STRATEGIC EQUITY CAPITAL PLC - Annual Financial Report

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STRATEGIC EQUITY CAPITAL PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2016

The full Annual Report and Accounts of Strategic Equity Capital plc (“the Company”) can be accessed via the Company’s website at: http://www.strategicequitycapital.com/ or by contacting the Company Secretary by telephone on 01392 477500.

KEY HIGHLIGHTS:

Richard Hills, Chairman of the Company, commented:

  • Despite recent market volatility, the long-term performance of the Company remains strong on an absolute and relative basis. Over the past three years, the share price total return per share of 73.6% has comfortably exceeded the 30.9% return from the FTSE Small Cap Index while the NAV total return of 59.2% has also been encouraging.
  • The end of the latest financial year was marked by a sharp increase in market volatility driven by speculation over the likely outcome of the UK Referendum, which increased further when the result became known.
  • As well as navigating these issues, the Investment Manager has been active in working with other stakeholders to help stabilise certain underperforming companies. The benefits of these initiatives started to come through in the period and we expect this trend to continue.
  • Over the 12 months to 30 June 2016 the Company’s share price declined by 22.4% on a dividends-reinvested basis, NAV fell by 8.7% on the same basis. The FTSE Small Cap Index declined by 3.7%.
  • The Board and the Investment Manager believe market conditions are likely to present good long term investment opportunities which the Company will be able to capitalise on, particularly given its closed-ended structure.

For further information, please contact:

GVQ Investment Management Limited 0203 824 4500
Investment: Stuart Widdowson
Investor relations: Theresa Russell

Canaccord Genuity Limited (Corporate broker)
Andrew Zychowski / Robbie Robertson / Lucy Lewis

Lansons Communications on behalf of GVQ Investment Management Limited
David Masters

 
020 7523 8000
 
020 7294 3687

Copies of the announcement, annual reports, quarterly update presentations and other corporate information can be found on the Company website at: http://www.strategicequitycapital.com/

INVESTMENT OBJECTIVE

The investment objective of the Company is to achieve absolute returns (i.e. growth in the value of investments) rather than relative returns (i.e. attempting to outperform selected indices) over a medium-term period, principally through capital growth.

The Company’s investment policy can be found within the Strategic Report below.

INVESTMENT MANAGER'S STRATEGY

The strategy of GVQ Investment Management Limited (“GVQIM” or the “Investment Manager”) is to invest in publicly quoted companies which will increase their value through strategic, operational or management change. GVQIM follows a practice of constructive corporate engagement and aims to work with management teams in order to enhance shareholder value.

A more detailed explanation can be found in the Investment Manager’s Report below.

Financial summary

At 30 June     2016     At 30 June     2015 % change
Capital return
Net asset value (“NAV”) (statutory) per Ordinary share 198.06p    217.69p (9.0)%
Ordinary share price (mid-market) 178.00p    230.25p (22.7)%
(Discount)/premium of Ordinary share price to NAV (10.1)%
5.8%
Average premium/(discount) of Ordinary share price to NAV for the year
1.6% 

(1.1)%
Total assets (£’000) 138,816     139,114 (0.2)%
Equity shareholders’ funds (£’000) 138,361     136,242 1.6%
Ordinary shares in issue with voting rights 69,858,891     62,583,891 11.6%
Year ended   
30 June  
  2016   
Year ended   
30 June   
2015  
Performance
Total return for the year (8.7%) 25.8%
Ongoing charges 1.40%  1.38%
Revenue return per Ordinary share 0.44p   0.99p
Dividend yield 0.4%  0.4%
Proposed final dividend for year 0.78p  0.78p

   

Year’s Highs/Lows High    Low   
NAV per Ordinary share 222.69p 188.33p
Ordinary share price 241.50p 178.00p

1 The Company’s sixth tender offer took place in November 2014. As a result 109,722 shares were bought back and held in treasury at a cost of £182,582. During the period January 2015 to June 2015, the Company issued 5,407,878 shares for a consideration of £11,711,869. The Company has issued 7,275,000 shares during the year to 30 June 2016 raising gross proceeds of £16,497,000 under its Share Issuance Programme.

2 Total return is the (decrease)/increase in NAV per share plus dividends paid, which are assumed to be reinvested at the time the shares are quoted ex-dividend.

3 The ongoing charges figure has been calculated using the Association of Investment Companies’ (“AIC’s”) recommended methodology and relates to the ongoing costs of running the Company. Non-recurring fees are therefore excluded from the calculation.

4 Dividend yield is calculated using the proposed dividend for the year and the closing price.

STRATEGIC REPORT

The Strategic Report has been prepared in accordance with Section 414A of the Companies Act 2006 (the “Act”). Its purpose is to inform members of the Company and help them to assess how the Directors have performed their legal duties under Section 172 of the Act to promote the success of the Company.

Chairman’s Statement

Introduction

Following several years of growth, the Company’s NAV declined during the year ended 30 June 2016. This was caused by a combination of trickier markets as well as some disappointing portfolio newsflow. The Investment Manager has been active in working with other stakeholders to help stabilise the underperforming companies and some of the benefits of this work have already come through in the period. Further details on the Company’s portfolio are included in the Investment Manager’s Report below.

Performance

Over the year to 30 June 2016, the NAV per share fell from 217.69 pence to 198.06 pence, a decrease of 9.0%. On a total return basis (i.e. including dividends), the Company’s NAV per share fell by 8.7%, which was greater than the fall in the FTSE Small Cap ex Investment Trusts Total Return Index (“FTSE Small Cap Index”), which decreased by 3.7%.

The Shareholder funds increased despite weakening performance due to the increase in the number of shares in the period.

The share price return during the year was lower than the NAV return. This was because the Company’s shares moved from trading at a considerable premium to NAV at the start of the period to a discount of c.10% at the end. The discount widened suddenly in June as a result of low trading volumes during the market turmoil following the UK referendum result to leave the EU (“UK Referendum”). When dividends are included, the total return of the share price was a negative 22.4%. Since the end of the period, the discount has returned to a reduced and much narrower level.

During the year, two holdings had operational management issues which were reflected in poor NAV performance. The Board believes that the actions taken by both of these companies to strengthen their boards and executive management will lead to a significant improvement in their business over the medium-term. These investments are covered more fully in the Investment Manager’s Report.

The Company has delivered a NAV total return per share of 59.2% over the past three years, exceeding the 30.9% return from the FTSE Small Cap Index by more than 28%. Its five year NAV total return per share growth of 96.5% has exceeded the FTSE Small Cap Index return by 26.7%.

Discount Management

The average premium to NAV of the Company’s shares was 1.6% compared with 1.1% discount in the prior year. However, this masks considerable volatility seen across the period. The year began with the shares trading on a significant premium to NAV, driven by ongoing buying demand. This was, in part, due to purchases by index funds which in turn was driven by the inclusion of the Company’s shares into the FTSE All-Share and FTSE Small Cap indices. During this period, the Company was unable to issue sufficient shares to satisfy demand. Following the implementation of the Share Issuance Programme in August 2015, the Company was then able to issue sufficient shares to manage the premium at which the shares traded. The market sell-off in mid-January 2016 coincided with investors becoming more risk averse. Alongside many similar investment trusts, the Company’s shares experienced a de-rating and began trading at a discount. Between this period and the UK Referendum, the shares traded between a discount of 7% and a small premium to NAV. In the immediate aftermath of the UK Referendum, the discount widened on low volumes to end the period at 10.1%.

