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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Sherborne Investors (guernsey) B Limited | LSE:SIGB | London | Ordinary Share | GG00B883XC99 | A ORD NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0.2525 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMSIGB
RNS Number : 5968B
Sherborne Investors (Guernsey)B Ltd
05 April 2017
5 April 2017
Sherborne Investors (Guernsey) B Limited
Annual Report and Consolidated Financial Statements
For the year ended 31 December 2016
Company Summary
Hot Features
Premium
The Company Sherborne Investors (Guernsey)
B Limited (the "Company") is a
Guernsey domiciled limited company
and its shares are admitted to
trading on the London Stock Exchange
Specialist Fund Segment ("SFS").
The Company was incorporated on
8 November 2012. The Company commenced
dealings on the SFS on 7 May 2013.
Investment Objective To realise capital growth from
investment in a target company
identified by the Investment Manager,
with the aim of generating a significant
capital return for Shareholders.
Investment Policy To invest through its investment
in the Investment Partnership
in a company which is publicly
quoted, most likely on a UK stock
exchange, which it considers to
be undervalued as a result of
operational deficiencies and which
it believes can be rectified by
the Investment Manager's active
involvement, thereby increasing
the value of the investment. The
Company will only invest in one
target company at a time.
Investment Manager The General Partner and the Investment
Partnership have appointed Sherborne
Investors Management (Guernsey)
LLC to provide investment management
services to the Investment Partnership.
Chairman's Statement
At 31 December 2016, the net asset value attributable to shareholders of the Company was GBP487.5 million (2015: GBP388.7 million) or 154.99 pence per share (2015: 123.57 pence per share) (see note 12). The Company's net asset value was based on the closing price of 4,777 pence as at 31 December 2016 for the shares of Electra Private Equity PLC ("Electra"). As at the year-end SIGB, LP held approximately 29.85% of Electra through ordinary shares. The ownership level remains the same as at the date of this letter.
On 25 January 2016, Electra announced it was undertaking a review of its investment strategy and policy and its structure. Electra announced that the review would look at all options for maximising long-term shareholder value.
On 26 May 2016, Electra released an interim update on the strategic review in which it announced the establishment of an executive function to provide resources to the board of Electra, including analytical support during the review process. As a part of this new structure, Electra appointed Edward Bramson, a managing director of the Investment Manager, as interim Chief Executive Officer. Electra also announced that it had served notice of termination to Electra's investment manager, Electra Partners LLP ("Electra Partners") (now known as Epiris Managers LLP). The board of Electra believed that service of termination at that time would provide it with flexibility to put in place any potential changes as an outcome of the review without any delay.
On 14 October 2016, Electra announced the results of Phase 1 of its strategic review. Among other items, Electra confirmed its earlier action to terminate the investment manager, Electra Partners, and set out a strategy to transition from an externally managed fund to an internally managed corporation. Electra also announced beginning Phase 2 of the review, which would evaluate the operating performance of the company's investments and determine appropriate uses of the company's funds going forward. Phase 2 of the review would begin on 1 June 2017, or earlier with the consent of Electra Partners. As at the date of this letter Electra has not announced that Electra Partners has provided earlier access to Electra's investments.
On 8 November 2016, Electra announced that it would be commencing an initial return of capital to shareholders by way of a tender offer which concluded on 21 December 2016. The Company did not participate in the tender offer and accordingly the Company's interest in Electra increased to 29.85% from 28.37% immediately prior to the tender offer.
On 23 June 2016 the United Kingdom held a referendum resulting in the decision for the United Kingdom to leave the European Union. The timing and ramifications of the United Kingdom leaving the EU are not certain. Although short term market volatility has been experienced and may continue to be experienced, at present the Directors believe that the referendum result will not ultimately have a material impact on the Company's performance or its investment in Electra. The principal risks and uncertainties of the Company are in relation to performance risk, market risk and relationship risk as described further in the Directors' Strategic Report.
Following the receipt of distributions from Electra, on 13 May 2016 a dividend of 1.5 pence was paid by the Company and a further dividend of 0.75 pence was paid on 29 July 2016, representing a total of 2.25 pence per share paid to shareholders during 2016.
Electra announced a distribution to its shareholders on 9 December 2016 which was accrued for by the Company at 31 December 2016 and was paid by Electra on 19 January 2017.
Subsequent to the year end, on 24 March 2017 Electra announced a special dividend of 2,612 pence per share payable on 5 May 2017 to shareholders of record on 7 April 2017. The Company is pleased to declare a dividend to shareholders of 87.0 pence per share payable on 19 May 2017 to shareholders of record on 18 April 2017. The payment of the Company's dividend is conditional on the receipt by the Company of Electra's dividend on 5 May 2017.
Pursuant to its existing authority, the Investment Manager may sell, short or otherwise dispose of all or a part of such shares held in Electra or purchase additional securities at any time.
During the year the Company continued to pursue its investment policy through its shareholding in Electra. The Company intends to continue to pursue its strategy as set out in its prospectus.
We are grateful for your continued support and will keep you informed of the status of our investment as it develops.
Board of Directors
Talmai Morgan (64) (Chairman)
Appointed to the Board 8 November 2012
Mr. Morgan has been a non-executive director of a number of publicly listed investment companies since 2005. He is currently chairman of NB Private Equity Partners Limited and Global Fixed Income Realisation Limited as well as Sherborne Investors (Guernsey) B Limited. He also sits on the board of BH Global Limited and John Laing Infrastructure Fund Limited. Previously, from July 2004 to May 2005, he was Chief Executive of Guernsey Finance, which is the official body for the promotion of the Guernsey finance industry. From January 1999 to June 2004, Mr. Morgan was Director of Fiduciary Services and Enforcement at the Guernsey Financial Services Commission where he was responsible for the design and implementation of Guernsey's law relating to the regulation of fiduciaries, administration businesses and company directors. He was also particularly involved in Working Groups of the Financial Action Task Force and the Offshore Group of Banking Supervisors. Prior to 1999, Mr. Morgan held positions at Barings and the Bank of Bermuda. Mr. Morgan holds an M.A. in Economics and Law from the University of Cambridge.
Trevor Ash (70) (Director)
Appointed to the Board 8 November 2012
Mr. Ash has been a non-executive director of a number of investment entities since 1999, and funds managed by Rothschild, Insight, Cazenove, Merrill Lynch and Thames River Capital. He is currently a Director, formerly Chairman, of JPEL Private Equity Limited. Prior to 1999, Mr. Ash spent 27 years with the Rothschild Group in various capacities, most recently as Managing Director of Rothschild Asset Management (CI) Limited and as a non-executive director of Rothschild Asset Management Limited in London. Mr. Ash is a fellow of the Chartered Institute for Securities & Investment.
Christopher Legge (61) (Audit Committee Chairman)
Appointed to the Board 10 May 2013
Mr. Legge is a Chartered Accountant having started his career at Pannell Kerr Forster (PKF), before moving to Ernst & Young in 1983, where he became a partner in 1986 and managing partner Guernsey in 1998. Since leaving Ernst & Young in 2003 he has taken on a number of non-executive directorships. He is currently non-executive director of Third Point Offshore Investors Limited, Ashmore Global Opportunities Limited, Multi-Manager Investment Programmes PCC Limited, TwentyFour Select Monthly Income Fund Limited and John Laing Environmental Assets Group Limited. Mr. Legge is an FCA and holds a BA (Hons) in Economics from the University of Manchester.
Directors' Strategic Report
The Directors present their annual report on the affairs of the Company and its subsidiary (together, the "Group"), together with the audited consolidated financial statements, for the year ended 31 December 2016.
Principal activities and investing policy
Sherborne Investors (Guernsey) B Limited (the "Company") is a Guernsey domiciled company incorporated on 8 November 2012 with limited liability. The Company's shares were admitted to trading on the SFS on 7 May 2013.
The Company is a limited partner in SIGB, LP (the "Investment Partnership"), a limited partnership registered in Guernsey on 6 November 2012. The Company aims to provide investors with capital growth through its investment in the Investment Partnership, to which it originally committed GBP200 million and subsequently increased its commitment by GBP100 million following a placing on 26 February 2015, representing substantially all of the Company's assets.
The Group's investment policy is to invest in one Selected Target Company ("STC") at a time. The Group will not seek to reduce risk through diversification. If, after acquiring a shareholding, the share price of the STC rises to a level at which further investment and the effort of a Turnaround is, in the Investment Manager's opinion, no longer justified or otherwise no longer presents a viable Turnaround opportunity, the Investment Partnership intends to sell (and distribute the proceeds to the Company) or distribute in kind the holding to the limited partners, rather than seeking to join the Board of Directors or otherwise to engage with the STC. In these circumstances, the Company intends to distribute any realised net profits received from the Investment Partnership to the Shareholders. In such event, an amount equal to the Company's capital contribution for the initial STC (less any losses on the sale) may be recalled by the Investment Partnership and invested into a new STC. This process may be repeated until a Turnaround has been effected.
The investment in the STC may be in shares but can also be in warrants, convertibles, derivatives and any other equity, debt or other securities. The holding period for the investment in the STC is neither fixed nor predictable, but the Company expects that a typical holding period would be greater than one year.
The Company will effect its investment policy indirectly through the Investment Partnership, which seeks to invest in a STC which is publicly quoted, most likely on a UK stock exchange, which it considers to be undervalued as a result of operational deficiencies and which it believes can be rectified by the Investment Manager's active involvement, thereby increasing the value of the investment (a "Turnaround"). The investment will thus not be passive. The Company's investment may be made on-market or off-market.
In December 2013, the Company's Board of Directors approved a stake building investment in Electra Private Equity PLC ("Electra") as proposed by SIGB, LP's investment manager, Sherborne Investors Management (Guernsey) LLC.
The Investment Manager continues to believe that an operational and strategic review of Electra will identify opportunities to enhance the value of the Company's shares. Accordingly, the Company continues to maintain its investment strategy with respect to Electra.
The Group intends that the holding in the STC shall not reach such a level as to require the Group to make a bid for the entire STC and, therefore, the Group will not have control over the STC.
At 4 April 2017, SIGB, LP held approximately 29.85% of Electra's outstanding shares.
Risk Management
The Directors are responsible for supervising the overall management of the Company, whilst the day-to-day management of the Company's assets has been delegated to the Investment Manager. Portfolio exposure has been limited by the guidelines which are detailed within the Principal Activities and Investment Policy section of the annual report. In its role as a third-party fund administration services provider, the Ipes Group, of which Ipes (Guernsey) Limited is a part, produces an annual AAF 01/06 Assurance Report on the internal control procedures in place within the Ipes Group, and this is subject to review by the Audit Committee and the Board.
The principal risks facing the Company relate to the Company's investment activities and these risks include the following:
-- performance risk; -- market risk; and -- relationship risk
An explanation of these principal risks and how they are managed is set out below.
The Board can confirm that the principal risks of the Company, including those which would threaten its business model, future performance, solvency or liquidity have been robustly assessed for the year ended 31 December 2016.
-- Performance risk - The Board is responsible for approving the Investment Manager's recommended investment in a STC and monitoring the performance of the Investment Manager. An inappropriate strategy or poor execution of strategy may lead to underperformance. To manage that risk the Investment Manager will typically have several potential target companies under review at any one time in various stages of analysis. The Investment Manager's recommendation of a STC includes an assessment of the capital appreciation potential of the proposed investment, assuming certain operating improvements and capital realignment are successfully implemented. The Company intends that its holding in the STC will be less than 30% of the outstanding shares, so that it is not required to make a bid for the entire company. Accordingly, the Company will not control the STC. The Investment Manager's involvement in the turnaround of the STC requires the support of other independent shareholders. The Board receives and reviews regular reports of the Investment Partnership's ownership interest in the STC, and STC board representation and other information that impacts its turnaround strategy.
