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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Lms Capital Plc | LSE:LMS | London | Ordinary Share | GB00B12MHD28 | ORD 10P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -0.30 | -1.79% | 16.50 | 14.00 | 17.00 | 17.00 | 17.00 | 17.00 | 833 | 16:35:20 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Investment Advice | 96k | -1.87M | -0.0232 | -7.33 | 13.72M |
From Apr 2019 to Apr 2024
TIDMLMS
RNS Number : 7735H
LMS Capital PLC
15 March 2018
15 March 2018
LMS Capital plc
Preliminary Results for year ended 31 December 2017
The Board of LMS Capital plc, ("LMS Capital" or "the Company"), is pleased to announce the Company's annual results for the year ended 31 December 2017, the first complete year under the new management arrangements with Gresham House Asset Management.
-- Return of capital completed ahead of expectation - the tender offer in August 2017, which returned GBP11 million to shareholders, satisfied in full the undertaking to return further capital to shareholders, which was set out in the circular to shareholders dated 27 July 2016.
-- The portfolio performed well during the year with NAV per share rising 12.7%:
o Net gains on the investment portfolio were GBP9.9 million (2016: losses of GBP16.2 million);
o The profit for the year was GBP7.6 million (2016: loss of GBP20.8 million); and
o Realisations for the year totalled GBP21.7 million (2016: GBP10.6 million).
-- The net asset value at 31 December 2017 was GBP64.5 million, 80p per share (31 December 2016: GBP68.1 million, 71p per share).
-- The improvement in NAV per share includes, significant value increase from the Yes To partial realisation, and further value potential exists.
-- Overhead costs for the year (including amounts incurred by subsidiaries) were GBP2.7 million significantly lower than last year (2016: GBP3.3 million, excluding reorganisation costs), reflecting the impact of planned cost savings with further savings expected in 2018. Overheads in 2017 include costs of approximately GBP1.0 million which are not expected to recur now that the transition to external management is complete.
-- The Company is now focused on re-investing future realisation proceeds in line with the new investment policy overseen by the Investment Committee.
-- The Board and the Manager continue to evaluate strategic options for the Company to enable greater scale and enhance shareholder value.
The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.
For further information, please contact
LMS Capital plc Martin Knight, Chairman 020 3837 6275 Gresham House Asset Management Limited Graham Bird 020 3837 6275 J.P. Morgan Cazenove Michael Wentworth-Stanley 020 7742 4000
Chairman's statement
I am pleased to report that 2017 was a year of progress for the Company - the previous realisation strategy, with its related commitment to make further returns of capital to shareholders, was successfully concluded and good progress was made in implementing the revised investment strategy under the leadership of the new Investment Manager, Gresham House Asset Management Limited ("GHAM").
In the circular to shareholders dated 27 July 2016 the Company announced a tender offer to return GBP6 million to shareholders and undertook to make two further returns of capital to shareholders by way of tender offers for a maximum of GBP11 million. After a successful period for realisations in the first half of 2017 the Company undertook a tender offer in August 2017 which returned the full GBP11 million to shareholders ahead of the expected schedule.
Performance review
Net Asset Value per share at 31 December 2017 was 80p, slightly higher than announced on 8 February, a 12.7% increase from 71p at the end of 2016.
Portfolio gains (realised and unrealised) for the year before carried interest charges were GBP10.5 million (2016: losses of GBP16.2 million), the key elements of which were:
-- The net gain on the funds' portfolio of GBP10.1 million (2016: GBP1.0 million) is principally a function of the strong performance during the year by investments held within San Francisco Equity Partners;
-- The net loss on the unquoted investments of GBP0.6 million (2016: net loss of GBP15.9 million) includes:
o Gains on the sale of 365iTMS and the partial sale and recapitalisation of Yes To (a co-investment with San Francisco Equity Partners);
o An unrealised gain on the Company's interest in Brockton Capital LLP, reflecting the sale of that business which is expected to complete in March 2018; and
o Write downs on Medhost and Elateral;
-- The gain on the quoted portfolio of GBP1.0 million (2016: loss of GBP1.3 million) includes a gain of GBP1.6 million in the value of the Company's interest in Gresham House plc, offset by losses on IDE Group Holdings and Weatherford International.
The portfolio gains for the year are stated after the impact of exchange losses of GBP3.2 million (2016: gains of GBP11.6 million), primarily due to the strengthening of sterling against the US dollar during 2017.
Overhead costs were GBP2.7 million, lower than the previous year (2016: GBP3.3 million). In line with the new Manager's plans, overheads in 2017 include costs of approximately GBP1.0 million which are not expected to recur now that the transition to external management is complete.
Conclusion and outlook
With the final commitment to return capital to shareholders fulfilled, the Company is now focused on implementing the new investment policy and growing net asset value for shareholders. As part of this implementation the Board and GHAM continue to evaluate strategic options for the Company to enable greater scale for the business and enhance shareholder value.
Tony Sweet is leaving GHAM and I would like, on behalf of the whole Board, to acknowledge our appreciation of his contribution to the Company. Tony was CFO from the time of the Company's beginnings in 2006 until August 2016, at which time he joined the Gresham House team and has overseen the transfer of the Company's finance and administration to the new externally managed structure. He will relinquish his role during the first half of 2018. As well as ensuring a sound financial management for the Company, Tony has been a valued source of support and guidance to the Board in many ways over the years. We wish him well in the future.
Martin Knight
Chairman
15 March 2018
Strategic Report
LMS Capital plc is an investment company whose shares are traded on the Main Market of the London Stock Exchange.
Investment objective and strategy
Until 16 August 2016 the Directors of the Company were conducting an orderly realisation of the assets of the Company. At a general meeting on 16 August 2016 shareholders voted to change the Company's investment policy from the realisation strategy to a new policy focused predominantly on private equity investment. At the same time Gresham House Asset Management Limited ("GHAM" or "the Manager") was appointed by the Board to manage the Company's assets.
In the circular to shareholders dated 27 July 2016 the Company announced a tender offer to return GBP6 million to shareholders and undertook to make two further returns of capital to shareholders by way of tender offers for a maximum of GBP11 million. After a successful period for realisations in the first half of 2017 the Company undertook a tender offer in August 2017 which returned the full GBP11 million to shareholders.
With the final commitment to return capital to shareholders fulfilled, the Company is now focused on re-investing future realisation proceeds in line with the new investment policy, including private equity and alternative, specialist asset classes. The Company's investment objective is to achieve total returns over the medium to longer term, principally through capital gains and supplemented with the generation of a longer term income yield. The Company is targeting a return on equity, after running costs, of between 12% and 15% per annum over the long term on new capital invested.
The investment strategy is now focused predominantly on private equity investment and alternative, specialist asset classes using the experience of the GHAM team in asset management, private equity and public markets:
-- The Manager will invest in and partner with management teams of profitable and cash generative businesses and investments to create value, targeting an annual return on equity of 12% -15% net of costs over the long term;
-- The focus will primarily be on smaller private investment opportunities below GBP50 million value where the Manager believes there to be significant market inefficiencies which create opportunities for superior long term returns and to leverage the experience of the investment team;
-- Investments may include alternative, specialist asset classes which target long term, illiquid strategies both through co-investment and fund opportunities on preferred terms; and
-- The focus is also on optimising the value of existing holdings and, where growth prospects are clear, to preserve and support longer term value creation.
No investment in any single company will (at the time of investment) represent more than 15% of the Company's net assets. Any investment in securities of a single company or investment fund, which represents more than 10% of the Company's net assets at the time the investment is made, requires the Board's approval.
The Company may invest in public or private securities; investments may be made in the form of, inter alia, equity, equity-related instruments, derivatives and indebtedness. The Company may hold controlling or non-controlling positions and may invest directly or indirectly. The Company may also invest in Gresham House plc, to benefit from the potential growth of GHAM.
The Company is not restricted to specific sectors; its assets are and will continue to be predominantly invested in the United Kingdom, Europe and North America, with an increasing focus on the United Kingdom. Indebtedness of the Company will not exceed 25% of net assets measured at the time of drawdown. The Company had no indebtedness at 31 December 2017 or at the date of this report.
Portfolio management
GHAM manages the Company's assets and investments in accordance with guidelines determined by the Directors and as specified in a formal portfolio management agreement. Further information about GHAM can be found in the Manager's Review.
In order to comply with the requirements of the Alternative Investment Fund Managers Directive 2011, the Company has appointed an alternative investment fund manager ("AIFM"). In due course, the Company's AIFM will be GHAM, once GHAM has obtained a variation of its permissions under Part 4A of the Financial Services and Markets Act 2000 to enable it to act as a full-scope UK AIFM. For an initial period, however, before GHAM has obtained this permission, the Company has appointed G10 Capital Limited ("G10 Capital"), a specialist provider of regulated services, as its initial AIFM and G10 Capital has delegated certain functions in relation to the portfolio management of the Company's assets to GHAM. The Company has appointed Ipes (UK) Limited as its depositary.
Under the AIFM and portfolio management agreement, the Manager is entitled to an annual management fee as follows:
a) 1.50% of the net asset value of the Company, to the extent that the Company's net assets under management are GBP100 million or less;
b) 1.25% of the net asset value of the Company, to the extent that the Company's net assets under management exceed GBP100 million but are GBP150 million or less: and
c) 1.00% of the net asset value of the Company to the extent that Company's net assets under management exceed GBP150 million.
The Manager is also entitled to a performance fee on new investments which is designed to align the interests of GHAM, as portfolio manager, with those of the Company. If certain hurdle return requirements are satisfied, GHAM earns a performance fee of 15% of the gain in the net asset value of new investments made after 16 August 2016. No performance fee will be payable in respect of investments held at the date of GHAM's appointment.
GHAM is the regulated subsidiary of Gresham House plc, the specialist asset manager quoted on the Alternative Investment Market of the London Stock Exchange. Its investment team has a successful track record, underpinned by proven operating and technical expertise. GHAM adopts a differentiated and rigorous approach to private and public equity investments through its specialist asset management strategies which are focused on capitalising on the growth in demand for alternative investment strategies, illiquid assets and for discretionary co-investments.