The Board will continue to monitor closely the premium/discount to NAV at which the Company’s shares trade. If the Company’s shares trade at an unacceptable discount over a sustained period in the future, the Board will consider what action to take including, inter alia, the re-introduction of tender offers.

Dividend

The Directors continue to expect that returns for Shareholders will derive primarily from the capital appreciation of the shares rather than from their dividends. The Board is proposing to maintain a final dividend of 0.78p per Ordinary share for the year ended 30 June 2016 (0.78p in 2015), payable on 16 November 2016 to Shareholders on the Register as at 14 October 2016. This will necessitate using some of the Company’s distributable reserves in addition to the current year’s earnings.

Development of the Company

The Board has been keen to see an increase in the size of the Company for two reasons. Firstly, this helps increase liquidity in the shares and secondly, it reduces the total expense ratio. In recent years, at Annual General Meetings, Shareholders have voted in favour of a Resolution to allow the Directors to issue pre-emptively new shares equivalent to a maximum of a 10% increase in the Company’s share capital. During the early part of the period it became evident that demand for new shares was so large that this facility would be fully utilised and the share price was in danger of being driven to an excessively large premium. In order to avoid this outcome the Directors, with Shareholder support, introduced a placing programme for up to 20 million new shares. In the event only 7.3 million shares were issued. The reason for this was that the Directors and the Investment Manager were keen to use this facility cautiously and not to overload the market with too many new shares. The placing programme was a success in that the rise in the share premium was contained, the size of the Company was increased and since the new shares were issued at a premium to NAV existing Shareholders did not bear any of the costs of the issues.

While the Board acknowledges the discount to NAV at which the Company’s shares currently trade, it remains minded to grow the Company over time through further equity issuance provided that such issuance is not dilutive to NAV. This objective will be achieved gradually and will depend on a number of factors such as performance, market background and demand for new shares, as well as the ability of the Investment Manager to deploy further capital given the specialist nature of the investment strategy in smaller companies. As always the Board considers the interests of existing Shareholders as paramount and would not issue new shares if it felt that this would be detrimental to these interests.

The Board

The Company continued its process of Board refreshment during the year. As previously announced to the market, William Barlow was appointed as a non-executive Director of the Company in February 2016. William comes with considerable experience of the investment trust sector which will be of great assistance to the Board.

Change of Company Secretary and Administrator

During the year, the Management Engagement Committee undertook a review of the provision of Company Secretarial and Administrative services. As a result of this process, a recommendation was made to, and agreed by, the Board to appoint Personal Assets Trust Administration Company Ltd (“PATAC”) as the Company’s new Company Secretary and Administrator with effect from 1 October 2016. The Board would like to thank Capita Sinclair Henderson Limited for its service to the Company since its launch in 2005.

Change of Auditor

As previously announced, the Company undertook an audit tender process in December 2015. As a result of this process, the Board appointed KPMG LLP as the Company’s new Auditor with effect from 17 February 2016. Accordingly, KPMG LLP have conducted the statutory audit of the Company for the year ended 30 June 2016. Further details regarding the change of Auditor can be found in the Audit Committee Report in the full Annual Report.

Gearing and Cash Management

The Company has maintained its policy of operating without a banking loan facility. This policy is periodically reviewed by the Board in conjunction with the Investment Manager.

The Board, together with the Investment Manager, has a conservative approach to gearing due to the concentrated nature of the portfolio. No gearing has been in place at any point during the period. Cash balances are maintained to take advantage of suitable investment opportunities as they arise.

Annual General Meeting

We hope that as many Shareholders as possible will attend the Company’s Annual General Meeting, which will be held on 9 November 2016 at 12 noon at the offices of Canaccord Genuity Limited, 88 Wood Street, London EC2V 7QR. This will be an opportunity to meet the Board and to receive a presentation from the Company’s Investment Manager.

Outlook

The new financial year has started with stock markets, both at home and overseas, assessing the impact of the UK Referendum result. However, the full impact on the medium to long-term prospects for many quoted companies will be unclear for some time. The Board shares the Investment Manager’s belief that the potential negative impact of the UK Referendum result on the Company’s portfolio is likely to be dampened by its relatively low exposure to domestic cyclical investments and the relatively high level of overseas earnings generated.

The prospects for many portfolio companies appear sound and in aggregate these companies are virtually ungeared and are forecast to have better growth potential than the broader, smaller companies sector. The Investment Manager has maintained a cautious approach to cash balance management which, in the main, has been helpful to long-term performance and has allowed for agile investing as and when blocks of stock have become available or enabling participations in secondary fundraisings.

The current investment environment, albeit with short-term uncertainties, is likely to offer some attractive long-term investment opportunities. The close-ended nature of the Company provides the Investment Manager with a useful tool to capitalise on these opportunities as and when they arise. The Board remains confident that the investment team will be able to produce good absolute and relative returns in the medium to long term.

The Board would like to thank you for your continued support.

Richard Hills
Chairman
20 September 2016

INVESTMENT MANAGER'S REPORT

Investment Strategy

Our strategy is to invest in publicly quoted companies which we believe will increase their value through strategic, operational or management change. We follow a practice of constructive corporate engagement and aim to work with management teams in order to enhance shareholder value. We aim to build a consensus with other stakeholders and prefer to work alongside like-minded co-investors as leaders, followers or supporters. We try to avoid confrontation with investee companies as we believe that there is strong evidence that overtly hostile activism generally produces poor returns for investors.

We are long-term investors and typically aim to hold companies for the duration of rolling three-year investment plans that include an entry and exit strategy and a clearly identified route to value creation. The duration of these plans can be shortened by transactional activity or lengthened by adverse economic conditions. Before investing we undertake an extensive due diligence process, assessing market conditions, management and stakeholders. Our investments are underpinned by valuations, which we derive using private equity-based techniques. These include a focus on cash flows, the potential value of the company to trade or financial buyers and potentially beneficial changes in capital structure over the investment period.

The typical investee company, at the time of initial investment, is too small to be considered for inclusion in the FTSE 250 Index. We believe that smaller companies provide the greatest opportunity for our investment style as they are relatively under-researched, often have more limited resources, and frequently can be more attractively valued.

We consider that this approach, if properly executed, has the potential to generate favourable risk adjusted returns for Shareholders over the long-term.

Market Background

The period under review began and ended with geopolitical events dominating the investment agenda. The Greek banking crisis was “fixed” in early July 2015, before markets began to fret about slowing growth in China. During the rest of the period, markets became ever more concerned, with global growth continuing to disappoint, as well as the systematic risks posed by the weak Eurozone banking sector. The shares of many European banks continue to trade on very significant discounts to book value, indicating an element of distress.

The unanticipated result of the UK Referendum in the final weeks of the period caused considerable market volatility – both in UK and European equity markets – and led to a significant depreciation of Sterling.

