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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Cip Merchant Capital Limited | LSE:CIP | London | Ordinary Share | GG00BF8NW879 | ORD NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 50.00 | 35.00 | 65.00 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From May 2019 to May 2024
TIDMCIP
RNS Number : 5671U
CIP Merchant Capital Ltd
01 April 2019
1 April 2019
CIP MERCHANT CAPITAL LIMITED
("CIP Merchant Capital" or the "Company")
Final Results for the period ended 31 December 2018
Availability of Annual Report and Notice of AGM
CIP Merchant Capital is pleased to announce its final audited results for the period from incorporation (13 September 2017) to 31 December 2018 (the "Period").
Highlights:
-- Equity investments completed in first four portfolio companies
-- Initial equity investment of GBP5.4m completed in Coro Energy plc (formerly Saffron Energy plc) on 9 April 2018, providing CIP with an equity interest of 21 per cent. (as at 29 March 2019)
-- Initial equity investment of $5m completed in Orthofix Medical Inc on 16 July 2018, with further investments of $0.5m on 9 August 2018 and $0.15m on 5 March 2018 (post period end), providing CIP with an equity interest of 0.57 per cent. (as at 29 March 2019)
-- Initial equity investment of EUR3.3 completed in Alkemy SpA on 26 July 2018, with a further investment of EUR1.1m on 31 August 2018, providing CIP with an equity interest of 6.0 per cent. (as at 29 March 2019)
-- Initial equity investment of EUR2.6 and provision of shareholder loan of EUR2.5m to 7Star SrL, providing CIP with a resulting equity interest of 49 per cent. (as at 29 March 2019)
-- Cautious approach taken to deployment of capital in light of prevailing market conditions, but remain well placed to take advantage of potential investment opportunities
The Company's Annual General Meeting ("AGM") will held be at will be held at 1 Le Truchot, 3rd Floor, St. Peter Port, Guernsey on 2 May 2019 at 11.00 a.m. BST.
Copies of the Company's full Annual Report and Financial Statements for the period ended 31 December 2018, together with formal notice of the AGM, will shortly be made available to download from the Company's website at www.cipmerchantcapital.com and posted to shareholders.
For further information, please contact:
Merchant Capital Manager Limited (Investment Manager) Marco Fumagalli +41 91 225 25 Carlo Sgarbi 60 Strand Hanson Limited (Financial & Nominated Adviser and Broker) Richard Tulloch / James Bellman +44 20 7409 3494
The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014.
Chairman's Statement
For the period from 13 September 2017 to 31 December 2018
Introduction
Following CIP Merchant Capital Limited's ("CIP" or the "Company") successful admission to trading on AIM in December 2017 ("Admission"), raising gross proceeds of GBP55 million, I am pleased to present the Company's Annual Report and Audited Consolidated Financial Statements for the period from the Company's incorporation on 13 September 2017 to 31 December 2018. (the "Audited Financial Statements").
Since Admission, the Investment Manager and its advisors have been busy sourcing opportunities and as at 31 December 2018 four investments have been made, representing approximately 34% of the Company's net assets.
Whilst taking longer than envisaged to invest its funds, the Company remains focused on investing the remainder of its cash and short term holdings in accordance with its investment policy and will keep shareholders updated in this regard. I would also note, however, that the general market sentiment has not improved significantly since the Company's 2018 interim accounts were announced on 28 September 2018. The Brexit negotiations have not progressed significantly throughout the year 2018 and uncertainty regarding the final outcome of the relationship between the United Kingdom and the European Union persists, with the material risk of a hard Brexit.
In accordance with its cash management policy, as at 31 December 2018, the Company had invested approximately GBP25.9 million in short dated treasury and corporate bonds. Further details on the current portfolio are set out in the Investment Managers Report.
As the Board has resolved not to hedge its investments in foreign currencies (comprising approximately 26.9% of investments made to date), shareholders should consider carefully the impact of a significant adjustment to Sterling, such as unforeseen outcomes of the negotiations between the United Kingdom and the European Union.
Performance
The Company's NAV as at the end of 31 December 2018 was 87.20p per share. During the period, the share price gradually decreased from the initial launch price of 100p per share to 72.00p per share (as at the close of business 28 December 2018). As at 22 March 2019, the Company's share price was 68.50p per share, representing a discount of 20.96% to the NAV of 86.67p per share.
During the period, the Company's NAV declined by 12.8% since its inception (gross of issue costs), while net of IPO costs the performance is negative by 8.6%. Post period end, the NAV of the Company has not changed considerably, ending at 86.67p per ordinary share as at 22 March 2019 (last NAV published to date).
Dividends
There were no dividends declared in the period. As stated in the Company's AIM Admission Document, it is the Company's intention to reinvest the net proceeds of any realisations in the portfolio.
Corporate Governance
The Company complies with the Association of Investment Companies ("AIC") Code of Corporate Governance to the extent required and undertakes to ensure that the Directors are kept up to date with matters concerning listed investment companies like ours. The Board take their fiduciary and corporate governance responsibilities seriously and I encourage shareholders to contact us at info@cipmerchantcapital.com should they have any questions or would like to discuss anything with us.