A dedicated investment committee of GHAM is responsible for the Company's portfolio and oversees the investment appraisal process in relation to investments made in respect of the Company's portfolio. The Company has the right to nominate a member to this committee and as at the date of this report has exercised that right.
The committee assesses existing assets and new investment opportunities and is also responsible for approving due diligence costs, abort costs exposure, capital allocation and appropriate risk management.
All investment opportunities are appraised by the investment team and a short list of deals progresses for review by the investment committee. The investment committee assist in due diligence, investment appraisal and the team can leverage their extensive network as required.
Representatives of GHAM are available to attend all meetings of the Board and provide regular reports on the investment portfolio and the affairs of the Company generally. The performance of each underlying investment is monitored regularly with commentary on trends and risks both company specific and market related. GHAM may also have representatives on the boards of portfolio investment companies.
Distribution policy
In future the Company intends to return in the region of 30% of annual cash realised profits from new investments and in so doing, to generate a dividend yield over the longer term.
Performance
The following are the key performance indicators ("KPIs") considered by the Board and the Manager in assessing the Company's performance against its objectives. These KPIs are:
Return on equity over the long term
The Company's objective is to achieve a return on equity (on new investments) of between 12% and 15% per annum over the long term.
NAV per ordinary share total return
The Company's net asset value per share total return was 12.7% for the year ended 31 December 2017. This compared with 9% for the FTSE All-Share Index.
Share price total return
The Company's share price total return was negative 12.6% for the year ended 31 December 2017.
Further information on the Company's performance is given in the Chairman's Statement and the Manager's Review.
Personnel
The average number of Directors and staff was as follows:
Hot Features
Premium
2017 2016
------------------- ------------------------- -------------------------
Male Female Total Male Female Total
------------------- ------ -------- ------- ------ -------- -------
Directors 4 - 4 6 - 6
Senior management - - - - - -
Other employees 1 1 2 1 3 4
------------------- ------ -------- ------- ------ -------- -------
5 1 6 7 3 10
------------------- ------ -------- ------- ------ -------- -------
Environment
The Company has a limited direct impact upon the environment and there are few environmental risks associated with the Company's activities. Information on greenhouse gas emissions are set out in the Directors' Report.
Risk management and principal risks and uncertainties
The Company has appointed G10 Capital, an independent investment manager, as its AIFM to act in accordance with the Company's investment objective and the AIFMD rules. This includes portfolio management and risk management services. At the same time GHAM was appointed to perform on behalf of G10 Capital day-to-day portfolio management services.
GHAM is responsible for the ongoing process of identifying, evaluating, monitoring and managing the risks facing the Company. The Board keeps G10 Capital's and GHAM's performance in all areas under review as part of its overall responsibility for ensuring that the Company has an effective risk management and internal control framework.
On behalf of the Board, the Audit Committee has responsibility for ensuring that the Company has an effective process to identify, document and assess those risks, which might impact the Company's performance and its achievement of its strategy.
Throughout the year ended 31 December 2017, the Board has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. A summary of the principal risks and uncertainties that could have a material adverse effect on the Company's strategy, performance and financial condition is set out below.
Principal risks Consequences Company procedures
Market risk
------------------------ ------------------------ -----------------------
Economic instability, Economic conditions Regular monitoring
political uncertainty may result in of the trading,
and low growth reduced demand cash flows
in the markets for the products and prospects
where the Company's and services (including
investments operate. supplied by exit opportunities)
Lack of liquidity investee companies. of the investment
in capital markets. Such a negative portfolio to
impact on performance identify the
and growth rates impact on individual
may result in investments
lower individual and on the
company valuations Company's strategy.
resulting in
a decline of
the Company's
NAV and its
failure to meet
its return targets
and investment
objective.
Volatility in At 31 December The Board regularly
listed equity 2017 64% of receives reports
prices, foreign the Company's on the Company's
currency rates investment portfolio foreign currency
and interest was denominated exposure in
rates. in US dollars. its investment
Movements in portfolio.
the USD/GBP The Company
exchange rate does not currently
have a significant hedge its underlying
impact on the non-sterling
Company's NAV. investments.
------------------------ ------------------------ -----------------------
Investment risk
-------------------------- ------------------------ ------------------------
The Company may The Company The Board has
not be able to may not be able retained the
implement the to meet the services of
strategy approved strategic objectives an experienced
by shareholders in its investment investment
in August 2016 strategy resulting manager to
if it has insufficient in a decline source and
available funds in its net asset execute deals
or is unable value and share to meet the
to find suitable price. Company's strategic
deals. objectives.
The investment
manager will
also assist
the Board in
seeking opportunities
to scale the
business and
ensure the
necessary funds
for investment
are available.
Investments fail Poor performance Regular monitoring
to perform in by portfolio of the trading
line with original companies may of individual
expectations result in the companies in
or management's Company not the investment
plans. Investment meeting its portfolio as
performance may investment return well as of
be impacted by objectives or the Company's
competition, its realisation overall investment
regulatory changes and cash distribution performance.
or other market plans. This
developments. could impact
the NAV and
the market's
view of the
Company's prospects,
with a consequent
negative impact
on its share
price
------------------------ ------------------------
Where the Company
has only minority
stakes in investments
it may not be
able to influence
performance initiatives
or exit strategy.
-------------------------- ------------------------ ------------------------
Financial risk
------------------------- ---------------------- ----------------------
Many of the Company's Failure to meet Working capital
investments produce future financial requirements
little or no obligations (including
recurring income (including capital exposure to
and the timing calls to funds) uncalled fund
of realisations could expose commitments)
to provide working the Company are reviewed
capital cannot to potential regularly.
be ascertained legal action
with certainty. and/or loss
of value (to
a fund investment).
---------------------- ----------------------
The Company has
made investments
in private equity
funds under the
terms of which
it may be obliged
to make further
capital contributions.
Whilst the maximum
amount of the
future commitment
is known, the
timing of such
capital contributions
cannot be predicted
with certainty.
------------------------- ---------------------- ----------------------
Operational risk
------------------------- ---------------------- ----------------------
Failure of the Reputational The Audit Committee,
Company's internal damage and/or on behalf of
processes and financial loss. the Board,
systems to ensure regularly reviews
that it complies the systems
with all legal, in respect
regulatory and of the principal
financial reporting operational
obligations. risks, as well
as reports
on the Company's
related risk
management
procedures.
------------------------- ---------------------- ----------------------
Viability statement
The Directors have assessed the Company's current position and prospects as described in the Chairman's Statement and the Manager's Review, as well as the principal risks and uncertainties set out above. The Directors concluded that the appropriate period for this assessment should be the three years commencing 1 January 2018 since this timeframe reflects the Company's internal planning horizon as well as that of most of the companies in which it is invested. Given the illiquid nature of much of its investment portfolio, investment/divestment decisions tend to reflect a time period which can be up to three years.
In performing their assessment, the Directors considered principally:
1. The Company's liquidity forecast for the three years from 1 January 2018; and
2. The Manager's latest report on the investment portfolio which includes (for every Board meeting) an assessment of operational issues as well as broader market factors and each asset's cash needs (if any) and likely future cash generation (amount and timing).
The Directors' consideration of these reports was made against the background of the following:
-- Many of the Company's investments are in private companies for which the timing and amount of income and/or realisation is uncertain;
-- The Board has reviewed the liquidity of the Company and considered commitments to private equity investments, long term cash flow projections and the potential availability of gearing. It has also satisfied itself that assumptions regarding future cash inflows are reasonable;
-- The Board has also considered likely downside risk in the value of marketable securities where realisations of these form part of the liquidity forecast. This risk typically includes factors impacting the price of the security and the exchange rate against sterling of the currency in which it is denominated; and
-- In making its assessment, the Board has taken into account the threats to the Company's solvency or liquidity incorporated in the principal risks and uncertainties and satisfied itself that they are being addressed as outlined above.
Taking account of the above factors, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of this assessment.
For and on behalf of the Board.
Martin Knight
Chairman
15 March 2018
Manager's Review
Transition to external manager
GHAM has made significant progress since being appointed investment manager in August 2016. With input from the LMS Capital Board it has carried out a staged approach towards achieving the objectives outlined in 2016.
The 'first stage' has been to transition to external management, including:
-- Implementing a new investment process and governance structure, including the newly appointed Investment Committee;
-- Detailed review of portfolio holdings to frame future strategy and drive potential growth and liquidity opportunities;
-- Significant engagement with the management teams of underlying portfolio investments in order to identify catalysts for stabilisation, value creation and long term growth. This includes members of GHAM joining the boards of Entuity, Elateral, Nationwide Energy Partners and 365iTMS; and
-- Appointing external administrators and driving targeted annualised cost savings.
The 'second stage' of development was focused on realisation and return of capital to shareholders alongside investing appropriately to optimise the value of the portfolio where there is a clear plan for longer term value creation with portfolio companies.
The 'third stage' is focused primarily on new investment in direct private equity opportunities at the smaller end of the market, leveraging the expertise, experience and network of the investment team and newly formed Investment Committee.
Investment approach
The investment approach is now focused predominantly on private equity investment and alternative, specialist asset classes using the experience of the GHAM team in asset management, private equity and public markets:
-- The Manager will invest in and partner with management teams of profitable and cash generative businesses and investments to create value, targeting an annual return on equity of 12% -15% net of costs over the long term;
-- The focus will primarily be on smaller private investment opportunities below GBP50 million value where the Manager believes there to be significant market inefficiencies which create opportunities for superior long term returns and to leverage the experience of the investment team;
-- Investments may include alternative, specialist asset classes which target long term, illiquid strategies both through co-investment and fund opportunities on preferred terms; and
-- The focus is also on optimising the value of existing holdings and, where growth prospects are clear, to preserve and support longer term value creation.