Larger companies outperformed small and mid size companies over the period, in part reflecting their greater liquidity and exposure to non-Sterling earnings. The FTSE 100 Index delivered a total return of 3.8% and was the only broad index to deliver a positive return. Over the year, there was considerable volatility in commodity prices which had an influence on the market’s performance. The price of oil more than halved from $63 per barrel at the start of the period to the trough of $28 in late January 2016, prior to recovering to finish the period at $50. Other hard commodities experienced similar gyrations. In a reversal from the prior period, the FTSE 350 Oil & Gas Producers Index rose by 21.3%, with the sector contributing disproportionately to the return of the FTSE 100 Index. Conversely, the mining sector detracted over the period with the FTSE 350 Mining Index falling by 12.5%. However, this masks a much larger fall to January 2016, before a significant rally in the sector.

The FTSE 250 Index fell by 5.7% and the FTSE Small Cap Index fell by 3.7% over the period, both measured on a total return basis. With many more domestically exposed companies than the FTSE 100 Index, these indices performed particularly badly in June following the UK Referendum result. The FTSE AIM All-Share Index also fell over the period, delivering a negative total return of 5.0%.

Within the UK Smaller Companies sector, it seemed to be a period of two very distinctive halves. The first six months witnessed what we believed to be a growth/momentum market, with share prices of many companies being driven ever higher on low trading volumes. In the second half of the period, markets were more unsettled. A sell-off in January was followed by a modest recovery through March, April and May, before markets plunged at the very end of June. Overall discounts in the UK Smaller Companies investment trust sector narrowed to a low at the end of December 2015, before widening out in the second half of the period, and widening materially after the UK Referendum result.

Mergers and Acquisitions (“M&A”) activity among UK quoted smaller companies is at a much lower level than that seen over the past decade. However, given the devaluation in Sterling, we expect foreign bargain hunters to appear and a marked increase in M&A is likely.

Performance Review

The long-term nature of our investment approach and the relatively low liquidity of holdings in smaller companies mean that there is always a need to think ahead. We must be prepared to be nimble and respond quickly to sudden changes, opportunities and short-term challenges. In fact there are many commonalities with sailing.

In sailing it is important to adjust the amount of sail to suit the wind conditions. In heavy winds, it is necessary to reduce the sail area (a process called “reefing”) to maintain the balance of a yacht or dinghy, allowing it to perform better as well as acting as a safety precaution. An old sailing saying goes “The first time you think of reducing sail (i.e. reefing), you should do so”. The main reason for thinking ahead is it is much more challenging, time consuming and potentially dangerous to reef once heavy weather and winds have arrived.

In last year’s Annual Report, we commented that we did not expect that future returns would match those of the past few years and that general market risks were increasing. We also set out tactics which we believed would help to protect and grow the NAV over the medium to long-term. The maintenance of a strong cash position and rebalancing the portfolio away from cyclical companies towards structural growth companies could be considered akin to making a modest “reef”.

This caution has proven to be well-founded. However, despite (in our view) adopting an appropriate tactical approach, the short-term NAV performance over the last year has been disappointing. Whilst avoiding domestic cyclical companies has been the right decision, particularly in the aftermath of the UK Referendum, negative stock-specific issues at three portfolio companies have more than counterbalanced favourable overall positioning. One of the advantages of a concentrated portfolio is that when challenges do occur in portfolio companies, we can invest the time to evaluate fully the causes for problems and consider options to remedy them. Where a lack of liquidity usually precludes the ability to exit the position in short order, we also have the time, experience and network to work with other stakeholders as and when appropriate to resolve underperforming situations where fresh approaches are needed.

We believe that the disappointing short-term performances experienced at Goals and Tribal over the period were largely management related, and it is notable that both companies have refreshed all but one of their directors since November 2015. In the case of Servelec, we believe that the profit warning issued in June was end market and customer related, leading to a delay in new business, rather than any structural weakness in the business or long-term deterioration of market opportunities or competitive position.

The portfolio’s broad positioning led to a pleasingly resilient performance in the immediate aftermath of the UK Referendum result. Market volatility was extreme in this period and since 23 June we have experienced trading days where, despite no portfolio newsflow, the concentrated nature of the portfolio has led to performance deviating from broader smaller company indices by up to 250 basis points. In these market conditions, we believe that short-term performance might not necessarily be reflective of the progress being made by portfolio companies.

Top 5 Contributors to Performance

Valuation
at period end
Period
attribution
Company £’000 (basis points)
IFG Group 9,349 130
4imprint Group 9,598 97
IDOX - 35
Vintage 1,648 33
Clinigen Group 13,086 25

IFG Group, the listed financial services business, delivered a total shareholder return of 29% over the year. This performance was driven by a combination of an earnings recovery in James Hay, its investment platform business. The shares appear to have de-rated on a P/E basis over the year, despite the cash balance continuing to rise (i.e. the ex cash P/E de-rating is even higher). Encouragingly volumes of shares traded in London (where it is only a standard listed company) have picked up of late. We believe this is an indication of more interest from UK based institutional investors. At the time of our initial investment in IFG, we believed that only a very limited amount of the shares were held by UK Smaller Company institutional funds. We believe that this is now rising steadily.

4imprint Group delivered a total shareholder return of 23.9% over the year. The group has continued to deliver organic sales and earnings growth of c.20% in US Dollars (sales are predominantly to the US market). The company reports in US Dollars. The strengthening of the US Dollar against Sterling aided the share price performance over the year – in US Dollars the shares returned only 4.5% over the period, implying a de-rating of the shares in US Dollar terms. The $9m investment in the facility in Oshkosh was completed, giving the business the capacity to double in size again with no further material capital expenditure. Other initiatives have been undertaken to reduce the absolute size of the pension fund and its deficit, which is uninsured. We believe that the size of the scheme and the deficit are no longer material considerations to the ongoing investment case.

IDOX, the provider of software to public sector organisations, was a new investment made in August 2015. It was fully exited in April 2016 following a re-rating which was faster than anticipated. The final tranche of shares were sold at a 40% premium to the purchase price and the investment generated an IRR of in excess of 90%.

Vintage, the private equity fund of funds, delivered a positive return, driven by an increase in the valuations of the underlying funds, many of which are invested in overseas companies and have benefitted from the depreciation of Sterling. Vintage is now mature and in run-off.

Clinigen Group shares were volatile over the period. The shares began the period performing well as the market continued to react favourably to the complementary acquisition of IDIS as detailed in the half-yearly report. However, the shares de-rated in the second half of the period. This was driven by market concerns over the achievability of the projected results for the year ended June 2016, given the implied heavier profit and sales weighting on the second half. Over the period, we became more comfortable about the company hitting projections and as a result increased the holding materially through the latter part of the financial year.

Outside of the top five contributors, OMG continued to perform well, with the shares delivering a total return of 12.5% over the period. The financial performance of the two remaining profitable divisions, Vicon and Yotta, continues to be positive. We believe that the shares remain attractively rated given the IP within the company and the current trading performance.