Adrian Collins
Non-executive Chairman
Investment Manager's Report
For the period from 13 September 2017 to 31 December 2018
Investment Strategy
The Company aims to generate risk-adjusted returns through capital appreciation, investing primarily in stocks and equity securities and taking a private equity approach to achieve a target IRR of 20% over the medium to long term. Key investment targets will predominantly be listed on a Western European stock exchange and will typically have a market capitalisation below GBP500 million, which the Board believes often puts such companies below the radar of the larger institutional investors in the market. A flexible mandate also allows part of CIP's capital to be deployed in debt, as well as funds or private equity.
The Investment Manager is continuously reviewing and considering various investment opportunities that may meet the Company's investment objectives and investing policy. The opportunities are actively sourced by the Investment Manager through its network of contacts and through a proactive identification of target investments through its proprietary database.
Market Conditions
2018 was undoubtedly one of the toughest years since the 2008 financial crisis, starting with an increase in the market volatility seen in the first half of the year followed by substantial falls across global equities as a result of macroeconomic conditions and global events, especially in December 2018. Historically, volatility is amplified at the smaller end of the market, and the second half of 2018 was no exception: the FTSE AIM 100 index lost 22.8%, exceeding the loss of the FTSE 100 index of 11.9%; similarly, in Germany, the SDAX fell 20.4% versus DAX falling by 14.2%; and in the US the Russel 2000 fell by 17.9% versus a 3.9% fall of the DJIA. Interestingly, the FTSE AIM Italia index lost 12% while the index for the Italian main market (FTSE MIB) lost 16.1%, which we believe is mostly due to concerns about the souring of the relationships between the country and the European Union. This led to a disconnection between the value of businesses and their underlying stock prices, which is typically a situation suited to the Company's strategy to identify undervalued investment opportunities.
The general trends in private markets were maintained during 2018 according to data from PitchBook which reports the following in relation to the Private Equity industry: in the US, a further 2,581 deals were completed from the registered 2,247 at the end of first half of 2018, representing a volume increase of 6% for the year versus 2017, with a total deal value of US$713 billion, up 17% versus 2017. By contrast, in the Europe 3,208 deals were completed in 2018 with a total of EUR396.3 billion, representing a 13% decrease in volume and a 4% decrease in deal value vis-à-vis 2017.
The start to 2019 has continued in much the same vain. Whilst markets conditions have generally improved year to date, volatility is still very much present, with numerous drivers. Among those that may directly affect the performance of the portfolio but also provide good entry points for further investment, we see the uncertainty about the outcome of the Brexit negotiations, the deterioration of the macroeconomic indicators across the globe and the exacerbation of international tensions between the US and China.
Performance Review
Our focus has remained both on seeking to identify opportunities to invest in and supporting existing investments.
As at 31 December 2018, the Company had completed four investments, which are all still in an early stage and hence it is too early to see the expected progress in the value creation leading to a recovery of the Net Asset Value. Post the end of the period, we have sought to take advantage of the weakness in Orthofix Medical Inc.'s recent share price performance and have, as a result, increased our position to 0.55% of the company's currently issued share capital. However, the current market conditions are not currently pricing in all the external risks, which pushes us to be careful in moving forward with the investment activity.
Portfolio Review
Hot Features
Premium
Portfolio Period end valuation Current valuation
Company Industry Country GBP % of NAV GBP % of NAV
================== ============ ========= ============ ========= ============== =============
Business
Alkemy SpA Services Italy 3.542.924 7.4% 3.745.226 7.9%
Coro Energy
Plc Oil & Gas UK 3.428.082 7.1% 3.089.041 6.5%
Orthofix Medical
Inc Healthcare US 3.895.083 8.1% 4.453.283 9.3%
Happy Friends Healthcare Italy 5.485.324 11.4% 5.442.777 11.4%
================== ============ ========= ============ ========= ============== =============
16.351.4
Portfolio 13 34.0% 16.730.327 35.1%
=========================================== ========== ========= ============== =============
* As at 22 March 2019
Coro Energy plc
It has been a busy period for Coro Energy plc ("Coro"), as the company entered into three transactions in South East Asia. After the acquisition of a 42.5% interest in the Lengo gas field, offshore East Java, Coro announced two further material developments: the signing of a Joint Study Agreement on 10 December 2018 and, after the reporting period, the acquisition of a 15% interest in Duyung Production Sharing Contract ("PSC").
The joint study agreement has now been signed with Petroliam Nasional Berhad ("Petronas"), the Malaysian oil and gas company owned by the Government of Malaysia, for the exploration of the Block 2A. The Block 2A, which covers an area of 2,400 sq km, is located in west Malaysia, in the Central Luconia province, a highly prolific sub-basin.
The Duyung PSC contains the Mako gas field, West Natuna Basin, offshore Indonesia, and is independently certified by Gaffney, Cline & Associates to include 276 billion cubic feet of certified gross 2C recoverable dry gas over a field upside of 392 billion cubic feet (3C resources). Coro is in the process of issuing EUR22.5 million Eurobonds, which will have senior security over Coro's shares held in operating subsidiaries holding its existing assets, in which the Company may participate.
Orthofix Medical Inc.
