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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Woodford Patient Capital Trust Plc | LSE:WPCT | London | Ordinary Share | GB00BVG1CF25 | ORD 1P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 33.60 | 33.55 | 33.90 | 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
TIDMSUPP
RNS Number : 5812L
Schroder UK Public Private Tst plc
01 May 2020
Schroder UK Public Private Trust plc (the Company)
Annual Report
1 May 2020
Schroder UK Public Private Trust plc (formerly Woodford Patient Capital Trust plc) hereby submits its Annual Report for the year ended 31 December 2019 as required by the UK Listing Authority's Disclosure Guidance and Transparency Rule 4.1.
The Company's Annual Report and Accounts for the year ended 31 December 2019 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's website www.schroders.com/publicprivatetrust . Please click on the following link to view the document:
http://www.rns-pdf.londonstockexchange.com/rns/5812L_1-2020-4-30.pdf
The Company has submitted its Annual Report and Accounts to the National Storage Mechanism and it will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism .
Enquiries:
Benjamin Hanley
Schroder Investment Management Limited
Tel: 020 7658 3847
CHAIRMAN'S STATEMENT
Performance
The year to 31 December 2019 was disappointing for investors. The net asset value fell 49.3% from 97.61p to 49.46p during the year and the share price fell 53.3%, from 82.10p to 38.35p. World economies are currently being severely disrupted by the COVID-19 pandemic and this may create opportunities for some of the many healthcare companies in the portfolio but will also put pressure on other aspects of their activity, such as fundraising.
The board has followed the guidance issued on 21 March 2020 by the Financial Conduct Authority (FCA) and on 23 March 2020 by the Financial Reporting Council (FRC) that public companies should delay the announcement of their results in order to give themselves more time to ensure the challenges caused by the COVID-19 virus are fully reflected in their reporting.
In light of the above, while the Company had intended to announce its audited annual results for the year ended 31 December 2019 in early April 2020, the Company has deferred the publication of its audited annual results to today.
The board has been encouraged by the appointment of Schroders Investment Management Limited (Schroders) as Portfolio Manager since December. The team at Schroders, backed by its deep resource in both private and public investments, is well placed to maximise value in the portfolio, notwithstanding the continued uncertainty of the LF (formerly Woodford) Equity Income Fund assets sale, and the wider market uncertainty of the COVID-19 pandemic. In the future, Schroders will use its dedicated teams to rebalance the portfolio towards what they believe is a more sustainable risk/reward profile.
A more detailed comment on performance and investment policy may be found in the Portfolio Manager's Review.
Gearing
The Company's borrowings have continued to be an area of focus during the year. In December 2019, coinciding with the appointment of Schroders, the board announced that the revolving credit facility with The Northern Trust Company had been extended until 15 January 2021. The current level of gearing stands at GBP107.0 million.
The commitment under the facility was reduced to GBP112.9 million, in-line with the amount drawn under the facility at that time and consistent with the Company's intention to reduce borrowings. In addition, the borrowing base, which limits borrowings to an amount based on the value of both the quoted and unquoted holdings, was removed, providing the Company with greater flexibility while it seeks to reduce gearing. The annual interest rate remains unchanged at LIBOR + 1.5 per cent.
The Company will work with Schroders to reduce the level of borrowings, although the board would like to reiterate that it is important that Schroders is provided with time to achieve this objective while protecting shareholder value.
Investment Policy
When Schroders was appointed in December 2019, the board indicated that the portfolio would continue to be managed in accordance with the Company's existing investment objective and investment policy in all material respects.
It is expected that over time, Schroders will seek to increase the overall liquidity of the portfolio and the level of diversification within it. However, in light of the composition of the existing policy Schroders is restricted from: (i) raising capital though disposals as a result of the requirement to have a minimum of 40 holdings; and (ii) making further investments into existing assets, as a result of the current restriction that no more than 80% of the Company's assets may be held in unquoted holdings, measured at the time of investment.
The board is therefore proposing to make a number of minor changes to the investment policy and restrictions to reflect the strategy that Schroders will deploy in managing the portfolio and to provide the necessary flexibility in the short term with regards to the minimum number of holdings and the mix of private and public assets. The full details of the proposed changes are set out on pages 70 and 71 of the Annual Report and a resolution seeking shareholder approval to these amendments will be put to shareholders at the forthcoming Annual General Meeting (AGM).
Valuation Frequency
I indicated in my Interim Statement that the board was considering moving from daily to periodic NAV reporting, bringing the Company more in line with peers. Following Schroders' appointment we have taken soundings from a numbers of investors, and on 26 March the board announced that the Company will move to a quarterly NAV reporting schedule.
This will enable the Company to undertake a review of the portfolio at the time of each NAV publication, which will be announced following each quarter end, and will provide a more representative valuation for investors. The first NAV to be published under the new reporting regime will be the 31 March 2020 NAV which is expected to be published before the end of June 2020. We will review every year whether a quarterly NAV reporting cycle remains appropriate.
The board also provided an update on the nature of information that will be released to the market under the new quarterly valuation cycle. In addition to announcements arising from developments within portfolio companies that have a material impact on the NAV, the board will make announcements relating to new private investments, realisations of any nature in private investments (including partial realisations), and material updates from private companies in the portfolio.
The board believes this quarterly NAV reporting cycle will provide shareholders with a clear framework for the release of information on the portfolio. This is in line with trusts with similar assets, and we would encourage all investors to sign up to receiving these updates each quarter, as they are released. This can be done on the Company's website, www.schroders.com/publicprivatetrust .
Discount management
At the last AGM, the Company was given the authority to purchase up to 14.99% of its issued share capital. We propose that share buyback authorities be renewed at the forthcoming AGM and that any shares so purchased be cancelled or held in treasury for potential reissue. Although the Company is restricted in the amount of capital it could put to use for these purposes for the immediate future, share buybacks remain an important tool and the board will look to consider buy backs once it is in a position to do so.
Board composition and Chair succession
The composition of the board has materially changed since the start of 2019. The board would like to thank Dame Louise Makin, Steven Harris, Carolan Dobson and Alan Hodson for their contributions to the Company. Stephen Cohen, Jane Tufnell and Raymond Abbott all joined the board and their elections will be proposed at the AGM.
Our new board members bring significant skills and specific investment trust experience to the deliberations of the board.
In view of these board changes, the challenges of the portfolio and the transition to Schroders, it is not thought to be beneficial to investors to make further changes at this stage and, therefore, I have agreed to continue to serve as Chairman for a time to support the transition to Schroders. In line with the board's agreed succession plans, and subject to shareholders' continued support at the forthcoming AGM, I will be retiring at the 2021 AGM.
The board has formed a Nominations Committee to be chaired by Jane Tufnell, and the Committee will lead the selection process for my successor. The board believes that it is important for appropriate new skills to be brought to the board and will continue to look to refresh one director every two to three years. All directors will continue to be subject to re-election each year at the AGM and will not serve for a period over nine years.
Outlook
I would like to reiterate our thanks to shareholders for their continued patience and understanding as we move ahead with Schroders. We believe that their appointment is a major step forwards and we remain focused on maximising value and restoring confidence in the Company and its portfolio.
Challenges remain. The continuing delays in the sale of the assets from the LF Equity Income Fund, whilst an entirely separate entity from the Company will, nevertheless, continue to cause disruption to a number of investee companies. This, together with the current general market conditions created by the outbreak of the COVID-19 pandemic, may impact the private equity market and may further affect our ability to pay down the gearing within the timeframe that the board would like.
Schroders have provided an update on the portfolio in their report which reflects the current environment. The possible impact from COVID-19 on the Company's NAV per share after the balance sheet date has been recorded as a post-balance sheet event in Note 23 to the Accounts below.
AGM
The AGM will be held at 10.30 a.m. on Friday, 5 June 2020 at Schroders' offices at 1 London Wall Place, London EC2Y 5AU. In light of the rapidly evolving situation and recent government guidance regarding the outbreak of COVID-19, the board has taken the decision to alter the format of the Company's AGM.
The formalities of the meeting, as required by the Companies Act 2006 and the Company's Articles of Association, will still take place. The safety and security of our shareholders, service providers, officers, and guests is of paramount importance to us. While the Government's "Stay at Home Measures" are in force public gatherings of more than two people are prohibited.
Shareholders are therefore asked not to attend the AGM in person but instead to vote by proxy. We also ask shareholders to follow the current advice of the Government and Public Health England, noting the current guidance on travel and the limits on numbers at public gatherings.
All shareholders should vote by proxy. Proxy votes can be submitted electronically through the registrar's portal. Details are included with the proxy forms and on the Company's webpages.
In the event that shareholders have a question for the board, please email (amcompanysecretary@schroders.com), and we will arrange for a response to be provided to you.