Market background
The first half of 2017 was characterised by uncertainty with several significant political events in the UK, Europe and the US. Investors had to navigate continued uncertainty over the terms of Brexit, the impact of the US presidential election as well as pockets of uncertainty in Europe and the snap election in the UK. The latter part of 2017 was one defined by eventual progress on Brexit and the global growth story. The FTSE All-Share rose 4.2% in the final 3 months of the year, finishing the year up 8.7% whilst the International Monetary Fund (IMF) upgraded its global growth forecast for 2017 from 3.2% to 3.6% reflecting improved expectations for the global economy. Commodities and Equities were both stand-out performers - with Oil & Gas a particularly strong sector; sentiment was driven by the generally favourable economic conditions and positive data for natural resources demand that emerged in the period, particularly from China.
The first two months of 2018 saw a bullish start to the year, notably in US markets, followed by a correction and return of volatility in February as markets reacted to rising inflation and the prospect of rising interest rates and also the threat of increased tariffs. The domestic environment continues to be dominated by Brexit.
High valuations, fund raising and increased competition for deals means private equity firms have high levels of uninvested funds, particularly for the larger enterprise value deals. We believe there are significant inefficiencies at the smaller end of the market, focusing on established smaller private companies below GBP50 million enterprise value where there can be less competition for deals and valuations are more attractive. This segment of the market tends to be off radar for venture and early stage funding providers and sub-threshold for mid-market private equity investors, creating an opportunity to generate superior long term returns.
Performance review
The movement in Net Asset Value during the year was as follows:
2017 2016
GBP'000 GBP'000
Opening Net Asset Value 68,116 95,091
Return on investments 9,898 (16,161)
Overheads, net of interest
received (2,298) (4,670)
---------- ----------
75,716 74,260
Tender offer, including
costs (11,228) (6,144)
---------- ----------
Closing Net Asset Value 64,488 68,116
---------- ----------
Cash realisations from the portfolio in 2017 were as follows:
Year ended
31 December
--------------------
2017 2016
GBP'000 GBP'000
---------------------------- --------- ---------
Sales of investments 6,812 5,927
Distributions from funds 14,902 4,675
---------------------------- --------- ---------
Total - gross 21,714 10,602
---------------------------- --------- ---------
Follow-on investments (550) (851)
Fund calls (68) (438)
Carried interest payments (417) (273)
---------------------------- --------- ---------
Total - net 20,679 9,040
---------------------------- --------- ---------
The follow-on investments are in respect of working capital for Elateral, a UK direct investment.
Realisations in 2017 include:
-- A distribution from San Francisco Equity Partners of GBP9.0 million following the recapitalisation and partial realisation of its portfolio company, YesTo;
-- Distributions from other funds of GBP5.9 million; -- GBP3.6 million forming the stage one payment on the sale of Nationwide Energy Partners; -- Proceeds of GBP1.1 million from the sale of 365iTMS; and -- The sale of 176,850 shares in Weatherford International for net proceeds of GBP0.7 million.
After a successful period for realisations in the first half of 2017 the Company undertook a tender offer in August 2017 which returned GBP11 million to shareholders, thereby discharging in full the undertaking given to shareholders in July 2016 to make further returns of capital up to this amount.
Below is a summary of the investment portfolio of the Company and its subsidiaries:
31 December
----------------------------------------------------------------------
2017 2016
---------------------------------- ----------------------------------
Asset type UK US Total UK US Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------- ---------- ---------- ---------- ---------- ---------- ----------
Quoted 6,874 1,770 8,644 2,481 2,995 5,476
Unquoted 8,400 14,504 22,904 9,384 21,987 31,371
Funds 7,806 24,464 32,270 11,149 25,436 36,585
------------- ---------- ---------- ---------- ---------- ---------- ----------
23,080 40,738 63,818 23,014 50,418 73,432
------------- ---------- ---------- ---------- ---------- ---------- ----------
The principal investments at 31 December 2017 comprising 80% of the total portfolio were:
Name Geography Sector Book value % of
31 December Net asset
value
----------------------- ------------ ------------- -------------------- -------------
2017 2016 31 December
2017
GBP'000 GBP'000
Quoted investments
Gresham House
PLC UK Financial 4,123 2,481 6.4%
IDE Group Holdings
(formerly Coretx
Holdings) UK Technology 2,751 - 4.3%
Unquoted investments
Medhost Inc US Technology 8,183 12,070 12.7%
Entuity UK Technology 3,600 3,000 5.6%
Elateral UK Technology 2,300 3,900 3.6%
Fund investments
San Francisco
Equity Partners
Penguin Computing* US Technology 12,895 10,133 20.0%
YesTo, Inc* US Consumer 9,437 8,387 14.6%
Others
Brockton Capital UK Property 4,603 6,651 7.1%
Opus Capital
Venture Partners US Technology 3,671 4,505 5.7%
*includes holdings by SFEP and co-investments held by the Company
Basis of valuation:
-- Quoted investments - bid price of security quoted on relevant securities exchange;
-- Unquoted investments - multiple of revenues or earnings of comparable quoted companies with appropriate discounts for marketability; and
-- Fund interests - based on amounts reported by the general partner unless the reported value is not in line with the Company's valuation policy.
Performance of the investment portfolio
The return on investments for the year ended 31 December 2017 was as follows:
Year ended 31 December
------------------------------------------------------------------------------------------------
2017 2016
---------------------------------------------- ------------------------------------------------
Realised Unrealised Total Realised Unrealised Total
gains/(losses) gains/(losses) gains/(losses) gains/(losses)
Asset type GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------ ---------------- ----------------- --------- ----------------- ----------------- ----------
Quoted 190 787 977 9 (1,291) (1,282)
Unquoted 2,488 (3,077) (589) - (15,879) (15,879)
Funds 3,595 6,472 10,067 491 492 983
------------------ ---------------- ----------------- --------- ----------------- ----------------- ==========
6,273 4,182 10,455 500 (16,678) (16,178)
------------------ ---------------- ----------------- ----------------- -----------------
(Charge)/credit
for incentive
plans (44) 737
------------------ ---------------- ----------------- --------- ----------------- ----------------- ----------
10,411 (15,441)
Operating
and similar
expenses
of subsidiaries (513) (720)
------------------ ---------------- ----------------- --------- ----------------- ----------------- ----------
9,898 (16,161)
------------------ ---------------- ----------------- --------- ----------------- ----------------- ----------
The (charge)/credit for incentive plans includes GBP44,000 (2016: credit of GBP737,000) for carried interest.
Approximately 64% of the portfolio at 31 December 2017 is denominated in US dollars (31 December 2016: 69%) and the above table includes the impact of currency movements. In the year ended 31 December 2017, the strengthening of sterling against the US dollar (year on year) resulted in an unrealised foreign currency loss of GBP3,248,000 (2016: unrealised gain of GBP11,319,000). As is common practice in private equity investment, it is the Board's current policy not to hedge the Company's underlying non-sterling investments.
Quoted investments
31 December
2017 2016
--------------------------- --------------- --------- ---------
Company Sector GBP'000 GBP'000
--------------------------- --------------- --------- ---------
Gresham House
PLC UK financial 4,123 2,481
IDE Group Holdings UK technology 2,751 -
(formerly Coretx
Holdings)
Weatherford International US energy 1,669 2,909
Others - 101 86
8,644 5,476
------------------------------------------- --------- ---------
The net gain on the quoted portfolio arose as follows:
Year ended 31
December
----------------------
2017 2016
Gains/(losses), net GBP'000 GBP'000
-------------------------------------------- ---------- ----------
Realised
Solaredge 155 (29)
Weatherford International 35 (158)
Bond International - 155
Other quoted holdings - 39
Dividend income - 2
-------------------------------------------- ---------- ----------
190 9
-------------------------------------------- ---------- ----------
Unrealised
Gresham House 1,642 -
IDE Group Holdings (344) -
Weatherford International (331) (1,781)
Bond International - 71
Other quoted holdings 24 (205)
Unrealised foreign currency (losses)/gains (204) 624
-------------------------------------------- ---------- ----------
787 (1,291)
-------------------------------------------- ---------- ----------
Total net gain/(loss) 977 (1,282)
-------------------------------------------- ---------- ----------
During the year the Company received distributions of shares in Solaredge Inc, from its fund investment, Opus Capital Venture Partners. These shares were all sold for net proceeds of GBP1,015,000.
The Company also sold 176,850 shares (2016: 700,000 shares) of its holding in Weatherford International for net proceeds of GBP751,000 (2016: GBP3,820,000). The unrealised losses during the period reflect the continuing pressure on this company's share price in 2017.
The shares in IDE Group Holdings were received in part consideration for the sale of 365iTMS.
Unquoted investments
31 December
--------------------
2017 2016
-------------------- --------------- --------- ---------
Company Sector GBP'000 GBP'000
-------------------- --------------- --------- ---------
Medhost Inc US technology 8,183 12,070
Entuity UK technology 3,600 3,000
Elateral UK technology 2,300 3,900
Nationwide Energy
Partners US energy 2,960 7,703
Brockton Capital
LLP UK Property 2,500 97
Penguin Computing* US technology 1,747 1,449
ICU Eyewear US consumer 740 -
Yes To* US consumer 874 765
365iTMS UK technology - 2,100
Other interests - - 287
-------------------- ---------------- --------- ---------
22,904 31,371
------------------------------------ --------- ---------
*These are co-investments with SFEP
The net gain on the unquoted portfolio arose as follows:
Year ended 31
December
---------------------
2017 2016
-------------------------------------------- --------- ----------
Gains/(losses), net GBP'000 GBP'000
-------------------------------------------- --------- ----------
Realised
365ITMS 1,932 -
YesTo 556 -
2,488 -
-------------------------------------------- --------- ----------
Unrealised valuation adjustments
Medhost (2,969) (4,878)
Brockton Capital LLP 2,403 -
Elateral (2,275) (650)
Nationwide Energy Partners (785) (3,521)
ICU Eyewear 740 (9,165)
Entuity 671 (1,878)
Penguin Computing 441 -
YesTo 445 -
365ITMS - (1,400)
Others (266) (841)
Unrealised foreign currency (losses)/gains (1,482) 6,454
-------------------------------------------- --------- ----------
(3,077) (15,879)
-------------------------------------------- --------- ----------
Total net losses (589) (15,879)
-------------------------------------------- --------- ----------
In April the Company's investment in 365ITMS was sold to IDE Group Holdings plc. The Company received gross cash proceeds of GBP1.1 million plus 9,826,400 shares in IDE Group Holdings with a value on completion of GBP3.0 million. The shares are subject to a 24-month orderly market agreement.