Orthofix Medical Inc. ("Orthofix") has shown significant progress since the Company's investment in terms of its business development. In terms of its business activity, the most relevant update is the company's announcement of 7 February 2019 regarding the FDA approval of its M6-C artificial cervical disc to treat patients with cervical disc degeneration, which unlocks the opportunity to target a niche, but valuable, market in the US in the coming years. From a financial perspective, Orthofix demonstrated a healthy improvement in performance, with 2018 Net Sales up by 4.4% year-on-year and Adjusted EBITDA up by 7.4% over the same period. On 25 February 2019, Orthofix announced its 2019 Outlook with expected Net Sales in the range of $472-477 million (representing a year-over-year increase of 4.2% to 5.3% on a reported basis) and Adjusted EBITDA in the range of $86-89 million (representing a year-over-year decrease of 1.8% to a year-over-year increase of 1.6%). The management of Orthofix expect to achieve a high single digit growth in sales in 2019 and double-digit growth in sales in 2020.
We note that the CEO of Orthofix, announced his intention to step down from his role after a 6-year period in office. Appointed with an initial mandate of 3-5 years at the helm of Orthofix, he explained his rationale was to ensure that Orthofix identify a CEO capable of navigating the company through the substantial growth expected in the coming years. Despite clarifying his intention to stay with Orthofix until the right person is found and properly handover, the market has not appreciated the news and the stock price took a plunge in excess of 15% in the share price. We have taken advantage of the resulting share price weakness to increase the Company's holding in Orthofix.
Alkemy SpA
Alkemy SpA ("Alkemy") has kept progressing in its international development growth strategy. On 13 December 2018, Alkemy announced the commencement of the process for its transition from the AIM Italia market to the STAR segment of the main market of Borsa Italiana, which is expected to give more visibility to the shares and provide access to a broader investor base.
Happy Friends
7Star Srl ("Happy Friends") is a company that seeks to disrupt the Italian market of veterinary practices through providing a full-service offering spanning 24 hour emergency versus ER, surgery, neurology, ortho, health plans, veterinary pharmacy, outpatient care, grooming, and training. After running a pilot center in Grassobbio (Bergamo province) for more than a year, the strategy of the management is to progress expansion throughout northern Italy. On 6 December 2018, the Company acquired a 49% interest in Happy Friends for a total consideration of EUR6.1 million, split between a share capital increase (EUR2.6 million) and shareholder loan (EUR3.5 million).
Cash Management
In accordance with its cash management policy, the Company had invested approximately GBP25.9 million as at 31 December 2018 in short dated treasury and corporate bonds.
Outlook
We are constantly screening investment opportunities and seeking to employ the Company's funds. This means not only that additional investments are expected to be completed going forward, but also that further capital could be used to support our existing portfolio companies.
The prolonged market uncertainties, especially the Brexit negotiations, give us reason to believe that it is prudent and in CIP's shareholders' best interests to wait, where applicable, until negative news affects the share price of a potential investment instead of investing too early before potential negative macroeconomic impacts are experienced by such targets. Accordingly, given this prudent approach to investing, the Company is not yet fully invested and it is now unclear as to how long this will take.
All the investee companies of CIP are pursuing strategies in line with CIP's investment targets, which has already led to material developments at the portfolio company level. It is hoped that the market will value the progress in the companies, leading to accelerations in the share prices, which will consequently lead to an improvement in the NAV of the Company.
Carlo Sgarbi
Investment Manager
Consolidated Statement of Comprehensive Income
For the period from 13 September 2017 to 31 December 2018
Period from 13 September
2017 to 31 December
2018
Notes GBP
========================================= ====== =========================
Net losses on investments at fair value
through profit or loss 6 (3,015,869)
Foreign exchange gains 40,580
========================================= ====== =========================
NET INVESTMENT LOSSES (2,975,289)
INCOME
Bank Interest 16,438
EXPENSES
Investment management fees 3, 11 (1,049,646)
Directors' fees 11 (105,479)
Secretarial and administration fees 3 (87,736)
Advisory and consultancy fees (47,672)
Legal and professional fees (16,899)
Brokerage and custody fees (21,777)
Audit fees (25,500)
Other fees (79,521)
========================================= ====== =========================
TOTAL EXPENSES (1,434,230)
LOSS FOR THE FINANCIAL PERIOD (4,393,081)
TOTAL COMPREHENSIVE LOSS FOR THE PERIOD (4,393,081)
Diluted and basic earnings per share
(ordinary shares) 13 (0.08)
========================================= ====== =========================
There are no comparative figures for the period as the Company was incorporated on 13 September 2017 and commenced business, following the Admission of the Company's shares to trading on the AIM Market of the London Stock Exchange, on 22 December 2017. These are therefore the first audited consolidated financial statements produced by the Company
Consolidated Statement of Financial Position
For the period from 13 September 2017 to 31 December 2018
As at 31 December
2018
Notes GBP
=================================== ====== ==================
ASSETS
Investments at fair value through
profit or loss 6 42,256,877
Receivables and prepayments 7 468,001
Cash and cash equivalents 5,635,760
------------------
6,103,761
TOTAL ASSETS 48,360,638
=================================== ====== ==================
LIABILITIES
Payables and accruals 8 (307,614)
TOTAL NET ASSETS 48,053,024
=================================== ====== ==================
EQUITY
Share capital 9 52,446,105