Web Conference - Update from Schroders
Please join managers, Ben Wicks and Tim Creed, for a webconference in which they will introduce Schroders as Portfolio Manager and outline their thoughts on the future direction of the portfolio. The presentation will be followed by a live Q&A session.
The webconference will take place 14 May 2020 at 10:00 am. Register for the event at
http://www.schroders.com/publicprivatetrust/updates .
Last year was exceptionally challenging, but I am proud of the work we have all done in the last 12 months and wish to thank all my colleagues as well as the Company's many service providers. With the appointment of Schroders, the portfolio should now have the time, the care and the stability it needs to survive and prosper.
Susan Searle
Chairman
30 April 2020
REVIEW OF 2019
Woodford Investment Management (Woodford) resigned as Portfolio Manager of the Company on 13 December 2019. Schroders were appointed the same day. Thus, the 2019 performance was in effect the responsibility of Woodford rather than Schroders. Woodford are not able to complete a Manager's Review section for this Annual Report and Schroders had no involvement prior to 13 December 2019, so the Directors are providing their own short summary of key events. Most of these are already covered in the Half-Yearly Report which was published on 30 September 2019. The most significant events for the Company are set out below.
In March 2019, the Company purchased further positions in five existing holdings in Atom Bank, Carrick Therapeutics, Cell Medica, RateSetter and Spin Memory for GBP73 million from the Woodford Equity Income Fund (WEIF). This was funded through the issue of 81.6 million new shares at the then prevailing NAV. This transaction had taken almost a year to negotiate and given the discount the shares were trading at, at the time the transaction was agreed, namely -13%, the net effect to shareholders was regarded by the board and by advisers as beneficial.
Woodford, as Portfolio Manager, had begun the year with high levels of optimism (gearing was 18.6%) about the likely 2019 performance for the Company's holdings including the expectation that it would be possible for some of these companies to IPO or to achieve a trade sale. This would have helped finance the ongoing funding requirements that investee companies were facing and to which the Portfolio Manager had in some cases legally committed the Company.
However, many factors came together to undo this outlook. The IPOs and trade sales did not transpire. There was ongoing deterioration in the performance and liquidity of Woodford's open-ended funds which were facing increasing redemption demands and consequent downward pressure on the value of its holdings. Several holdings in the open-ended funds were also held by the Company.
On 3 June 2019, Link Fund Solutions Limited (LFS), as AIFM, announced the suspension of dealing in the Woodford open-ended funds and later that month the board instructed the Portfolio Manager to seek to reduce gearing by the end of 2019, which the Portfolio Manager indicated was eminently achievable. This was done to reduce risk in the Company and to seek to enable funding commitments to be met. However, the absence of any mooted IPO's or trade sales rendered the Portfolio Manager unable to reduce gearing in the second half of 2019.
As set out on pages 29 and 30 of the Annual Report the board initiated a process to identify a new Portfolio Manager in July 2019 following the crisis in Woodford and the deterioration in performance. The board also initiated direct discussions with the lender in August 2019 to renegotiate the terms of the loan agreement as a number of the covenant terms had become onerous. This was a lengthy process which was subsequently successfully taken on by Schroders as the new Portfolio Manager culminating in the signing of a new agreement on 13 December 2019.
There were significant extra costs incurred by the Company during the year. Legal costs associated with the transaction in March 2019, the Portfolio Manager search and transfer, debt renegotiation and advice to the board were much higher than usual. In addition, the board appointed FTI Consulting (FTI) to advise and help with press and public relations during a period when there was coverage of Woodford's problems in the media almost every day and a deluge of enquiries. Finally, the board engaged its broker to provide a much higher level of service than in normal circumstances in order to advise on the multiple RNS' issued, the Portfolio Manager search and to advise the board generally. All three service providers were invaluable during this very difficult period, especially in the second half of 2019, when 16 board meetings proved necessary, plus multiple meetings of the board sub-group responsible for the search for a new Portfolio Manager. FTI were invaluable in helping to correct misapprehensions that had arisen in the press and helping to reinforce the clear difference between WEIF, which had faced redemptions it was unable to meet, and the closed-ended Company, whose shares were actively traded.
Performance
This was clearly very disappointing with the NAV falling by 49.3% from 97.61p to 49.46p. The top 5 contributors to this negative return were as follows:
Benevolent AI: -7.67% - the company has made good progress via collaborations with AstraZeneca and Novartis, a new funding round took place at a lower level, albeit the funding was provided by Temasek who should prove a strong future cornerstone investor.
Industrial Heat: -7.44% - mainly as a result of technology development delays.
Autolus Therapeutics: -4.45% - as a result of a more sceptical background for listed biotech companies and then delays in constructing a technical facility.
Kuur Therapeutics (previously called Cell Medica): -3.29% - as a result of a lower valuation for new funds.
Rutherford Health (previously called Proton Partners): -3.07% - as a result of delays in the ramp-up of new centres.
Portfolio Activity
The major sales were as follows -
Oxford Sciences Innovation plc - GBP41.4m - sold, at a small premium (1.5%) to the then valuation.
Autolus Therapeutics - GBP32.1m - sold given its liquidity.
Ultrahaptics - GBP19.0m - sold profitably to a London private equity fund.
Sensyne Health - GBP17.9m - sold given its liquidity.
Prothena - GBP17.5m - sold given its liquidity.
All of the above were completed in order to raise cash to finance funding requirements and to seek to manage gearing.
The major purchases were as follows -
Atom Bank - GBP44.4m - as part of the transaction with WEIF referred to above and then a further funding commitment, alongside other shareholders, Toscafund and BBVL.
Rutherford (previous called Proton Partners) - GBP35m - acquired as a primary issue, linked to the Woodford commitment entered into at the time of IPO.
Benevolent AI - GBP15m - as part of a previously committed funding.
RateSetter - GBP14.3m - as part of the transaction with WEIF
Spin Memory (previously called Spin Transfer Tech) - GBP13.2m - as part of the transaction with WEIF.
Henceforth, Schroders, as Portfolio Manager, will naturally be reporting to shareholders in the Half-Yearly and Annual Reports on both portfolio activity and performance. They will also be producing quarterly NAV reports with a portfolio update of top ten holdings and commentary on activity and performance.
PORTFOLIO MANAGER'S REVIEW
Market background
2019 was a year of significant volatility and change for the Company and its portfolio. The portfolio experienced a meaningful decline in value, leading to the renegotiation of the Company's lending facility and a change of Portfolio Manager. A review of 2019 can be found above.
Concerns over the spread of coronavirus and its potential impact on global growth have dominated financial markets recently, with public equity markets falling sharply.
COVID-19 has started to negatively impact the real economy globally and has the potential to cause more economic disruption. The main cause-effect relationship between the virus and the economy is that, due to the rapid exponential spread of the virus, governments are forced to enact decisive countermeasures to slow down transmission, so health systems are able to cope with the situation. It is these countermeasures, including travel restrictions and partial lock-downs, as well as changing consumer behaviour targeted at social distancing, which can lead to economic disruption. Any disruption is likely to be temporary. Either countermeasures are successful, or seasonal weather changes might have a positive impact, or treatments and vaccines will be available at some point in time or the virus will run its course.
For existing investments, the impact varies mainly by region and industry, the specific business model of a company and its financing situation. The portfolio has a high proportion of healthcare companies, which is a key strength at this point in time. This includes a number of companies in the Trust that are actively working on COVID-19. As well as providing an overview of the top 10 portfolio companies, we have provided an update on the impact of the situation, where relevant, in the next section.
We have taken on this portfolio because we believe it contains many attractive holdings and are confident that our experience and resources will afford us the opportunity to re-position the portfolio toward creating long-term value for shareholders.
Top 10 portfolio holdings
Atom Bank (14.4% of the portfolio)
Atom Bank is the UK's first bank built exclusively for mobile. It is redefining what a bank should be, making things easier, more transparent and better value in a world of finance. Currently the bank offers savings accounts, mortgages and business loans. During 2019 Atom has been investing into its infrastructure and technology platform. The Company was awarded a GBP10m Banking Competition and Remedies grant to drive competition in lending to SMEs, and also successfully completed its second mortgage securitisation of over GBP500m. This followed the successful GBP50m fundraising round completed earlier in the year with participation from BBVA,
Toscafund, Perscitus LLP, alongside SUPP.
In early March, Atom invoked full contingency and moved swiftly to complete implementation of homeworking for all roles by the end of the month. Throughout, it has maintained strong customer service levels while responding to Government initiatives in support both of mortgage customers and SMEs. Strongly capitalised and highly solvent Atom plans to launch new savings products in Q2 and to continue lending to the real economy throughout 2020 and beyond.