In June, YesTo (a portfolio company of SFEP) was the subject of a recapitalisation and partial sale. The amounts in the above table for YesTo reflect the gains resulting from this transaction for the Company's co-investment. More detail on YesTo is provided within the commentary on SFEP below
Valuations are sensitive to changes in the following two inputs:
-- The operating performance of the individual businesses within the portfolio; and
-- Changes in the revenue and profitability multiples and transaction prices of comparable businesses, which are used in the underlying calculations.
In most cases the multiples used at 31 December 2017 are similar to those prevailing at the end of 2016 and therefore the unrealised gains or losses set out in the table above arise principally as a result of the companies' performance.
Comments on other individual companies are set out below.
Medhost
Medhost is a co-investment with one of the Company's fund interests, Primus Capital, which is the lead investment manager. Medhost has announced that an advisor has been appointed to find a buyer for the business. The Company has based its carrying value on the carrying value reported by the general partner.
Brockton Capital LLP
In 2006 the Company, together with 3 other cornerstone investors, backed the establishment of Brockton Capital LLP, a private equity real estate investment adviser, and became an investor in Brockton Capital Fund I LP ("the Fund"), a real estate investment fund. The investment in Brockton Capital LLP gave the Company the right to participate in entities that would receive a share of any carried interest in relation to the performance of the Fund and subsequent Brockton-advised funds.
The interests in Brockton Capital LLP and the carried interest entities were previously reported at cost, this was equivalent to fair value. Early in February 2018 the majority owners of Brockton Capital LLP agreed terms for the sale of the business, completion of which is conditional on customary conditions including obtaining regulatory approval. Assuming the conditions are met, the sale will result in the realisation by the Company of its minority investment for proceeds expected to be in the region of GBP2.5 million. The carrying value at 31 December 2017 reflects the expected outcome for the Company of this transaction.
ICU Eyewear
The Company fully wrote off its interest at the end of 2016. During 2017 the company's financial position improved following a restructuring of its liabilities and a programme of cost reductions. As a result LMS Capital has recognised a small positive carrying value for the business at 31 December 2017.
Nationwide Energy Partners ("NEP")
In January 2017 the Company reached agreement to sell its interest back to the founder in a two stage transaction. The stage one payment of US$4.5 million was received in January 2017. The second and final stage has been settled through the issue to LMS Capital of a US$5.0 million loan note repayable (with interest) in instalments over 4 years. The carrying value is the present value of the Company's current estimate of amounts receivable from the loan note.
Entuity
Following completion of the strategic review in 2016 a new CEO was appointed and took up his post in February 2017. The new team is performing satisfactorily and is focussed on future value growth.
Elateral
Elateral has invested heavily in recent years to re-engineer and upgrade its technology platform as a precursor to retaining and growing its multinational client base. There have been changes in the leadership team during 2017 and the company is looking to grow its revenues and improve profitability. The write down in 2017 reflects the need to provide additional working capital to provide a platform for future growth.
Penguin Computing
This is a co-investment with SFEP. The business has made good progress in the last 18 months and the improved results are reflected in the write up of its carrying value.
Fund interests
31 December
--------------------
2017 2016
---------------------- -------------------------- --------- ---------
General partner Sector GBP'000 GBP'000
---------------------- -------------------------- --------- ---------
San Francisco
Equity Partners US consumer & technology 20,048 16,748
Brockton Capital
Fund 1 UK property 4,603 6,651
Opus Capital Venture
Partners US venture capital 3,671 4,505
Weber Capital US micro-cap quoted
Partners stocks 599 3,784
Eden Ventures UK venture capital 1,883 2,964
Other interests - 1,466 1,933
---------------------- --------------------------- --------- ---------
32,270 36,585
------------------------------------------------- --------- ---------
Gains and losses on the Company's funds portfolio for the year ended 31 December 2017 were as follows:
Year ended 31
December
----------------------
2017 2016
Gains/(losses), net GBP'000 GBP'000
---------------------------------------- ---------- ----------
Realised
San Francisco Equity Partners (partial 3,576 -
sale to Yes To)
Other funds 19 491
3,595 491
---------------------------------------- ---------- ----------
Unrealised valuation adjustments
San Francisco Equity Partners 8,748 1,993
Eden Ventures (1,128) (1,189)
Brockton Capital 362 (2,518)
Simmons Parallel Energy (180) (439)
Opus Capital Venture Partners 315 (1,613)
Weber Capital 30 459
Others (net) (113) (441)
Unrealised foreign currency (losses)/gains (1,562) 4,240
-------------------------------------------- --------- ---------
6,472 492
-------------------------------------------- --------- ---------
Total net gains 10,067 983
-------------------------------------------- --------- ---------
San Francisco Equity Partners ("SFEP")
LMS Capital is the majority investor in SFEP (as opposed to the other fund interests where the Company has only a minority stake).
SFEP has two remaining investments:
-- Penguin Computing - fund carrying value GBP11,148,000. The company continues to make good progress and is performing ahead of expectations; and
-- YesTo - fund carrying value GBP8,563,000. The above table includes the gains arising as a result of the recapitalisation and partial sale in June of SFEP's interest at a significant premium to the previous book value. Total proceeds to the Company were GBP9.0 million, of which GBP8.2 million was received in respect of the Company's interest in SFEP and GBP0.8 million in relation to the Company's co-investment with SFEP.
In addition to the fund investments noted above the Company has a co investment in Penguin of GBP1,747,000 and in YesTo of GBP874,000. Together with its fund interests described above the Company's total investment in Penguin is GBP12,895,000 and in YesTo is GBP9,437,000.
Other fund interests
-- Eden Ventures' portfolio performed below expectations during the year and this is reflected in the reduction in the carrying value of the Company's interest;
-- Brockton Capital - the overall decrease reflects distributions received in the first half of the year. The Company's valuation methodology for this investment results in a small uplift for its remaining interest;
-- Opus Capital, a US venture fund, made stock distributions in kind during 2017 totalling GBP860,000; and
-- During 2017 the Company liquidated substantially all of its positions in the Weber Capital funds, leaving only a small interest in one fund.
Overhead costs
Overhead costs for the year (including amounts incurred by subsidiaries) were GBP2,731,000 - significantly lower than last year (2016: GBP3,301,000). Overheads in 2017 include costs of approximately GBP1.0 million which are not expected to recur now that the transition to external management is complete.
Taxation
The Company has no tax charge for the year (2016: nil) - in both years tax deductible expenses exceeded taxable income. The excess of these tax-deductible expenses will be surrendered to subsidiaries of the Company to offset taxable income in those companies.
Financial resources and commitments
Including cash in subsidiaries, cash holdings were GBP3,960,000 (31 December 2016: GBP1,632,000) with no debt.
At 31 December 2017 subsidiary companies had commitments of GBP3,133,000 (31 December 2016: GBP3,577,000) to meet outstanding capital calls from fund interests.