-- Market risk - Market risk arises from uncertainty about the future operating performance and market response to the Company's investment in the STC. The Company's investment approach is to invest in only one company at a time. Such investment concentration may subject the Company to greater market fluctuation and loss than might result from a diversified investment portfolio. The market's valuation of the STC is also subject to fluctuations in overall market prices as well as fluctuations in the industry sectors in which the STC operates. The Investment Manager does not typically hedge against overall market or sector fluctuations. The Company also may use a limited amount of short-term leverage to acquire a portion of its ownership interest in the STC which will amplify the results of the STC. In addition to interest and dividend income received from the STC, the source of debt repayment could come from the proceeds realised from the sale of a portion of the STC. The Group's market risk is managed by the Investment Manager in accordance with policies and procedures in place as disclosed in the Group's prospectus.
-- Relationship risk - Neither the Company nor the Investment Partnership has a physical presence (employees and/or premises). The Company and Investment Partnership are heavily dependent on the Investment Manager for the selection of an appropriate STC and for the day-to-day management and operation of the STC's business and the execution of its Turnaround.
As the nominated appointees now serve on the Board of Directors of the STC, there is a risk that the nominated appointees may not be re-elected. Operational risk is reviewed by the Board at each Board meeting. The Board also monitors the Group's investment performance and activities since the last Board meeting to ensure that the Investment Manager adheres to the agreed investment policy and approved investment guidelines. Further, at each Board meeting, the Board receives reports from the Company Secretary and Administrator in respect of compliance matters and duties performed by it on behalf of the Company.
Other risks faced by the Company are described in detail within the Company's Offering Document.
The Board have considered the Company's solvency and liquidity risk and full disclosure of this is made in Note 16 of the Consolidated Financial Statements and in the viability statement below.
Viability Statement
In accordance with provision C.2.2 of the UK Corporate Governance Code, the Directors have assessed the viability of the Company over the period ending 31 December 2019. The Directors have determined that the three year period to 31 December 2019 is the maximum period over which to provide its viability statement in order to keep in line with its investment strategy. The holding period for the investment in the STC is neither fixed nor predictable, but the Company expects that a typical holding period would be sufficient to execute the Investment Manager's Turnaround Strategy.
The Directors have identified the following factors as potential contributors to ongoing viability:
-- The principal risks documented in the Directors' Strategic Report as set out above; -- The liquidity of the Company's portfolio; and -- The ongoing relevance of the Company's investment objective in the current environment.
The Company, through its investment in the Investment Partnership, is fully invested in listed equity securities of the STC or cash. The STC established an annual recurring dividend equal to 3% of its Net Asset Value. Projected dividends to be received by the Investment Partnership would be more than adequate to cover all operating costs of the Company as well as financing costs for the three year period ended 31 December 2019. Were the STC to significantly reduce the annual dividend (by as much as nearly 40%), the Company's pro rata share would still be sufficient to cover such costs. The Facility commitment was reduced from GBP50 million to GBP20 million and borrowings under the facility are GBP15 million as at the date of this report. The Company has been able to extend the maturity of the short term financing and plans to continue to do so until the investment in the STC is realised. If the Company is unable to extend its financing arrangements with its current lenders and not obtain replacement financing from alternative providers under satisfactory terms and conditions, the Company believes it would be able to liquidate a portion (<3%) of its holdings in the STC and apply the sale proceeds to satisfy its obligations.
Based on the foregoing, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its obligations as and when they fall due over the three year period to 31 December 2019.
Subsequent events
Details of events that have occurred after the date of the Consolidated Statement of Financial Position are provided in Note 14 to the Consolidated Financial Statements.
Dividend policy
The Company's dividend policy, subject to the discretion of the Directors who reserve the right to retain amounts for working capital, is to pay dividends to Shareholders following receipt of any distributions from the Investment Partnership. This will be dependent on the frequency with which the STC pays dividends to its shareholders (of which the Investment Partnership is one) as well as the extent such dividends are first required to be used to repay outstanding indebtedness.
Dividend
A dividend of 1.5 pence per share was declared on 14 April 2016 and paid on 13 May 2016 to Shareholders on the register at 22 April 2016. (2015: Nil)
A dividend of 0.75 pence per share was declared on 29 June 2016 and paid on 29 July 2016 to Shareholders on the register at 8 July 2016. (2015: Nil)
Business review
A review of the Company's business during the year and an indication of likely future developments are contained in the Chairman's Statement.
Capital
Details of the Company's capital are provided in Note 11 to the Consolidated Financial Statements. All shares carry equal voting rights.
Substantial interests
As at 31 March 2017, the Company had received notification of the following material shareholdings of greater than 5 per cent:
Number of
Ordinary % of issued
Shareholder Shares share capital
------------------------------- ----------- ---------------
Ameriprise Financial,
Inc 62,908,708 19.9%
Aviva plc 60,044,268 19.1%
Sherborne Investors GP,
LLC 59,882,984 19.0%
FIL Limited 31,395,187 10.0%
Invesco Limited 19,556,149 6.2%
Insight Investment Management 17,810,772 5.7%
Soros Fund Management
LLC 15,864,736 5.0%
------------------------------- ----------- ---------------
The Directors currently hold no shares in the Company.
Independent Auditor
A resolution to re-appoint the auditors to the Company will be proposed at the Annual General Meeting of the Company on 24 May 2017. Deloitte LLP have indicated their willingness to continue as auditors.
Directors' Remuneration Report
Remuneration Policy & Components
The Board endeavours to ensure the Remuneration Policy reflects and supports the Company's strategic aims and objectives throughout the period under review. It has been agreed that, due to the small size and structure of the Company, a separate Remuneration Committee would be inefficient; therefore the Board is responsible for discussions regarding remuneration. No external remuneration consultants were appointed during the period under review.
As per the Company's Articles of Association, all Directors are entitled to such remuneration as is stated in the Company's Prospectus or as the Company may by ordinary resolution determine; the aggregate overall limit is currently set at GBP120,000. Subject to this limit, it is the Company's policy to determine the level of Directors' fees, having regard for the level of fees payable to non-executive Directors in the industry generally, the role that individual Directors fulfil in respect of responsibilities related to the Board and Audit Committee and the time dedicated by each Director to the Company's affairs. Base fees are set out below. An increase in Director fees of GBP15,000 (GBP5,000 per Director) will become effective 1 April 2017. As a result of the increase, a resolution to approve an increase of the aggregate overall limit to GBP150,000 will be proposed to the Shareholders of the Company.
Base Fees and Fees Received 2016 GBP 2015 GBP ----------------------------- --------- --------- Chairman (Mr Talmai Morgan) 45,000 45,000 ----------------------------- --------- --------- Audit Committee Chairman (Mr Christopher Legge) 35,000 35,000 ----------------------------- --------- --------- Non-executive Director (Mr Trevor Ash) 30,000 30,000 ----------------------------- --------- --------- Total 110,000 110,000 ----------------------------- --------- ---------
As outlined in the Articles of Association, the Directors may also be paid for all reasonable travelling, hotel and other out-of-pocket expenses properly incurred in the attendance of Board or Committee meetings, General meetings, or meetings with shareholders of the Company or otherwise in the discharge of their duties; and all reasonable expenses properly incurred by them seeking independent professional advice on any matter that concerns them in the furtherance of their duties as Directors of the Company, such expenses having been immaterial during 2016.
No Director has any entitlement to pensions, paid bonuses or performance fees, granted share options or has been invited to participate in long-term incentive plans. No loans have been extended to a Director by the Company and neither have any loans to a Director been guaranteed by the Company.
None of the Directors have a service contract with the Company. Each of the Directors has entered into a letter of appointment with the Company, subject to election at the first Annual General Meeting, or as determined in line with the Company's Articles, and re-election at subsequent Annual General Meetings in accordance with the Company's Articles and all due regulations and provisions. The Directors do not have any interests in contractual arrangements with the Company or its investment during the year under review, or subsequently. Each appointment can be terminated in accordance with the Company's Articles and without compensation. No notice period is stated in the Articles and is terminable at will of both parties.
Directors' and Officers' liability insurance cover is maintained by the Company but is not considered a benefit in kind nor does it constitute part of the Directors' Remuneration. The Company's Articles indemnify each Director, Secretary, agent and officer of the Company, former or present, out of assets of the Company in relation to charges, losses, liabilities, damages and expenses incurred during the course of their duties, in so far as the law allows and provided that such indemnity is not available in circumstances of fraud, wilful misconduct or negligence.
Corporate Governance Report
As an unregulated Guernsey incorporated company quoted on the SFS, the Company is not required to comply with the UK Corporate Governance Code or the GFSC Finance Sector Code of Corporate Governance. The Directors, however, place great importance on ensuring that high standards of corporate governance are maintained. Accordingly, the Directors take appropriate measures to ensure that the Company operates with due consideration to any codes of corporate governance which the Board deems appropriate, having regard to the Company's size and the nature of its business. The Board perceives that good corporate governance practice is necessary for delivering sustainable value, enhancing business integrity and maintaining shareholder confidence in the Company. To further these aims, the Board has decided to voluntarily comply with the UK Corporate Governance Code dated September 2014 (the "Code"), which sets out guidance in the form of principles and provisions for companies to follow good corporate governance practice. Further information on the Code can be obtained from www.frc.org.uk.
Except as disclosed within the report, the Board is of the view that throughout the year ended 31 December 2016, the Company complied with the recommendations of the Code and the provisions of the Code. Key issues affecting the Company's corporate governance responsibilities, how they are addressed by the Board and application of the Code are presented below.
Section A: Leadership
The Chairman is responsible for the leadership of the Board and ensuring its effectiveness on all aspects of its role.
Board Responsibilities
The Board ensures that the Company's contracts of engagement with the Investment Manager, Administrator and other service providers are operating satisfactorily so as to ensure the safe and accurate management and administration of the Company's affairs and business and that they are competitive and reasonable for Shareholders. Terms of Reference that contain a formal schedule of matters reserved for the Board of Directors and its duly authorised Committee for decision has been approved and can be reviewed at the Company's registered office.
Management of the Investment Partnership is the responsibility of Sherborne Investors (Guernsey) GP, LLC, the General Partner, which has delegated investment decisions and day-to-day management of the Investment Partnership to the Investment Manager under the terms of an investment management agreement. Through its majority interest in the Investment Partnership, the Company and therefore the Board, has the ability to approve proposed investments and to remove the General Partner. The performance of the Investment Manager is subject to regular review by the Board.
Other matters for the Board include review of the Company's overall strategy and business plans; approval of the Company's half-yearly and annual Financial Statements; review and approval of any alteration to the Group's accounting policies or practices and valuation of investments; approval of any alteration to the Company's capital structure; approval of dividend policy; appointments to the Board and constitution of Board Committees; and performance review of key service providers.
The Company holds appropriate Directors' and Officers' Liability Insurance cover in respect of any legal action taken against the Board.
Board Composition
The Board consists of three non-executive members. For further information relating to the Board, please refer to Board of Directors. Due to the size and structure of the Company, the appointment of a senior independent director is not deemed appropriate at this time.
Board Committees
The Board has established an Audit Committee composed of all members of the Board, all of whom are independent. The Chairman of the Board is included as a Committee member to enable a full understanding of the issues facing the Company, but is not appointed as its Chair. The Committee, its membership and its terms of reference are kept under regular review by the Board.
The Audit Committee meets at least twice a year and is responsible for ensuring that the financial performance of the Company is properly reported on and monitored, including reviews of the annual and interim accounts, results announcements, internal control systems and procedures and accounting policies.