Rutherford Health (14.4% of the portfolio)
Rutherford operates three innovative cancer treatment centres in Newport (South Wales), Northumberland and Thames Valley, with a fourth centre in Liverpool recently handed over for commissioning of equipment. The service offering is extensive and covers: imaging, chemotherapy, immunotherapy, radiotherapy and high energy proton therapy. Over 300 patients have been treated across all services including 100 patients treated with high energy proton beam therapy. In 2019, the company listed on the NEX Growth Exchange raising GBP20m on listing and a further GBP70m through the year.
Rutherford Health has partnered with the NHS to provide cancer care to patients in times in which many NHS healthcare facilities are burdened with a high number of COVID-19 patients. Cancer patients receiving chemo-, radio- or proton beam therapy are particularly vulnerable to COVID-19 infections due to their weakened immune system and Rutherford outpatient facilities focused on cancer care only ensure a safe and prioritised treatment.
Oxford Nanopore (13.3% of the portfolio)
Oxford Nanopore has developed a new generation of DNA sequencers, which uniquely scale from small portable formats to ultra-high throughput. They are unique in combining this scalability with real-time data streaming and the ability to sequence very long fragments of DNA / RNA, which provides very rich biological data. The Company now has customers in about 100 countries, using its technology for a range of scientific research including pathogen analysis, cancer research, agriculture, human genetics and environmental research. During the year Oxford Nanopore raised GBP109.5m in investment from new and existing investors from the US, Europe and Asia/Pacific. This brings total primary investment into the company to GBP481m.
Oxford Nanopore is providing support on the frontline of the coronavirus outbreak through their MinION sequencers, which allow rapid and decentralized genome sequencing, enabling an improved surveillance of the coronavirus outbreak and better understanding of the disease and its development, including potential mutations. Oxford Nanopore has partnered with global public health scientists and public health authorities in more than 30 countries, with another 40+ countries preparing to use MinION sequencers.
BenevolentAI (6.0% of the portfolio)
BenevolentAI creates and applies artificial intelligence (AI) and machine learning to transform the way medicines are discovered and developed. Benevolent integrates its technology into every step of the drug discovery process from hypothesis generation to late-stage clinical development. The Benevolent Platform(R) is used by scientists and technologists to find new ways to treat disease, improve the efficacy and lower the development time and costs of new treatments. During 2019, as well as advancing its internal R&D pipeline, the company announced collaborations with AstraZeneca and Novartis, and a $90m investment from Temasek, a Singapore-headquartered investment company.
Benevolent AI has been providing important insight in the global effort to combat the COVID-19 outbreak. In February 2020, Benevolent published two papers in The Lancet outlining how its proprietary knowledge graph, queried by a suite of AI algorithms, enabled the rapid identification of a potential therapeutic candidate for COVID-19. Its scientists re-examined the affinity and selectivity of all the drugs in its knowledge graph to identify already approved drugs with both anti-viral and anti-inflammatory properties. Its research suggests that Baricitinib, an already approved drug for rheumatoid arthritis, could be used to inhibit both viral entry into cells and the human inflammatory response strongly associated with the terminal phase of COVID-19 infection. It could also be used in combination with the directly acting antivirals currently being used in the COVID-19 outbreak. A leading example of how AI is being applied to accelerate the drug discovery process.
Immunocore (4.3% of the portfolio)
Immunocore is a pioneering T cell receptor biotechnology company, working to develop and commercialise a new generation of transformative medicines to address unmet needs. The Company's most advanced programmes are in oncology and it has a rich pipeline of programmes in infectious and autoimmune diseases. Its lead programme, Tebentafusp (IMCgp100), has entered pivotal clinical studies as a treatment for patients with metastatic uveal melanoma. During the year, two additional programmes entered the clinic and one was approved by the US FDA.
Autolus (3.3% of the portfolio)
Autolus Therapeutics is at the forefront of a revolutionary immuno-oncology treatment that is offering new hope to patients suffering from cancers. In 2019, Autolus continued to demonstrate good proof of concept data for its "chimeric antigen receptor T cell therapy" (CAR-T) platform in several of its key clinical programmes. At the American Society of Haematology (ASH) conference in December, the company provided additional compelling patient data for its clinical programme.
During 2019, Autolus did experience one setback - a five month construction-related delay to its new semi-automated UK manufacturing facility in Stevenage. This negatively impacted progress of its clinical trials. However, as of September, the facility became operational and is now delivering clinical products for patients in both Europe and the US. Autolus' proprietary ability to produce products in a semi-automated closed system is a major milestone that should offer a distinct competitive advantage relative to competitors, in terms of both efficiency and quality control.
Autolus' manufacturing facility has continued to operate uninterrupted despite the outbreak of COVID-19, which is a major achievement for the firm given how critical this supply is to key therapeutic programmes for the year ahead.
Inivata (3.2% of the portfolio)
Inivata is a leader in liquid biopsy, a transformative approach that identifies tiny amounts of cancer DNA in the blood of patients with cancer. The Company's technology is based on pioneering research from the Cancer Research UK Cambridge Institute, at the University of Cambridge and is reinforced by multiple high calibre publications. Its lead product, InVisionFirst(R)-Lung, is commercially available and helps clinicians to make informed treatment decisions for patients with Lung cancer. Further products in development help to manage patients with early stage cancer. The Company has a CLIA certified, CAP accredited laboratory in Research Triangle Park, NC and laboratories in Cambridge, UK.
Inivata is actively engaging with thoracic oncology experts on how they are modifying their patient care practices and adapting to the current COVID-19 crisis. Inivata has also engaged mobile blood draw services to enable patients to have blood drawn and their cancer profiled via the InVisionFirst test without needing to visit a healthcare facility.
Carrick Therapeutics (3.1% of the portfolio)
Carrick Therapeutics is a biopharmaceutical company focusing on targeting key pathways in cancer progression and adaptive resistance. During 2019 Carrick hired a new CEO to transition the company and drive the next growth phase. For their lead asset, targeting a receptor on cancer cell, Carrick Therapeutics completed a phase 1a dose escalation and safety study with positive results and started enrolling the phase 1b trial.
Carrick is actively managing the COVID-19 situation to ensure the safety of clinical trial patients, their continued access to study therapy and high data quality. The company is providing a nurse-led dispensing service with direct-to-home delivery to trial patients.
Mission Therapeutics (2.8% of the portfolio)
Mission Therapeutics has built a leading platform for the discovery and development of first-in-class, small molecule drugs that selectively target deubiquitylating enzymes (DUBs) - an emerging drug class that is attracting significant commercial interest in the area of protein homeostasis. The company focuses on treatment of kidney disease, fibrosis, rare mitochondrial diseases, and neurodegenerative. Mission Therapeutics has a major collaboration with AbbVie in the Alzheimer's Disease and Parkinson's Disease area.
It has been shown in the literature that a Mission asset could potentially enhance autophagy and reduce replication of MERS-CoV up to 28,000-fold. Mission has approached selected pharma companies to develop compounds to reduce replication of the related virus SARS-CoV-2.
Evofem Biosciences (2.8% of the portfolio)
Evofem Biosciences is a clinical-stage biopharmaceutical company that is focused on non-hormonal contraceptive products and products for the prevention of sexually transmitted infections. The company's primary candidate, Phexxi, is currently undergoing review by the U.S. Food and Drugs Agency (FDA), and if approved will be directly marketed to consumers by the company during the latter half of 2020 and early 2021. Evofem Biosciences is listed on
the US Nasdaq exchange.
Evofem is not directly affected by COVID-19, with its main product awaiting FDA approval at the time of writing. However, generalised social lockdowns will make commercialisation and further product trials more difficult until the situation returns to normal.
The following charts provide an overview of the Company's positioning as at 31 December 2019. One important note, looking at the chart that illustrates the portfolio's sector positioning, is that the portfolio has a high proportion of healthcare companies, as mentioned earlier. Over the long term, we expect to provide a more diversified portfolio by sector.
Portfolio by geography
Hot Features
Premium
Country
UK 87%
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US 7%
----
Luxembourg 3%
----
Switzerland 2%
----
Norway 1%
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Source: LFS, as at 31 December 2019. Geographic split based on market listing for quoted companies and by country of domicile for unquoted companies.
Portfolio by sector
Sector
Health Care 58%
----
Financials 19%
----
Industrials 11%
----
Technology 11%
----
Consumer staples 1%
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Source: LFS, as at 31 December 2019.
Split between public and private companies
Private 76%
Public 24%
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Source: LFS, as at 31 December 2019.
Revenue-generating vs pre-revenue
Revenue Generating 82%
Pre Revenue 18%
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Source: LFS, as at 31 December 2019.
