Fund manager commentary
The Company’s portfolio made good progress during the year giving an annual NAV total return of 6.8%. At 31 December 2012 the net assets of the ordinary share pool were £186.3m giving an NAV per share of 254.38p on a fully diluted basis. Taking into account the dividend of 4.96p paid on 2 November this is a NAV total return for the quarter of 3.3%.
During the year we made five new fund investments. We committed £4.0 million to Lyceum Capital III and £6.0 million to Inflexion 2012 Co-investment Fund. We have had long standing relationships with both these UK focused funds. We also increased our exposure to Northern Europe through €4 million commitment to Nordic specialists Procuritas for fund V, the second of their funds we have backed. In Germany we again committed to DBAG for their fund VI with €5 million. We made one commitment outside Europe during 2012. $5 million was committed to HealthpointCapital Partners III, a New York based healthcare fund which specialises in the orthopaedic sector. This fund is what we could term an ‘advanced primary’ with an initial portfolio which is already showing strong signs of success.
Since the year end we have also committed £3.5 million to GCP Capital Partners Europe II LP through a secondary transaction. We also made our first investment in Finland by committing €3 million to Vaaka Buy-Out Fund II. Further south, another first was accomplished through the commitment of €3 million to Polish mid-market fund, Avallon MBO Fund II.
The Company’s co-investment component is currently 11.4% of the portfolio. It has reduced principally as a result of successful exits during the last few years. We are actively seeking to increase this and some initial progress has been made. In November we invested £2.3 million in funeral plans business Avalon for a 9.5% stake in the company which sells funeral plans in the UK and increasingly in other markets such as Spain. This deal was led by the emerging private equity group Lonsdale. Since the year end we have invested £2.0 million for a 15% stake in UK furniture company David Phillips. A number of other co-investment opportunities are under consideration. Including co-investments, total drawdowns for 2012 were £31.7 million. 2012 saw drawdowns from a wide range of funds across Europe and further afield.
Realisations were strong during 2012 with the total, including rolled up income, amounting to £60.6 million, a significant increase on the 2011 total of £38.3 million. During the year two of the co-investment holdings were realised and another was partially realised. The August Equity led investment in the UK’s largest provider of supported living for disabled adults, Lifeways, was sold to the Canadian pension fund OMERS for an investment multiple of 3.0x, an IRR of 25% and total proceeds of £13.5 million. Bartec, the German based explosion protection systems manufacturer, was sold by Capvis III to the larger private equity house Charterhouse. The investment multiple was 3.1x, the IRR 33% and total proceeds to the Company of £7.0 million. 3si, the anti-theft security systems company, was recapitalised which led to a distribution to the Company of £2.6 million. In addition to co-investments, there were many realisations from within the fund holdings. Some of the notable ones being: In the UK, August Equity Partners II exited home care specialist Enara for an investment multiple of 2.5x, IRR of 24% and proceeds of £3.7 million. Arle sold Capital Safety Group to KKR achieving a multiple of 2.7x with an IRR of 26% and proceeds to the Company of £1.2 million. Contrary to received wisdom there was successful private equity activity in Southern Europe. In Spain, Nmas 1 Private Equity Fund sold ZIV, a control and metering products provider for power utilities yielding £0.8 million which was 3.5x cost. Portobello Capital II sold civil explosives company Maxam to Advent yielding £1.6 million, 3.4x cost and an IRR of 28%. In Northern Europe, a notable success was the sale by Procuritas IV of tyre services company Dackia to Pirelli for a spectacular 9x cost and an IRR of 110%. The Company’s share of this exit was £2.1 million.
Over the course of the year the Company’s Ordinary Pool has moved from a position of net debt of £6.5 million to net cash of £12.4 million. When added to the accrued liability for the Zero Dividend Preference Shares of £38.2 million, total net debt was £25.8 million resulting in gearing of 12.2%. The new dividend policy was effective from November and this entailed a first semi-annual dividend of £3.6 million. The strong surplus of realisations over drawdowns and new investments has strengthened the balance sheet considerably. The Company’s £50 million revolving credit facility, which was arranged in February 2012 and runs for four years until 2016, is currently completely undrawn.
Overall there has been considerable positive activity in the portfolio over the quarter and the modest increase reflects a larger number of moderate gains from companies which are progressing well, being offset by some late cycle and unexpected problems elsewhere. The number of new investment opportunities has picked up in recent months. The hostile fund raising environment makes it a longer, less regular and more uncertain process, but it also improves the opportunity for us to coinvest alongside credible private equity managers. At present we have several coinvestment opportunities under consideration and we expect to implement some of them over the next few months. As has been the case for some time, deals are taking a long time to come to fruition and this applies to our exits as well. At present we have no large exits imminent although there are some which might take place later in the year. We expect a large number of smaller exits however and these will allow the build up of cash. There are multiple opportunities to back mid-market buyout funds in Europe and we will be taking these highly selectively..
As at 31 December 2012 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.