The Audit Committee considers the scope and effectiveness of the Company's external audit. The Company's auditor, Deloitte LLP may also provide additional non-audit services to the Company, which in the Audit Committee's opinion, will not compromise the independence of Deloitte LLP's audit team. Further information is provided in the Report of the Audit Committee.
Board and Committee Meeting Attendance
The Board met four times during the year. Individual attendance at Board and Committee meetings is set out below.
Board Audit Committee
---------------- ------ ----------------
Talmai Morgan 4 3
Trevor Ash 4 3
Christopher
Legge 4 3
Total Meetings
for Year 4 3
---------------- ------ ----------------
Division of Responsibilities
There are no executive Directors appointed to the Board. The non-executive Directors responsibilities are clearly defined within the Schedule of Matters reserved to the Board. All day-to-day functions are outsourced to external service providers.
The Chairman
Appointed to the position of Chairman of the Board on 7 May 2013, Talmai Morgan is responsible for leading the Board in all areas, including determination of strategy, organising the Board's business and ensuring the effectiveness of the Board and individual Directors. He also endeavours to produce an open culture of debate within the Board.
Role of the non-executive Directors
The Board is composed entirely of non-executive Directors, who meet as required without the presence of the Investment Manager and service providers to scrutinise the achievement of agreed goals and objectives, and monitor performance. Through the Audit Committee, they are able to ascertain the integrity of financial information and confirm that all financial controls and risk management systems are robust. In addition, a non-executive Director may provide a written statement outlining any concerns to the Chairman upon resignation.
See the statements on Board and Committee responsibilities for further information.
Section B: Effectiveness
The Board believes that its balance of skills, experience and knowledge, provides for a sound base from which the interest of investors will be served to a high standard.
Board Composition & Independence
For the purposes of assessing compliance with the UK Corporate Governance Code, the Board considers the Directors are independent of the Investment Manager and free from any business or other relationship that could materially interfere with the exercise of their independent judgment.
Composition of the Board is explained in Section A of the Corporate Governance Report.
Board Appointments Process
Appointment Process
There is currently no Nominations Committee for the Company as it is deemed that the size, composition and structure of the Company would mean the process would be inefficient and counter-productive.
The Board has chosen not to adopt a definitive policy with quantitative targets for board diversity. The Board believes that the current mix of skills, experience, knowledge and age of the Directors is appropriate to the requirements of the Company. In accordance with the Code, any Director who has served on the Board for longer than six years will be subject to rigorous review to ensure the need for progressive refreshing of the Board is complied with.
Commitment
Chairman's Commitment
Prior to the Chairman's appointment, discussions were undertaken to ensure the Chairman was sufficiently aware of the time needed for his role, and agreed to upon signature of his appointment letter. Other significant commitments of the Chairman were disclosed prior to appointment to the Board, and any changes declared as and when they arise. These commitments, and their subsequent impact, can be identified in his biography.
Non-executive Directors' Commitments
The terms and conditions of appointment for non-executive Directors are outlined in their letters of appointment, and are available for inspection by any person at the Company's registered office during normal business hours and at the AGM for fifteen minutes prior to and during the meeting. As with the Chairman, significant appointments are declared prior to appointment, any changes reported as and when appropriate.
Development
The Board believes that the Company's Directors should develop their skills and knowledge through participation at relevant courses. The Chairman is responsible for reviewing and discussing the training and development of each Director according to identified needs. Upon appointment, all Directors participate in discussions with the Chairman and other Directors to understand the responsibilities of the Directors, in addition to the Company's business and procedures. The Company also provides regular opportunities for the Directors to obtain a thorough understanding of the Company's business by regularly meeting members of the senior management team from the Investment Manager and other service providers, both in person and by phone.
Information and Support
Information Provided to the Board
Reports and papers, containing relevant, concise and clear information, are provided to the Board and Committees in a timely manner to enable review and consideration prior to both scheduled and ad-hoc specific meetings. This ensures that Directors are capable of contributing to, and validating, the development of Company strategy and management. The regular reports also provide information that enables scrutiny of the Company's Investment Manager's and other service providers' performance. When required, the Board has sought further clarification of matters with the Investment Manager and other service providers, both in terms of further reports and via in-depth discussions, in order to make a more informed decision for the Company.
Company Secretary
Under the direction of the Chairman, the Company Secretary facilitates the flow of information between the Board, Committees, Investment Manager and other service providers' through the development of comprehensive meeting packs, agendas and other media.
Full access to the advice and services of the Company Secretary is available to the Board; in turn, the Company Secretary is responsible for advising on all governance matters through the Chairman. The Articles and schedule of matters reserved for the Board indicate the appointment and resignation of the Company Secretary is an item reserved for the full Board. A review of the performance of the Company Secretary is undertaken by the Board on a regular basis.
Evaluation
Board and Director Evaluation
Using a pre-determined template based on the Code's provisions as a basis for review, the Board undertakes an evaluation of its performance and that of the Audit Committee. This was last completed in January 2017. Additionally, an evaluation focusing on individual commitment, performance and contribution of each Director is conducted. The Chairman meets with each Director to fully understand their views of the Company's strengths and to identify potential weaknesses. If appropriate, new members are proposed to resolve the perceived issues, or a resignation sought. Due to the size and structure of the Board the evaluation of the Chairman of the Board and Audit Committee is dealt with, within the Board and Audit evaluations.
Given the Company's size and the structure of the Board, no external facilitator or independent third party is used in the performance evaluation.
New Directors would receive an induction from the Investment Manager. All Directors receive other relevant training as necessary.
Re-election and Board Tenure
The Board has considered the need for a policy regarding tenure of office; however, the Board believes that any decisions regarding tenure should consider the Company's investment objective and the average length of seeking to achieve that, the need for continuity and maintenance of knowledge and experience and to balance this against the need to periodically refresh Board composition and have a balance of skills, experience, age and length of service.
Each Director is required to be elected by shareholders at the first Annual General Meeting following his initial appointment to the Board. The Board recommends the on-going re-election of each Director and supporting biographies, including length of service, are disclosed.
Section C: Accountability
The Directors' Responsibility Statement confirms that the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group as a whole, whilst the Chairman's Statement includes a fair view of the development and performance of the business and the position of the Group.
Financial and Business Reporting
Financial and Business Information
An explanation of the Directors' roles and responsibilities in preparing the Annual Report and Accounts for the year ending 31 December 2016 is provided in the Report of the Directors and Statement of Director's Responsibilities.
Further information enabling shareholders to assess the Company's performance, business model and strategy can be sourced in the Chairman's Statement and the Directors' Strategic Report.
Going concern
The Consolidated Financial Statements have been prepared on the going concern basis. The net current asset position at year end is GBP17,043,069. The net current liability position as at 28 February 2017 is GBP4,090,999 as a result of the maturity of the loan facility being within 12 months from the date of signing of this Annual Report. The revolving loan facility with HSBC Bank plc (the "Facility") was extended for an additional 12 months on 19 December 2016, with a new maturity date of 26 February 2018. The Facility commitment was reduced from GBP50 million to GBP20 million and borrowings under the facility are GBP15 million as at the date of this report. The Company has significant highly liquid assets in respect of its investment in Electra Private Equity Plc ("Electra"), which therefore can be realised in order to satisfy repayment if required. Therefore, after making enquiries and based on the sufficient cash reserves as at 31 December 2016, the Directors are of the opinion that the Group has adequate resources to continue its operational activities for the foreseeable future. The Board is therefore of the opinion that the going concern basis should be adopted in the preparation of the Consolidated Financial Statements. Further detail can be found in the Viability Statement.
Investment Manager
After careful consideration of Sherborne Investment Management (Guernsey) LLC's ("SIMG") performance, primarily in terms of advice, managing the portfolio and communicating effectively with shareholders, the Board agreed that it would be in the best interests of the Company that SIMG continue on the current agreed contractual terms.
The management agreement shall terminate upon the dissolution of the Partnership, unless earlier terminated, (i) automatically upon the removal of the General Partner as contemplated by Section 10.b of the Partnership Agreement, or (ii) voluntarily by the Manager, upon 180 days prior written notice to the General Partner and the Partnership.
Risk Management and Risk Control
The Board is required to annually review the effectiveness of the Company's key internal controls such as financial, operational and compliance controls and risk management. As this is the Company's fourth year of operations, the Board has documented these controls and reviews their effectiveness on an ongoing basis. The controls are designed to ensure that the risk of failure to achieve business objectives is managed rather than eliminated, and are intended to provide reasonable, rather than absolute, assurance against material misstatement or loss. Through regular meetings and meetings of the Audit Committee, the Board seeks to maintain full and effective control over all strategic, financial, regulatory and operational issues. The Board maintains an organisational and committee structure with clearly defined lines of responsibility and delegation of authorities.
The Company's system of internal control includes inter alia the overall control exercise, procedures for the identification and evaluation of business risk, the control procedures themselves and the review of these internal controls by the Audit Committee on behalf of the Board. Each of these elements that make up the Company's system of internal control is explained in further detail as follows:
(i) Control environment
The Company is ultimately dependent upon the quality and integrity of the staff and management of both its Investment Manager, Sherborne Investors Management (Guernsey) LLC, and Administration & Company Secretarial service provider, Ipes (Guernsey) Limited. In each case, qualified and able individuals have been selected at all levels. The staff of both the Investment Manager and Administrator, are aware of the internal controls relevant to their activities and are also collectively accountable for the operation of those controls. Appropriate segregation and delegation of duties is in place. The Audit Committee undertakes a review of the Company's financial controls on a regular basis.
In its role as a third-party fund administration services provider, the Ipes Group, of which Ipes (Guernsey) Limited is a part, produces an annual AAF 01/06 Assurance Report on the internal control procedures in place within the Group, which is subject to review by the Audit Committee and the Board.
(ii) Identification and evaluation of business risks
Another key business risk is the performance of the Company's investment. This is managed by the Investment Manager, who undertakes regular analysis and reporting of business risks in relation to the target company, who then propose appropriate courses of action to the Board for their review.
(iii) Key procedures
In addition to the above, the Board's key procedures involve a comprehensive system for reporting financial results to the Board regularly. A review of controls is conducted by the Audit Committee annually, and a twice-yearly review of investment valuations by the Board, including reports on the underlying investment performance.
Due to the size and nature of the Company and the outsourcing of key services to the Administrator and Investment Manager, the Company does not have an internal audit function. It is the view of the Board that the controls in relation to the operating, accounting, compliance and IT risks performed robustly throughout the year. In addition, all have been in full compliance with the various policies and external regulations, including:
-- Investment policy, as outlined in the IPO documentation
-- Personal Account Dealing
-- Whistleblowing Policy
-- Anti-Bribery Policy
-- Applicable Financial Conduct Authority Regulations
-- Treatment and handling of confidential information
-- Conflicts of interest
-- Compliance policies
-- Market Abuse Regulation
The Company has delegated the provision of all services to external service providers whose work is overseen by the Board. Each year a short questionnaire is circulated to all external service providers requesting thorough details in regards to controls, personnel and information technology, amongst others. This is in order to provide additional detail when reviewing the performance pursuant to their terms of engagement.
There were no protected disclosures made pursuant to the whistleblowing policy of service providers in relation to the Company, during the year ended 31 December 2016.
In summary, the Board considers that the Company's existing internal controls, coupled with the analysis of risks inherent in the business models of the Company and its subsidiaries, continue to provide appropriate tools for the Company to monitor, evaluate and mitigate its risks.