History
On 24 October 2019 the board announced Schroders' appointment as Portfolio Manager for the Company, which subsequently came into effect on 13 December 2019. We are proud to have the opportunity to use our extensive investment experience and resources to realign the portfolio and seek to deliver growth for the long-term benefit of the shareholders.
We believe that we are well-positioned to execute on the expectations outlined by the Board and have deployed significant resources in our initial due diligence and current monitoring of the portfolio companies. Already by the time of our appointment on December 13th, we had accomplished the work needed to gain a strong understanding of the portfolio, positioning us for a running start to manage the portfolio going forward.
Schroders' expertise
As we take the helm of the portfolio, we believe it is important for shareholders to understand why we believe we are suitable to manage the portfolio and how we intend to drive the Company's long-term value creation.
Schroders is a well-established UK based investment manager. The firm's GBP500.2 billion under management (as at 31 December 2019) and over 200 years serving our clients from our now 32 offices around the world has positioned us among the leaders in institutional investment management globally. In 2017, Schroders acquired Adveq Management (now known as Schroder Adveq), a global private equity firm with more than 115 professionals with a significant focus on investing in emerging companies and financing their technology development and commercial growth. Managing the Company's portfolio is, thus, an ideal match with the heritage, experience and ongoing commitment of Schroders and in particular Schroder Adveq.
Sustainable investment
As a firm we have long recognised both the importance of examining the impacts of social and environmental trends on the companies we invest in, and the role investors can play in helping to address those challenges. The investment team of the Company will proactively incorporate significant aspects of the UN SDGs (United Nations Sustainable Development Goals) into our investment strategy, as described later in the report.
Outlook
We will be focusing on two key objectives in 2020: ensuring that the key value-creating portfolio companies receive the appropriate level of financial and strategic support to maximize the Company's investment return and to seek proactively to pay down the debt obligations. We recognize that at times these two objectives may be conflicting, however the long-term success of the Company will serve as the guiding principle by which individual key decisions will be made.
Beyond these two objectives and over the next few years, we will seek to re-balance the exposure between private and public companies in a manner commensurate with the risks posed. In the private portion of the portfolio we will continue to focus on high growth, developing and innovative companies. This will likely entail reducing the average investment exposure per company and the maximum allowable investment cost to any one company to a level that will ensure the Company's ability to provide financial support to all of its portfolio companies. For the publicly-traded portion of the portfolio, we will sustain the focus on innovative growth companies but will seek to increase the exposure over time towards companies with good trading liquidity and proven business models.
Schroder Investment Management Limited
30 April 2020
PRINCIPAL RISKS AND UNCERTAINTIES
The board has carried out a robust assessment of its principal and emerging risks during the period under review, including those that would threaten its business model, future performance, solvency, liquidity or reputation. This review has been done after reviewing the risks identified in the disclosures in the 2019 Interim Report as well as taking into account recent developments, especially those related to the appointment of the new Portfolio Manager and the impact of COVID-19. The process involves the maintenance of a risk register, which identifies the risks facing the Company and assesses each risk on a scale, classifying the likelihood of the risk and the potential impact of each risk to the Company. This helps the Audit, Risk and Valuation Committee and the board focus on any identified risk of particular concern and aids the development of the board's risk appetite. In developing the risk management process, the board took into consideration the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting issued by the Financial Reporting Council (FRC).
The board has established controls to mitigate the risks faced by the Company, which are reviewed on a regular basis to ascertain the effectiveness of each control.
The Company's operations are undertaken by third-party service providers who have established controls to mitigate against risks identified by the board. The controls and operations of each service provider, other than the Company Secretary and Portfolio Manager, are subject to a detailed analysis of their operations, which includes testing their key systems to identify any weaknesses, by independent auditors on at least an annual basis. The findings of each review are detailed in Assurance Reports, copies of which are provided to the Audit, Risk and Valuation Committee for its review, so that it can gain a greater understanding of the risk management processes and how they apply to the Company's business. For this Company the Portfolio Manager operates a partially outsourced operational business model and the relevant assurance reports are the audited Annual Report of the Portfolio Manager where the auditor will have reviewed financial controls as well as the Portfolio Manager's own Internal Controls and Compliance reports, together with evidence of the relevant Business Continuity Plans and Disaster Recovery Plans.
The principal and emerging risks and uncertainties faced by the Company are set out below. The risks arising from the Company's financial instruments are set out in note 20 on pages 63 to 68 of the Annual Report.
The board has determined that the key risks for the Company are COVID-19 risk, gearing risk, performance risk, general valuation risk, portfolio specific valuation risk; investee company specific risk; portfolio concentration risk; Portfolio Manager and key man risk; outsourced service provider model risk; currency risk and cyber risk. The new Portfolio Manager was appointed in December 2019 and the debt facility was renegotiated which the board believes have both served to mitigate the risks set out in the Interim Report. These risks below are therefore forward looking from the establishment of these new agreements.
Risk Mitigation
1. COVID-19
The COVID-19 pandemic will clearly The board receives regular updates
have a very general widespread from the Portfolio Manager regarding
economic impact. This may well the impact of the disease in
possibly be quite extreme in terms of both portfolio management
the shorter term depending on activities, the impact on investee
the scale of the response by companies and their responses
governments. The longer-term to the pandemic.
impacts could also be significant,
although these are unclear at The board receives assurances
the time of writing. The consequences that service providers have
for the Company may well be implemented Business Continuity
lower valuation levels and greater Plans.
difficulty in realising disposals
and/or lower prices realised
on disposal.
Individual investee companies
may be impacted by cash flow
and funding difficulties and/or
lower prices when so doing .
This in turn could impact valuations.
Their day-to-day business could
also be impacted by travel restrictions
and staffing issues.
Besides the general economic
impact, problems arising from
the COVID-19 pandemic could
result in specific supply-chain
problems for individual investee
companies and for pharmaceutical
companies, in particular delays
for clinical trials as a result
of difficulties in recruiting
patients.
A few companies in the portfolio
may prove to be beneficiaries
as they are involved in diagnostics
and advanced therapies.
Risks 2-6 listed below are all
likely exacerbated by the COVID-19
pandemic.
The staff of the Company's service
providers and of the investee
companies may be unduly impacted
by the disease resulting in
difficulties for them in delivering
their functions or in developing
their businesses.
------------------------------------------
2. Gearing risk
The Company has the ability The board receives regular reports
to employ gearing up to a maximum from the Administrator on the
of 20 per cent of NAV, calculated outstanding amount of the debt
at the time of borrowing. The and regular reports from the
Company has utilised its gearing Portfolio Manager on the programme
facility in order to invest of disposals. Gearing is reviewed
further behind specific portfolio by the board at each board meeting
companies which means there and more often, as necessary.
is less flexibility to make The Portfolio Manager provides
new investments and provide weekly updates to the debt provider.
follow-on funding to the portfolio
companies. A higher level of The board monitors the progress
gearing may have a significant of the reduction in gearing
downside effect on the Company's and seeks to confirm with the
NAV during a period of poor Portfolio Manager that this
performance or decline in the process is nevertheless preserving
market and may impact the Company's shareholder value.
debt covenants.
The Portfolio Manager also provides
Other market participants may a thorough analysis of any anticipated
infer the Company may need to funding decisions and possible
sell certain listed equity positions liquidity events of the portfolio
and choose to sell or short companies. This allows the board
these securities. Or investors to assess the Company's ability
in investee companies held by to meet its commitments and
the Company may infer the Company maintain its financing facility.
has difficulty making further
funding decisions and may only Any time the loan facility terms
offer funding at valuations are being reconsidered, the
less attractive to the investee board works very closely with
companies or seek to attach the Portfolio Manager to optimise
terms to such funding which any agreement.
is unattractive to the Company.
The board discusses with the
In as much as the Portfolio Portfolio Manager the principles
Manager needs to make disposals behind balancing a more rapid
in order to reduce gearing over disposal programme at perhaps
a relatively short time horizon, less favourable prices with
the prices achieved may be below one of greater patience which
the prices which the positions might mean better disposal prices
are carried in the portfolio, albeit with the risk of needing
on a fair value basis, per International to renegotiate the debt agreement.
Private Equity and Venture Capital
(IPEV) guidelines.
There may be difficulties when
companies have funding requirements
and the Company wishes to participate,
given the terms of the debt
facility and a need to seek
approval from the lender to
provide funding.
In late 2019, the board and
the Portfolio Manager entered
into a revised loan agreement
with the debt provider. This
rolled over the previous cost
of the debt funding but laid
down a schedule of repayments
arising from disposals during
2020. This constrains the Portfolio
Manager from making new investments
and failure to meet this schedule
could mean that the agreement
could be terminated or need
to be renegotiated, possibly
at less favourable terms or
that alternative capital providers
would need to be sought, which
might also be at less favourable
terms. The intention is to seek
to have repaid this debt facility
by January 2021.