Outlook
GHAM has engaged with portfolio companies and is working with the management teams to identify catalysts for growth and to drive long term value; we are also focused on progressing and initiating sale processes for certain holdings. We are looking to access and reinvest in direct private equity opportunities at the smaller end of the market and alternative asset classes targeting long term, illiquid strategies in each case leveraging the within GHAM. The Board and the Manager continue to evaluate strategic options for the Company, to enable greater scale and enhance shareholder value
Gresham House Asset Management Limited
15 March 2018
Income Statement
For the year ended 31 December 2017
Year ended 31
December
2017 2016
Notes GBP'000 GBP'000
----------
Net gains/(losses) on investments 2 9,898 (16,161)
Directors' and other fees from
investments - 48
Interest income 3 66 20
--------- ----------
9,964 (16,093)
Operating expenses 4 (2,364) (4,738)
--------- ----------
Profit/(loss) before tax 7,600 (20,831)
Taxation 6 - -
Profit/(loss) for the year 7,600 (20,831)
Attributable to:
Equity shareholders 7,600 (20,831)
--------- ----------
Earnings/(loss) per ordinary
share - basic 7 8.4p (20.6)p
Earnings/(loss) per ordinary
share - diluted 7 8.4p (20.6)p
------------------------------------ ------- --------- ----------
Statement of Other Comprehensive Income
For the year ended 31 December 2017
Year ended 31
December
2017 2016
GBP'000 GBP'000
--------- ----------
Profit/(loss) for the year 7,600 (20,831)
Other comprehensive income - -
--------- ----------
Total comprehensive profit/(loss)
for the year 7,600 (20,831)
------------------------------------- --------- ----------
Attributable to:
Equity shareholders 7,600 (20,831)
------------------------------------- --------- ----------
Statement of Financial Position
As at 31 December 2017
31 December
----------------------
2017 2016
Notes GBP'000 GBP'000
----------
Non-current assets
Property, plant and equipment 8 - 32
Investments 9 141,964 148,312
---------- ----------
Non-current assets 141,964 148,344
---------- ----------
Current assets
Operating and other receivables 10 281 248
Cash and cash equivalents 11 2,283 1,249
---------- ----------
Current assets 2,564 1,497
---------- ----------
Total assets 144,528 149,841
---------- ----------
Current liabilities
Operating and other payables 12 (1,292) (4,078)
Amounts payable to subsidiaries (78,748) (76,743)
---------- ----------
Current liabilities (80,040) (80,821)
---------- ----------
Non-current liabilities
Provisions and other liabilities 13 - (904)
---------- ----------
Non-current liabilities - (904)
---------- ----------
Total liabilities (80,040) (81,725)
---------- ----------
Net assets 64,488 68,116
----------------------------------- ------- ---------- ----------
Equity
Share capital 14 8,073 9,644
Share premium 508 508
Capital redemption reserve 24,949 23,378
Retained earnings 30,958 34,586
----------------------------------- ------- ---------- ----------
Total equity shareholders' funds 64,488 68,116
----------------------------------- ------- ---------- ----------
Statement of Changes in Equity
For the year ended 31 December 2017
Capital
Share Share redemption Retained Total
capital premium reserve earnings equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------- --------- ------------ ---------- ----------
Balance at 1 January
2016 10,358 508 22,664 61,561 95,091
Total comprehensive
income
for the year
Loss for the year - - - (20,831) (20,831)
Transactions with
owners,
recorded directly
in equity
Repurchase of shares (714) - 714 (6,144) (6,144)
--------- --------- ------------ ---------- ----------
Balance at 31 December
2016 9,644 508 23,378 34,586 68,116
Total comprehensive
income
for the year
Profit for the
year - - - 7,600 7,600
Transactions with
owners,
recorded directly
in equity
Repurchase of shares (1,571) (-) 1,571 (11,228) (11,228)
------------------------- --------- --------- ------------ ---------- ----------
Balance at 31 December
2017 8,073 508 24,949 30,958 64,488
------------------------- --------- --------- ------------ ---------- ----------
Cash Flow Statement
For the year ended 31 December 2017
Year ended 31
December
2017 2016
Notes GBP'000 GBP'000
Cash flows from operating activities
Profit/(loss) for the year 7,600 (20,831)
Adjustments for:
Depreciation 4 32 233
(Gains)/losses on investments (9,898) 16,161
Interest income (66) (20)
--------------------------------------- ------- ---------- ----------
(2,332) (4,457)
Change in operating and other
receivables (33) (92)
Change in operating and other
payables (3,690) (120)
Change in amounts payable to
subsidiaries 18,296 9,585
---------- ----------
Net cash from operating activities 12,241 4,916
--------------------------------------- ------- ---------- ----------
Cash flows from Investing activities
Interest received 21 19
Purchase of investments - (1,621)
Acquisition of property, plant
and equipment - (4)
---------- ----------
Net cash from/(used in) investing
activities 21 (1,606)
--------------------------------------- ------- ---------- ----------
Cash flows from financing activities
Repurchase of own shares (11,000) (6,144)
Transaction costs relating
to tender offer (228) -
---------- ----------
Net cash used in financing
activities (11,228) (6,144)
--------------------------------------- ------- ---------- ----------
Net increase/(decrease) in
cash and cash equivalents 1,034 (2,834)
Cash and cash equivalents at
the beginning of the year 1,249 4,083
---------- ----------
Cash and cash equivalents at
the end of the year 2,283 1,249
--------------------------------------- ------- ---------- ----------
Notes to the Financial Statements
1. Principal accounting policies
Reporting entity
LMS Capital plc ("the Company") is domiciled in the United Kingdom. These financial statements are presented in pounds sterling because that is the currency of the principal economic environment of the Company's operations.
The Company was formed on 17 March 2006 and commenced operations on 9 June 2006 when it received the demerged investment division of London Merchant Securities.
Basis of preparation
These financial statements have been prepared in accordance with International Financial Reporting Standards as adopted for use in the European Union ("Adopted IFRSs"). These financial statements were authorised for issue by the Directors on 15 March 2018.
The financial statements have been prepared on the historical cost basis except for investments which are measured at fair value, with changes in fair value recognised in the income statement.
The Company's business activities and financial position are set out in the Strategic Report on pages 6 to 11 and in the Manager's Review on pages 13 to 24. In addition, note 16 to the financial information includes a summary of the Company's financial risk management processes, details of its financial instruments and its exposure to credit risk and liquidity risk. Taking account of the financial resources available to it, the Directors believe that the Company is well placed to manage its business risks successfully. After making enquiries the Directors have a reasonable expectation that the Company has adequate resources for the foreseeable future.
Accounting for subsidiaries
The Directors have concluded that the Company has all the elements of control as prescribed by IFRS 10 "Consolidated Financial Statements" in relation to all its subsidiaries and that the Company satisfies the criteria to be regarded as an investment entity as defined in IFRS 10, IFRS 12 "Disclosure of Interests in Other Entities" and IAS 27 "Consolidated and Separate Financial Statements". Subsidiaries are therefore measured at fair value through profit or loss, in accordance with IFRS 13 "Fair Value Measurement" and IAS 39 "Financial Instruments: Recognition and Measurement".
The Company's subsidiaries, which are wholly-owned and over which it exercises control, are listed in note 21.
New standards and interpretations not yet applied
The International Accounting Standards Board has issued the following standards, which are relevant to the Company's reporting but which have not yet been applied and have an effective date after the date of these financial statements:
-- IFRS 9 "Financial instruments" addresses the classification, measurement and recognition of financial assets and financial liabilities. The standard is effective for accounting periods beginning on or after 1 January 2018. It will not have a material impact on the Company's classification, measurement or disclosure of its financial assets and financial liabilities.
-- IFRS 15, 'Revenue from Contracts with Customers' will supersede all current revenue recognition requirements under IFRS. It is effective for periods beginning on or after 1 January 2018. The Company is not exposed to IFRS 15 given its business model and it is not expected to have any impact.
-- IFRS 16 "Leases" primarily affects accounting by lessees and will result in the recognition of most leases in the statement of financial position. The standard removes the current distinction between operating and finance leases and requires recognition of an asset (the right to use the leased item) and a financial liability to pay rentals for virtually all lease contracts. The standard is effective for accounting periods beginning on or after 1 January 2019. The Company's lease of its premises at 100 George Street, London W1U 8NU would fall to be accounted for under the new requirements but that lease expires on 24 March 2018. At 1 January 2019 the Company is not expected to have any leases and for the 2018 comparative period the amount will be insignificant in terms of impact.
Use of estimates and judgements
The preparation of financial statements in conformity with Adopted IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis; revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements is included in note 1 - valuation of investments.
Investments in subsidiaries
The Company's investments in subsidiaries are stated at fair value which is considered to be the carrying value of the net assets of each subsidiary. On disposal of such investments the difference between net disposal proceeds and the corresponding carrying amount is recognised in the income statement.
Valuation of investments
The Company and its subsidiaries manage their investments with a view to profit from the receipt of dividends and changes in fair value of equity investments. Therefore all quoted, unquoted and managed fund investments are designated at fair value through profit and loss and carried in the Statement of Financial Position at fair value.
Fair values have been determined in accordance with the International Private Equity and Venture Capital Valuation Guidelines. These guidelines require the valuer to make judgments as to the most appropriate valuation method to be used and the results of the valuations.
Each investment is reviewed individually with regard to the stage, nature and circumstances of the investment and the most appropriate valuation method selected. The valuation results are then reviewed and any amendment to the carrying value of investments is made as considered appropriate. Where the value of an investment is considered to be impaired, it is written down to its expected recoverable amount as part of the determination of its fair value.
Quoted investments
Quoted investments for which an active market exists are valued at the closing bid price at the reporting date.
Unquoted direct investments
Unquoted direct investments for which there is no ready market are valued using the most appropriate valuation technique with regard to the stage and nature of the investment.
Valuation methods that may be used include:
-- Investments in which there has been a recent funding round involving significant financing from external investors are valued at the price of the recent funding, discounted if an external investor is motivated by strategic considerations;
-- Investments in an established business are valued using revenue or earnings multiples depending on the stage of development of the business and the extent to which it is generating sustainable profits or positive cash flows;
-- Investments in a business the value of which is derived mainly from its underlying net assets rather than its earnings are valued on the basis of net asset valuation;
-- Investments in an established business which is generating sustainable profits or positive cash flows but for which other valuation methods are not appropriate are valued by calculating the discounted cash flow of future cash flows or earnings; and
-- Investments in early stage businesses not generating sustainable profits or positive cash flows and for which there has not been any recent independent funding are valued by calculating the discounted cash flow of the investment to the investors.
Funds
Investments in managed funds are valued at fair value. The general partners of the funds will provide periodic valuations on a fair value basis which the Company will adopt, provided it is satisfied that the valuation methods used by the funds are not materially different from the Company's valuation methods.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation and any impairment loss. Cost includes expenditure that is directly attributable to the asset, including where appropriate the cost of materials, direct labour and any other costs directly attributable to bringing the asset to a working condition for its intended use.
Depreciation is charged using the straight-line method over the estimated useful lives of the assets as follows:
Plant and equipment 3 years Fixtures and fittings 3 - 7 years
When parts of an item of property, plant and equipment have different useful lives, these components are accounted for as separate items of property, plant and equipment. The useful lives of the items within property, plant and equipment are reviewed regularly, including at each reporting date.
Impairment of financial assets
Loans and receivables are considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.
An impairment loss in respect of loans and receivables measured at amortised cost is calculated as the difference between their carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Individually significant loans and receivables are tested for impairment on an individual basis. The remaining loans and receivables are assessed collectively in groups that share similar credit risk characteristics.
An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised.
Foreign currencies
Transactions in foreign currencies are recorded at the rate of exchange at the date of transaction. Monetary assets and monetary liabilities denominated in foreign currencies at the reporting date are reported at the rates of exchange prevailing at that date and exchange differences are included in the income statement.
Operating and other receivables
Operating and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment losses.
Cash and cash equivalents
Cash, for the purpose of the cash flow statement, comprises cash in hand and cash equivalents, less overdrafts payable on demand.
Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
Financial liabilities
The Company's financial liabilities include operating and other payables. They are measured at cost which is the fair value of the consideration to be paid in the future for goods and services received.
Provisions
A provision is recognised if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the liability.
Income
Gains and losses on investments
Realised and unrealised gains and losses on investments are recognised in the income statement in the period in which they arise.
Interest income
Interest income is recognised as it accrues using the effective interest method.