Audit Committee and Auditors
Audit Committee Responsibilities
The Audit Committee is intended to assist the Board in discharging its responsibilities for the integrity of the Company's financial statements, as well as aid the assessment of the Company's internal control effectiveness and objectivity of external auditors. Further information on the Committee's responsibilities are given in the Report of the Audit Committee.
The Board has reviewed the need for an internal audit function and has decided that the systems and procedures employed by the Administrator and Investment Manager, including their own internal controls and procedures, provide sufficient assurance that a sound system of risk management and internal control, which safeguards shareholders' investment and the Group and Company's assets, is maintained. An internal audit function specific to the Group is therefore considered unnecessary, as explained.
Section D: Remuneration
Level and Components of Remuneration
Directors are paid in accordance with agreed principles covering various functions. Further information can be sourced in the Directors' Remuneration Report.
Procedures
The Company has a formal remuneration policy, outlined in the Directors' Remuneration Report.
Section E: Relations with Shareholders
Dialogue with Shareholders
The Directors place a great deal of importance on communication with shareholders. The Investment Manager and Broker aim to meet with large shareholders at least annually. The Board also receives reports from the Brokers on shareholder issues. The Annual Report and Financial Statements are widely distributed to other parties who have an interest in the Company's performance, and are available on the Company's website.
All Directors are available for discussions with the shareholders, in particular the Chairman and the Audit Committee Chairman, as and when required.
Alternative Investment Fund Management Directive ("AIFMD")
The AIFMD, which was introduced as from 22 July 2014, aims to harmonise the regulation of Alternative Investment Fund Managers ("AIFMs") and imposes obligations on managers who manage or distribute Alternative Investment Funds ("AIFs") in the EU or who market shares in such funds to EU investors.
After seeking professional regulatory and legal advice, the Company was established in Guernsey as a Non-EU AIF, appointing Sherborne Investors Management (Guernsey) LLC to act as the Non-EU AIFM.
The marketing of shares in AIFs that are established outside the EU (such as the Company) to investors in any EU member state is prohibited unless certain conditions are met. Certain of these conditions are outside the Company's control as they are dependent on the regulators of the relevant third country (in this case Guernsey) and the relevant EU member state entering into regulatory co-operation agreements with one another.
Currently, the National Private Placement Regime ("NPPR") provides a mechanism to market Non-EU AIFs that are not allowed to be marketed under the AIFMD domestic marketing regimes. The Board is utilising NPPR in order to market the Company, specifically in the UK. The Board is working with the Company's advisers to ensure the necessary conditions are met, and all required notices and disclosures are made under NPPR. Eligible AIFMs will be able to continue to use NPPR until at least 2018.
Any regulatory changes arising from implementation of AIFMD (or otherwise) that limit the Company's ability to market future issues of its shares may materially adversely affect the Company's ability to carry out its investment policy successfully and to achieve its investment objective, which in turn may adversely affect the Company's business, financial condition, results of operations, NAV and/or the market price of the Ordinary Shares.
The Board, in conjunction with the Company's advisers, will continue to monitor the development of AIFMD and its impact on the Company.
Foreign Account Tax Compliance Act ("FATCA") and The OECD Common Reporting Standards ("CRS")
FATCA became effective on 1 January 2013 and is being gradually implemented internationally. The legislation is aimed at determining the ownership of US assets in foreign accounts and improving US Tax compliance with respect to those assets.
More than 90 jurisdictions, including 33 member countries of the Organisation for Economic Co-operation and Development ("OECD") and the G20 members, have committed to implement the Common Reporting Standard for automatic exchange of tax information ("CRS"). Building on the model created by FATCA, the CRS creates a global standard for the annual automatic exchange of financial account information between the relevant tax authorities.
The Board in conjunction with the Company's service providers and advisers have ensured the Company's compliance with FATCA and CRS's requirements to the extent relevant to the Company.
Constructive Use of the AGM
The Notice of AGM is sent out at least 20 working days in advance of the meeting. All shareholders will have the opportunity to put questions to the Board or Manager, either formally at the Company's Annual General Meeting on 24 May 2017, informally following the meeting, or in writing at any time during the year via the Company Secretary. The Company Secretary is available to answer general shareholder queries at any time throughout the year.
Report of the Audit Committee
The Board is supported by the Audit Committee, which comprised all the Directors during the year; including the Chairman of the Board to enable a greater understanding of the issues facing the Company. The Board has considered the composition of the Committee and is satisfied that there are sufficient recent relevant skills and experience, in particular with the Chairman of the Audit Committee, Chris Legge, having a background as a chartered accountant.
Role and Responsibilities
The primary role and responsibilities of the Audit Committee are outlined in the Committee's Terms of Reference, available at the registered office, including:
-- Monitoring the integrity of the financial statements of the Company and any formal announcement relating to the Company's financial performance, consideration of the viability statement and reviewing significant financial reporting judgements contained within said statements and announcements;
-- Reviewing the Company's internal financial controls, and the Company's internal control and risk management systems;
-- Monitoring the need for an internal audit function annually;
-- Monitoring and reviewing the scope, independence, objectivity and effectiveness of the external auditors, taking into consideration relevant regulatory and professional requirements;
-- Making recommendations to the Board in relation to the appointment, re-appointment and removal of the external auditors and approving their remuneration and terms of engagement, which in turn can be placed to the shareholders for their approval at the Annual General Meeting;
-- Development and implementation of the Company's policy on the provision of non-audit services by the external auditors, as appropriate;
-- Reviewing the arrangements in place to enable Directors and staff of service providers to, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters insofar as they may affect the Company;
-- Providing advice to the Board on whether the annual financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy; and
-- Reporting to the Board on how the Committee discharged all relevant responsibilities, undertaken by myself at each Board meeting.
Financial Reporting
The Primary role of the Audit Committee in relation to the financial reporting is to review with the Administrator, Investment Adviser and the Auditor the appropriateness of the Annual Report and Audited Consolidated financial Statements and Interim Condensed Consolidated Financial Statements, concentrating on, amongst other matters:
-- The quality and acceptability of accounting policies and practices;
-- The clarity of the disclosures and compliance with financial reporting standards and relevant financial and governance reporting requirements;
-- Material areas in which significant judgements have been applied or there has been discussion with the Auditor;
-- Whether the Annual Report and Audited consolidated Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for the shareholders to assess the Company's performance, business model and strategy; and
-- Any correspondence from regulators in relation to the Company's financial reporting.
To aid its review, the audit committee considers reports from the Administrator and Investment Adviser and also reports from the Auditor on the outcomes of their half-year review and annual audit. The audit committee supports Deloitte LLP in displaying the necessary professional scepticism their role requires.
The Committee met three times during the year under review; individual attendance of Directors is outlined. The main matters discussed at those meetings were:
-- Review and approval of the interim review plan of the external auditors;
-- Review of auditor independence;
-- Review and approval of the annual audit plan of the external auditors;
-- Discussion and approval of the fee for the external audit;
-- Detailed review of the Half Year Report and Accounts and Annual Report and Consolidated Financial Statements and recommendation for approval by the Board;
-- Discussion of reports from the external auditors following their interim review and annual audit;
-- Assessment of the effectiveness of the external audit process as described below;
-- Review of the Company's key risks and internal controls; and
-- Consideration of the 2016 UK Corporate Governance Code, Guidance on Audit Committees and other regulatory guidelines, and the subsequent impact upon the Company.
The Committee has also reviewed and considered the whistleblowing policy in place for the Administrator, and is satisfied the relevant staff can raise concerns in confidence about possible improprieties in matters of financial reporting or other matters insofar as they may affect the Company.
Annual General Meeting
The Audit Committee Chairman, or other members of the Audit Committee appointed for the purpose, shall attend each Annual General Meeting of the Company, prepared to respond to any shareholder questions on the Audit Committee's activities.
Internal Audit
The Audit Committee considers at least once a year whether or not there is a need for an internal audit function. Currently, the Audit committee does not consider there to be a need for an internal audit function, given that there are no employees in the Group and all outsourced functions are with parties / administrators who have their own internal controls and procedures. This is evidenced by the internal control reports provided by the providers, which give sufficient assurance that a sound system of internal control is maintained.
Significant Risks in Relation to the Financial Statements
Throughout the year, the Audit Committee identified a number of significant issues and areas of key audit risks in respect of the Annual Report and Financial Statements. The Committee reviewed the external audit plan at an early stage and concluded that the appropriate areas of audit risk relevant to the Company had been identified and that suitable audit procedures had been put in place to obtain reasonable assurance that the financial statements as a whole would be free of material misstatements. The below table sets out the key areas of risk identified and how the Committee addressed the issues.
Significant Issues Actions to Address Issue -------------------------- ---------------------------------- Valuation and ownership The Audit Committee and Board of investment- focus review detailed portfolio upon one target company valuations on a regular basis means that any errors throughout the year under in valuation, depending review, and receive confirmation on their size, can from the Investment Manager be highly material. that the pricing basis is A key risk is incorrect appropriate and in line with
pricing used based relevant accounting standards. on requirement of IFRS taking into account the market for those shares. -------------------------- ----------------------------------
Auditor Tenure and Objectivity
The Company's current auditors, Deloitte LLP, have acted in this capacity since the Company's inaugural meeting on 9 November 2012. The Committee reviews the auditor's performance on a regular basis to ensure the Company receives an optimal service. Subject to annual appointment by shareholder approval at the Annual General Meeting, the appointment of the auditor is formally reviewed by the Committee on an annual basis. The Auditors are required to rotate the audit partner regularly every 5 years, and the current partner has been in place since 2014. There are no contractual obligations restricting the choice of external auditor and the company will consider putting the audit services contract out to tender at least every ten years. In line with the FRC's suggestions on audit tendering, this will be considered further when the audit partner rotates, therefore will be discussed during 2019.
Deloitte LLP regularly updates the Committee on the rotation of audit partners, staff, level of fees in proportion to overall fee income of the Company, details of any relationships between the auditor, the Company and any target company, and also provides overall confirmation from the auditors' of their independence and objectivity.
In addition to the audit and half yearly related remuneration, GBP45,000 non audit fees were paid to the Auditor in relation to the placing and a further GBP34,280 for Tax compliance services.
The Audit Committee undertook a formal review of the external auditor for the year ending 31 December 2016, with no issues arising. As a result of their review, the Committee is satisfied that Deloitte LLP is independent of the Company, the Investment Manager and other service providers and recommends the continuing appointment of the auditors to the Board.
Conclusions in Respect of the Financial Statements
The production and the audit of the Company's Annual Report and Financial Statements is a comprehensive process requiring input from a number of different contributors. In order to reach a conclusion on whether the Company's financial statements are fair, balanced and understandable, the Board has requested that the Committee advise on whether it considers that the Annual Report and Financial Statements fulfils these requirements. In outlining their advice, the Committee has considered the following:
-- The comprehensive documentation that is in place outlining the controls in place for the production of the Annual Report, including the verification processes in place to confirm the factual content;
-- The detailed reviews undertaken at various stages of the production process by the investment manager, administrator and the Committee that are intended to ensure consistency and overall balance; and
-- The controls enforced by the investment manager, administrator and other third party service providers to ensure complete and accurate financial records and security of the Company's assets.
As a result of the work performed during the year, the Audit Committee has concluded it has acted in accordance with its terms of reference and ensured the independence and objectivity of the external auditor. The Annual Report for the year ended 31 December 2016, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy, and has reported on these findings to the Board. The Board's conclusions in this respect are set out in the Statement of Directors' Responsibilities.
Statement of Director's Responsibilities
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
The Companies (Guernsey) Law, 2008 requires the directors to prepare financial statements for each financial year. Under that law the directors are required to prepare the group financial statements in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union. Under company law the directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period. In preparing these financial statements, International Accounting Standard 1 ("IAS1") requires that directors:
-- properly select and apply accounting policies;
-- present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
-- provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's financial position and financial performance; and
-- make an assessment of the Group's ability to continue as a going concern.
