(2,852) 

Net (loss)/return before taxation

 

(5,956) 

(430,549) 

(436,505) 

(3,847) 

55,752 

51,905 

Taxation

6

Net (loss)/return after taxation

 

(5,956) 

(430,549) 

(436,505) 

(3,847) 

55,752 

51,905 

(Loss)/return per share

8

(0.67)p

(48.08)p

(48.75)p

(0.47)p

6.74p

6.27p

 

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no other items of other comprehensive income, and therefore the net (loss)/return  after taxation is also the total comprehensive income for the year.

 

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.

The notes form an integral part of these accounts.

 

STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2019

 

Note

Called-up

Share

Capital

£'000

Share 

Premium 

£'000 

Capital 

Reserves 

£'000 

Revenue 

Reserve 

£'000 

Total 

At 31 December 2017

 

8,270

813,099 

(62,137)

(3,937)

755,295 

Net return/(loss)

 

-

55,752 

(3,847)

51,905 

At 31 December 2018

 

8,270

813,099 

(6,385)

(7,784)

807,200 

Net loss

 

-

(430,549)

(5,956)

(436,595)

Issue of shares

 

816

78,105 

78,921 

Share issue costs

 

-

(187)

(187)

At 31 December 2019

13/14

9,086

891,017 

(436,934)

(13,740)

449,429 

 

The notes form an integral part of these accounts.

 

 

 

 

 

 

Note

2019 

£'000 

2018 

£'000 

Fixed assets

 

 

 

Investments held at fair value through profit or loss

9

561,115 

963,613 

Current assets

10

 

 

Debtors

 

30 

11 

Cash at hand and in bank

 

2,234 

 

1,065 

 

 

2,264 

1,076 

Current liabilities

11

 

 

Creditors: amounts falling due within one year

 

(1,050) 

(150,449) 

 

(7,040) 

 

 

(1,050) 

(157,489) 

Net current assets/(liabilities)

 

1,214 

(156,413) 

Total assets less current liabilities

 

562,329 

807,200 

Creditors: amounts falling due after more than one year

12

(112,900) 

Net assets

 

449,429 

807,200 

Capital and reserves

 

 

 

Called-up share capital

13

9,086 

8,270 

Share premium

14

891,017 

813,099 

Capital reserves

14

(436,934) 

(6,385) 

Revenue reserve

14

(13,740) 

(7,784) 

Total equity shareholders' funds

 

449,429 

807,200 

Net asset value per share

15

49.46p

97.61p

STATEMENT OF FINANCIAL POSITION

AT 31 DECEMBER 2019

 

 

These accounts were approved and authorised for issue by the board of directors on 30 April 2020 and signed on its behalf by:

 

 

 

Susan Searle

Chairman

 

The notes below form an integral part of these accounts.

Registered in England and Wales as a public company limited by shares

Company registration number: 09405653

 

 

 

 

 

CASH FLOW STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2019

 

 

2019 

£'000 

2018 

£'000 

Cash flows from operation activities

 

 

Return before finance costs and taxation

(433,664)

54,757 

 

 

 

Adjustments for:

 

 

Losses/(gains) on investments held at fair value through profit or loss

421,175 

(77,089)

Net movement in foreign forward currency contracts

9,373 

21,337 

Net movement in foreign exchange

Increase in debtors

(19)

(7)

Increase /(decrease) in creditors

578 

45 

Net cash flows from operating activities

(2,556)

(957)

Cash flows from investment activities

 

 

Purchases of investments

(137,143)

(117,186)

Proceeds from sales of investments

191,387 

135,802 

Net movement in foreign forward currency contracts

(15,349)

(15,362)

Net cash flow from investment activities

38,895 

3,254 

Cash flows from financing activities

 

 

Issue of shares

6,000 

Share issue costs

(187)

Finance costs

(2,852)

(2,852)

Net cash flow from financing activities

2,961 

(2,852)

Net increase/(decrease) in cash and cash equivalents

39,300 

(555)

Cash and cash equivalents at the beginning of the year

(149,966)

(149,411)

Reclassification of overdraft liabilities in the year1

112,900 

Cash and cash equivalents at the end of the year

2,234 

(149,966)

1 Following the amendments to the term facility agreement with the Northern Trust Company the overdraft has been reclassified as a loan.