Directors' and other fees from investments
These principally comprise investment management fees receivable from portfolio companies.
Expenditure
Employee benefits
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related services are provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or carried interest incentive arrangements if the Company has a present legal or constructive obligation to pay the amount as a result of past service provided by the employee and the obligation can be estimated reliably.
Payments to defined contribution pension schemes are charged as an expense as they fall due.
Share-based payments
The Company has issued share options and awards of performance shares to certain employees. Such options and awards are treated as equity-settled share-based payments and measured at fair value at the date of grant and the fair value is recognised as an expense with a corresponding increase in equity on a straight-line basis over the vesting period.
Fair value is calculated by use of a binomial option valuation model taking into account the terms and conditions under which the equity-settled share-based payments were issued. Service and non-market performance conditions attached to transactions are not taken into account in determining fair value.
Operating lease payments
Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense over the term of the lease. Provision is made for all or part of an operating lease if it is considered to be onerous.
Income tax expense
Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity as other comprehensive income.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognised using the balance sheet liability approach, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which temporary differences can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised.
The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2017 or 2016 but is derived from those accounts. Statutory accounts for 2016 have been delivered to the registrar of companies, and those for 2017 will be delivered in due course. The auditor has reported on those accounts; their report on the accounts for 2017 was (i) unqualified and (ii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. The auditor's report on the accounts for 2016 was (i) unqualified (ii) drew attention by way of emphasis without qualifying their report to the accounts not being prepared on a going concern basis and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
2. Net gains/(losses) on investments
Gains and losses on investments were as follows:
Year ended
31 December
---------- ------------ -------------- ---------- ------------ ----------
2017 2016
---------- ------------ -------------- ---------- ------------ ----------
Realised Unrealised Total Realised Unrealised Total
Asset type GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------ ---------- ------------ -------------- ---------- ------------ ----------
Quoted 190 787 977 9 (1,291) (1,282)
Unquoted 2,488 (3,077) (589) - (15,879) (15,879)
Funds 3,595 6,472 10,067 491 492 983
------------------ ---------- ------------ -------------- ---------- ------------ ----------
6,273 4,182 10,455 500 (16,678) (16,178)
------------------ ---------- ------------ -------------- ---------- ------------ ----------
(Charge)/credit
for incentive
plans (44) 737
-------------- ----------
10,411 (15,441)
Operating and
similar
expenses of
subsidiaries* (513) (720)
9,898 (16,161)
------------------ ---------- ------------ -------------- ---------- ------------ ----------
* Includes operating and legal costs and taxation charges of subsidiaries.
3. Interest income
Interest income comprises interest receivable on bank deposits.
4. Operating expenses
Operating expenses comprise administrative expenses and include the following:
Year ended
31 December
--------------------
2017 2016
GBP'000 GBP'000
------------------------------------- --------- ---------
Depreciation 32 127
Personnel costs (note 5) 421 1,198
Operating lease expense (22) 269
Reorginsation costs - 2,157
Management fees 1,055 573
Other administrative expenses 350 471
Foreign currency exchange
differences 420 (202)
Auditor's remuneration
Fees to Group auditor
- parent company 32 27
- subsidiary companies 76 63
Non-audit related services
- other assurance services* - 55
-------------------------------------- --------- ---------
2,364 4,738
------------------------------------- --------- ---------
* relates to non-audit services provided by the previous auditor, KPMG LLP.
The reorganisation costs in 2016 comprised the following:
-- Professional charges in connection with the circular to shareholders dated 27 July 2016 - GBP866,000
-- Severance costs for Executive Directors and staff - GBP712,000
-- Premises costs for property that was surplus to requirements - GBP579,000 (including GBP105,000 accelerated depreciation on fixtures and fittings).
5. Personnel expenses
Year ended 31
December
--------------------
2017 2016
GBP'000 GBP'000
----------------------------- --------- ---------
Wages and salaries 323 1,010
Compulsory social security
contributions 79 125
Contributions to defined
contribution plans 19 63
------------------------------ --------- ---------
421 1,198
----------------------------- --------- ---------
The wages and salaries expense includes a credit of GBPnil (2016: credit of GBP179,000) in relation to carried interest.
The wages and salaries expense is shown in the income statement as follows:
Year ended 31
December
--------------------
2017 2016
GBP'000 GBP'000
----------------------- --------- ---------
Gains on investments - (179)
Operating expenses 323 1,189
------------------------ --------- ---------
323 1,010
----------------------- --------- ---------
The executive incentive plan is described in the Remuneration Committee Report. The scheme was linked to amounts returned to shareholders as a consequence of the Company's realisation strategy and GBPnil is accrued at 31 December 2017 (31 December 2016: GBP904,000) in respect of amounts due to the former Executive Directors.
The Company operates carried interest arrangements in line with normal practice in the private equity industry, calculated on the assumption that the investment portfolio is realised at its year-end carrying amount. As at 31 December 2017, GBPnil has been accrued (2016: GBPnil)
The average number of Directors and staff was as follows:
31 December 2017 31 December 2016
------------------------------------------------------------- -------------------------------------------------------------
Male Female Total Male Female Total
------------- ------------------- ------------------- ------------------- ------------------- ------------------- -------------------
Directors 4 - 4 6 - 6
Senior
Management - - - - - -
Other
employees 1 1 2 1 3 4
------------- ------------------- ------------------- ------------------- ------------------- ------------------- -------------------
5 1 6 7 3 10
------------- ------------------- ------------------- ------------------- ------------------- ------------------- -------------------
6. Taxation
Year ended 31
December
--------------------
2017 2016
GBP'000 GBP'000
--------------------- --------- ---------
Current tax expense
Current year - -
--------------------- --------- ---------
Total tax expense - -
--------------------- --------- ---------
Reconciliation of tax expense
Year ended 31
December
---------------------
2017 2016
GBP'000 GBP'000
--------------------------------------- --------- ----------
Profit/(loss) before tax 7,600 (20,831)
--------------------------------------- --------- ----------
Corporation tax using the Company's
domestic tax rate - 19.25% (2016:
20%) 1,463 (4,166)
Fair value adjustments not currently
taxed 516 3,811
Non-deductible expenses 6 (212)
Non-taxable income (3,139) 27
Deferred tax asset not recognised 230 686
Group relief 924 (204)
Overseas tax paid - 39
Prior year adjustment - 19
--------- ----------
Total tax expense - -
--------------------------------------- --------- ----------
7. Earnings/(loss) per ordinary share
The calculation of the basic and diluted earnings per share, in accordance with IAS 33, is based on the following data:
Year ended 31
December
--------------------------------------
2017 2016
GBP'000 GBP'000
-------------------------------------- ------------ ------------------------
Earnings
Earnings/(loss) for the purposes
of earnings/(loss) per share
being
net profit/(loss) attributable
to equity holders of the parent 7,600 (20,831)
--------------------------------------- ------------ ------------------------
Number Number
------------ ------------------------
Number of shares
Weighted average number of
ordinary shares for the
purposes of basic earnings/(loss)
per share 90,457,391 101,203,640
Effect of dilutive potential
ordinary shares:
Share options and performance
shares* - -
Weighted average number of
ordinary shares for the
purposes of diluted earnings/(loss)
per share 90,535,922 101,203,640
--------------------------------------- ------------ ------------------------
Earnings per share Pence Pence
-------------------------------------- ------------ ------------------------
Basic 8.4 (20.6)
Diluted 8.4 (20.6)
--------------------------------------- ------------ ------------------------
* There were no potentially dilutive shares in 2016 since the Company made a loss.
8. Property, plant and equipment
Plant
and Fixtures
and
equipment fittings Total
GBP'000 GBP'000 GBP'000
------------------------------ ----------- ----------- ---------
Cost
Balance at 1 January 2016 329 1,023 1,352
Additions 4 - 4
------------------------------ ----------- -----------
Balance at 31 December 2016 333 1,023 1,356
------------------------------ ----------- ----------- ---------
Balance at 1 January 2017 333 1,023 1,356
Additions - - -
Balance at 31 December 2017 333 1,023 1,356
------------------------------ ----------- ----------- ---------
Depreciation and impairment
losses
Balance at 1 January 2016 325 766 1,091
Depreciation charge for the
year 3 230 233
----------- ----------- ---------
Balance at 31 December 2016 328 996 1,324
------------------------------ ----------- ----------- ---------
Balance at 1 January 2017 328 996 1,324
Depreciation charge for the
year 5 27 32
----------- ----------- ---------
Balance at 31 December 2017 333 1,023 1,356
------------------------------ ----------- ----------- ---------
Carrying amounts
At 31 December 2016 5 27 32
At 31 December 2017 - - -
------------------------------ ----------- ----------- ---------
9. Investments
The Company's investments comprised the following:
Year ended 31
December
--------------------
2017 2016
GBP'000 GBP'000
------------------------------------------- --------- ---------
Total investments 141,964 148,312
------------------------------------------- --------- ---------
Investment portfolio of the Company 4,123 2,481
Investment portfolio of the subsidiaries 59,695 70,951
------------------------------------------- --------- ---------
Investment portfolio - total 63,818 73,432
Other net assets of subsidiaries 78,146 74,880
141,964 148,312
------------------------------------------- --------- ---------
The carrying amounts of the Company's and its subsidiaries' investment portfolios were as follows:
31 December 2017 31 December 2016
------------------------------- -------------------------------
UK US Total UK US Total
Asset type GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------ --------- --------- --------- --------- --------- ---------
Quoted 6,874 1,770 8,644 2,481 2,995 5,476
Unquoted direct 8,400 14,504 22,904 9,384 21,987 31,371
Funds 7,806 24,464 32,270 11,149 25,436 36,585
------------------ --------- --------- --------- --------- --------- ---------
23,080 40,738 63,818 23,014 50,418 73,432
------------------ --------- --------- --------- --------- --------- ---------
The movements in the investment portfolio were as follows:
Quoted Unquoted
securities securities Funds Total
GBP'000 GBP'000 GBP'000 GBP'000
Carrying value
Balance at 1 January 2016 9,761 46,112 39,770 95,643
Purchases 2,618 852 438 3,908
Reclassification (286) 286 - -
Disposals (5,326) - - (5,326)
Distributions from partnerships - - (4,779) (4,779)
Fair value adjustments (1,291) (15,879) 1,156 (16,014)
------------ ------------ ---------- ----------
Balance at 31 December
2016 5,476 31,371 36,585 73,432
---------------------------------- ------------ ------------ ---------- ----------
Balance at 1 January 2017 5,476 31,371 36,585 73,432
Purchases 3,957 675 68 4,700
Disposals (1,576) (6,331) - (7,907)
Distributions from partnerships - - (11,313) (11,313)
Fair value adjustments 787 (2,811) 6,930 4,906
------------ ------------ ---------- ----------
Balance at 31 December
2017 8,644 22,904 32,270 63,818
---------------------------------- ------------ ------------ ---------- ----------
The following table analyses investments carried at fair value at the end of the year, by the level in the fair value hierarchy into which the fair value measurement is categorised. The different levels have been defined as follows:
Level 1: quoted prices (unadjusted) in active markets for identical assets;
Level 2: inputs other than quoted prices included within level 1 that are observable for the asset, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3: inputs for the asset that are not based on observable market data (unobservable inputs such as trading comparables and liquidity discounts).