The Directors confirm that they have complied with the above requirements in preparing the Consolidated Financial Statements. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies (Guernsey) Law, 2008. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
-- the financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;
-- the Chairman's statement, Directors' strategic report and corporate governance statement include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and
-- the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.
In accordance with section 249 of the Companies (Guernsey) Law, 2008, each of the Directors confirms that, to the best of their knowledge:
-- There is no relevant audit information of which the Company's auditors are unaware;
-- All Directors have taken the necessary steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditors are aware of said information.
Independent Auditor's Report to the Members of Sherborne Investors (Guernsey) B Limited
Opinion on financial statements of Sherborne Investors (Guernsey) B Limited
In our opinion the financial statements:
-- give a true and fair view of the state of the Group's affairs as at 31 December 2016 and of the Group's profit for the year then ended;
-- have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; and
-- have been prepared in accordance with the requirements of the Companies (Guernsey) Law, 2008.
The financial statements that we have audited comprise:
-- the Consolidated Statement of Comprehensive Income -- the Consolidated Statement of Financial Position -- the Consolidated Statement of Changes in Equity -- the Consolidated Statement of Cash Flows -- the related notes 1 to 16
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union.
Going concern and the directors' assessment of
the principal risks that would threaten the solvency
or liquidity of the Group
--------------------------------------------------------------------------------
We have reviewed the directors' We confirm that we
statement regarding the appropriateness have nothing material
of the going concern basis of to add or draw attention
accounting contained within to in respect of these
note 1 to the financial statements matters.
and the directors' statement
on the longer-term viability
of the Group contained within
the Directors' strategic report.
We are required to state whether We agreed with the
we have anything material to directors' adoption
add or draw attention to in of the going concern
relation to: basis of accounting
-- the directors' confirmation and we did not identify
that they have carried out a any such material
robust assessment of the principal uncertainties. However,
risks facing the Group, including because not all future
those that would threaten its events or conditions
business model, future performance, can be predicted,
solvency or liquidity; this statement is
-- the disclosures that describe not a guarantee as
those risks and explain how to the Group's ability
they are being managed or mitigated; to continue as a going
-- the directors' statement concern.
in note 1 to the financial statements
about whether they considered
it appropriate to adopt the
going concern basis of accounting
in preparing them and their
identification of any material
uncertainties to the Group's
ability to continue to do so
over a period of at least twelve
months from the date of approval
of the financial statements;
and
-- the directors' explanation
as to how they have assessed
the prospects of the Group,
over what period they have done
so and why they consider that
period to be appropriate, and
their statement as to whether
they have a reasonable expectation
that the Group will be able
to continue in operation and
meet its liabilities as they
fall due over the period of
their assessment, including
any related disclosures drawing
attention to any necessary qualifications
or assumptions.
---------------------------------------------------- --------------------------
Independence
We are required to comply We confirm that
with the Financial Reporting we are independent
Council's Ethical Standards of the Group and
for Auditors and confirm that we have fulfilled
we are independent of the our other ethical
Group and we have fulfilled responsibilities
our other ethical responsibilities in accordance with
in accordance with those standards. those standards.
We also confirm
we have not provided
any of the prohibited
non-audit services
referred to in those
standards.
Our assessment of risks of material misstatement
-------------------------------------------------------------------------------------------------------------------------------------
The assessed risks of material misstatement
described below are those that had the greatest
effect on our audit strategy, the allocation
of resources in the audit and directing the
efforts of the engagement team. We have not
reported on the risk around the Basis and Calculation
for the Incentive Allocation as, given the Turnaround
strategy currently being implemented, there
is less judgement around this balance.
Valuation and ownership of investments at fair
value through profit or loss
===================================================================================================================================
Risk description The investment balance at 31 December
2016 had a fair value of GBP545.8m,
representing 100.5% of the net asset
value of the Group. This is comprised
solely of an equity investment in Electra
Private Equity Plc ("Electra"), representing
29.85% economic interest in Electra
at year-end. Details of the investments
are disclosed in notes 5 and 16, and
the accounting policies relating to
them are disclosed in note 1 (d).
Investments are the most quantitatively
significant balance on the Consolidated
Statement of Financial Position and
are an area of focus as they drive the
performance and net asset value of the
Group.
The risk exists that the Group's investment
is not accurately valued based on relevant
information that is representative of
its value. The use of an unadjusted
level 1 price to value the investments
balance at year-end may not be representative
of its value in accordance with IFRS
13 - Fair Value Measurement ('IFRS 13')
There is also a risk that the incorrect
number of shares owned by the Group
is recognised at year-end, resulting
in a material misstatement of the calculation
of the fair value of investments. This
includes investment trades being recorded
in the incorrect period, resulting in
an incorrect number of shares being
recognised in the financial statements.
============================================================ =====================================================================
How the In order to test the investments balance
scope as at 31 December 2016 we performed
of our the following procedures:
audit
responded * Assessed the design and implementation of controls
to the relating to the valuation of investments to determine
risk whether appropriate oversight had been exercised
within the valuation process and in the
reconciliation of shares held. This included
reviewing the controls adopted by the Group's
administrator and a review of the AAF 01/06 report to
the Group's administrator;
* Assessed the valuation policy and methodology adopted
by management in order to assess compliance to IFRS
13 - Fair Value Measurement ("IFRS 13"), with
emphasis placed on the use of an unadjusted level 1
price in valuing the investment as per IFRS 13 ;
* Evaluated the liquidity of the market for Electra
shares, to ensure there was an active market for
those shares as defined in IFRS 13;
* Reconciled the number of equity shares held as at 31
December 2016 to an independently received
confirmation from the Group's custodian;
* Obtained independent pricing information as at 31
December 2016 in order to recalculate the fair value
of the Group's investment; and
* Tested the initial cost and cut-off of investment
transactions by agreeing all investment transactions
of equity shares to independent confirmations.
============================================================ =====================================================================
Key observations Based on the work performed we conclude
the investment holding in Electra is
not materially misstated. We have assessed
that the holding is appropriately valued
using an unadjusted level 1 price given
the liquidity of Electra shares.
============================================================ =====================================================================
These matters were addressed in the context
of our audit of the financial statements as
a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on
these matters.
Our application of materiality
==========================================================================================================================================
We define materiality as the magnitude of misstatement
in the financial statements that makes it probable
that the economic decisions of a reasonably knowledgeable
person would be changed or influenced. We use
materiality both in planning the scope of our
audit work and in evaluating the results of our
work.
Based on our professional judgement, we determined
materiality for the financial statements as a
whole as follows:
Group materiality GBP9,587,000 (2015: GBP7,228,000)
------------------- =============================================
Basis for 2% of equity (2015: 2% of equity)
determining
materiality
------------------- =============================================
Rationale In determining the materiality,
for the benchmark we considered what the most important
applied balances on which the users of the
financial statements would judge
the performance of the Group. As
the investment objective of the
Group is to invest in a selected
company identified by the investment
manager and realise a return on
the growth in fair value of the
investment, we consider the net
asset value of the Group to be a
key performance indicator for shareholders.
------------------- =============================================
We agreed with the Audit Committee that we would
report to the Committee all audit differences
in excess of GBP191,720 (2015: GBP144,560), as
well as differences below that threshold that,
in our view, warranted reporting on qualitative
grounds. We also report to the Audit Committee
on disclosure matters that we identified when
assessing the overall presentation of the financial
statements.
An overview of the scope of our audit
------------------------------------------------------------------------------------------------------------------------------------------
Our Group audit was scoped by obtaining an understanding
of the Group and its environment, including Group-wide
controls, and assessing the risks of material
misstatement at the Group level.
Sherborne Investors (Guernsey) B Limited ("the
Company") is a limited partner in SIGB, LP ("the
Investment Partnership"), together "the Group",
holding a 95.55% capital interest. The Investment
Partnership holds the underlying investment in
Electra. Deloitte LLP have audited both the Company
and the Investment Partnership and therefore
the audit team have audited the whole Group directly.
At the parent entity level we also tested the
consolidation process and carried out analytical
procedures to confirm our conclusion that there
were no significant risks of material misstatement
of the aggregated financial information of the
remaining components not subject to audit or
audit of specified account balances.
The administrator maintains the books and records
of the entity. Our audit therefore included obtaining
an understanding of this service organisation
(including obtaining and reviewing their controls
assurance report) and its relationship with the
entity.
Matters on which we are required to report by
exception
---------------------------------------------------------------------------------------------------------------------------------------
Adequacy of explanations received
and accounting records We have nothing
Under the Companies (Guernsey) to report in respect
Law, 2008 we are required to of these matters.
report to you if, in our opinion:
* we have not received all the information and
explanations we require for our audit; or
* proper accounting records have not been kept by the
Parent Company; or
* the financial statements are not in agreement with
the accounting records.
Corporate Governance Statement
Although not required to do We have nothing
so, the Directors have voluntarily to report arising
chosen to make a corporate from our review.
governance statement detailing
the extent of their compliance
with the UK Corporate Governance
Code. We reviewed the part
of the Corporate Governance
Statement relating to the Group's
compliance with certain provisions
of the UK Corporate Governance
Code.
Our duty to read other information
in the Annual Report We confirm that
Under International Standards we have not identified
on Auditing (UK and Ireland), any such inconsistencies
we are required to report to or misleading statements.
you if, in our opinion, information
in the annual report is:
* materially inconsistent with the information in the
audited financial statements; or
* apparently materially incorrect based on, or
materially inconsistent with, our knowledge of the
Group acquired in the course of performing our audit;
or
* otherwise misleading.
In particular, we are required
to consider whether we have
identified any inconsistencies
between our knowledge acquired
during the audit and the directors'
statement that they consider
the annual report is fair,
balanced and understandable
and whether the annual report
appropriately discloses those
matters that we communicated
to the audit committee which
we consider should have been
disclosed.
Respective responsibilities of directors and
auditor
-----------------------------------------------------------
As explained more fully in the Directors' Responsibilities
Statement, the directors are responsible for
the preparation of the financial statements
and for being satisfied that they give a true
and fair view. Our responsibility is to audit
and express an opinion on the financial statements
in accordance with applicable law and International
Standards on Auditing (UK and Ireland). We also
comply with International Standard on Quality
Control 1 (UK and Ireland). Our audit methodology
and tools aim to ensure that our quality control
procedures are effective, understood and applied.
Our quality controls and systems include our
dedicated professional standards review team
and independent partner reviews.
This report is made solely to the company's
members, as a body, in accordance with Section
262 of the Companies (Guernsey) Law, 2008. Our
audit work has been undertaken so that we might
state to the company's members those matters
we are required to state to them in an auditor's
report and for no other purpose. To the fullest
extent permitted by law, we do not accept or
assume responsibility to anyone other than the
Company and the Company's members as a body,
for our audit work, for this report, or for
the opinions we have formed.
Scope of the audit of the financial statements
-----------------------------------------------------------
An audit involves obtaining evidence about the
amounts and disclosures in the financial statements
sufficient to give reasonable assurance that
the financial statements are free from material
misstatement, whether caused by fraud or error.