 

NOTES TO THE ACCOUNTS

 

1. Accounting policies  

Basis of accounting

Schroder UK Public Private Trust plc (the Company) is registered in England and Wales as a public company limited by shares. The Company's registered office is Beaufort House, 51 New North Road, Exeter EX4 4EP, United Kingdom.

 

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice (UK GAAP), in particular in accordance with Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (the SORP) issued by the Association of Investment Companies in October 2019. All of the Company's operations are of a continuing nature.

 

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments and derivative financial instruments held at fair value through profit or loss. The directors believe that the Company has adequate resources to continue operating for at least 12 months from the date of approval of these accounts.

 

In forming this opinion, the directors have taken into consideration: the controls and monitoring processes in place; the Company's level of debt and other payables; the low level of operating expenses, comprising largely variable costs which would reduce pro rata in the event of a market downturn; the Company's cash flow forecasts and the liquidity of the Company's investments.

 

The financial statements have been prepared on a going concern basis (see above) and on assumption that approval as an investment trust will continue to be granted.

 

The Company has adopted the provisions of Section 11 and 12 of FRS 102 for measuring and disclosing its financial instruments.

 

The accounts are presented in sterling and amounts have been rounded to the nearest thousand.

 

The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 31 December 2018.

 

 

2. Income

 

2019

£'000

2018

£'000

Overseas dividends

-

195

UK dividends

-

86

Total

-

281

 

3. Portfolio management fee

The Company appointed Schroder Investment Management Limited (Schroder) as Portfolio Manager, effective from 13 December 2019. Under the terms of the new management agreement, Schroder is entitled to a management fee and a performance fee, subject to achieving performance targets. Details of these calculations are set out in the Directors' Report on page 30 of the Annual Report. No fees are payable to Schroder in respect of the current year under the terms of the new agreement.

 

Under the terms of the previous management agreement, Woodford Investment Management Ltd was entitled to a fee, conditional upon meeting certain performance targets (a "performance fee"). No performance fee was earned to the contract termination date. No other management fee was payable under the terms of that agreement.

 

Details of all transactions with the current and previous Portfolio Managers are given in note 17 on page 62 of the Annual Report.

 

 

 

4. Administrative expenses

 

2019

£'000

2018

£'000

 

 

 

Other administration expenses

1,896

643

Valuation fees

282

292

Directors' fees1

210

181

Company secretarial fee

122

74

Auditor's remuneration for the audit of the Company's annual accounts2

346

72

Auditor's remuneration for audit related services interim review2

286

14

Total

3,115

1,276

1 Full details are given in the remuneration report on page 40 of the Annual Report.

2 Annual audit fees includes VAT amounting to £46,000 (2018: £2,000). Interim review fees include VAT amounting to £38,000 (2018: £2,000).

 

5. Finance costs

 

2019

£'000

2018

£'000

 

 

 

Bank loan/overdraft fees and interest

2,841

2,852

 

6. Taxation

 

(a) Analysis of tax charge for the year: 

 

2019

2018

 

Revenue

£'000

 

Capital

£'000

 

Total

£'000

Revenue

£'000

Capital

£'000

Total

£'000

 

 

 

 

 

 

 

Taxation

 

-


-

 

-

 

-

-

-

 

The Company has no corporation tax liability for the year ended 31 December 2019 (2018: nil).

 

(b) Factors affecting the tax charge for the year:

 

The factors affecting the current tax charge for the year are as follows:

 

 

2019

2018

 

 

Revenue 

£'000 

Capital 

£'000 

Total 

£'000 

Revenue 

£'000 

Capital 

£'000 

Total 

£'000 

 

Net return before taxation

(5,956)

(430,549)

(436,505)

(3,847)

55,752 

51,905 

Net return before taxation multiplied by the Company's applicable rate of corporation tax for the year of 19.0% (2018: 19.0%)

(1,132)

(81,804)

(82,936)

(731)

10,593 

9,862 

Effects of:

 

 

