Fund manager commentary
The net asset value (‘NAV’) of the Company was £195.8m at 31 March 2014. The fully diluted NAV per Ordinary Share was 267.18p, a decrease over the three months of 0.7%. As intimated with the full year results the company will pay a final dividend in respect of the year ended 31 December 2013 of 5.36p per share on 30 May 2014 to shareholders on the register on 2 May 2014.
The Company had net cash at 31 March of £9.5m. Taking into account the accrued liability for the Zero Dividend Preference Shares of £42.8m, the Company’s total debt was £33.3m giving gearing of approximately 14%. At the end of the period the Company had outstanding undrawn commitments to private equity funds of £59.7m. Of this amount £18m is to funds whose investment period has expired and therefore only a small amount of this is likely to be drawn for follow-on investments. The private equity investment environment within the European mid-market has been characterised by increased confidence with healthy levels of deal activity and prices rising, but not to levels that preclude establishing excellent deals. There are many good quality fund proposals in the market and a strong flow of quality co-investments and secondary opportunities as well.
Only one new commitment to a private equity fund was made during the quarter. £3m was committed to the well-established lower mid-market specialists Primary for their Fund IV. This fund which has closed at £235m is focused on UK companies with enterprise value of between £20m and £100m. After the quarter end we have added two investments to our co-investment portfolio. £3.25m has been invested for 3.3% of Park Holidays UK, the country’s fourth largest caravan holiday park operator, owning and operating 21 freehold and 2 leasehold caravan holiday parks, concentrated in the South of England. Caravan park holidays have been an enduring and robust form of leisure activity for a large proportion of the population and with the economic recovery well established there is scope for the market to accelerate from here. This company has a very experienced management team who have the skills to maximise returns from the existing parks as well as to make selective acquisitions. This investment is led by Caledonia Investments plc, who have a significant commitment and resource dedicated to private equity.
Very recently we have invested £2m for 7.5% of Ticketscript, the market leader in the Netherlands of cloud-based, self-serve event ticketing, promotion and management software, growing rapidly in other core European markets. Its market are the small to medium events and venues (selling less than 50,000 tickets a year) which are poorly served by the large ticket agencies and largely rely on ‘old economy’ sales solutions at present. Apart from a significant cost advantage and digital marketing, Ticketscript provides excellent customer analytics. This deal is led by Fleming Family & Partners Private Equity (FFPPE).
During the quarter total drawdowns from funds have been £5.2m. The largest new investment was made by Capvis III who have called £1.1m for Italian based swimwear manufacturer Arena. Capvis are finishing their Fund III and starting Fund IV and their latest deal, VAT Holdings AG, is in both funds. Our investment between the two fundsfor VAT Holdings AG is £1.1m. It is a Swiss based manufacturer of high end vacuum valves used in the semi-conductor, flat panel display and photovoltaic industries. In Spain N+1 Fund II has invested £0.7m for us in Salto, a designer and manufacturer of electronic locks.
Distributions in Q1 totalled £10.2m. In addition the Company received £1.6m of income. The exits were widespread by sector and geography.
In the UK Inflexion exited Parasol (Optionis), a longstanding holding of its 2003 Fund and its associated Hickory Fund. This employment services company, was sold achieving an investment multiple of 3.5x and an IRR of 22% and returning £1.0m. SEP III exited Control Circle, a provider of cloud based services to medium sized companies, returning £0.7m and achieving 2.5x and an IRR of 27%. Hutton Collins returned £1.3m through the refinancing of Caffe Nero, which represented 1.6x and an IRR of 17%.
In Continental Europe Chequers Capital XV recapitalised Accelya, an IT services provider to the air transport industry, returning £1.3m. Since acquisition the company has generated returns of 5.2x cost and 30% IRR. Gilde sold frozen food company Hofmann Menü returning £1.1m (2.9x, IRR 20%), and Hutton Collins through Funds II and III exited Spanish consultancy Everis, which was sold to Japanese corporate NTT, returning £1.9m (1.8x, IRR 10%). Also in Spain Portobello Capital II exited hygiene pads company Indas to Domtar Corporation returning £0.7m (2.6x, IRR 15.5%).
Lastly FSN further reduced the position in Danish house-builder Huscompagniet by selling down the remaining preference shares returning £0.6m. In the US Camden Partners IV sold Prolexic, a cyber-security company, to Akamai Technologies returning £0.6m (3.2x, IRR 94%).
There were few significant changes in valuation during the quarter. The Inflexion Co-investment Fund 2012 was up by £0.4m due to positive trading in a number of its holdings. Argan Capital was up by £0.3m mainly due to strong trading of its main holding, industrial connectors business Faster. The Aurora Fund was up by £0.2m reflecting a number of positive developments. On the downside Progressus (Safran) was reduced by £0.3m as management have adopted a provision for carried interest.
On 15 December this year our issue of zero dividend preference shares is due for redemption. This will require £46m. The Company has considered a range of options including, accumulation of a cash balance, a further issue of zero dividend preference shares, an issue of convertible loan stock or preference shares and an expansion and extension of our banking facility. We have concluded that the most cost effective and flexible means of redeeming the zero dividend preference shares is by putting in place medium term borrowing through increasing the size of our banking facility and extending it over a longer period. We are at the advanced stage of discussions with our bankers.
The economic recovery, which is gathering momentum across Europe, is providing a supportive background for private equity deal making in the mid-market. Confidence levels of private equity investors, vendors of private companies, management teams and corporate players has all improved. This is even the case in markets where there have been deep adjustments, such as in Spain, where investors are now returning. Fund raising continues for many mid-market funds with the aggregate total of funds raised growing once again. Within this total there are widely different experiences with ‘established names’ succeeding fairly quickly, but for most fund raising is an arduous and intensely competitive process. That this private equity is in general very hard won, means that it is deployed very judiciously and carefully. There is no sign that the required return of private equity investors is falling. On the contrary after more extended holding periods and the challenges brought about by recession, there is a strong incentive for managers to buy quality companies as well as possible and a disincentive to be lured into over paying for sought after assets. At present the European mid-market, as seen through the activities of our investment partners, appears to offer some excellent opportunities at reasonable prices. Our older maturing portfolio continues to throw off cash as companies which have come through recession increasingly find buyers. Our well diversified portfolio is well placed to benefit from these positive trends.
As at 31 March 2014 unless otherwise stated.
Past performance is not a guide to future performance. Stock market movements may cause the value of investments and the income from them to fall as well as rise and investors may not get back the amount originally invested. Changes in rates of exchange may have an adverse effect on the value, price or income of investments. Smaller companies carry a higher degree of risk and their value can be more sensitive to market movement; their shares may be less liquid and performance may be more volatile. The fund may invest in hedge funds or private equity funds which are not normally available to individual investors, exposing the fund to the performance, liquidity and valuation issues of these funds. Such funds typically have high minimum investment levels and may restrict or suspend redemptions or repayment to investors. The asset value of these shares and its prospects may be more difficult to assess. If markets fall, gearing can magnify the negative impact on performance.