Retained earnings 10 (4,393,081)
----------------------------------- ------ ------------------
TOTAL EQUITY 48,053,024
=================================== ====== ==================
Net Asset Value per share 12 0.87
=================================== ====== ==================
The Financial Statements were approved and authorised for issue by the Board on 29 March 2019 and sign on its behalf by:
John Falla Rob King Director Director
Consolidated Statement of Changes in Equity
For the period from 13 September 2017 to 31 December 2018
Period from 13 September 2017
to 31 December 2018
Retained
Share Capital Earnings Total equity
====================================== ====== =============== ============= =============
Notes GBP GBP GBP
Total Equity as at 13 September
2017 - -
Transactions with Shareholders:
Shareholders proceeds from
issues of shares 9 55,000,002 - 55,000,002
Cancellation of shares 9 (2) - (2)
Expenses of share issue 9 (2,553,895) - (2,553,895)
Total transactions with shareholders 52,446,105 - 52,446,105
Total comprehensive loss for
the period - (4,393,081) (4,393,081)
Total Equity as at 31 December
2018 52,446,105 (4,393,081) 48,053,024
====================================== ====== =============== ============= =============
Consolidated Statement of Cash Flows
For the period from 13 September 2017 to 31 December 2018
Period from 13 September
2017 to 31 December 2018
GBP
============================================== ==========================
CASH FLOWS FROM OPERATING ACTIVITIES
Total comprehensive loss (4,393,081)
Adjustments for:
Increase in receivables and prepayments (468,001)
Increase in payables and accruals 307,614
Net losses on investments at fair value
through profit or loss 3,015,869
Investment income 503,801
Foreign exchange gains (40,580)
Purchase of investments (82,776,547)
Sale of investments 37,000,000
============================================== ==========================
NET CASH USED IN OPERATING ACTIVITIES (46,850,925)
CASH FLOWS FROM FINANCING ACTIVITIES
Issue of ordinary shares 55,000,002
Cancellation of ordinary shares (2)
Expenses of ordinary shares issue (2,553,895)
============================================== ==========================
NET CASH GENERATED FROM FINANCING ACTIVITIES 52,446,105
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,595,180
Cash and cash equivalents at the beginning
of the period -
Gains on exchange movements 40,580
Net increase in cash and cash equivalents 5,595,180
Cash and cash equivalents at end of period 5,635,760
============================================== ==========================
Notes to the Consolidated Financial Statements
For the period from 13 September 2017 to 31 December 2018
1. PRINCIPAL ACTIVITES
The Company was incorporated with limited liability in Guernsey under the Companies (Guernsey) Law, 2008, as amended, on 13 September 2017 with registered number 64013, and is a registered closed-ended investment scheme pursuant to The Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended and the Registered Closed-ended Investment Scheme Rules (the "RCIS Rules"). The Company commenced business following the admission of the Company's shares to trading on the AIM market of the London Stock Exchange on 22 December 2017.
The registered office of the Company is at 3(rd) Floor, 1 Le Truchot, St Peter Port, Guernsey, GY1 1WD.
The investment objective of the Company is to generate risk-adjusted returns for Shareholders through investment in equity and equity-related products and instruments, by targeting appreciation in the value of its investments over the medium to longer term, principally through capital growth.
2. PRINCIPAL ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been applied consistently, unless otherwise stated.
Basis of preparation
The Company's financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union.
These financial statements are presented in Sterling, the Group's functional currency, being the currency of the primary economic environment in which the Group operates.
The Company has early adopted IFRS 9, which is effective for periods beginning on or after 1 January 2018.
International Accounting Standards ("IAS"), IFRS and International Financial Reporting Interpretations Committee of the IASB ("IFRIC") Interpretations issued but not yet effective at the reporting date.
At the date of approval of these Financial Statements, there are a number of new standards, amendments to existing standards and interpretations, which have not been applied in these Financial Statements that were in issue but not yet effective and will be adopted from their effective date. The Directors do not expect any of them to have an effect on the future Financial Statements.
Going concern
In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council. After making enquiries, and bearing in mind the nature of the Company's business and assets, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.
Investment entity exemption
The Investments are made by the Group via the limited partnership - Merchant Capital LP (the "Limited Partnership"). The Company and the Limited Partnership have met the criteria within IFRS 10 to qualify as an investment entity.
As per IFRS 10 an investment entity is an entity that obtains funds from one or more investors for the purpose of providing those investors with investment management services, commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both, and measures and evaluates the performance of substantially all of its investments on a fair value basis.
The Company has therefore not consolidated the Limited Partnership on the basis of the Limited Partnership being an investment entity. The investment in the Limited Partnership has therefore been reflected at fair value.
Basis of Consolidation
As the General Partner is itself not an investment entity, and is solely in the structure to be General Partner to the Limited Partnership which itself is providing services to the Fund, it has been consolidated.
Where the Company has control over an investee, it is classified as a subsidiary. The Company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.
All intra-group transactions, balances, income and expenses are eliminated on consolidation. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted across the Group.