Fair value measurements are based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's view of market assumptions in the absence of observable market information (see note 16 - Financial risk management).
The Company's investments are analysed as follows:
31 December
--------------------
2017 2016
GBP'000 GBP'000
---------- --------- ---------
Level 1 3,304 2,366
Level 2 - -
Level 3 138,660 145,946
------------ --------- ---------
141,964 148,312
---------- --------- ---------
Level 3 amounts include GBP59,695,000 (2016: GBP70,951,000) relating to the investment portfolios of subsidiaries (including quoted investments of GBP4,521,000 (2016: GBP2,995,000)) and GBP78,146,000 (2016: GBP74,880,000) in relation to the other net assets of subsidiaries.
10. Operating and other receivables
31 December
--------------------
2017 2016
GBP'000 GBP'000
--------- ---------
Trade receivables 35 60
Other receivables and
prepayments 246 188
--------- ---------
281 248
------------------------ --------- ---------
11. Cash and cash equivalents
31 December
--------------------
2017 2016
GBP'000 GBP'000
---------------------- --------- ---------
Bank balances 40 117
Short-term deposits 2,243 1,132
------------------------ --------- ---------
2,283 1,249
---------------------- --------- ---------
12. Operating and other payables
31 December
--------------------
2017 2016
GBP'000 GBP'000
--------------------------- ---------
Trade payables 335 1,470
Other non-trade payables
and accrued expenses 957 2,608
----------------------------- --------- ---------
1,292 4,078
--------------------------- --------- ---------
13. Provisions and other liabilities
31 December
---------------------
2017 2016
GBP'000 GBP'000
--------------------------- ---------- ---------
Executive incentive plan
(note 5) - 904
----------------------------- -------- ---------
14. Capital and reserves
Share capital
2017 2017 2016 2016
Ordinary shares Number GBP'000 Number GBP'000
---------------- --------- ----------------- ---------
Balance at the beginning
of the year 96,441,735 9,644 103,584,592 10,358
Repurchase of shares (15,714,285) (1,571) (7,142,857) (714)
---------------- ----------------- ---------
Balance at the end
of the year 80,727,450 8,073 96,441,735 9,644
--------------------------- ---------------- --------- ----------------- ---------
The Company's ordinary shares have a nominal value of 10p per share and all shares in issue are fully paid up.
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.
The repurchase of shares was in connection with the tender offer in August 2017 for GBP11 million (2016: GBP6 million).
Share premium account
The Company's share premium account arose on the exercise of share options in prior years.
Capital redemption reserve
The capital redemption reserve comprises the nominal value of shares purchased by the Company out of its own profits and cancelled.
Treasury shares
The Company has no shares held in treasury.
15. Share-based payments
Executive share option plan
The Company has a share option plan that entitles certain employees to purchase shares in the Company at the market price of the shares at the date of grant of the option, subject to Company performance criteria. Under the terms of the scheme, options may be exercised between three and ten years after the date of grant. At 31 December 2017 there were no option grants outstanding under this plan (2016: nil).
Deferred share bonus plan
The Company has a deferred share bonus plan for key executives. Shares awarded under this scheme are released over three or four years (depending on the size of the award) and the first release may take place no earlier than the first anniversary of the award subject to the increase in the Net Asset Value per share of the Company exceeding the increase in the Retail Prices Index ("RPI") by an average of at least 3% per annum.
At 31 December 2017 options over 49,999 ordinary shares were outstanding (2016: 49,999). There were no grants or exercises of options under this plan during 2017 (2016: nil). These options are vested and available for exercise until 12 April 2020. The weighted average exercise price of the awards outstanding at 31 December 2017 was GBPnil (31 December 2016: GBPnil).
Performance share plan
The Company has a performance share plan that entitles certain employees to receive an award of performance shares in the Company. Performance shares granted under the plan are subject to the performance criteria set out below.
For 25% of the total award to vest, Total Shareholder Return (TSR) over the-three year measurement period must exceed the median TSR of the FTSE All-Share Index. For the remaining 75% of the award, the increase in Net Asset Value per share over the period must exceed the increase in the Retail Prices Index by at least 3% per annum. At RPI plus 3%,
18.75% of the total shares that are subject to the award will vest, rising on a straight-line basis to the remaining 75% vesting if the increase in Net Asset Value per share exceeds RPI by 8% per annum.
At 31 December 2017 options over 28,352 ordinary shares were outstanding (2016: 28,352). There were no grants or exercises of options under this plan during 2017 (2016: nil). These options are vested and available for exercise until 11 April 2021. The weighted average exercise price of the awards outstanding at 31 December 2017 was GBPnil (31 December 2016: GBPnil).
Recognition and measurement
The fair value of services received in return for grants and awards under the Company's share-based incentive plans is based on their fair value measured using a binomial valuation model. There were no awards of shares under the plans in 2017 or 2016 and there was no charge or credit recognised in the income statement in respect of share based incentive plans in 2017 (2016: GBPnil).
16. Financial risk management
Financial instruments by category
The following tables analyse the Company's financial assets and financial liabilities in accordance with the categories of financial instruments in IAS 39. Assets and liabilities outside the scope of IAS 39 are not included in the table below:
31 December
2017 2016
----------------------------------- -----------------------------------
Fair Fair
Value Value
through Loans through Loans
profit profit
or and or and
loss receivables Total loss receivables Total
Assets GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------- --------- ------------- --------- --------- ------------- ---------
Investments 141,964 - 141,964 148,312 - 148,312
Operating and
other receivables - 281 281 - 248 248
Cash and cash
equivalents - 2,283 2,283 - 1,249 1,249
--------------------- --------- ------------- ---------
Total 141,964 2,564 144,528 148,312 1,497 149,809
--------------------- --------- ------------- --------- --------- ------------- ---------
31 December
2017 2016
------------------------------------ -----------------------------------
Fair Fair
Value Value
through Loans through Loans
profit profit
or and or and
loss receivables Total loss receivables Total
Liabilities GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------- ---------- ------------- --------- --------- ------------- ---------
Operating and
other payables - 1,292 1,292 - 4,078 4,078
Provisions and
other liabilities - - - - 904 904
Amounts payable
to subsidiaries - 78,748 78,748 - 76,743 76,743
--------------------- ---------- ------------- --------- --------- ------------- ---------
Total - 80,040 80,040 - 81,725 81,725
--------------------- ---------- ------------- --------- --------- ------------- ---------
The Company has exposure to the following risks from its use of financial instruments:
-- Credit risk; -- Liquidity risk; and -- Market risk.
This note presents information about the Company's exposure to each of the above risks, its policies for measuring and managing risk, and its management of capital.
Credit risk
Credit risk is the risk of the financial loss to the Company if a counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company's receivables and its cash and cash equivalents.
31 December
--------------------
2017 2016
GBP'000 GBP'000
--------------------- ---------
Operating and
other receivables 281 248
Cash and cash
equivalents 2,283 1,249
------------------------- ---------
2,564 1,497
--------------------- --------- ---------
The Company limits its credit risk exposure by only depositing funds with highly rated institutions. Cash holdings at 31 December 2017 and 2016 were in funds currently rated A or better by Standard and Poor's. Given these ratings the Company does not expect any counterparty to fail to meet its obligations and therefore no allowance for impairment is made for bank deposits.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. Its financing requirements are met through a combination of liquidity from the sale of investments and the use of cash resources.
Operating and other payables are due within six months or less.
In addition certain of the Company's subsidiaries have uncalled capital commitments to funds of GBP3,133,000 (31 December 2016: GBP3,577,000) for which the timing of payment is uncertain (see note 18).
Market risk
Market risk is the risk that changes in market prices such as foreign exchange rates, interest rates and equity prices will affect the Company's income or the value of its holdings of financial instruments. The Company aims to manage this risk within acceptable parameters while optimising the return.
Currency risk
The Company is exposed to currency risk on those of its investments which are denominated in a currency other than the Company's functional currency which is pounds sterling. The only other significant currency within the investment portfolio is the US dollar; approximately 64% of the investment portfolio is denominated in US dollars.
The Company does not hedge the currency exposure related to its investments. The Company regards its exposure to exchange rate changes on the underlying investment as part of its overall investment return, and does not seek to mitigate that risk through the use of financial derivatives.
The Company is exposed to translation currency risk on sales and purchases which are denominated in a currency other than the Company's functional currency. The currency in which these transactions are denominated is principally US dollars.