A significant downturn in the
values of equity market assets,
which also impacts the valuations
of unquoted assets, could mean
it is significantly more difficult
to realise disposals or that
the prices that can be realised
are materially below the current
carrying values. Thus, this
may also trigger a need to renegotiate
the debt facility or simply
affect valuation levels.
Such an event could be triggered
by an economic correction, for
instance as a result of COVID-19,
although as a result of the
length of the current economic
cycle and of the current equity
market a wide variety of possible
triggers may also cause such
a correction.
------------------------------------------
3. Performance risk
There is always, for any investment This risk is mitigated by the
portfolio, the generic risk board monitoring the performance
of poor performance arising of the portfolio and the decisions
as a result of poor decisions made by the Portfolio Manager
made by the Portfolio Manager. through detailed reporting on
In addition, given the long-term the decisions. The board seeks
nature of this investment strategy to evaluate the general quality
(up to 10 years) and the absence and nature of portfolio decisions
of a clear benchmark, it is as well as the performance.
not necessarily easy to make Where the board determines that
an evaluation of the Portfolio the Portfolio Manager is not
Manager based simply on returns performing to a satisfactory
over shorter periods. standard, the board, together
with AIFM for the portfolio,
LFS may decide to terminate
the appointment of the Portfolio
Manager under the terms of its
contract.
------------------------------------------
4. General valuation risk
The valuation of unquoted early The Company employs LFS, the
stage companies is inherently AIFM, who has been delegated
subjective. Valuation at a fixed responsibility for the valuation
point in time may not be representative of the assets in the portfolio.
of the medium or longer term. LFS, in turn, uses extensive
Particular events at a company research and input from its
or particular funding rounds own valuation specialist provider,
may have a significant impact. IHSMarkit. They conduct a regular
Information may not be as widely rolling review of the valuation
available as with public companies. of all portfolio assets and
Companies may not yet have meaningful also review their valuations
revenues or profits. Considerable in the event of any significant
uncertainty may exist around triggers at individual investee
the eventual feasibility and companies. They follow the widely
value of a particular technology respected and widely followed
or its commercialisation. IPEV guidelines in executing
these valuations; these processes
are explained on pages 54 and
55 of the Annual Report.
------------------------------------------
5. Portfolio specific valuation
risk The board receives updates from
Where other portfolio managers the Portfolio Manager regarding
seek to make disposals of securities disposal, investment and funding
held in portfolios they manage plans. In as much as the Portfolio
and these securities are also Manager is aware of the holdings
held by the Company, the valuation the Fund is seeking to sell
of these securities may thereby (because these were publicly
be affected. Equally, simply disclosed), the Portfolio Manager
market anticipation of these can adjust the divestment plan
disposals may also impact valuations. accordingly. In addition, where
necessary and possible, the
As the new Manager of the LF Portfolio Manager can seek to
Equity Income Fund (Fund), formerly postpone or avoid further funding.
the LF Woodford Equity Income The Portfolio Manager regularly
Fund, which used to be managed categorises the Company's positions
by the Company's previous Portfolio in terms of relative
Manager, seeks to make disposals future importance, which helps
of unquoted positions in the the board assess divestment
Fund, in order to return capital and funding decisions.
to investors, these disposals
may also, indirectly, when the
Company's independent valuation
agent, LFS, references prices
of recent transactions, lead
to downward revaluation of some
of the Company's holdings, unless
under IPEV guidelines the sales
were categorised as not being
"orderly" in the judgment of
the independent valuation agent.
International Financial Reporting
Standards (IFRS) guidelines
and their interpretation may
mean that sales regarded as
not being "orderly" under IPEV
guidelines may nevertheless
be so regarded under IFRS.
And, in as much as the wider
market and other investors in
the Company's investee companies
are also aware of the disposal
process of the Fund they may
seek more demanding terms on
any future funding rounds which
may also in turn impact valuations.
------------------------------------------
6. Investee company specific
risk The Portfolio Manager conducts
The Company invests in a variety regular reviews of these businesses
of biopharma and technology through engaging regularly with
businesses, many of them relatively all investee companies to monitor
early stage, where the technology progress. The Portfolio Manager
is not yet fully proven or commercialised. also carries out due diligence
This can offer very significant on the relevant technologies
financial success when the technology and obtains regular updates.
delivers but also carries downside The Portfolio Manager uses its
risks particular to the companies own proprietary analytics to
concerned. The eventual outcome assess the prospects for investee
for some of these companies companies and may also seek
may be somewhat binary in as expert third party opinions
much as either the technology regarding the likely success
works, or it does not, resulting of the technology. The board
in the company concerned becoming seeks assurance from the Portfolio
worth significantly less. Failure Manager through its regular
may materialise, for instance, portfolio review meetings that
in the case of clinical trials thorough research has been,
for a biotechnology business, and is being, conducted.
in the case of scaling up or
commercialisation of an engineering
business or in terms of the
appearance of a new, previously
unknown competitor for a software
company. Leading edge commercial
scientific development in many
fields is by its nature risky.
The performance of the Company's
individual holdings, together
with market events, may thus
create short-term volatility
in the Company's NAV .
------------------------------------------
7. Portfolio concentration risk
Some of the Company's investments The Company's portfolio is monitored
have demonstrated relatively closely by the board, the AIFM
more success and/or required and the Portfolio Manager. The
more funding than others, which Company seeks to invest in a
has led to those investments diversified portfolio across
representing larger proportions a wide range of companies so
of the portfolio than might as to mitigate against the risk
be expected. While both the posed by an individual early-stage
board and the Portfolio Manager or early-growth company. However,
feel that undue concentration the board is mindful that the
is not desirable in the longer Company was established
term, in the shorter term, portfolio with the aim of providing long-term
concentration can be acceptable. growth and that concentration
In any event, the nature of can be a sign of success as
the investments means that any a result of assets backed becoming
rebalancing of the portfolio more valuable. Short-term liquidity
will likely take time, as they problems with the Company's
cannot always be sold quickly. underlying holdings, which may
The Portfolio Manager, under be compounded by market events,
delegated authority from the should be mitigated over time
board, has authority regarding when such companies deliver
portfolio construction and managing on their milestones and value
questions of portfolio concentration is recognised.
in the best interests of the
shareholders. This approach The board also considers increased
is in line with the Portfolio specific risk that may arise
Manager's investment strategy from increased concentration,
and investment philosophy. The as the result of the relative
alternative, of imposing limits success of certain investee
on the size of any one investment, companies. The board discusses
other than at the time of investment, this risk with the Portfolio
would potentially result in Manager, and where appropriate
the Company being a forced seller with the AIFM, with a view to
of an investment that still considering whether or not to
had further growth potential. seek to reduce the size of particularly
large holdings within the portfolio.
The risk linked to any portfolio However, the board is mindful
concentration might be compounded that through the AIFM it has
due to the nature of some of delegated investment management
the businesses and the risks decisions to the Portfolio Manager
associated with both commercial to make as it sees fit.
and technical milestones.
------------------------------------------
8. Portfolio Manager and key
man risk The Portfolio Manager has a
The Portfolio Manager operates compensation and incentive scheme
a team approach to portfolio to retain key staff and has
management and decision making developed a suitable succession
so the risk arising from the planning programme, which seeks
departure of one or more of to ease the impact that the
the Portfolio Manager's key loss of a key investment professional
investment professionals should may have on the Company's performance.
not necessarily prevent the The Portfolio Manager will notify
Company from achieving its investment any change in its key professionals
objective. to
the board at the earliest possible
The Portfolio Manager could opportunity and the board will
terminate its contract with be made aware of all efforts
the Company. This event would made to fill a vacancy. Furthermore,
have an impact on the management investment decisions are made
of the portfolio and would constitute by a team of
a technical default on the debt professionals, mitigating the
facility, requiring renegotiation impact of the loss of any key
or substitution, likely on less professional within the Portfolio
favourable terms. Manager's organisation on the
Company's performance.
Recent experience suggests that
the board would be able to identify
an alternative Portfolio Manager
should the need arise.
------------------------------------------
9. Outsourced service provider
model risk The performance of the Company's
The Company has no employees service providers is monitored
and the Directors have been closely by the board and in
appointed on a non-executive particular by the Management
basis. The Company is reliant Engagement Committee. The Management
upon the performance of third-party Engagement Committee monitors
service providers for its executive service providers and their
function. The AIFM, the Portfolio activities. Each of the service
Manager, the Depositary, the providers has a notice period
Company Secretary and the Administrator so as to allow an alternative
will be performing services to be appointed.
that are integral to the operation
of the Company. Failure of any
of its third-party service providers
to perform in accordance with
the terms of its appointment
could have a material detrimental
impact on the operation of the
Company. Furthermore, any
of the Company's service providers
could terminate their contract.