The "Group" is defined as the Company and its subsidiary Merchant Capital GP Limited (the "GP").
Foreign currency
Transactions and balances
Foreign currency transactions are translated into the functional currency of the Company, being Sterling, using the exchange rates prevailing at the date of the transactions. Monetary assets and liabilities in foreign currencies are translated into the functional currency using the exchange rate prevailing at the date of the Statement of Financial Position.
Foreign exchange gains and losses arising from translation are included in the Statement of Comprehensive Income
Where foreign currency items are held at fair value, the foreign currency movements are treated as part of the fair value change.
Use of estimates
The preparation of financial statements in accordance with IFRS requires the Board to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the period. Actual results could differ from those estimates and assumptions.
Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have a significant effect on the amounts recognised in the financial statements is included in note 4.
Financial assets
Classification
The Group's financial assets are classified in the following measurement categories:
-- those to be measured subsequently at fair value or through profit or loss; and -- those to be measured at amortised cost.
The classification depends on the Group's business model for managing the financial assets and the contractual terms of the cash flows.
At initial recognition, the Group measures a financial asset at its fair value, plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss.
Financial assets held at amortised cost
Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. These assets are subsequently measured at amortised cost using the effective interest method.
The Group assesses on a forward looking basis the expected credit losses associated with its financial assets held at amortised cost. The Group has applied the simplified approach permitted by IFRS 9 in respect of trade and other receivables. This approach requires expected lifetime losses to be recognised from initial recognition of the receivables.
The Group's financial assets held at amortised cost include trade and other receivables and cash and cash equivalents.
Financial assets at fair value through profit or loss
The investment into the Limited Partnership is measured at fair value as the business model is for capital appreciation and the Group manages and evaluates the performance on a fair value basis. The Limited Partnership holds listed and unlisted investments.
The change in fair value is recognised in profit or loss and is presented within the 'net gains/(losses) on investments at fair value through profit or loss' in the Consolidated Statement of Comprehensive Income.
Recognition, derecognition and initial measurement
A financial asset (in whole or in part) is derecognised either (i) when the Group has transferred substantially all the risks and rewards of ownership; or (ii) when it has neither transferred nor retained substantially all the risks and rewards and when it no longer has control over the assets or a portion of the asset; or (iii) when the contractual right to receive cash flow has expired.
Financial liabilities
Recognition
Financial liabilities are recognised in the Consolidated Statement of Financial Position when the Group becomes a party to the contractual provisions of the relevant financial instrument. Financial liabilities are initially recognised at fair value.
Classification and measurement
The Group only has financial liabilities which are classified as amortised cost.
Financial liabilities measured at amortised cost
Other payables do not bear interest and are stated at their monetary value. Other payables are recorded to the extent that a financial obligation exists to third parties.
De-recognition of financial liabilities
A financial liability (in whole or in part) is derecognised when the Group's contractual obligation to deliver cash or other financial assets is extinguished i.e. is discharged, expires or is cancelled. Any gain or loss on de-recognition is recognised in the Consolidated Statement of Comprehensive Income.
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and cash on deposit measured at fair value.
Equity instruments
Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from proceeds.
Income
Interest income is accounted for on an accruals basis and recognised in the Consolidated Statement of Comprehensive Income. Interest income includes interest earned on cash held at bank on call and on deposit.
Dividend income from investments is accounted for on an ex-dividend basis, gross of applicable withholding taxes and is recognised in the Statement of Comprehensive Income within investment income when the Group's right to receive payments is established.
Segmental reporting
The decision maker is the Board. The Directors are of the opinion that the Group is engaged in a single segment of business with the primary objective of investing in securities to generate capital growth for shareholders. Consequently, no business segmental analysis is provided.
3. SIGNIFICANT ONGOING AGREEMENTS
The following significant contracts have been entered into by the Company:
Investment Management Agreement
The Company, the GP and Merchant Capital Manager Limited (the "Investment Manager") have entered into the Investment Management Agreement. Under the Investment Management Agreement, the Investment Manager has been appointed to act as the Group's investment manager and AIFM, subject to the overall control and supervision of the Directors.
The Investment Manager receives from the Company an investment manager fee of 2.0% per annum of the prevailing Net Asset Value. The management fees are calculated on the last day of each quarter and are payable in arrears.
Administration Agreement
Under the Administration Agreement, Maitland Administration (Guernsey) Limited (the "Administrator") receives from the Company a fee computed and payable quarterly in arrears. The fee is calculated at the rate of 0.09% of the net asset value of the Company with a minimum fee per annum of GBP40,000.
The Administrator also receives a quarterly periodic fee in respect of the Company Secretarial Services of GBP40,000 per annum. The Administrator is also reimbursed all out-of-pocket expenses reasonably incurred.
Merchant Capital Limited Partnership Agreement
The Limited Partnership Agreement is an agreement between the GP, the Company and the Investment Manager dated 30 November 2017 pursuant to which the parties have agreed to establish the Limited Partnership in order to make investments pursuant to the Company's investing policy. The Limited Partnership shall continue until the one hundredth anniversary of the date of its registration under the Limited Partnership (Guernsey) Law, 1995 (the "Partnership Law") unless it is dissolved or its life is extended under the Limited Partnership Agreement.