This includes an assessment of: whether the
accounting policies are appropriate to the Group's
circumstances and have been consistently applied
and adequately disclosed; the reasonableness
of significant accounting estimates made by
the directors; and the overall presentation
of the financial statements. In addition, we
read all the financial and non-financial information
in the annual report to identify material inconsistencies
with the audited financial statements and to
identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Consolidated Statement of Comprehensive Income
For the year ended
31 December 2016
2016 2015
Notes GBP GBP GBP GBP
------------------------------ -------- ------------ ------------ ---------- ------------
Income 1(e)
Unrealised gain on
investments held at
fair value through 1(d),
profit or loss 5 116,586,481 76,040,076
Realised gain on investments 5 - 2,950,714
Dividend income 6 26,436,895 3,778,198
Investment income - 509,600
Bank interest income 13,455 17,762
------------------------------ -------- ------------ ------------ ---------- ------------
143,036,831 83,296,350
------------------------------ -------- ------------ ------------ ---------- ------------
Expenses 1(f)
Professional fees 760,511 919,894
Trading and custodian
fees 56,445 1,012,761
Administrative fees 271,316 270,321
Finance costs 1(g),10 1,887,638 2,120,563
Management fees 15 4,368,592 3,341,523
Other fees 141,363 356,472
Directors' fees 2 110,000 110,000
(7,595,865) (8,131,534)
------------------------------ -------- ------------ ------------ ---------- ------------
Consolidated comprehensive
income for the year 135,440,966 75,164,816
------------------------------ -------- ------------ ------------ ---------- ------------
Income attributable
to:
Shareholders 105,904,742 70,351,500
1(b),
Non-controlling interest 15 29,536,224 4,813,316
------------------------------ -------- ------------ ------------ ---------- ------------
Weighted average number
of shares outstanding 4 314,547,259 297,717,952
Basic and diluted earnings
per share (pence) 4 33.67 23.63
------------------------------ -------- ------------ ------------ ---------- ------------
All revenue and expenses are derived
from continuing operations.
The accompanying notes form an integral part of these consolidated financial statements.
Consolidated Statement of Financial Position
For the year ended 31 December 2016
2016 2015
Notes GBP GBP GBP GBP
------------------------- ------ ----------- --------------- ------------- -------------
Non-current Assets
Financial assets
at fair value
through profit
or loss 5 545,824,128 426,795,688
------------------------- ------ ----------- --------------- ------------- -------------
545,824,128 426,795,688
------------------------- ------ ----------- --------------- ------------- -------------
Current Assets
Prepaid expenses 7 27,534 31,890
Trade and other
receivables 14 12,568,695 -
Cash and cash
equivalents 8 4,852,217 8,934,650
------------------------- ------ ----------- --------------- ------------- -------------
17,448,446 8,966,540
------------------------- ------ ----------- --------------- ------------- -------------
Current Liabilities
Trade and other
payables 9 (405,377) (1,012,106)
Loan payable 10 - (19,979,533)
------------------------- ------ ----------- --------------- ------------- -------------
(405,377) (20,991,639)
------------------------- ------ ----------- --------------- ------------- -------------
Net Current Assets
/ (Liabilities) 17,043,069 (12,025,099)
------------------------- ------ ----------- --------------- ------------- -------------
Non-Current Liabilities
Loan payable 10 (20,000,000) -
------------------------- ------ ----------- --------------- ------------- -------------
Net Assets 542,867,197 414,770,589
------------------------- ------ ----------- --------------- ------------- -------------
Capital and Reserves
Called up share
capital and share
premium 11 302,696,145 302,696,145
Retained reserves 184,825,104 85,997,672
------------------------- ------ ----------- --------------- ------------- -------------
Equity attributable
to the Company 487,521,249 388,693,817
------------------------- ------ ----------- --------------- ------------- -------------
Non-controlling 1(b),
interest 15 55,345,948 26,076,772
------------------------- ------ ----------- --------------- ------------- -------------
Total Equity 542,867,197 414,770,589
------------------------- ------ ----------- --------------- ------------- -------------
NAV Per Share 12 154.99p 123.57p
------------------------- ------ ----------- --------------- ------------- -------------
The Consolidated Financial Statements were approved by the Board of Directors for issue on 4 April 2017.
Consolidated Statement of Changes in Equity
For the year ended 31 December 2016
Share
Capital Non-
and Share Retained Controlling Total
Premium Reserves Interests Equity
Notes GBP GBP GBP GBP
------------------------ ------ ------------ ------------- ------------- ------------
Balance at 1 January
2016 302,696,145 85,997,672 26,076,772 414,770,589
------------------------ ------ ------------ ------------- ------------- ------------
Proceeds of Share
issue 11 - - - -
Total comprehensive
income for the
year - 129,393,684 6,047,282 135,440,966
1(m),
Incentive allocation 15 - (23,488,942) 23,488,942 -
Dividends paid 13 - (7,077,310) - (7,077,310)
Distribution 13 - - (267,048) (267,048)
------------------------ ------ ------------ ------------- ------------- ------------
Balance at 31 December
2016 302,696,145 184,825,104 55,345,948 542,867,197
------------------------ ------ ------------ ------------- ------------- ------------
Share
Capital Non-
and Share Retained Controlling Total
Premium Reserves Interests Equity
Notes GBP GBP GBP GBP
---------------------------- ------ ------------ ------------ ------------- ------------
Balance at 1 January
2015 203,833,343 15,646,172 6,243,056 225,722,571
---------------------------- ------ ------------ ------------ ------------- ------------
Proceeds of Share
issue 11 100,556,687 - - 100,556,687
Contribution from
non-controlling interests 14 - - 15,020,400 15,020,400
Cost of share issue 11 (1,693,885) - - (1,693,885)
Total comprehensive
income for the year - 71,968,231 3,196,585 75,164,816
1(m),
Incentive allocation 15 - (1,616,731) 1,616,731 -
Balance at 31 December 2015 302,696,145 85,997,672 26,076,772 414,770,589 ---------------------------- ------ ------------ ------------ ------------- ------------
Consolidated Statement of Cash Flows
For the year ended 31 December
2016 Notes 2016 2015
GBP GBP
-------------------------------------- ------ -------------- --------------
Net cash flow used in operating
activities 7,557,630 (1,890,026)
-------------------------------------- ------ -------------- --------------
Investing activities
Purchase of investments 5 (2,441,959) (108,784,050)
Bank interest income 13,455 17,762
Proceeds from disposal of
investments 5 - 752,544
Net cash flows used in investing
activities (2,428,504) (108,013,744)
-------------------------------------- ------ -------------- --------------
Financing activities
Dividend paid 13 (7,077,310) -
Distribution paid to Non-Controlling
Interest 15 (267,048) -
Issue of share premium 11 - 100,556,687
Cost of share issue 11 - (1,693,885)
Loan drawdowns 10 - 40,000,000
Loan repayments 10 - (60,000,000)
Finance costs (1,867,201) (1,063,662)
Transaction costs and commitment
fee on loan 10 - (342,289)
Contributions from non-controlling
interest 15 - 15,020,400
Net cash flows from financing
activities (9,211,559) 92,477,251
-------------------------------------- ------ -------------- --------------
Net movement in cash and
cash equivalents (4,082,433) (17,426,519)
Cash and cash equivalents
at beginning of year 8,934,650 26,361,169
-------------------------------------- ------ -------------- --------------
Cash and cash equivalents
at year end 4,852,217 8,934,650
-------------------------------------- ------ -------------- --------------
Net cash flow used in operating
activities
-------------------------------------- ------ -------------- --------------
Total consolidated comprehensive
income for the year 135,440,996 75,164,816
Realised gain on investments
and derivative contracts - (2,950,714)
Fair value gain on financial
assets (116,586,481) (76,040,076)
Movement in prepaid expenses
and income receivable (12,564,339) 27,181
Movement in trade and other
payables (606,729) (194,034)
Bank interest income (13,455) (17,762)
Finance costs 1,887,638 2,120,563
-------------------------------------- ------ -------------- --------------
Net cash flow used in operating
activities 7,557,630 (1,890,026)
-------------------------------------- ------ -------------- --------------
Notes to the Consolidated Financial Statements
For the year ended 31 December 2016
1. Summary of significant accounting policies
Reporting entity
Sherborne Investors (Guernsey) B Limited (the "Company") is a closed-ended investment company with limited liability formed under The Companies (Guernsey) Law, 2008. The Company was incorporated and registered in Guernsey on 8 November 2012. The Company commenced dealings on the London Stock Exchange's AIM market on 29 November 2012 and moved from AIM to the London Stock Exchange's Specialist Fund Segment ("SFS") on 7 May 2013. The Company's registered office is 1 Royal Plaza, Royal Avenue, St Peter Port, Guernsey, Channel Islands, GY1 2HL. The "Group" is defined as the Company and its subsidiary, SIGB, LP.
Basis of preparation
The Consolidated Financial Statements of the Group have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union, which comprise standards and interpretations approved by the International Accounting Standards Board (the "IASB") and International Accounting Standards and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee (the "IASC") that remain in effect, together with applicable legal and regulatory requirements of Guernsey law. The Directors of the Company have taken the exemption in Section 244 of The Companies (Guernsey) Law, 2008 (as amended) and have therefore elected to only prepare Consolidated Financial Statements for the year.
These Consolidated Financial Statements have been prepared on the historical cost basis, as modified by the measurement at fair value of investments and derivatives.
Going concern
Under the UK Corporate Governance Code and applicable regulations, the Directors are required to satisfy themselves that it is reasonable to assume that the Company is a going concern.
The Board is of the opinion that the going concern basis should be adopted in the preparation of the Consolidated Financial Statements. Further detail can be found in the Viability Statement.
The Directors have undertaken a rigorous review of the Company's ability to continue as a going concern including reviewing the ongoing cash flows and the level of cash balances as of the reporting date as well as taking forecasts of future cash flows into consideration.
After making enquiries of the Investment Manager and the Administrator, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt a going concern basis in preparing these audited consolidated financial statements. Please see the Corporate Governance section.
Critical accounting judgments and key sources of estimation uncertainty
The preparation of the Group's Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies at the date of the Group's Consolidated Financial Statements and revenue and expenses during the reported year. Actual results could differ from those estimated.
As more fully described in Note 15, "Related Party Transactions", the Special Limited Partner is entitled to receive an incentive allocation once aggregate distributions to Partners of the Investment Partnership exceed a certain level. The basis of the incentive calculation differs depending on how the investment in the Selected Target Company is ultimately characterised (i.e. as a Turnaround or Stake Building Investment). Otherwise there are no significant estimates utilised for the preparation of the Group's Consolidated Financial Statements as at 31 December 2016 due to the nature of the activities that have occurred in this year, together with the sole investment held by the Group being quoted on the London Stock Exchange. Fair value of financial assets held through profit or loss is therefore based on the quoted closing bid price at 31 December 2016.
Adoption of new and revised standards
(i) Amendments early adopted by the Company:
There were no standards, amendments and interpretations adopted early by the Company.
(ii) Standards, amendments and interpretations in issue but not yet effective:
New standards Effective
date
---------------- ----------------------------------------------------
IFRS Financial Instruments - Classifications 1 January
9 and Measurement 2018
IFRS Revenue from Contracts with Customers 1 January
15 2018
Revised and amended standards Effective
date
-------------------------------- ----------------------------------------------------
IFRS Mandatory Effective Date and Transition 1 January
7/9 Disclosure (amended) 2018
Unless stated otherwise, the Directors do not consider the adoption of new and revised Accounting Standards and Interpretations to have a material impact.
a. Basis of consolidation
The Consolidated Financial Statements incorporate the financial statements of the Company and an entity controlled by the Company (its subsidiary). Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.
Non-controlling interests in the net assets of the consolidated subsidiary are identified separately from the Group's equity therein. Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling entities' share of changes in equity since the date of the combination. Losses applicable to the non-controlling entities in excess of their interest in the subsidiary's equity are allocated against their interests to the extent that this would create a negative balance.