 

 

 

 

Capital loss/(return) on investments

81,804 

81,804 

(10,593)

(10,593)

UK dividends which are not taxable

(16)

(16)

Loan relationship deficit not untilised

540 

540 

554 

554 

Movement in unutilised management expenses

560 

560 

230 

230 

Overseas dividends

-  

(37)

(37)

Expenses not deductible for UK corporation tax purposes

32 

32 

Taxation

 

 

(c)  Deferred taxation

The Company is not liable to corporation tax on its chargeable gains due to its status as an investment trust. Due to the Company's status as an investment trust, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided for deferred tax on any chargeable gains and losses arising on the revaluation or disposal of investments.

 

The Company has an unrecognised deferred tax asset of £2,801,000 (2018: £1,816,000 - this amount has been adjusted to reflect the losses carried forward per the final submitted tax return) based on a prospective corporation tax rate of 17%. It is unlikely that the Company will generate sufficient taxable profits in the future to utilise these expenses and therefore no deferred tax asset in respect of these expenses has been recognised.

 

 

7. Dividend

No dividends have been paid or proposed for the year ended 31 December 2019 (2018: nil).

 

 

8. (Loss)/return per share

 

2019 

£'000 

2018 

£'000 

Revenue loss

(5,956) 

(3,847) 

Capital loss/(return)

(430,549) 

55,752 

Total (loss)/return

(436,505) 

51,905 

Weighted average number of shares in issue during the year

895,442,758 

827,000,000 

Revenue loss per share

(0.67)p

(0.47)p

Capital (loss)/return per share

(48.08)p

6.74p

Total (loss)/return per share

(48.75)p

6.27p

 

 

9. Creditors: amounts falling due after more than one year

 31 December

2019

£'000

2018

£'000

 

 

 

Bank loan

112,900

-

 

On 13 December 2019, the Company amended its term facility agreement with the Northern Trust Company. At the year end the Company had drawn down £112,900,000 on the facility, which expires on 15 January 2021. The loan is secured on all the Company's assets. The agreement requires that, subject to an allowance for operating expenses, the proceeds of Private Asset sales must be used to make loan repayments, which cannot be redrawn. Furthermore, the Company may not make further Private Asset investments until certain repayments have been made. The loan agreement also requires the Company to seek to maintain a balance between the listed and unlisted investments in the portfolio. Interest payable will be calculated at LIBOR, for one month or other agreed loan period, plus a margin of 1.5%.

 

Following the amendments to the term facility agreement with the Northern Trust Company the overdraft has been reclassified as a loan.

 

The directors consider that the carrying amount of creditors falling due after more than one year approximates to their fair value.

 

 

10. Called-up share capital

Ordinary shares allotted, called up and fully paid:

2019

£'000

2018

£'000

 

 

 

Ordinary shares of 1p each:

 

 

Opening balance of 827,000,000 (2018: 827,000,000) shares

8,270

8,270

Issue of 81,639,238 (2018: nil) shares

816

-

Closing balance of 908,639,238 (2018:827,000,000) shares

9,086

8,270

 

During the year, 81,639,238 new shares, nominal value £816,392, were issued to the LF Woodford Equity Income Fund at a price of 96.67p per share, being a premium to NAV per share and thus accretive to existing shareholders. The consideration amounted to £78.9 million, and comprised £72.9 million in unquoted assets and £6.0 million in cash.

 

 

11. Net asset value per share

 

2019 

2018 

 

 

 

Net assets attributable to shareholders (£'000)

449,429 

807,200 

Shares in issue at the year end

908,639,238 

827,000,000 

Net asset value per share

49.46p

97.61p

 

 

12. Disclosures regarding financial instruments measured at fair value

The Company's financial instruments within the scope of FRS 102 that are held at fair value comprise its investment portfolio and derivative financial instruments.

 

FRS 102 requires that financial instruments held at fair value are categorised into a hierarchy consisting of the three levels below. A fair value measurement is categorised in its entirety on the basis of the lowest level input that is significant to the fair value measurement.

 

Level 1 - valued using unadjusted quoted prices in active markets for identical assets.