The GP has agreed to act as general partner of the Limited Partnership and will be solely responsible for the conduct and management of the Limited Partnership's business. The limited partners in the Limited Partnership, namely the Company and the Investment Manager, shall take no part in the management and control of the business and affairs of the Limited Partnership, and shall have no right or authority to act for the Limited Partnership or to take any part in or in any way interfere in the conduct or management of the Limited Partnership or to vote on matters relating to the Limited Partnership other than as set forth in the Limited Partnership Agreement and/or as permitted by the Partnership Law.
The GP, the Company and the Investment Manager have made capital contributions of GBP1, GBP799 and GBP200 to the Limited Partnership respectively. The Company is required to make loans to enable the Limited Partnership to meet its obligations as they fall due for such amount and for such purpose as the GP may request on not less than five business days' written notice (or such shorter period as may be necessary in an emergency). Where the Company makes a loan to the Limited Partnership, the Limited Partnership shall not pay interest on any loan and all loans shall be unsecured. While it remains a limited partner of the Limited Partnership, the Company shall not be entitled to be repaid all or any part of a loan other than on liquidation of the Limited Partnership or realisations by the Limited Partnership.
The Investment Manager will receive 20% of the net realised cash profits from investments and follow-on investments made over the relevant period once the Company has received all loan capital and a preferred return that equates to an IRR of 5% for the relevant period and associated follow-on period.
4. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS
The Directors make estimates and assumptions concerning the future. The resulting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below:
Fair value measurement
The company invests in Merchant Capital Limited Partnership as per note 2. The fair value of the investment in the Limited Partnership is based on the net asset value of the Limited Partnership. This is based on the components within the Limited Partnership, see note 14 for more information.
5. TAXATION
The Company is eligible for exemption from taxation in Guernsey under the provisions of the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989, and has paid an annual exemption fee of GBP1,200.
There is no taxation charge included in the Consolidated Statement of Comprehensive Income as there has not being any irrecoverable withholding tax incurred on investment income received in the period.
The Limited Partnership is treated as a transparent entity for tax purposes which means that its profits are taxed directly in the hands of each partner.
6. INVESTMENTS
Limited Direct Investments
Partnership Total Investments
GBP GBP GBP
==================================== ============= =================== ==================
Opening at fair value - - -
Additions at cost 19,520,047 63,256,500 82,776,547
Disposal proceeds - (37,000,000) (37,000,000)
Net realised loss on disposal
of investments - (23,075) (23,075)
Net unrealised loss on revaluation
of investments (3,168,634) (327,961) (3,496,595)
==================================== ============= =================== ==================
Closing fair value 16,351,413 25,905,464 42,256,877
==================================== ============= =================== ==================
The valuations of investments is discussed in more detail in note 14.
2018
GBP
=================================================== ============
Net realised loss on disposal of investments (23,075)
Net unrealised loss on revaluation of investments (3,496,595)
Investment Income 503,801
=================================================== ============
Net losses on investments at fair value through
profit or loss (3,015,869)
=================================================== ============
7. RECEIVABLES AND PREPAYMENTS
2018
GBP
Accrued income 458,181
Prepayments 9,820
================== ========
468,001
================== ========
8. OTHER PAYABLES AND ACCRUALS
2018
GBP
============================================ ========
Accrual for:
Investment management fee 241,805
Administration and Company Secretarial
fee 20,964
Audit fee 17,500
Other expenses 27,345
============================================ ========
307,614
============================================ ========
9. SHARE CAPITAL
Number of shares Share capital
GBP
Ordinary shares
========================= ================= ==============
Opening balance - -
Issue of shares - Gross
proceeds 55,000,002 55,000,002
Issue costs N/A (2,553,895)
Redemption of shares (2) (2)
========================= ================= ==============
Balance at 31 December
2018 55,000,000 52,446,105
========================= ================= ==============
The Company was incorporated on 13 September 2017 with an issued share capital of GBP2 represented by 2 ordinary shares of GBP1 each. These shares were redeemed immediately following the share issue described below from the proceeds raised.
On 22 December 2017, the Company issued 55 million ordinary shares of no par value at GBP1 per share in an offer for subscription, raising GBP52,446,105 after expenses of broker fees and legal and professional fees of GBP2,553,895.
10. RETAINED EARNINGS
The following items are the components of the retained earnings account:
-- gains and losses on the disposal of investments; -- exchange differences of a capital nature;
-- expenses charged to the Statement of Comprehensive Income in accordance with the above accounting policies;
-- increases or decreases in the valuation of investments held at the period end; and -- net revenue recognised in the Statement of Comprehensive Income. 11. RELATED PARTY TRANSACTIONS
The bases of calculation of the fees due to the Investment Manager are set out in note 3. The Investment Manager earned remuneration of GBP1,049,646 from the Company during the period in respect of normal services provided, with GBP241,805 outstanding at the end of the period.
During the period, the Directors received remuneration fees of GBP105,479 of which GBP21,875 were outstanding at the end of the period. The Independent Non-Executive Directors received an annual remuneration fee of GBP25,000 each. The Chairman receives an additional GBP10,000 and the Chairman of the Audit Committee receives an additional GBP2,500.