------------------------------------------
10. Currency risk
In as much as the Portfolio The Portfolio Manager regularly
Manager now no longer seeks reports to the board and highlights
to hedge non-sterling currency any significant impacts of currency
exposures through forward foreign movements on the value of investments.
exchange contracts and some
of the Company's investments
are based wholly or partly outside
the UK or have revenues in currencies
other than sterling then the
value of the portfolio, in sterling
terms, may be affected negatively
by a rise in sterling relative
to these other currencies and,
equally, positively by a fall
in sterling.
------------------------------------------
11. Cyber risk
Each of the Company's service The board receives controls
providers is at risk of cyber reports from its service providers
attack, data theft, service which describe the protective
disruption, etc. While the risk measures they take as well as
of financial loss by the Company their Business Recovery Plans.
is probably small, the risk
of
reputational damage and the
risk of loss of control of sensitive
information is more significant,
for instance a GDPR breach.
Many of the Company's service
providers and the board often
have sensitive information regarding
transactions or pricing and
information regarded as inside
information in regulatory terms.
Data theft or data corruption
per se is regarded as a lower
order risk as relevant data
is held in multiple
locations.
------------------------------------------
Emerging risks and uncertainties
During the year, the board also discussed and monitored a number of emerging risks that could potentially impact the Company's ability to meet its strategic objectives.
1. Given the prolonged economic and stock market cycle, the generally high levels of equity market valuations, even following recent corrections, both global economies and/or global equity markets could be vulnerable to further significant correction as a result of various different possible trigger events, besides COVID-19. This would likely affect valuations of the portfolio holdings.
2. Brexit negotiations create the possibility of a wide variety of unknown legislative and economic consequences.
3. Investors generally may become disenchanted with the listed investment structure as an appropriate vehicle for investing in unquoted early-stage companies.
4. While some investee companies in the portfolio are pursuing technologies that might help mitigate climate change or that might see an increase in demand as a result of climate change, the risks arising from further climate change are thought unlikely to have a direct impact on the Company over the next 5-10 years, given its investment objectives. However, investee companies generally could well be affected by various possible indirect generalised negative economic impacts arising from climate change.
GOING CONCERN
The board has considered the risks arising from the need to repay the Company's bank loan, particularly in light of the reduced asset values and economic disruption caused by the COVID-19 pandemic. The board continues to hold regular and constructive discussions with the lender who remains supportive. The board has scrutinised the detailed cash flow forecast prepared by the Portfolio Manager and considered their assessment of the likelihood and quantum of funds which could be raised from sales of investments. The Portfolio Manager has also performed a range of stress tests, and demonstrated to the board that even in an adverse scenario of depressed markets and restrictions on sales in the private equity market, the Company could still, within the terms of the loan agreement, generate sufficient funds from sales of investments to meet its liabilities over the next twelve months. As a result, the board is comfortable that the Company will have sufficient liquid funds to pay operating expenses, service the loan and pay down the loan in accordance with the terms of the loan agreement.
The board have also considered the provisions in the new loan agreement, and have taken into account the current total debt of GBP107m in the context of gross assets of GBP563.4m at 31 December 2019, the fact that the loan is due for repayment or refinance in January 2021 and the need to seek to maintain a certain aggregate level of listed investments as a per cent of the value of the total portfolio. Recent discussions with the loan provider have demonstrated their ongoing constructive approach to working with the Company as a lender.
On this basis, the board considers it appropriate to adopt the going concern basis of accounting in the Company's accounts, and has not identified any material uncertainties to the Company's ability to continue as a going concern over a period of at least twelve months from the date of approval of these financial statements.
VIABILITY STATEMENT
In accordance with Provision 36 of the AIC Code of Corporate Governance, published in February 2019, the board has assessed the prospects of the Company over the five-year period ending 31 December 2024. The board considers a five-year period to be appropriate because it is the minimum holding period that it would recommend to a prospective investor considering purchasing shares in the Company.
The board has considered the Principal Risks above. The board has considered detailed cash flow forecasts prepared by the Manager, and stress case scenarios, including the possibility of breach of its loan covenants. In making its assessment, the board has also considered the positive impact of steps taken in the last ten months to secure the viability of the Company. Three new directors with diverse skills and experience have been appointed. It has appointed Schroders as Portfolio Manager as described on pages 29 and 30 of the Annual Report. Schroders is well-capitalised and resourced; has the necessary skills and experience; and uses a team-based approach. It has signed a new debt agreement which extends the timeline for the repayment of debt to January 2021. It has agreed with the new Portfolio Manager a new investment strategy and guidelines (see pages 70 and 71 of the Annual Report), which includes a move over time to having a higher percentage of the portfolio in listed securities and reducing debt.
The board believes that the portfolio will provide shareholders with satisfactory returns from the investment portfolio over a five-year period and that there will be continued demand for the Company's shares.
Although there may well be short term strains arising from the current economic crisis driven by the COVID-19 pandemic, and some companies in the portfolio may be severely affected, the portfolio's exposure to healthcare companies which may benefit from the pandemic will help to provide a balance. Based on current understanding, as with other pandemics, the impact will diminish over time and the opportunities arising from investing in new innovative businesses will remain. It should therefore be possible for the new Portfolio Manager to have moved materially to implement the new strategy within a five-year timeframe. Having considered all of the Company's resources, strategy, risks and probabilities, the board has a reasonable expectation that the Company will continue to operate and meet its liabilities as they fall due, during the five year period to 31 December 2024.
By order of the board
Link Company Matters Limited
Company Secretary
30 April 2020
Board of Directors
Susan Searle - Independent non-executive Chairman
Raymond Abbott - Independent non-executive director
Stephen Cohen - Independent non-executive director
Jane Tufnell - Senior independent non-executive director
Scott Brown - Independent non-executive director
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable laws and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law, the directors have elected to prepare the financial statements in accordance with UK Accounting Standards and applicable law, including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland". 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 Company as at the end of each financial year and of the profit or loss of the Company for that period.
In preparing these financial statements, the directors are required to:
- present fairly the financial position, financial performance and cash flows of the Company;
- select suitable accounting policies in accordance with United Kingdom Generally Accepted Accounting Practice (UK GAAP) and then apply them consistently;
- present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
- make judgements and estimates that are reasonable and prudent;
- state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
- prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company'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 Act 2006. 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 also responsible for preparing the strategic report, the directors' report, the directors' remuneration report and the report of the Audit, Risk and Valuation Committee in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure Guidance and Transparency Rules.
The directors have delegated responsibility to the Portfolio Manager for the maintenance of the Company's corporate and financial information included on its web pages. Legislation in the UK governing the preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
Each of the directors, whose names are listed above, confirms that, to the best of their knowledge:
- the financial statements, prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit/loss of the Company; and
- the strategic report contained in the Annual Report and financial statements include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
The AIC Code of Corporate Governance requires directors to ensure that the Annual Report and financial statements are fair, balanced and understandable. In order to reach a conclusion on this matter, the board has requested that the Audit, Risk and Valuation Committee advises on whether it considers that the Annual Report and financial statements fulfil these requirements. The process by which the Audit, Risk and Valuation Committee has reached these conclusions is set out in its report on pages 35 to 37 of the Annual Report. As a result, the board has concluded that the Annual Report and financial statements for the year ended 31 December 2019, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
Signed on behalf of the board of directors by:
Susan Searle
Chairman
30 April 2020
INCOME STATEMENT FOR THE YEARED 31 DECEMBER 2019
2019 2018
Revenue Capital Total Revenue Capital Total
Note GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
(Losses)/gains
on investments
held at
fair value
through
profit
or loss - (421,175) (421,175) - 77,089 77,089
Losses
on foreign
forward
currency
contracts - (9,373) (9,373) - (21,337) (21,337)
Losses
on foreign
exchange - (1) (1) - - -
Income
from investments 2 - - - 281 - 281
--------------------- ----- --------- ---------- ---------- --------- --------- ---------
Gross (loss)/return - (430,549) (430,549) 281 55,752 56,033
Portfolio
management
fee 3 - - - - - -
Administrative
expenses 4 (3,115) - (3,115) (1,276) - (1,276)
--------------------- ----- --------- ---------- ---------- --------- --------- ---------
Net (loss)/return
before
finance
costs
and taxation (3,115) (430,549) (433,664) (995) 55,752 54,757
Finance
costs 5 (2,841) - (2,841) (2,852) - (2,852)
--------------------- ----- --------- ---------- ---------- --------- --------- ---------
Net (loss)/return
before
taxation (5,956) (430,549) (436,505) (3,847) 55,752 51,905
Taxation 6 - - - - - -
--------------------- ----- --------- ---------- ---------- --------- --------- ---------
Net (loss)/return
after taxation (5,956) (430,549) (436,505) (3,847) 55,752 51,905
--------------------- ----- --------- ---------- ---------- --------- --------- ---------
(Loss)/return
per share 8 (0.67)p (48.08)p (48.75)p (0.47)p 6.74p 6.27p
--------------------- ----- --------- ---------- ---------- --------- --------- ---------
The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no other items of other comprehensive income, and therefore the net (loss)/return after taxation is also the total comprehensive income for the year.