Bottom 5 Contributors to Performance

Valuation
at period end
Period 
attribution 
Company £’000 (basis points)
Goals Soccer Centres 5,530 (352)
Tribal Group (incl Nil Paids) 9,629 (294)
E2V Technologies 13,512 (193)
Servelec Group 10,676 (187)
Tyman 5,414 (106)

Goals Soccer Centres released two disappointing trading updates in the first half of the period as detailed in the half-yearly report. The shares continued to de-rate materially between January and the end of March, despite trading being in line with revised expectations. We believe that this de-rating was driven by market concerns over the level of the company’s gearing. In early June, the company announced a well-supported placing of shares at close to the then prevailing share price. At the same time, the recently appointed executive chairman announced the results of his initial review of the business. The proceeds of the cash raised are being used for three purposes: to reduce gearing; accelerate a refresh of older pitches at some of the UK centres and modernise club houses; and fund the development of an additional site in the USA. Since the beginning of 2016, the incoming chairman has overseen a wholesale refresh of the company’s board, with the appointment of a new CEO and new non-executive directors. The new executive chairman has set out a detailed strategic plan for the company to re-invigorate its customer proposition and its long-term financial performance.

Tribal Group was a considerable detractor to performance in the first part of the period, as detailed in the half-yearly report. It is pleasing to note the significant improvement in performance in the second half of the period. The new chairman and senior non-executive directors, appointed in November 2015, acted swiftly and decisively to stabilise the business. In February, a new CEO was appointed, which started a significant and prolonged recovery in the company’s share price. The new CEO is well known to us, as he served as CEO of Allocate Software, in which the Company was invested from 2009 to 2014. We believe he brings highly relevant skills and energy to Tribal. A few weeks after the appointment, Tribal announced the sale of its Synergy subsidiary to Servelec for an attractive cash consideration. This enabled the previously announced, fully underwritten rights issue to be significantly reduced, leading to a lower cash call on investors and less dilution. The shares reacted positively again to this news. The rights issue completed in mid April, and the company is now forecast to have an ungeared balance sheet. A new finance director, with highly relevant industry experience, was announced at the end of April and he joined the company at the end of the period. Whilst this has been a challenging investment to date, thanks to the considerable efforts made by incoming board members, we believe that the company is on the road to recovery. Its products enjoy high market shares and we believe the company has strategic value over and above that which might be implied by its current financial performance. We note that Jenzabar, a peer of Tribal based in North America, has acquired c.9% of the issued share capital of the company through buying shares and nil-paid options in the market since March 2016.

After its stellar run in the previous year, E2V Technologies gave back some of its performance due to a de-rating of the shares. Despite many companies in its sector issuing profit warnings or reducing estimates during the period, E2V matched its profit expectations for its financial year ended March 2016. The market de-rated the shares relative to its broader peer group due to concerns (unwarranted in our view) about the working capital absorption during the year. We believe that the working capital position is temporary and should unwind during the current financial year. At the end of the period, the company’s shares appeared considerably undervalued relative to its peers and what we believe to be its intrinsic value. The transformation of manufacturing at its Chelmsford site continues to make good progress, which augurs well for future returns.

Servelec Group’s share price performance was highly volatile during the year. The shares performed exceptionally well until June, due to the achievement of its forecasts, a re-rating and a positive response to its acquisition of Synergy from Tribal. The strength of the share price was used to reduce the holding over this period. In the middle of June, the company released a profit warning driven by a combination of unrelated bad news across all three of its trading divisions. The health and social care software business had been anticipating winning new business through the year and during 2017 and 2018 through the “North Refresh” – the re-procurement of multiple Childrens, Community and Mental Health Trust electronic patient record systems across the North, Midlands and East of England. In mid-June, the company was informed by the health authorities that this reprocurement would be delayed. At the same time, the company was informed by its major oil and gas client that it wished to delay the start of automating control and safety systems for two offshore production platforms. Although the company was told by both parties that the delays were timing issues, the directors decided to inform the market and profit guidance was reduced to remove all revenues from these activities from the forecasts. This led to a significant fall in forecasts and a further de-rating of the shares. Whilst we had been taking profits from March through to June, the fall in the share price had a significant negative impact on the NAV. We believe that the profit guidance has been reduced to an extremely conservative level and the medium to long-term balance of risk appears skewed to the upside. We consider that the shares now trade at a considerable discount to their Sum-of-the-Parts valuation.

Tyman’s shares were volatile and generally weak over the period. The key North American residential market failed to grow at the pace of industry expectations during 2015, leading to lower than anticipated profits in the year. However, 2016 has started well. In addition, the company announced the acquisitions of Giesse and Bilco, to strengthen its product lines in the European and US commercial markets respectively. A small placing of equity was undertaken in June to help fund the Bilco acquisition. Although the company’s earnings have benefitted from the translation of overseas earnings of late, as well as the enhancement from acquisitions, the shares have not performed well over the year. We believe that the market is concerned about the general medium-term outlook for earnings, given the cyclical nature of some markets, as well as the increased financial gearing of the company. Whilst we believe this remains a quality company, with strong market positions and a high quality management team, the position has been reduced selectively over the year to fund new and existing investments in less cyclical areas.

The average cash balance in the Company’s portfolio was 11.0% over the period, reflecting both the Board’s and the Investment Manager’s conservative approach to gearing and the desire to retain the ability to participate in block transactions at short notice without being a forced seller of other holdings. The level of net cash at the end of the period was 9.5%, slightly lower than the 10.9% at the beginning of the period.

Dealing Activity

The level of portfolio activity was higher than in recent years, driven by M&A activity, as well as the deployment of capital raised through the issuance of Company shares. Disposals netted £25.4m (excluding distributions from unlisted investments) representing around 17.5% of the weighted average NAV. In addition, £0.8m of total proceeds were received from unlisted investments. £43.8m of purchases were made, representing 30.3% of the weighted average NAV.

The small remaining positions in Journey Group, Lavendon and XP Power, were exited over the period. Unusually, the relatively small £1.9m investment in IDOX was both initiated and realised within the period after the shares re-rated much faster than anticipated.

The largest new investment made over the year was the purchase of £8.6m in shares in Equiniti Group. The company is a technology-enabled business services provider. It has a diverse portfolio of products and services, typically aimed at FTSE 350 companies. The company IPO’d in late 2015, having been owned by the well-regarded private equity firm Advent International since 2007. We believe that the company’s sales and earnings are resilient and organic sales growth should range between 3-7% per annum across the cycle. In addition, we believe there is scope for earnings growth to exceed sales growth through further initiatives to reduce its operational complexity, as well as gradual offshoring of more of its labour intensive administrative operations. The company’s IPO was unfortunately timed, and it was eventually priced at the bottom end of the pricing range. The shares performed badly in the aftermarket, despite the company meeting expectations. The investment was made partially through market purchases and via participation in a placing where Advent sold down part of their residual investment.

An investment of just less than £0.8m was made in Iomart Group, a UK hosting company, in January, as part of a placing of shares by a large holder wishing to exit the position. The company has a good record of high single digit organic growth, combined with high earnings visibility and a track record of accretive M&A.

Further market purchases were made in IFG Group (£2.1m) and E2V Technologies (£1.6m) over the period. £1.3m was invested in the placing of Goals Soccer Centres shares, to avoid the existing holding being diluted.

Market volatility of some portfolio company share prices during the year led to significant buying and selling some holdings, with a net £3.1m realised from reducing the weight in Tyman over the period. A further net £1.8m was realised from taking profits in Brooks MacDonald, following a material re-rating during the latter part of 2015. £1.3m net was realised from taking profits in Gooch & Housego.