Where necessary, adjustments are made to the financial statements of the subsidiary to bring the accounting policies used into line with those used by the Group.
All intra-group transactions, balances and expenses are eliminated on consolidation.
The Company owns approximately 95.55% (2015: 95.55%) of the capital interest in SIGB, LP. Whilst the general partner of SIGB, LP, Sherborne Investors (Guernsey) GP, LLC, a company registered in Delaware, USA, is responsible for directing the day to day operations of SIGB, LP, the Company, through its majority interest in SIGB, LP, has the ability to approve the proposed investment of SIGB, LP and to remove the general partner. Hence, the Company has consolidated SIGB, LP in its financial statements.
b. Non-controlling interest
The interest of non-controlling parties in the subsidiary is measured at the minority's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.
c. Functional currency
Items included in the Consolidated Financial Statements of the Group are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The Consolidated Financial Statements are presented in Pound Sterling ("GBP"), which is the Group's functional and presentational currency. Transactions in currencies other than GBP are translated at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the date of the Consolidated Statement of Financial Position are retranslated into GBP at the rate of exchange ruling at that date. Exchange differences are reported in the Consolidated Statement of Comprehensive Income.
d. Financial assets at fair value through profit or loss
Investments, including equity and loan investments in associates, are designated at fair value through profit or loss in accordance with International Accounting Standard 39 ("IAS 39") "Financial Instruments: Recognition and Measurement", as the Company is an investment company whose business is investing in financial assets with a view to profiting from their total return in the form of interest and changes in fair value. Despite the large holding, under International Accounting Standard 28 ("IAS 28") "Investments in Associates", the fund can hold the investment in Electra shares at fair value through profit or loss rather than as an associate as SIGB is a close-ended fund.
Investments in voting shares, convertible bonds and derivative contracts are initially recognised at cost. The investments in voting shares and derivative contracts and convertibles are subsequently re-measured at fair value, as determined by the Directors. Unrealised gains or losses arising from the revaluation of investments in voting shares and derivative contracts and convertibles are taken directly to the Consolidated Statement of Comprehensive Income.
In determining fair value in accordance with IFRS 13 "Fair Value Measurement" ("IFRS 13"), investments measured and reported at fair value are classified and disclosed in one of the following categories within the fair value hierarchy:
Level I - An unadjusted quoted price for identical assets and liabilities in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available. As required by IFRS 13, the Group will not adjust the quoted price for these investments, even in situations where it holds a large position and a sale could reasonably impact the quoted price.
Level II - Inputs are other than unadjusted quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies.
Level III - Inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgement or estimation.
The investments held by the Group at the year end are classified as meeting the definition of Level I (2015: Level I). On disposal of shares or conversion of bonds, cost of investments are allocated on a FIFO basis.
e. Revenue recognition
Dividend income is recognised when the Group's right to receive payment has been established. Tax suffered on dividend income for which no relief is available is treated as an expense.
Interest receivable from short-term deposits and investment income are recognised on an accruals basis. Where receipt of investment income is not likely until the maturity or realisation of an investment then the investment income is accounted for as an increase in the fair value of the investment.
f. Expenses
All expenses are accounted for on an accruals basis. Expenses are charged through the Consolidated Statement of Comprehensive Income.
g. Finance cost
Finance costs include interest on bank loan and amortised transaction costs. Finance cost is recognised using the effective interest method.
h. Prepaid expenses and trade receivables
Trade and other receivables are initially recognised at fair value. A provision for impairment of trade receivables is established when there is objective evidence the Group will not be able to collect all amounts due according to the original terms of the receivables.
i. Cash and cash equivalents
Cash and cash equivalents comprise cash in hand, call and current balances with banks and similar institutions, which are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value. This definition is also used for the Consolidated Statement of Cash Flows.
j. Trade and other payables
Trade and other payables are initially recognised at fair value and subsequently, where necessary, re-measured at amortised cost using the effective interest method.
k. Financial instruments
Financial assets and liabilities are recognised in the Group's Consolidated Statement of Financial Position when the Group becomes a party to the contractual provisions of the instrument.
l. Segmental reporting
As the Group invests in one Investee Company, there is no segregation between industry, currency or geographical location. No further disclosures have been made in conjunction with IFRS 8 Operating Segments as it is deemed not to be applicable.
m. Incentive allocation
The incentive allocation is accounted for on an accruals basis and the calculation is disclosed in Note 15. It was calculated as GBP31,305,111 at 31 December 2016 (GBP7,816,169 at 31 December 2015). The incentive is payable to Non-Controlling Interest and therefore recognised in the Consolidated Statement of Changes in Equity rather than recognised as an expense in the Consolidated Statement of Comprehensive Income.
2. Comprehensive income
The consolidated comprehensive income has been arrived at after charging:
2016 2015
GBP GBP
---------------------------------- -------- --------
Directors' fees 110,000 110,000
Auditor's remuneration - Audit 28,200 28,200
Auditor's remuneration - Interim
Review 14,600 14,600
---------------------------------- -------- --------
In addition to the audit and half-yearly review related remuneration above, GBPNil (2015: GBP45,000) non-audit related fees were paid to the Auditor in the current year in relation to share placing and a further GBP28,658 (2015: GBP34,280) for Tax compliance services.
3. Tax on ordinary activities
The Company has been granted exemption from income tax in Guernsey under the Income Tax (Exempt Bodies) (Bailiwick of Guernsey) Ordinance 1989, and is liable to pay an annual fee (currently GBP1,200) under the provisions of the Ordinance. As such it will not be liable to income tax in Guernsey other than on Guernsey source income (excluding deposit interest on funds deposited with a Guernsey bank). No withholding tax is applicable to distributions to Shareholders by the Company.
The Investment Partnership will not itself be subject to taxation in Guernsey. No withholding tax is applicable to distributions to partners of the Investment Partnership.
Income which is wholly derived from the business operations conducted on behalf of the Investment Partnership with, and investments made in, persons or companies who are not resident in Guernsey will not be regarded as Guernsey source income. Such income will not therefore be liable to Guernsey tax in the hands of non-Guernsey resident limited partners.
Dividend income is shown gross of any withholding tax.
4. Earnings per share
The calculation of basic and diluted earnings per share is based on the return on ordinary activities less total comprehensive income attributable to the Non-Controlling Interest and on there being 314,547,259 (2015: 297,717,952) weighted average number of shares in issue during the year.
Days in Weighted Average
Date Shares issue Shares
01/01/2016 314,547,259 366 314,547,259
5. Financial assets at fair value through profit or loss
2016 2015
GBP GBP
---------------------------------- ------------ ------------
Opening fair value at the
beginning of the year 426,795,688 239,773,392
Purchases of ordinary shares
at cost 2,441,959 85,282,572
Purchases of convertible
bonds at cost - 23,501,478
Disposal of shares - (589,242)
Adjustment for shares recognised
on conversion - 2,787,412
Movement in fair value 116,586,481 76,040,076
---------------------------------- ------------ ------------
Closing fair value at the
end of the period 545,824,128 426,795,688
---------------------------------- ------------ ------------
Percentage holding of Electra 29.85% 28.21%
The Board of Directors approved an investment in Electra Private Equity plc ("Electra") which was proposed by SIGB, LP's Investment Manager, Sherborne Investors Management (Guernsey) LLC in December 2013. Electra is a London Stock Exchange listed investment trust focused on private equity investments.
As at 31 December 2016, the Group held 11,426,086 shares of Electra (31 December 2015: 11,360,013). During 2016, the Group held no convertible bonds in Electra and received no interest.
6. Dividend Income
2016 2015
GBP GBP
----------------- ----------- ----------
Dividend income 26,436,895 3,778,198
Total 26,436,895 3,778,198
----------------- ----------- ----------
On 26 October 2015 an announcement was made to the stock exchange that Electra would pay a dividend of 78 pence per share with a record date of 22 January 2016, paid on 26 February 2016. This equated to GBP8,861,980.
On 4 May 2016 Electra declared an interim dividend of 44 pence per share, paid on 24 June 2016 to shareholders of record on 13 May 2016 which equates to GBP5,006,220 (2015: GBP3,778,198).
A final dividend in Electra was declared on 9 December 2016, payable to shareholders of record on 16 December 2016 and on 19 January 2017 the dividend of GBP12,568,695 was received.
7. Prepaid Expenses
2016 2015
GBP GBP
-------------------------------- ------- -------
Prepaid Directors and officers
insurance 10,384 21,877
Other prepaid expenses 17,150 10,013
-------------------------------- ------- -------
Total 27,534 31,890
-------------------------------- ------- -------
8. Cash and cash equivalents
Cash and cash equivalents comprises cash held by the Group and short term deposits held with various banking institutions. The carrying amount of these assets approximates their fair value.
9. Trade and other payables
2016 2015
GBP GBP
-------------------------------- -------- ----------
Professional fees payable 27,177 -
Unsettled investment purchases - 603,894
Amount due to broker - 8,350
Loan interest payable 89,021 197,133
Loan commitment fee payable 685 29,116
Other payables 288,494 173,613
-------------------------------- -------- ----------
Total 405,377 1,012,106
-------------------------------- -------- ----------
10. Loan payable
2016 2015
GBP GBP
-------------------------------- ----------- -------------
Balance at 1 January 19,979,533 39,264,921
Loan draw down - 40,000,000
Repayment - (60,000,000)
Transaction costs - (342,289)
Amortisation of transaction
costs 20,467 1,056,901
-------------------------------- ----------- -------------
Total 20,000,000 19,979,533
-------------------------------- ----------- -------------
In March 2015, GBP20 million of a new GBP50 million, unsecured term loan facility with HSBC Bank Plc was drawn with GBP10 million being repaid on 1 May 2015. The remaining GBP10 million was due to be repaid by 21 September 2015, but was extended. Two further drawdowns of GBP5 million each were made on 20 October 2015 and 25 November 2015, respectively. In 2016, the GBP50 million, unsecured term loan facility was reduced to GBP25 million on 23 November 2016 and reduced further to GBP20 million on 15 December 2016. The finance costs amounted to GBP1,887,638 (2015: GBP2,120,563), consisting of GBP912,177 loan interest to 31 December 2016 plus non-utilisation fees of GBP754,995 and utilisation fees of GBP220,466.
At the date of this report GBP15 million of this facility is repayable, with interest. This was extended on 19 December 2016 to 26 February 2018 and as such this facility is non-current. The rate of interest per annum on the loan is LIBOR rates plus 4%. The weighted average effective interest rate for the year was 4.39% per annum.
The Facility Agreement has the following main covenants:
i. Any dividend received from Electra shall be applied in prepayment of the Loan and accrued interest up to the amount of the dividend.
ii. Any disposal proceeds from the sale of Electra shares, debt instruments or relevant derivatives shall be applied in the prepayment of the Loan and accrued interest up to the amount of the disposal proceeds.
iii. Any partnership capital injections in SIGB, LP shall be applied in the prepayment of the Loan and accrued interest up to the amount of the capital injections.
iv. SIGB, LP is also required to maintain a Loan to Value (LTV) ratio below 50%. An LTV ratio of 50% or higher would entitle the bank to require full or partial prepayment to restore the required LTV ratio. The LTV ratio is the percentage of the Loan, any accrued interest and fees to the value of SIGB, LP's investment in Electra.
The Loan to Value ratio is regularly monitored by the Board to ensure that covenants are maintained in accordance with the Facility Agreement. HSBC have waived the requirement of using any dividend payments to reduce outstanding borrowings at the year end.
11. Share capital and share premium
2016 2015
Consolidated Consolidated
--------------------------- ------------- -------------
Authorised share capital No. No.
Ordinary Shares of no par
value Unlimited Unlimited
--------------------------- ------------- -------------
Issued and fully paid No. No.