All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.
The notes form an integral part of these accounts.
STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 DECEMBER 2019
Called-up
Share Share Capital Revenue
Capital Premium Reserves Reserve
Note GBP'000 GBP'000 GBP'000 GBP'000 Total
At 31 December
2017 8,270 813,099 (62,137) (3,937) 755,295
Net return/(loss) - - 55,752 (3,847) 51,905
------------------- ------ ---------- --------- ---------- --------- ----------
At 31 December
2018 8,270 813,099 (6,385) (7,784) 807,200
Net loss - - (430,549) (5,956) (436,595)
Issue of shares 816 78,105 - - 78,921
Share issue costs - (187) - - (187)
------------------- ------ ---------- --------- ---------- --------- ----------
At 31 December
2019 13/14 9,086 891,017 (436,934) (13,740) 449,429
------------------- ------ ---------- --------- ---------- --------- ----------
The notes form an integral part of these accounts.
2019 2018
Note GBP'000 GBP'000
Fixed assets
Investments held at fair value through
profit or loss 9 561,115 963,613
---------------------------------------- ----- ---------- ----------
Current assets 10
Debtors 30 11
Cash at hand and in bank 2,234 -
Derivative financial instruments held
at fair value through profit or loss - 1,065
---------------------------------------- ----- ---------- ----------
2,264 1,076
---------------------------------------- ----- ---------- ----------
Current liabilities 11
Creditors: amounts falling due within
one year (1,050) (150,449)
Derivative financial instruments held
at fair value through profit or loss - (7,040)
---------------------------------------- ----- ---------- ----------
(1,050) (157,489)
---------------------------------------- ----- ---------- ----------
Net current assets/(liabilities) 1,214 (156,413)
---------------------------------------- ----- ---------- ----------
Total assets less current liabilities 562,329 807,200
Creditors: amounts falling due after
more than one year 12 (112,900) -
---------------------------------------- ----- ---------- ----------
Net assets 449,429 807,200
---------------------------------------- ----- ---------- ----------
Capital and reserves
Called-up share capital 13 9,086 8,270
Share premium 14 891,017 813,099
Capital reserves 14 (436,934) (6,385)
Revenue reserve 14 (13,740) (7,784)
---------------------------------------- ----- ---------- ----------
Total equity shareholders' funds 449,429 807,200
---------------------------------------- ----- ---------- ----------
Net asset value per share 15 49.46p 97.61p
STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 2019
These accounts were approved and authorised for issue by the board of directors on 30 April 2020 and signed on its behalf by:
Susan Searle
Chairman
The notes below form an integral part of these accounts.
Registered in England and Wales as a public company limited by shares
Company registration number: 09405653
CASH FLOW STATEMENT
FOR THE YEARED 31 DECEMBER 2019
2019 2018
GBP'000 GBP'000
Cash flows from operation activities
Return before finance costs and taxation (433,664) 54,757
Adjustments for:
Losses/(gains) on investments held at fair
value through profit or loss 421,175 (77,089)
Net movement in foreign forward currency contracts 9,373 21,337
Net movement in foreign exchange 1 -
Increase in debtors (19) (7)
Increase /(decrease) in creditors 578 45
------------------------------------------------------ ---------- ----------
Net cash flows from operating activities (2,556) (957)
------------------------------------------------------ ---------- ----------
Cash flows from investment activities
Purchases of investments (137,143) (117,186)
Proceeds from sales of investments 191,387 135,802
Net movement in foreign forward currency contracts (15,349) (15,362)
------------------------------------------------------ ---------- ----------
Net cash flow from investment activities 38,895 3,254
------------------------------------------------------ ---------- ----------
Cash flows from financing activities
Issue of shares 6,000 -
Share issue costs (187) -
Finance costs (2,852) (2,852)
------------------------------------------------------ ---------- ----------
Net cash flow from financing activities 2,961 (2,852)
------------------------------------------------------ ---------- ----------
Net increase/(decrease) in cash and cash equivalents 39,300 (555)
Cash and cash equivalents at the beginning
of the year (149,966) (149,411)
Reclassification of overdraft liabilities
in the year(1) 112,900 -
------------------------------------------------------ ---------- ----------
Cash and cash equivalents at the end of the
year 2,234 (149,966)
------------------------------------------------------ ---------- ----------
(1) Following the amendments to the term facility agreement with the Northern Trust Company the overdraft has been reclassified as a loan.
NOTES TO THE ACCOUNTS
1. Accounting policies
Basis of accounting
Schroder UK Public Private Trust plc (the Company) is registered in England and Wales as a public company limited by shares. The Company's registered office is Beaufort House, 51 New North Road, Exeter EX4 4EP, United Kingdom.
The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice (UK GAAP), in particular in accordance with Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (the SORP) issued by the Association of Investment Companies in October 2019. All of the Company's operations are of a continuing nature.
The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments and derivative financial instruments held at fair value through profit or loss. The directors believe that the Company has adequate resources to continue operating for at least 12 months from the date of approval of these accounts.
In forming this opinion, the directors have taken into consideration: the controls and monitoring processes in place; the Company's level of debt and other payables; the low level of operating expenses, comprising largely variable costs which would reduce pro rata in the event of a market downturn; the Company's cash flow forecasts and the liquidity of the Company's investments.
The financial statements have been prepared on a going concern basis (see above) and on assumption that approval as an investment trust will continue to be granted.
The Company has adopted the provisions of Section 11 and 12 of FRS 102 for measuring and disclosing its financial instruments.
The accounts are presented in sterling and amounts have been rounded to the nearest thousand.
The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 31 December 2018.
2. Income
2019 2018
GBP'000 GBP'000
-------------------- ---------- ---------
Overseas dividends - 195
UK dividends - 86
-------------------- ---------- ---------
Total - 281
-------------------- ---------- ---------
3. Portfolio management fee
The Company appointed Schroder Investment Management Limited (Schroder) as Portfolio Manager, effective from 13 December 2019. Under the terms of the new management agreement, Schroder is entitled to a management fee and a performance fee, subject to achieving performance targets. Details of these calculations are set out in the Directors' Report on page 30 of the Annual Report. No fees are payable to Schroder in respect of the current year under the terms of the new agreement.
Under the terms of the previous management agreement, Woodford Investment Management Ltd was entitled to a fee, conditional upon meeting certain performance targets (a "performance fee"). No performance fee was earned to the contract termination date. No other management fee was payable under the terms of that agreement.
Details of all transactions with the current and previous Portfolio Managers are given in note 17 on page 62 of the Annual Report.
4. Administrative expenses
2019 2018
GBP'000 GBP'000
------------------------------------------ --------- ---------
Other administration expenses 1,896 643
Valuation fees 282 292
Directors' fees(1) 210 181
Company secretarial fee 122 74
Auditor's remuneration for the audit
of the Company's annual accounts(2) 346 72
Auditor's remuneration for audit related
services interim review(2) 286 14
Total 3,115 1,276
------------------------------------------ --------- ---------
(1) Full details are given in the remuneration report on page 40 of the Annual Report.
(2) Annual audit fees includes VAT amounting to GBP46,000 (2018: GBP2,000). Interim review fees include VAT amounting to GBP38,000 (2018: GBP2,000).
5. Finance costs
2019 2018
GBP'000 GBP'000
--------------------------------------- --------- ---------
Bank loan/overdraft fees and interest 2,841 2,852
--------------------------------------- --------- ---------
6. Taxation
(a) Analysis of tax charge for the year:
2019 2018
--------- --------------------------------- -------------------------------
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------- --------- ---------- ---------- --------- --------- ---------
Taxation
- - - - - -
--------- --------- ---------- ---------- --------- --------- ---------
The Company has no corporation tax liability for the year ended 31 December 2019 (2018: nil).