The strong performance of Clinigen at the beginning of the period led to modest top slicing. These shares were subsequently repurchased, and the position was increased considerably towards the end of the period when the share price was weak, leading to a net £2.9m additional investment. A net £0.5m was invested in EMIS over the period.

£8.0m net was invested in Tribal Group over the period, of which c.£2.4m was via participation in the rights issue and the purchase of nil paid rights. Unfortunately some of the investment was made during summer 2015 as detailed in the half-yearly report, prior to the significant fall in the share price. However, in early January 2016, and after careful consideration, we decided to increase the holding up to 10% of the company’s issued share capital by buying in the market at extremely depressed levels. This has helped to reduce the average in-price of the investment materially. The strong share price performance in early June led us to take some small profits and enable some headroom to repurchase shares in adverse markets.

£1.6m net was invested in Volution, most of which was purchased in a secondary sell down by a large private equity shareholder.

Portfolio Review

At the end of the financial period, the portfolio remained highly focused, with a total of 18 holdings and the top 10 holdings accounting for 76% of the NAV. 98.8% of the portfolio was invested in quoted companies. The percentage of the portfolio invested in unlisted securities was stable at c.1.2%. At the period end, 9.5% of the NAV was invested in cash.

The sector exposure changes detailed in last year’s Annual Report have continued, albeit at a more measured place. Industrials have reduced from 8.4% of the NAV to 5.1%, due to profit taking from Tyman. Financials have increased from 8.1% to 9.3% due to the strong performance of Brooks Macdonald and IFG Group. Pharmaceuticals have increased from 7.4% to 9.5% due to the further investment in and positive attribution from Clinigen. The weighting to Electronics has fallen from 18.0% to 15.1%, following the exit of XP Power, profit taking from Gooch & Housego and the relative underperformance of E2V Technologies.

As a result of its move from the main market, where it was classified as a Support Services company, to AIM, we have re-allocated Tribal to Software and Computer Services. On a like-for-like basis, the exposure to Software and Computer Services has fallen slightly. The like-for-like exposure to Support Services has risen from c.7.0% to 13.2%, mainly due to the new investment in Equiniti.

As at the end of the period, underlying aggregated portfolio sales exposure to the UK, North America and European regions was 57%, 23% and 11% respectively, which has changed from 55%, 26% and 11% respectively at June 2015. Exposure to Asia is c.5%, and we believe that the majority of revenues derived from this region are US Dollar denominated. Given portfolio companies with international exposure typically have central overheads based in the UK, we believe that the underlying profit contribution from North America, Europe and Asia is higher than the sales exposure. The moderate increase in exposure to the UK has been as a result of the investment in Equiniti. The only UK Discretionary Consumer investment remains Goals Soccer Centres.

The majority of the decline in exposure to North America over the last year is due to continued profit taking from Tyman. We continue to believe that the exposure to periphery Europe is negligible. 92% of the sales exposure to Europe is generated by specialist electronics (including space, healthcare and industrial applications), pharmaceutical products and services and B2B media (largely healthcare). The underlying sales exposure mirrors our scepticism of a broad based European economic “recovery”.

We reviewed the composition of the portfolio at the end of the period in light of the unexpected UK Referendum result, and contacted the management teams of the major holdings to discuss the implications of the result for their businesses. When considering changes to the portfolio, we evaluated a number of factors including: the broader sector exposure of the portfolio; earnings visibility and cyclicality; scope for enhanced operating margins through management initiatives; the strength of balance sheets; currency exposure; absolute valuation; and the cash balance in the portfolio. The outcome of this review was that we felt the portfolio was well placed and little re-shaping was necessary as a result of the UK Referendum result.

Portfolio as at 30 June 2016 – Top 10 Largest Investments


 
Company

 
Sector classification


Date
of first
investment

 
Cost
£'000

 
Valuation
£'000
% of invested portfolio at 30 June
2016
% of invested portfolio at 30 June
2015


% of
net
assets
E2V Technologies Specialist Electronics Oct 2009 4,383 13,512 10.8 12.5 9.8
Clinigen Group Pharmaceuticals Jul 2014 10,729 13,086 10.5 8.3 9.5
Wilmington Group Media Oct  2010 8,987 11,894 9.5 9.4 8.6
EMIS Group Software & Computer Services Mar 2014 9,498 11,476 9.2 8.8 8.3
Servelec Group Software & Computer Services Dec 2013 11,173 10,676 8.5 11.4 7.7
4imprint Group Support Services Feb 2006 1,864 9,598 7.7 7.0 6.9
IFG Group Financial Services Apr 2015 7,605 9,349 7.5 4.5 6.8
Tribal Group Software and Computer Services Dec 2014 13,474 9,269 7.4 4.7 6.7
Equiniti Group Support Services Mar 2016 8,611 8,266 6.6 - 6.0
Gooch & Housego Specialist Electronics Dec 2011 4,134 7,403 5.9 7.3 5.4

Portfolio as at 30 June 2016

Sector spilt by industry %
Software & Computer Services 24.5
Specialist Electronics 15.1
Support Services 13.2
Pharmaceuticals 9.5
Financials 9.3
Media 8.6
Industrials 5.1
Leisure 4.0
Unquoted Investments 1.2
Net cash 9.5

   

Size split by market capitalisation %
<£100m 12.4
£100m - £300m 32.5
£300m - £500m 26.6
>£500m 17.8
Unquoted Investments 1.2
Net cash 9.5

The operational performance of much of the portfolio remains solid. Those companies which have underperformed operationally during the period have virtually entirely new boards of directors and are well placed to start to deliver to their potential. In the case of Servelec, we believe that the recent trading reflects timing issues rather than operational issues. At the end of the period, the portfolio in aggregate had a neutral balance sheet.

Portfolio Characteristics

The following data is provided for informational purposes and should not be regarded as a performance measure. The performance of the Company is detailed in the Financial Summary above.


 
Consensus median portfolio characteristics

 
Strategic    Equity Capital   

FTSE Small     
   Cap     
ex Investment         Trusts     
FTSE Small      Cap     
ex Investment      Trusts ex      Resources     
Price/Earnings ratio (FY1) 15.5x 11.1x 11.2x
Dividend yield 2.3% 4.0%* 4.2%*
Price/Book ratio 3.1x 1.0x n/a
Price/Sales ratio 1.7x 0.6x n/a
Price/Cashflow ratio 14.1x n/a n/a
GVQIM Cashflow yield 10.2% n/a n/a
Forecast earnings growth (FY1) 14.6% 4.1% 5.8%
Forecast net debt to EBITDA 0.1x 2.2x 2.0x

Source: Factset Portfolio Analysis System, Peel Hunt. Index statistics include loss makers. * Dividend yield for the indices excludes non-payers.

Consistent with previous periods, the portfolio’s aggregate valuation (in terms of the P/E ratio) is higher than the constituents of the broader FTSE Small Cap Index. However, the portfolio companies enjoy less geared balance sheets and are forecast to grow earnings much faster. It is worth noting that the relatively high dividend yield of the broader indices reflects the exclusion of companies which do not pay a dividend.