The Company's exposure to foreign currency risk was as follows:
31 December
------------------------------------------------------------------
2017 2016
-------------------------------- --------------------------------
GBP USD Other GBP USD Other
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------- ---------- --------- --------- ---------- --------- ---------
Investments 99,205 41,441 1,318 94,190 52,628 1,494
Operating and
other receivables 281 - - 247 1 -
Cash and cash
equivalents 1,995 288 853 396 -
Operating and
other payables (80,040) - - (80,821) - -
--------------------- ---------- --------- --------- ---------- --------- ---------
Gross exposure 21,441 41,729 1,318 14,469 53,025 1,494
Forward exchange
contracts - - - - - -
--------------------- ---------- --------- ---------
Net exposure 21,441 41,729 1,318 14,469 53,025 1,494
--------------------- ---------- --------- --------- ---------- --------- ---------
At 31 December 2017, the rate of exchange was USD 1.35 = GBP1.00 (31 December 2016: USD 1.23 = GBP1.00). The average rate for the year ended 31 December 2017 was USD 1.32 = GBP1.00 (2016: USD 1.34 = GBP1.00).
A 10% strengthening of the US dollar against the pound sterling would have increased equity by GBP4.4 million at 31 December 2017 (31 December 2016: increase of GBP5.4 million) and decreased the loss for the year ended 31 December 2017 by GBP4.4 million (2016: decreased the loss by GBP5.4 million). This assumes that all other variables, in particular interest rates, remain constant. A weakening of the US dollar against the pound sterling would have decreased equity and increased the loss for the year by the same amounts.
Interest rate risk
At the reporting date the Company's cash and cash equivalents are exposed to interest rate risk and the sensitivity below is based on these amounts.
An increase of 100 basis points in interest rates at the reporting date would have increased equity by GBP18,000 (31 December 2016: increase of GBP27,000) and decreased the loss for the year by GBP18,000 (2016: decreased the loss by GBP27,000). A decrease of 100 basis points would have decreased equity and increased the loss for the year by the same amounts.
Fair values
All items not held at fair value in the Statement of Financial Position have fair values that approximate their carrying values.
Other market price risk
Equity price risk arises from equity securities held as part of the Company's portfolio of investments. The Company's management of risk in its investment portfolio focuses on diversification in terms of geography and sector, as well as type and stage of investment.
The Company's investments comprise unquoted investments in its subsidiaries and investments in quoted investments. The subsidiaries' investment portfolios comprise investments in quoted and unquoted equity and debt instruments. Quoted investments are quoted on the main stock exchanges in London, USA and Canada. A proportion of the unquoted investments are held through funds managed by external managers.
As is common practice in the venture and development capital industry, the investments in unquoted companies are structured using a variety of instruments including ordinary shares, preference shares and other shares carrying special rights, options and warrants and debt instruments with and without conversion rights. The investments are held for resale with a view to the realisation of capital gains. Generally, the investments do not pay significant income.
The significant unobservable inputs used at 31 December 2017 in measuring investments categorised as level 3 in note 9 are considered below:
1. Unquoted securities (carrying value GBP22.9 million) are valued using the most appropriate valuation technique such as the price of recent investment;, an earnings or revenue based approach, or a discounted cash flow approach. In most cases the valuation method uses inputs based on comparable quoted companies for which the key unobservable inputs are:
-- EBITDA multiples in the range 5-9 times dependent on the business of each individual company, its performance and the sector in which it operates;
-- Revenue multiples in the range 0.5-1.5 times, also dependent on attributes at individual investment level; and
-- Discounts applied of up to 65%, to reflect the illiquidity of unquoted companies compared to similar quoted companies. The discount used requires the exercise of judgement taking into account factors specific to individual investments such as size and rate of growth compared to other companies in the sector.
2. Investments in funds (carrying value GBP32.3 million) are valued using reports from the general partners of the fund interests with adjustments made for calls, distributions and foreign currency movements since the date of the report (if prior to 31 December 2017). The Company also carries out its own review of individual funds and their portfolios to satisfy ourselves that the underlying valuation bases are consistent with our basis of valuation and knowledge of the investments and the sectors in which they operate. However, the degree of detail on valuations varies significantly by fund and, in general, details of unobservable inputs used are not available.
The valuation of the investments in subsidiaries makes use of multiple interdependent significant unobservable inputs and it is impractical to sensitise variations of any one input on the value of the investment portfolio as a whole. Estimates and underlying assumptions are reviewed on an ongoing basis however inputs are highly subjective.
If the valuation for level 3 category investments declined by 10% from the amount at the reporting date, with all other variables held constant, the loss for the year ended 31 December 2017 would have increased by GBP13.9 million (2016: loss increased by GBP14.6 million). An increase in the valuation of level 3 category investments by 10% at the reporting date would have an equal and opposite effect.
Capital management
The Company's total capital at 31 December 2017 was GBP64 million (31 December 2016: GBP68 million) comprising equity share capital and reserves. The Company had borrowings at 31 December 2017 of GBPnil (31 December 2016: GBPnil).
In order to meet the Company's capital management objectives, the Manager and the Board monitor and review the broad structure of the Company's capital on an ongoing basis. This review includes:
-- Working capital requirements and follow-on investment capital for portfolio investments, including calls from funds;
-- Capital available for new investments;
-- The possible timing of returning capital to shareholders in line with the Company's commitment to further capital returns to shareholders; and
-- The annual dividend policy.
The Company's objectives, policies and processes for managing capital reflect the change in strategy from 16 August 2016.
17. Operating leases
Leases as lessee
Non-cancellable operating lease rentals are payable as follows:
31 December
--------------------
2017 2016
GBP'000 GBP'000
----------------------- --------- ---------
Less than one year 139 406
Between one and five
years - -
----------------------- --------- ---------
139 406
----------------------- --------- ---------
The operating lease obligations are significantly reduced, due to the termination of the lease on 24 March 2018.
18. Capital commitments
31 December
--------------------
2017 2016
GBP'000 GBP'000
-------------------------- --------- ---------
Outstanding commitments
to funds 3,133 3,577
---------------------------- --------- ---------
The outstanding capital commitments to funds comprise unpaid calls in respect of funds where a subsidiary of the Company is a limited partner.
19. Related party transaction
Gresham House Asset Management Limited was appointed the investment manager of LMS Capital plc on 16 August 2016. Amounts charged by the investment manager in 2017 were GBP1,055,000 (2016: GBP573,000).
With effect from January 2011 the Company entered into a lease agreement with Derwent London plc in respect of the premises comprising its head office and registered office. Under the terms of the lease the Company paid an annual rent of GBP406,000 (2016: GBP406,000) to Derwent London plc plus certain service charges. Robert Rayne is Chairman of Derwent London plc. The lease will terminate on 24 March 2018.
For a number of years, the Company has provided without charge office accommodation and services within its premises for The Rayne Foundation, a registered charity (www.raynefoundation.org.uk). The estimated monetary value of this for the first six months of 2017 was GBP30,000 (full year 2016: GBP65,000). The Company has been transitioning out of its offices during 2017 in line with the outsourcing of management and administration services and, as a result, the Rayne Foundation was required to find alternative office premises from 1 July 2017. To compensate the Foundation for the additional costs which it will incur, the Company made a one-off contribution to these additional costs of GBP275,000. The Company will make no further payments to the Rayne Foundation. Robert Rayne is Chairman of the Board of Trustees of The Rayne Foundation.
As part of the transition referred to above the Company gave notice on its annual contract with a financial news service. To reduce the ongoing cost to the Company of this service, SQP Limited agreed to assume the Company's obligations under its contract with the news service provider. In connection with this transfer the Company paid SQP Limited GBP13,000 as a contribution to the contract costs. Robert Rayne is the controlling shareholder and a director of SQP Limited
Compensation arrangements for Directors are set out in the Remuneration Committee Report on pages 40 to 43.
20. Subsequent events
In February 2018 the majority owners of Brockton Capital LLP agreed terms for the sale of the business, completion of which is conditional on customary conditions including obtaining regulatory approval. Assuming the conditions are met, the sale will result in the realisation by the Company of its minority investment for proceeds expected to be in the region of GBP2.5 million. The carrying value at 31 December 2017 reflects the expected outcome for the Company of this transaction.
21. Subsidiaries
The Company's subsidiaries are as follows:
Country of Holding
Name incorporation % Activity
--------------------------- ---------------- --------- ------------
International Oilfield Bermuda 100 Investment
Services Limited holding
LMS Capital (Bermuda) Bermuda 100 Investment
Limited holding
LMS Capital (ECI) England and 100 Investment
Limited Wales holding
LMS Capital (General Bermuda 100 Investment
Partner) Limited holding
LMS Capital (GW) Bermuda 100 Investment
Limited holding
LMS Capital Group England and 100 Investment
Limited Wales holding
LMS Capital Holdings England and 100 Investment
Limited Wales holding
LMS NEP Holdings United States 100 Investment
Inc of America holding
Lioness Property England and 100 Investment
Investments Limited Wales holding
Lion Property Investments England and 100 Investment
Limited Wales holding
Lion Investments England and 100 Investment
Limited Wales holding
Lion Cub Investments England and 100 Dormant
Limited Wales
Lion Cub Property England and 100 Investment
Investments Limited Wales holding
Tiger Investments England and 100 Investment
Limited Wales holding
LMS Tiger Investments England and 100 Investment
Limited Wales holding
LMS Tiger Investments England and 100 Investment
(II) Limited Wales holding
Westpool Investment England and 100 Investment
Trust PLC Wales holding
--------------------------- ---------------- --------- ------------
In addition to the above, certain of the Company's carried interest arrangements are operated through five limited partnerships (LMS Capital 2007 LP, LMS Capital 2008 LP, LMS Capital 2009 LP, LMS Capital 2010 LP and LMS Capital 2011 LP) which are registered in Bermuda.
The registered addresses of the Company's subsidiaries are as follows:
Subsidiaries incorporated in England and Wales: 100 George Street, London W1U 8NU.
Subsidiaries and partnerships incorporated in Bermuda: Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda.
Subsidiary incorporated in the United States of America: c/o 100 George Street, London W1U 8NU.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR GGUCWWUPRPPC
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March 15, 2018 03:01 ET (07:01 GMT)
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