Mr Sgarbi and Mr Fumagalli have signed a waiver letter dated 30 November 2017 and therefore have waived their Directors fee.
Mr M. Fumagalli, a Director of the Company, has an indirect beneficial interest in the Company, of 1.82%.
Mr C. Sgarbi, a Director of the Company, has an indirect beneficial interest in the Company of 1.82%.
Mr J. Falla, a Director of the Company, has a direct beneficial interest in the Company of 0.02%.
12. NET ASSET VALUE RECONCILIATION
The 28 December 2018 Net Asset Value ("NAV") as reported to shareholders on 31 December 2018 has been adjusted mainly to reflect adjustments on accrued expenses based on information received after the period end.
The NAV per share is expressed in GBP and is determined by dividing the net assets attributable to shareholders of the Company by the number of participating redeemable shares in issue on the valuation day.
13. BASIC AND DILUTED EARNINGS PER ORDINARY SHARE
Basic (loss)/earnings per Ordinary Share is calculated by dividing the comprehensive loss for the period of GBP4,393,081 by the weighted average number of ordinary shares outstanding during the period. The weighted average number of ordinary shares for the period is 55,000,000.
The basic and diluted value is the same as the Company doesn't have any diluted type of shares.
14. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
The Group's investing activities, through its Limited Partnership, exposes it to various types of risk that are associated with the investments in order to generate returns. The financial risks are: Market Risk, Liquidity Risk and Credit Risk.
Market risk
Market risk is affected by three main components: price risk, interest rate risk and currency risk. All three of these components may be affected by Brexit although this is not quantifiable at the time of publication of these financial statements.
Price risk
The Group is exposed to price risk on its financial instruments. There is a risk that the value of a financial instrument will fluctuate as a result of changes in market prices, whether those changes are caused by factors specific to the individual financial instrument held or factors affecting all financial instruments traded in the market.
If the prices of the Group at 31 December 2018 had increased by 5% with all other variables held constant, this would have increased net assets attributable to shareholders by approximately GBP1,295,273. Conversely, if the prices had decreased by 5%, this would have decreased net assets attributable to shareholders by approximately GBP1,295,273.
The fair value of the Limited Partnership is directly impacted by the underlying investments held by the Limited Partnership. The underlying investments held by the Limited Partnership comprise listed investments, unlisted investments and unlisted warrants. No sensitivity has been prepared for the warrant, as it is immaterial.
If the prices of the Limited Partnership at 31 December 2018 had increased by 5% with all other variables held constant, this would have increased net assets attributable to shareholders by approximately GBP817,571. Conversely, if the prices had decreased by 5%, this would have decreased net assets attributable to shareholders by approximately GBP817,571.
Interest rate risk
The Group is exposed to interest rate risk to the extent that prevailing interest rates may fluctuate on the floating rate instruments.
The exposure at 31 December 2018 of financial assets and financial liabilities to interest rate risk is shown by reference to:
-- Floating interest rates
-- Fixed interest rates
GROUP Total
31 December 2018 GBP GBP
=============================== =========== ===========
Exposure to fixed interest
rates 24,105,238 24,105,238
Exposure to floating interest
rates* 1,800,226 1,800,226
Cash and cash equivalents
(floating interest rate) 5,635,760 5,635,760
=============================== =========== ===========
31,541,224 31,541,224
=============================== =========== ===========
* Exposure is via investments held at Fair Value through Profit or Loss.
There is no interest rate risk exposure in the Limited Partnership. The only item that could be considered as bearing interest is the loan given to Merchant Capital HF, but this is an interest free loan and therefore not exposed to interest risk.
Interest rate sensitivity
The following table illustrates the sensitivity of the Group to an increase or decrease of 50 basis points (bps) in interest rates in regards to the assets which are subject to interest rate risk.
The sensitivity analysis is based on the Group's financial instruments held at the balance sheet date, with all other variables held constant.
50 bps increase 50 bps decrease
31 December 2018 GBP GBP
Effect on Net
equity 16,653 (16,653)
================== ================ ================
16,653 (16,653)
================== ================ ================
Currency risk
A proportion of the Group's portfolio is invested in investments denominated in a foreign currency and movement in exchange rates can significantly affect their Sterling value.
The Investment Manager does not normally hedge against foreign currency movements affecting the value of the investment portfolio, but takes account of this risk when making investment decisions.
The fair values of the Group's assets that have foreign currency exposure at 31st December 2018 are shown below:
US Dollars Euro Total
31 December 2018 GBP GBP GBP
================================== =========== ========== ===========
Investment at fair value through
profit or loss 3,895,083 9,028,248 12,923,331
Cash and cash equivalents 484,658 24,933 509,591
================================== =========== ========== ===========
4,379,741 9,053,181 13,432,922
================================== =========== ========== ===========
Currency risk sensitivity
If the foreign currency exchange rates at 31 December 2018 had increased/decreased by 5% with all other variables held constant, this would have increased/decreased net assets attributable to shareholders as follow:
US Dollars Euro Total
31 December 2018 GBP GBP GBP
If exchange rates appreciated
5% 230,513 476,483 706,996
If exchange rates depreciated
5% (208,559) (431,103) (639,662)
=============================== =========== ========== ==========
Included in the previous table are the movements impacting the underlying Limited Partnership.