Unlisted Investments

Over the period, the Company received a total of €0.8m from Vintage I. The outstanding commitment relating to Vintage I is €1,560,000 and its adviser has communicated that it does not expect to make any further cash calls.

Outlook

In common with last year’s outlook statement, we continue to believe that the next year will see mixed trading from quoted companies. With many companies operating at close to peak margins, combined with a low growth macro environment, companies that cannot benefit from structural growth or significant margin improvement initiatives, are likely to find material, organic, constant currency earnings growth challenging. Alongside this, there are many macro and geopolitical factors for these companies to navigate.

We would be surprised if the UK Referendum was the last geopolitical or economic shock of the current year. Many macro risks remain in the global economy, in an environment where the growth outlook continues to slow.

However, whilst these factors influence broader market conditions, the financial and operational performance of portfolio companies and potential investments we consider are more likely to be influenced by decisions taken by their management teams and demand conditions in their individual markets. Within our target investment universe, returns will be driven by three factors: earnings growth; rating changes (which will be impacted by the broader market as well as company specific factors); and M&A.

We believe that the prospects for earnings growth of smaller companies are likely to vary considerably. Companies with low growth prospects, challenged business models and little scope to improve margins are likely to struggle to make headway. In comparison, smaller companies operating in niches which are growing and/or where their financial performance is relatively unaffected by the geopolitical and macro economic gyrations of the global economy, are likely to continue to perform well. Uncertain times can bring opportunities as well as challenges and nimble smaller companies and quality management teams can often be well placed to capitalise on these opportunities.

There are competing influences on ratings in our investment universe. On the positive side, ratings (in absolute terms and relative to the FTSE 350) appear to be below long-term averages and smaller companies offer good growth prospects in a low growth environment. In addition, AIM shares offer significant inheritance tax benefits and there appears to be a relative shortage of high quality non-resource AIM stocks with market capitalisations above £50m. We have not seen the impact of a prolonged period of outflows from a broad range of funds for many years and the recent market volatility does not yet appear to have led to material outflows in smaller company OEICs. The positive moves in the smaller company markets over the past few years have been driven by much lower liquidity than during the last cycle leading up to 2007. Within the market, we believe that investors may take a more cautious approach to company balance sheets, and more highly geared companies could de-rate. Our working assumption on ratings is to expect no material change over the next year.

The prospects for M&A look better than for some time. The fall in Sterling has made UK assets much “cheaper” for overseas investors, particularly where those UK companies have significant overseas earnings. Trophy assets may attract suitors. This is typified by the announcement post the period end of the bid for ARM Holdings by Softbank. In addition, the cost of borrowing remains very low, and in a low growth world, M&A offers an attractive, swift and accessible way for companies to grow. Statistics produced by Liberum imply that M&A among FTSE Small Cap companies as a % of the index market capitalisation is running at the lowest level since 2001.

In this environment, we believe that the portfolio is well placed. From an earnings perspective, the portfolio in aggregate has limited exposure to the UK consumer and there is very low exposure to cyclical companies based in Europe. Many companies have US Dollar earnings, which will provide a tailwind to earnings in the coming months. In addition, a number of holdings have significant opportunities to improve their efficiency, leading to scope for improved organic sales growth and/or cost efficiencies. The work done to strengthen the boards of a number of portfolio companies over the previous period should deliver benefits in the coming year.

At the end of the period, the aggregate portfolio company rating was looking more attractive than for some time – both in absolute terms and also relative to the aggregate growth prospects.

We believe that the strategic value of a number of holdings is significantly in excess of their current market ratings. We have consciously avoided investing in companies with significant pension deficits or poison pills. As a result, we believe that a prolonged period of under-valuation may act as a catalyst for M&A activity within the portfolio.

If markets and macro economic conditions were to worsen, gearing at the portfolio company level is modest and those companies which had weaker balance sheets have acted to strengthen them through equity issuance. In addition, the Company retains a strong net cash balance sheet. Given the risk of short-term market volatility, we plan to maintain cash at around the current level unless we find outstanding investment opportunities offering the potential for asymmetric returns (i.e.very low downside risk with a very strong chance of positive returns above our threshold). Equally, we will be proactive in reducing holdings if we believe that their share prices reflect too much of tomorrow’s potential value today.

We will continue to seek out new investments offering reasonably priced structural growth, as well as very attractively priced good quality companies which may be unloved or underperforming, and where there is a clear opportunity to enhance shareholder value. The close-ended nature of the Company enables us to take a long-term view on selecting and, where appropriate, engaging with portfolio companies. We will continue to put all of these advantages to best use.

Whilst optimistic about the medium and long-term prospects for markets and the portfolio in particular, we continue to anticipate short-term volatility. In sailing terms, we remain moderately “reefed” and are conscious of the old sailing term “When you think you are ready to take out a reef, have a cup of tea first”. Or in other words, be sure that the storm has totally passed, and it is not merely a lull, before progressing more aggressively.

Stuart Widdowson/Jeff Harris
GVQ Investment Management Limited
20 September 2016

Top 10 Investee Company Review (as at 30 June 2016)

4imprint Group is the fourth largest distributor of promotional products in the world with an international network of companies in the UK, USA, Hong Kong and Europe. We have been involved with the company since a change of management in 2003. Following the disposal of Brand Addition, virtually all of the profits of the group are generated by the fast growing US business. The company has a significant net cash balance. Funds managed by the Investment Manager currently hold approximately 5% of the company’s equity.

Clinigen Group is a speciality pharmaceutical and services company. It has four business units – Specialist Pharmaceuticals products, Clinical Trial Services, Managed Access and IDIS Global Access. Activities undertaken by these businesses include: acquiring, licencing and revitalising hospital-only critical care medicines; and providing patient access to its own or other pharmaceutical companies’ products, whether to meet unmet medical needs or for use in clinical trials. The company has grown rapidly since its IPO in 2012, both organically and through targeted acquisitions. In April 2015 it acquired IDIS, a peer, for £225m through a mixture of debt and equity. During the period under review, it also acquired Link Healthcare, a specialist pharmaceutical and medical business focused on the Asia, Africa and Australasia region. Strong cash generation should see the company de-gear rapidly over the next two years. Funds managed by the Investment Manager hold c. 3% of the company’s equity.

E2V Technologies is a global market leader in the design and manufacture of specialist electronic components and low volume, high value, high reliability semi-conductors, predominately for the medical, aerospace, defence and industrial markets. An ill-timed acquisition in September 2008 funded by debt left the balance sheet of the business overstretched as the economic downturn began. A new finance director, well known to us, was appointed in May 2009. The management team acted, raising new equity to pay down debt as well as restructure the UK and French cost base, a process which is now largely complete. The Company made its initial investment during October 2009 via a placing and a deeply discounted rights issue to refinance the balance sheet. During 2013, a new chairman and CEO were appointed. We believe that the new CEO has made a substantial positive impact upon the business since his arrival. Funds managed by the Investment Manager currently hold 5% of the company’s equity.