 

Level 2 - valued using observable inputs other than quoted prices included within Level 1.

 

Level 3 - valued using inputs that are unobservable.

 

Details of the Company's policy for valuing investments and any derivative instruments are given in note 1(b) on pages 54 and 55 and 1(g) on page 56 of the Annual Report. Level 3 investments have been valued in accordance with note 1(b)(i) - (v).

 

At 31 December, the Company's investment portfolio and any derivative financial instruments were categorised as follows:

 

 

 

2019

 

 

Level 1

£'000

Level 2 

£'000 

Level 3

£'000

Total 

£'000 

Investments in equities

- quoted

53,476

80,811

134,287 

- unquoted

-

426,828

426,828 

Total

53,476

507,639

561,115 

 

 

2018

 

 

Level 1

£'000

Level 2 

£'000 

Level 3

£'000

Total 

£'000 

Investments in equities

- quoted

224,847

110,903

355,750 

- unquoted

-

627,863

627,863 

Derivative financial instruments - forward currency contracts

-

(5,975)

-

(5,975)

Total

224,847

(5,975)

738,766

957,638 

 

Movements in fair value measurements included in Level 3 during the year are as follows:

 

 

2019 

£'000 

2018 

£'000 

Opening book cost

580,006 

568,151 

Opening investment holding gains

158,760 

51,115 

Opening valuation

738,766 

619,266 

Purchase at cost

126,733 

109,913 

Investments received as consideration for share issue

72,921 

Sale proceeds

(81,390)

(79,844)

Transfer between unquoted/quoted

(61,016)

Net movement in investment holding gains and losses

(349,391)

150,447 

Closing valuation

507,639 

738,766 

Closing book cost

702,358 

580,006 

Closing investment holding gains

(194,719)

158,760 

Total level 3 investments held at fair value through profit or loss

507,639 

738,766 

 

The company received £81,390,000 (2018: £79,844,000) from Level 3 investments sold in the year. The book cost of the investments when they were purchased was £77,302,000 (2018: £37,042,000). These investments have been revalued over-time until they were sold any unrealised gains/losses were included in the fair value of the investments.

 

 

13. Events the accounting date that have not been reflects in the financial statements

The Directors have also sought to assess the impact of COVID-19 on the NAV and have used two separate methodologies. On the one hand a bottom up analysis of individual companies based on work already done for the March 31st NAV by LFS as AIFM and responsible for valuation, suggests an aggregate impact of -3.3%. On the other hand, using a portfolio-weighted basket of relevant stock market sector indices and looking at their percentage change from December 31st through April 17th, the suggested portfolio NAV impact is -7.4%. This latter approach assumes that the main factor in changing stock market valuations over the period was the emergence of the COVID-19 pandemic.

 

Clearly, at the time of writing realistic forecasting even of the short term impact of this global pandemic let alone the longer term impact is very difficult and such forecasting may well be subject to the train of rapidly unfolding events. Thus, with all due caveats, the Directors believe that, as currently assessed, the impact from COVID-19 on the portfolio NAV up until April 17th has been in the range of -3% to -8%. The Company will be releasing the March 31st, 2020 NAV during the second calendar quarter of 2020 which should provide a more up to date indication of the COVID-19 impact on the portfolio.

 

Subsequent to the year end, the Company has made repayments totalling £5.9 million of its bank loan, which now amounts to £107.0 million, at April 17th 2020.

 

 

14. Status of announcement

2018 Financial Information

The figures and financial information for 2018 are extracted from the published Annual Report and accounts for the year ended 31 December 2018 and do not constitute the statutory accounts for that year. The 2018 Annual Report and accounts have been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

 

2019 Financial Information

The figures and financial information for 2019 are extracted from the Annual Report and accounts for the year ended 31 December 2019 and do not constitute the statutory accounts for the year. The 2019 Annual Report and accounts include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The 2019 Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

 

 

LEI: 2138008X94M7OVE73I77

 

 

Neither the contents of the Company's webpages nor the contents of any website accessible from hyperlinks on the Company's webpages (or any other website) is incorporated into, or forms part of, this announcement.

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [email protected] or visit www.rns.com.
 
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