The below table analyses the individual foreign currency movement in respect of the Limited Partnership:
US Dollars Euro Total
31 December 2018 GBP GBP GBP
=============================== =========== ========== ==========
If exchange rates appreciated
5% (205,004) (475,171) (680,175)
If exchange rates depreciated
5% 185,480 429,917 615,397
=============================== =========== ========== ==========
Liquidity risk
Liquidity risk, also referred to as funding risk, is the risk that the Group will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from an inability to sell a financial asset quickly at, or close to, its fair value. Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, and the availability of liquid assets.
Liquidity risk is not significant as the majority of the Group's assets are investments in quoted securities which are readily realisable; their value is significantly in excess of the Group's financial liabilities.
All financial liabilities of the Group at the balance sheet date are payable within 3 months.
Credit risk
The Group is exposed to material credit risk on its cash and cash equivalents and investments. Failure of the transaction counterparty to perform their obligations under the financial instruments may lead to a financial loss. The credit risk in respect of cash balances are mitigated by placing cash with a reputable banking institution with a credit rating with a single A- (or equivalent) or higher credit rating as determined by an internationally recognised rating agency or gilts or otherwise approved by the Board.
No classes of financial assets contain impaired assets. The maximum exposure to credit risk over financial assets is the carrying value of those assets in the Statement of Financial Position.
The Group does not have any collateral held as security or other credit enhancements as at 31 December 2018.
Valuation of financial instruments
The Company classifies fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:
-- Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1);
-- Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2); and
-- Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurements as a whole. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability. The determination of what constitutes 'observable' requires significant judgement by the Company. The Company considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
The following table analyses, within the fair value hierarchy, the Company's financial assets (by class) measured at fair value at 31 December 2018:
Level
Level 1 2 Level 3 Total
31 December GBP GBP GBP GBP
================== =========== ====== =========== ===========
Investments
Investment in
LP - - 16,351,413 16,351,413
Debt instruments 25,905,464 - - 25,904,464
================== =========== ====== =========== ===========
25,905,464 - 16,351,413 42,256,877
================== =========== ====== =========== ===========
During the period, there were no transfers between levels.
The fair value of the investment in the Limited Partnership is based on the net asset value of the Limited Partnership. This is based on the components within the Limited Partnership. Further details regarding the components of the Limited Partnership can be found in the unaudited portfolio statement on page 52.
Orthofix Medical Inc, Alkemy SpA and Coro Energy Plc are all quoted securities and therefore their fair value is using quoted bid prices as at close of business on 31 December 2018.
Merchant Capital HF Limited is an unquoted security and its fair value is based on the underlying investment into Happy Friends, which is based on recent investment price given that the investment was made just before the period end but revalued with the 31 December 2018 exchange rate.
Core Energy Plc warrants are priced using the Black- Scholes model which gives a theoretical estimate of the price of the option and the warrants are not material to the financial statements.
Capital risk management
The capital structure of the Company is as disclosed in the Statement of Financial Position and is managed on a basis consistent with its investment objective and policies.
15. EVENTS AFTER THE REPORTING PERIOD
Following the reporting period, the Company, through the Limited Partnership, made further share purchase investments in Orthofix as follows:
-- 2,500 shares on 26 February 2019; -- 4,500 shares on 11 March 2019; and -- 4,500 shares on 12 March 2019.
Unaudited Portfolio Statement
As at 31 December 2018
Valuation Percentage of net assets
GBP %
============================================= =========== =========================
Merchant Capital L.P.
Merchant Capital HF Limited 5,485,324 11.42
Orthofix Medical Inc 3,895,083 8.11
Alkemy SpA Common 3,542,924 7.37
Coro Energy plc 3,428,082 7.13
Coro Energy plc Warrants 9 April 2019 - -
============================================= =========== =========================
Fair value of Limited Partnership 16,351,413 34.03
The Company
UK Treasury Bill 4.5% 07/03/2019 10,066,600 20.95
European Investment Bank 1.5% 01/02/2019 10,006,435 20.82
European Investment Bank 5.375% 07/03/2019 4,032,203 8.39
Lloyds Bank 2.75% 14/01/2019 1,800,226 3.75
============================================= =========== =========================
Total Investments 25,905,464 53.91
Cash and cash equivalents 5,635,760 11.73
Other net current assets 160,387 0.33
============================================= =========== =========================
Total net asset value 48,053,024 100.00
============================================= =========== =========================
Reconciliation of Loss
The loss consists of:
Merchant Capital L.P.
Realised gains/losses on investments - Unrealised gains/losses on investments (3,168,634) Investment income - Expenses - ========================================= ============ LP Fair value movement (3,168,634) Reconciliation of Loss (continued) Other Gains/Losses Realised losses on investments (23,075) Unrealised losses on investments (327,961) Exchange gains on currency balances 40,580 Investment income 503,801 Bank interest 16,438 Investment management fees (1,049,646) Other expenses (384,584) ========================================= ============ Total comprehensive loss for the period (4,393,081) ========================================= ============
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 rns@lseg.com or visit www.rns.com.
END
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