EMIS Group is a specialist healthcare software and services provider. It is the UK market leader in the provision of electronic patient records for GPs, with a 53% market share. It also supplies electronic patient records to other healthcare organisations including community pharmacies, community and mental health trusts and accident & emergency departments. It has grown organically every year for 24 years and just under 80% of its revenues are recurring. It is very cash generative and has used this cash to augment its product portfolio through selective acquisitions. Funds managed by the Investment Manager currently hold 3% of the company’s equity.

Equiniti Group is a business services company providing administration, processing payments services and technology products to typically FTSE 350 companies. Its is one of the three main share registrars for UK quoted companies. It administers company benefits schemes and share savings schemes. It also provides software and services to help manage the administration of company and public sector pension funds. The business was founded with the buyout of Lloyds TSB Share Registrars by private equity house Advent International in 2007. Following the buyout the company added to its product and service capability through a number of targeted acquisitions. The company IPO’d in October 2015. Whilst it was well invested under private equity ownership, there are significant medium to long-term opportunities through rationalising its UK office footprint as well as offshoring more activities to its base in India. Together with moderate organic growth we believe that the company has the potential to deliver high single digit/low double digit earnings growth, which should not be significantly impacted by the broad market cycle. The initial investment was made at a very attractive rating. Funds managed by the Investment Manager currently hold c.3% of the company’s equity.

Gooch & Housego is a global market leader in the design and manufacture of specialist optical components and subsystems. Funds managed by the Investment Manager previously invested in the company during 2010 and the Investment Manager knows the business and management team well. The company’s shares de-rated significantly at the end of 2011 and early 2012, driven by concerns over slowing activity in their industrial division. The Investment Manager took advantage of this weakness in the share price to rebuild a stake at a significantly lower level than its exit price in late 2010. The new product development pipeline and ramping up of volumes on existing contracts has the potential to deliver significant growth over the medium-term. Its fibre-optics products have strong long-term growth prospects as they substitute conventional electronics in aerospace and defence applications. Funds managed by the Investment Manager currently hold 3% of the company’s equity.

IFG Group is a financial services holding company with two operating assets. London-based Saunderson House is an advisory-only wealth manager with more than £4bn assets under advice. James Hay is an investment platform, originally a pioneer in the provision of Self-Invested Pension Plans. Over the past few years, IFG has sold a number of other activities to focus on Saunderson House and James Hay. We believe that both of these businesses offer long-term structural sales growth, as well as scope to make higher margins. Despite the UK base and operations of the remaining operating assets, IFG’s head office remains in Dublin. The shares are dual-listed in Dublin and London, with the primary listing in Dublin. Comparative M&A multiples suggest that IFG shares trade at a considerable discount to its Sum-of-the-Parts valuation. Funds managed by the Investment Manager currently hold 5% of the company’s equity.

Servelec Group is a UK technology company with three key divisions. The healthcare software division is a market leader in the design and operation of electronic patient records for NHS mental and community trusts. The controls division specifies, designs, assembles, installs and maintains safety and remote control systems for the oil & gas and process industries. The technologies division provides software, hardware and systems for industrial telemetry and SCADA applications. It was listed in November 2013, having previously been owned by a Singaporean-listed group. The company has a robust balance sheet. Cash conversion will be strong for the foreseeable future due to the unwinding of a legacy trade debtor. In December 2014, it announced the acquisition of Corelogic. In July 2015, it announced the acquisition of Aura. In March 2016 it acquired Synergy from Tribal Group. Funds managed by the Investment Manager currently hold c.7% of the company’s equity.

Tribal Group is a global provider of products and services to the international education, training and learning markets. Over the past six years, the company has disposed of a number of activities to focus on student records and administration systems. It has a high market share in a number of product niches and geographies. We believe that the company has the potential to grow through increasing its international sales in Australia and Canada, as well as updating and upselling to its existing UK customer base. Since November 2015 the company’s board has been substantially refreshed, a non-core subsidiary sold and equity raised to strengthen the balance sheet. Funds managed by the Investment Manager currently hold 9% of the company’s equity.

Wilmington Group provides business information and training services to professional business customers in the financial services, legal and medical sectors. More than 80% of revenues in the main publishing and information division are delivered digitally, typically on a subscription basis, and with high levels of client retention. The company is highly cash generative. Growth has been held back over the past few years due to a significant fall, and no recovery, in its legal training market and the decline in some legacy print publications. This has masked strong growth in the rest of the business. The declining segments have now either been exited or stabilised. The company’s strong cash flow has enabled it to make value enhancing acquisitions again. In July 2015, it announced the acquisition of FRA for a maximum consideration of £13.2m. Funds managed by the Investment Manager currently hold 5% of the company’s equity.

GVQ Investment Management Limited
20 September 2016

The unconstrained, long-term philosophy and concentrated portfolios resulting from the Investment Manager’s investment style can lead to periods of significant short-term variances of performance relative to comparative indices. The Investment Manager believes that evaluating performance over rolling periods of no less than three years, as well as assessing risk taken to generate these returns, is most appropriate given the investment style and horizon. Properly executed, the Investment Manager believes that this investment style can generate attractive long-term risk adjusted returns.

All statements of opinion and/or belief contained in this Investment Manager’s report and all views expressed and all projections, forecasts or statements relating to expectations regarding future events or the possible future performance of the Company represent the Investment Manager’s own assessment and interpretation of information available to it at the date of this report. As a result of various risks and uncertainties, actual events or results may differ materially from such statements, views, projections or forecasts. No representation is made or assurance given that such statements, views, projections or forecasts are correct or that the objectives of the Company will be achieved.

OTHER INFORMATION

Business and Status of the Company

The principal activity of the Company is to conduct business as an investment trust. The Company is currently an investment company in accordance with the provisions of Section 833 of the Companies Act 2006. The Directors do not envisage any change in the Company’s activity in the future.

The Company has been incorporated with an indefinite life but is subject to an annual continuation vote. The Company is registered in England with number 05448627.

The Company has received written approval from HM Revenue and Customs as an authorised investment trust under Section 1158 of the Corporation Tax 2010 (“CTA”). The Company will continue to be treated as an investment trust company, subject to there being no serious breaches of the conditions for approval. The Company’s status as an investment trust means that the Company does not pay capital gains tax on any profits arising from the disposal of its investments.

Investment Objective

The investment objective of the Company is to achieve absolute returns (i.e. growth in the value of investments) rather than relative returns (i.e. attempting to outperform selected indices) over a medium-term period, principally through capital growth.

Investment Policy

The Company invests primarily in equity and equity-linked securities quoted on markets operated by the London Stock Exchange where the Investment Manager believes the securities are undervalued and could benefit from strategic, operational or management initiatives. The Company also has the flexibility to invest up to 20% of the Company’s gross assets at the time of investment in securities quoted on other recognised exchanges.

The Company may invest up to 20% of its gross assets at the time of investment in unquoted securities, provided that, for the purpose of calculating this limit, any undrawn commitments which may still be called shall be deemed to be an unquoted security.

The maximum investment in any single investee company will be no more than 15% of the Company’s investments at the time of investment.

The Company will not invest more than 10%, in aggregate, of the value of its total assets at the time the investment is made in other listed closed-end investment funds.