(b) Factors affecting the tax charge for the year:
The factors affecting the current tax charge for the year are as follows:
2019 2018
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Net return before
taxation (5,956) (430,549) (436,505) (3,847) 55,752 51,905
------------------------ ---------- ---------- ---------- --------- --------- ---------
Net return before
taxation multiplied
by the Company's
applicable rate
of corporation
tax for the year
of 19.0% (2018:
19.0%) (1,132) (81,804) (82,936) (731) 10,593 9,862
Effects of:
Capital loss/(return)
on investments - 81,804 81,804 - (10,593) (10,593)
UK dividends
which are not
taxable - - - (16) - (16)
Loan relationship
deficit not untilised 540 - 540 554 - 554
Movement in unutilised
management expenses 560 - 560 230 - 230
Overseas dividends - - - (37) - (37)
Expenses not
deductible for
UK corporation
tax purposes 32 - 32 - - -
------------------------ ---------- ---------- ---------- --------- --------- ---------
Taxation - - - - - -
------------------------ ---------- ---------- ---------- --------- --------- ---------
(c) Deferred taxation
The Company is not liable to corporation tax on its chargeable gains due to its status as an investment trust. Due to the Company's status as an investment trust, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided for deferred tax on any chargeable gains and losses arising on the revaluation or disposal of investments.
The Company has an unrecognised deferred tax asset of GBP2,801,000 (2018: GBP1,816,000 - this amount has been adjusted to reflect the losses carried forward per the final submitted tax return) based on a prospective corporation tax rate of 17%. It is unlikely that the Company will generate sufficient taxable profits in the future to utilise these expenses and therefore no deferred tax asset in respect of these expenses has been recognised.
7. Dividend
No dividends have been paid or proposed for the year ended 31 December 2019 (2018: nil).
8. (Loss)/return per share
2019 2018
GBP'000 GBP'000
Revenue loss (5,956) (3,847)
Capital loss/(return) (430,549) 55,752
------------------------- ------------ ------------
Total (loss)/return (436,505) 51,905
------------------------- ------------ ------------
Weighted average number
of shares in issue
during the year 895,442,758 827,000,000
Revenue loss per share (0.67)p (0.47)p
Capital (loss)/return
per share (48.08)p 6.74p
------------------------- ------------ ------------
Total (loss)/return
per share (48.75)p 6.27p
------------------------- ------------ ------------
9. Creditors: amounts falling due after more than one year
31 December 2019 2018
GBP'000 GBP'000
------------- --------- ---------
Bank loan 112,900 -
On 13 December 2019, the Company amended its term facility agreement with the Northern Trust Company. At the year end the Company had drawn down GBP112,900,000 on the facility, which expires on 15 January 2021. The loan is secured on all the Company's assets. The agreement requires that, subject to an allowance for operating expenses, the proceeds of Private Asset sales must be used to make loan repayments, which cannot be redrawn. Furthermore, the Company may not make further Private Asset investments until certain repayments have been made. The loan agreement also requires the Company to seek to maintain a balance between the listed and unlisted investments in the portfolio. Interest payable will be calculated at LIBOR, for one month or other agreed loan period, plus a margin of 1.5%.
Following the amendments to the term facility agreement with the Northern Trust Company the overdraft has been reclassified as a loan.
The directors consider that the carrying amount of creditors falling due after more than one year approximates to their fair value.
10. Called-up share capital
Ordinary shares allotted, called up and 2019 2018 fully paid: GBP'000 GBP'000 ---------------------------------------------------- --------- --------- Ordinary shares of 1p each: Opening balance of 827,000,000 (2018: 827,000,000) shares 8,270 8,270 Issue of 81,639,238 (2018: nil) shares 816 - Closing balance of 908,639,238 (2018:827,000,000) shares 9,086 8,270 ---------------------------------------------------- --------- ---------
During the year, 81,639,238 new shares, nominal value GBP816,392, were issued to the LF Woodford Equity Income Fund at a price of 96.67p per share, being a premium to NAV per share and thus accretive to existing shareholders. The consideration amounted to GBP78.9 million, and comprised GBP72.9 million in unquoted assets and GBP6.0 million in cash.
11. Net asset value per share
2019 2018
----------------------------------------- ------------ ------------
Net assets attributable to shareholders
(GBP'000) 449,429 807,200
Shares in issue at the year end 908,639,238 827,000,000
Net asset value per share 49.46p 97.61p
----------------------------------------- ------------ ------------
12. Disclosures regarding financial instruments measured at fair value
The Company's financial instruments within the scope of FRS 102 that are held at fair value comprise its investment portfolio and derivative financial instruments.
FRS 102 requires that financial instruments held at fair value are categorised into a hierarchy consisting of the three levels below. A fair value measurement is categorised in its entirety on the basis of the lowest level input that is significant to the fair value measurement.
Level 1 - valued using unadjusted quoted prices in active markets for identical assets.
Level 2 - valued using observable inputs other than quoted prices included within Level 1.
Level 3 - valued using inputs that are unobservable.
Details of the Company's policy for valuing investments and any derivative instruments are given in note 1(b) on pages 54 and 55 and 1(g) on page 56 of the Annual Report. Level 3 investments have been valued in accordance with note 1(b)(i) - (v).
At 31 December, the Company's investment portfolio and any derivative financial instruments were categorised as follows:
2019
Level
Level 1 Level 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
Investments in equities - quoted 53,476 - 80,811 134,287
-------------------------
- unquoted - - 426,828 426,828
-------------------------------------- --------- --------- --------- ---------
Total 53,476 - 507,639 561,115
--------------------------------------- --------- --------- --------- ---------
2018
Level
Level 1 Level 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
Investments in equities - quoted 224,847 - 110,903 355,750
-------------------------
- unquoted - - 627,863 627,863
-------------------------------------- --------- --------- --------- ---------
Derivative financial instruments
- forward currency contracts - (5,975) - (5,975)
--------------------------------------- --------- --------- --------- ---------
Total 224,847 (5,975) 738,766 957,638
--------------------------------------- --------- --------- --------- ---------
Movements in fair value measurements included in Level 3 during the year are as follows:
2019 2018
GBP'000 GBP'000
Opening book cost 580,006 568,151
Opening investment holding gains 158,760 51,115
------------------------------------------- ---------- ---------
Opening valuation 738,766 619,266
Purchase at cost 126,733 109,913
Investments received as consideration for
share issue 72,921 -
Sale proceeds (81,390) (79,844)
Transfer between unquoted/quoted - (61,016)
Net movement in investment holding gains
and losses (349,391) 150,447
------------------------------------------- ---------- ---------
Closing valuation 507,639 738,766
------------------------------------------- ---------- ---------
Closing book cost 702,358 580,006
Closing investment holding gains (194,719) 158,760
------------------------------------------- ---------- ---------
Total level 3 investments held at fair
value through profit or loss 507,639 738,766
------------------------------------------- ---------- ---------
The company received GBP81,390,000 (2018: GBP79,844,000) from Level 3 investments sold in the year. The book cost of the investments when they were purchased was GBP77,302,000 (2018: GBP37,042,000). These investments have been revalued over-time until they were sold any unrealised gains/losses were included in the fair value of the investments.
13. Events the accounting date that have not been reflects in the financial statements
The Directors have also sought to assess the impact of COVID-19 on the NAV and have used two separate methodologies. On the one hand a bottom up analysis of individual companies based on work already done for the March 31st NAV by LFS as AIFM and responsible for valuation, suggests an aggregate impact of -3.3%. On the other hand, using a portfolio-weighted basket of relevant stock market sector indices and looking at their percentage change from December 31st through April 17th, the suggested portfolio NAV impact is -7.4%. This latter approach assumes that the main factor in changing stock market valuations over the period was the emergence of the COVID-19 pandemic.
Clearly, at the time of writing realistic forecasting even of the short term impact of this global pandemic let alone the longer term impact is very difficult and such forecasting may well be subject to the train of rapidly unfolding events. Thus, with all due caveats, the Directors believe that, as currently assessed, the impact from COVID-19 on the portfolio NAV up until April 17(th) has been in the range of -3% to -8%. The Company will be releasing the March 31st, 2020 NAV during the second calendar quarter of 2020 which should provide a more up to date indication of the COVID-19 impact on the portfolio.
Subsequent to the year end, the Company has made repayments totalling GBP5.9 million of its bank loan, which now amounts to GBP107.0 million, at April 17th 2020.
14. Status of announcement
2018 Financial Information
The figures and financial information for 2018 are extracted from the published Annual Report and accounts for the year ended 31 December 2018 and do not constitute the statutory accounts for that year. The 2018 Annual Report and accounts have been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.
2019 Financial Information
The figures and financial information for 2019 are extracted from the Annual Report and accounts for the year ended 31 December 2019 and do not constitute the statutory accounts for the year. The 2019 Annual Report and accounts include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The 2019 Annual Report and Accounts will be delivered to the Registrar of Companies in due course.
LEI: 2138008X94M7OVE73I77
Neither the contents of the Company's webpages nor the contents of any website accessible from hyperlinks on the Company's webpages (or any other website) is incorporated into, or forms part of, this announcement.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
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