Ordinary Shares of no par
value 314,547,259 314,547,259
--------------------------- ------------- -------------
2016 2015
Consolidated Consolidated
---------------------------- ------------- -------------
Share premium account GBP GBP
Share premium account upon
issue 302,696,145 307,556,687
Less: Cumulative costs
of issue - (4,860,542)
Balance at the end of the
year 302,696,145 302,696,145
---------------------------- ------------- -------------
12. Net asset value per share attributable to the Company
No. of Shares Consolidated
Pence per
Share
------------------- -------------- -------------
31 December 2016
Ordinary Shares
Basic and diluted 314,547,259 154.99
31 December 2015
Ordinary Shares
Basic and diluted 314,547,259 123.57
13. Dividends
On 14 April 2016 a dividend of 1.5 pence per share was declared by the Company and was paid on 13 May 2016 to shareholders of record on 22 April 2016 which equated to GBP4,718,208.
On 29 June 2016 a dividend of 0.75 pence per share was declared by the Company and was paid on 29 July 2016 to shareholders of record on 8 July 2016 which equated to GBP2,359,102.
14. Subsequent Events
A final dividend in Electra was declared on 9 December 2016, payable to shareholders of record on 16 December 2016. On 19 January 2017 SIGB LP received GBP12,568,695 (of which GBP5,000,000 was used to reduce the outstanding borrowings). HSBC Bank waived the requirement of using the dividend payment to reduce additional outstanding borrowings.
On 8 March 2017, the Board received a Notice of Cash Distribution from SIGB, LP for the amount of GBP3,344,222.
Electra also announced a special dividend of 2,612 pence per share to its shareholders on 24 March 2017 which is expected to be paid on 5 May 2017 to shareholders of record on 7 April 2017.
The Company is pleased to declare a dividend to shareholders of 87.0 pence per share payable on 19 May 2017 to shareholders of record on 18 April 2017. The payment of the Company's dividend is conditional on the receipt by the Company of Electra's dividend on 5 May 2017.
Since 31 December 2016, the share price of Electra has increased from 4,777 pence to 4,951 pence as at 3 April 2017. If this share price was used to value the Electra shares at 31 December 2016, it would have resulted in an increase in the closing fair value from GBP545,824,128 to GBP565,705,518.
15. Related party transactions
The Investment Partnership and its General Partner, Sherborne Investors (Guernsey) GP, LLC, have engaged Sherborne Investors Management (Guernsey) LLC to serve as Investment Manager who is responsible for identifying the Selected Target Company, subject to approval by the Board of Directors of the Company, as well as day to day management activities of the Investment Partnership. The Investment Manager is entitled to receive from the Investment Partnership a monthly management fee equal to one-twelfth of 1% of the net asset value of the Investment Partnership, less cash and cash equivalents and certain other adjustments. At the year end, management fees of GBP4,368,592 (2015: GBP3,341,523) had been paid by the Partnership. No balance was outstanding at the year end.
One member of Sherborne Investors (Guernsey) GP, LLC is Sherborne Investors LP (the non-controlling interest), which also serves as the Special Limited Partner of the Investment Partnership. The Special Limited Partner is entitled to receive an incentive allocation once aggregate distributions to Partners of the Investment Partnership, of which one is the Company, exceed a certain level of capital contributions to the Investment Partnership, excluding amounts contributed attributable to management fees.
SSFD, an affiliate of the General Partner to the Investment Partnership, subscribed as a limited partner for GBP15 million of SIGB, LP on 20 May 2015, thereby acquiring a 4.43% capital interest. The interest was acquired at the net asset value ("NAV") of SIGB, LP on 20 May 2015. Management and incentive fees have been accrued based on the capital interest of the new limited partner since the date of its admission. For Turnaround investments, the incentive allocation is computed at 10% of the distributions to all Partners in excess of 110%, increasing to 20% of the distributions to all Partners in excess of 150% and increasing to 25% of the distributions to all Partners in excess of 200% of capital contributions, excluding amounts contributed attributable to management fees.
If after acquiring a shareholding, the share price of the Selected Target Company rises to a level at which further investment and the effort of a Turnaround is, in the Investment Manager's opinion, no longer justified or otherwise no longer presents a viable Turnaround opportunity, the Investment Partnership intends to sell (and distribute the proceeds to the Company) or distribute in kind the holding to the limited partners (in each case after deductions for any costs and expenses and for the Investment Partnership's Minimum Capital Requirements and subject to applicable law and regulation), rather than seeking to join the Board of Directors or otherwise engage with Selected Target company (a "Stake Building Investment").
For Stake Building Investments, the incentive allocation is computed at 20% of net returns on the investment of the Investment Partnership, such amount to be payable after each partner in the Investment Partnership has had distributed to it an amount equal to its aggregate capital contribution to the Investment Partnership in respect to the Stake Building Investment (excluding any capital contributions attributable to Management Fees). The Special Limited Partner may waive or defer all or any part of any incentive allocation otherwise due.
At 31 December 2016, the incentive allocation has been computed based on a Turnaround investment basis and amounts to GBP32,320,735 (2015: GBP7,994,843) of which GBP1,015,624 (2015: GBP178,674) relates to SSFD.
Each of the Directors (other than the Chairman) receives a fee payable by the Company currently at a rate of GBP30,000 per annum. The Chairman of the Audit Committee receives GBP5,000 per annum in addition to such fee. The Chairman receives a fee payable by the Company currently at the rate of GBP45,000 per annum.
Individually and collectively, the Directors of the Company hold no shares of the Company as at 31 December 2016.
Sherborne Investors GP, LLC has granted to the Company a non-exclusive licence to use the name "Sherborne Investors" in the UK and the Channel Islands in the corporate name of the Company and in connection with the conduct of the Company's business affairs. The Company may not sub-licence or assign its rights under the Trademark Licence Agreement. Sherborne Investors GP, LLC receives a fee of GBP20,000 per annum for the use of the licenced name.
16. Financial risk factors
The Group's investment objective is to realise capital growth from investment in the Selected Target Company, identified by the Investment Manager with the aim of generating significant capital return for Shareholders. Consistent with that objective, the Group's financial instruments mainly comprise an investment in a Selected Target Company. In addition, the Group holds cash and cash equivalents as well as having trade and other receivables and trade and other payables that arise directly from its operations.
Liquidity risk
The Group's cash and cash equivalents are placed in demand deposits and short-term money market instruments with a range of financial institutions. The listed investment in Electra could be partially redeemed relatively quickly (within 3 months) should the Group need to meet obligations or ongoing expenses as and when they fall due.
The following table details the liquidity analysis for financial liabilities at the date of the Consolidated Statement of Financial Position:
As at 31 December
2016 Less than 1 - 12 1 - 2
Consolidated 1 month months years Total
GBP GBP GBP GBP
Trade and other payables (316,356) (89,021) - (405,377)
Loan payable - - (20,000,000) (20,000,000)
(316,356) (89,021) (20,000,000) (20,405,377)
-------------------------- ---------- ------------- ------------- -------------
As at 31 December
2015 Less than 1 - 12 1 - 2
Consolidated 1 month months years Total
GBP GBP GBP GBP
-------------------------- ---------- ------------- ------------- -------------
Trade and other payables (814,973) (197,133) - (1,012,106)
Loan payable - (19,979,533) - (19,979,533)
-------------------------- ---------- ------------- ------------- -------------
(814,973) (20,176,666) - (20,991,639)
-------------------------- ---------- ------------- ------------- -------------
Credit risk
The Company is exposed to credit risk in respect of its cash and cash equivalents and derivative contracts, arising from possible default of the relevant counterparty, with a maximum exposure equal to the carrying value of those assets. The credit risk on liquid funds is mitigated through the Group depositing cash and cash equivalents across several banks. The credit risk associated with derivative contracts is monitored by reviewing the credit rating for counterparty. The Group is exposed to credit risk in respect of its trade receivables and other receivable balances with a maximum exposure equal to the carrying value of those assets. UBS Financial Services Inc. currently has a stand alone credit rating of A- with Standard & Poor's (2015: Credit Suisse Securities (USA) LLC A- with Standard & Poor's).
Market price risk
Market price risk arises as a result of the Group's exposure to the future values of the share price of the Selected Target Company. It represents the potential loss that the Group may suffer through investing in the Selected Target Company.
As at 31 December 2016 a +/-20% change in the price of Electra would positively or negatively affect the Group's net assets, income and consolidated comprehensive income for the year, by GBP109,164,826 (2015: GBP85,359,138).
Interest rate risk
The Group is subject to risks associated with changes in interest rates in respect of interest earned on its cash and cash equivalents and interest paid on its loan payable. The Group seeks to mitigate this risk by monitoring the placement of cash balances on an on-going basis in order to maximize the interest rates obtained.
As at 31
December
2016 Interest bearing
--------------------------------- -------------
Less 1 month 3 months
than to to 1 - 2 Non- interest
1 month 3 months 1 year years bearing Total
GBP GBP GBP GBP GBP GBP
------------------- ---------- ---------- --------- ------------- -------------- -------------
Assets
Cash and
cash equivalents 4,852,217 - - - - 4,852,217
Dividend
receivable - - - 12,568,695 12,568,695
Investments
held at fair
value through
profit or
loss - - - - 545,824,128 545,824,128
Prepaid expenses - - - - 27,534 27,534
------------------- ---------- ---------- --------- ------------- -------------- -------------
Total Assets 4,852,217 - - - 558,420,357 563,272,574
------------------- ---------- ---------- --------- ------------- -------------- -------------
Liabilities
Other payables - - - - (405,377) (405,377)
Loan payable - - - (20,000,000) - (20,000,000)
------------------- ---------- ---------- --------- ------------- -------------- ------------- Total Liabilities - - - (20,000,000) (405,377) (20,405,377) ------------------- ---------- ---------- --------- ------------- -------------- -------------
Interest rate risk
As at 31 December
2015 Interest bearing
-------------------------------------
Less 1 month 3 months
than to to Non- interest
1 month 3 months 1 year bearing Total
GBP GBP GBP GBP GBP
------------------- ---------- ---------- ------------- -------------- -------------
Assets
Cash and cash
equivalents 8,934,650 - - - 8,934,650
Investments
held at fair
value through
profit or loss - - - 426,795,688 426,795,688
Prepaid expenses - - - 31,890 31,890
------------------- ---------- ---------- ------------- -------------- -------------
Total Assets 8,934,650 - - 426,827,578 435,762,228
------------------- ---------- ---------- ------------- -------------- -------------
Liabilities
Other payables - - - (1,012,106) (1,012,106)
Loan payable - - (19,979,533) - (19,979,533)
------------------- ---------- ---------- ------------- -------------- -------------
Total Liabilities - - (19,979,533) (1,012,106) (20,991,639)
------------------- ---------- ---------- ------------- -------------- -------------
As at 31 December 2016, the total interest sensitivity gap for interest bearing items was a deficit of GBP15,147,783 (2015: deficit GBP11,044,883).
As at 31 December 2016, interest rates reported by the Bank of England were 0.25% (2015: 0.50%) which would equate to net expense of GBP37,869 (2015: income GBP55,224) per annum if interest bearing assets and liabilities remained constant. If interest rates were to fluctuate by 0.25%, this would have a positive or negative effect of GBP37,869 (2015: GBP27,612) on the Group's annual income.
Capital risk management
The capital structure of the Company consists of proceeds raised from the issue of Ordinary Shares. As at 31 December 2016, the Group is not subject to any external capital requirement.
The Directors believe that at the date of the Consolidated Statement of Financial Position there were no other material risks associated with the management of the Company's capital.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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