Other than as set out above, there are no specific restrictions on concentration and diversification. The Board does expect the portfolio to be relatively concentrated, with the majority of the value of investments typically concentrated in the securities of 10 to 15 issuers across a range of industries. There is also no specific restriction on the market capitalisation of securities into which the Company will invest, although it is expected that the majority of the investments by value will be invested in companies too small to be considered for inclusion in the FTSE 250 Index.

The Company’s Articles of Association permit the Board to take on borrowings of up to 25% of the net asset value at the time the borrowings are incurred for investment purposes.

Performance and Dividend

Over the year to 30 June 2016, net assets have increased by £2.1 million representing an increase of 1.6% (9.0% decrease on a per share basis). Further information on the performance of the Company’s portfolio is contained in the Investment Manager’s report above.

The Company’s investment objective is one of capital growth and it is anticipated that returns for Shareholders will derive primarily from capital gains. The Board is governed by the rules for investment trusts that require that the Company must not retain more than 15% of its income from any one year. However, the Company is also able to utilise the flexibility afforded to it from the structure of the Company that allows the use of distributable reserves as stated in the Chairman’s Statement on page 3. The Board recommends a final dividend of 0.78p (2015: 0.78p) per Ordinary share, amounting to £545,000 (2015: £534,000) based on the Ordinary share capital at the date of this report.

Performance Analysis Using KPIs

In order to measure the success of the Company in meeting its objectives and to evaluate the performance of the Investment Manager, the Directors take into account the following key performances indicators:

NAV per Ordinary share

The NAV per Ordinary share, including revenue reserves, as at 30 June 2016 was 198.06p (30 June 2015: 217.69p).

Movement in the Company’s share price

In the year to 30 June 2016, the Company’s share price decreased by 22.7% from 230.25p to 178.00p. The share price total return, taking account of the 0.78p dividend paid in the year, was negative 22.4%.

Premium/(discount) of the share price in relation to the NAV

Over the year, the premium/(discount) of the Ordinary share price in relation to the NAV ranged from a premium of 10.5% to a discount of 10.1)%. As at 30 June 2016, the Company’s shares traded at a discount of 10.1% (30 June 2015: premium of 5.8%).

Ongoing charges

The ongoing charges ratio was 1.40% in the year to 30 June 2016 (30 June 2015: 1.38%).

Investment Manager

The Investment Manager appointed by the Company is GVQIM. Established in 2002, the public equity team of GVQIM, formerly of SVGIM, was one of the first in the UK to invest in publicly traded equities using private equity techniques. The team now consists of four investment professionals who combine a number of complementary skill sets, including corporate finance, traditional fund management, research and private equity disciplines. In addition, GVQIM makes use of a panel of industrial advisors and other external due diligence providers. GVQIM currently has funds under management of more than £500m.

Investment Management Agreement

The Company’s investments are managed by GVQIM under an agreement dated 19 February 2015. The Investment Manager’s appointment is subject to termination on 12 months’ notice given at any time by either party.

There are no specific provisions contained within the Investment Management Agreement relating to compensation payable in the event of termination of the agreement other than entitlement to fees, including performance fees, which would be payable within any notice period. However, in the event that a continuation resolution proposed at any Annual General Meeting is not passed, the Investment Management Agreement expressly permits the Company to give notice terminating the Investment Manager’s appointment without any compensation being payable to the Investment Manager in lieu of any period of notice otherwise required under the Investment Management Agreement.

At Board meetings, the Directors regularly keep under review the performance of the Investment Manager. In the opinion of the Directors the continuing appointment of GVQIM as Investment Manager is in the best interests of Shareholders as a whole.

Investment Manager’s Fees

The Investment Manager is entitled to receive from the Company a basic fee together with, where applicable, a performance fee.

Basic Fee

The basic management fee accrues daily and is payable quarterly in arrears. The basic fee is the lower of (i) 1.0% of the adjusted NAV of the Company and (ii) 1.0% per annum of the Company’s market capitalisation.

Performance Fee Arrangements

The Company’s performance is measured over rolling three year periods ending on 30 June each year, by comparing the NAV total return per share over a performance period against the total return performance of the FTSE SmallCap (ex Investment Companies) Index. A performance fee is payable if the NAV total return per share (calculated before any accrual for any performance fee to be paid in respect of the relevant performance period) at the end of the relevant performance period exceeds both:

(i) the NAV per share at the beginning of the relevant performance period as adjusted by the aggregate amount of (a) the total return on the FTSE SmallCap (ex Investment Companies) Index (expressed as a percentage) and (b) 2.0% per annum over the relevant performance period (“Benchmark NAV”); and

(ii) the high watermark (which is the highest NAV per share by reference to which a performance fee was paid previously).

The Investment Manager will be entitled to 15% of the excess over the higher of the Benchmark NAV per share and the high watermark. Payment of a performance fee that has been earned will be deferred to the extent that the amount payable exceeds 1.75% per annum of the Company’s NAV at the end of the relevant performance period (amounts deferred will be payable when, and to the extent that, following any later performance period(s) with respect to which a performance fee is payable, it is possible to pay the deferred amounts without causing that cap to be exceeded or the relevant NAV total return per share to fall below the relevant Benchmark NAV per share and the relevant high watermark).

No performance fee is payable in respect of the year ended 30 June 2016.

Administration Agreement

Under an agreement dated 17 January 2013, company secretarial services and the general administration of the Company are undertaken by Capita Sinclair Henderson Limited (“CSH”). The fee charged in the year was £98,000 (2015: £90,000). The majority of this increase was due to the move to the production of daily NAVs part way through the previous year. The current fee includes the provision for daily NAVs for the entire year. The fee is also subject to annual review based on the UK Retail Price Index. As mentioned in the Chairman’s Report above, CSH will be replaced by PATAC as Company Secretary and Administrator with effect from 1 October 2016.

Principal Risks and Uncertainties Associated with the Company

For the Company the overriding risk to an investor is that the market on which the Company’s shares trade, and the shares of the companies in which it invests in may move out of the control of the Board.

The principal ongoing risks and uncertainties currently faced by the Company, which may vary in significance from time to time, are outlined below together with the controls and actions taken to mitigate those risks.

Principal Risk Mitigation Action taken in the year
Investment Performance
The unconstrained long term philosophy and concentrated portfolios resulting from the investment strategy can lead to periods of significant short-term variation in performance. The underlying investments are in companies which, due to their smaller size, may have limited product lines, limited financial resources with dependence on a few key individuals and less liquid shares. These risks are more significant than in larger companies. The Board maintains a close review of how the Investment Manager invests to implement the investment strategy and regularly reviews adherence to the investment policy.

The Board maintains a longer-term perspective in relation to monitoring performance of the Investment Manager in achieving the investment objective.

The Board relies on the Investment Manager to engage actively with the investing companies in order to support long term value enhancement and the actions taken are reviewed regularly by the Board.
The Board, through its review process did not identify any specific new action required either with the portfolio as a whole or with any one specific investment to mitigate performance risk over and above that already taken by the Investment Manager.
Operational Risk
The Company appoints and relies on a number of third parties including the Investment Manager to provide it with the necessary services such as registrar, depository, custodian, administrator, company secretary, lawyers, external auditors and brokers. The Board has a detailed risk matrix which is reviewed by the Audit Committee and the Board twice yearly and is used as a tool to consider the key risks of the Company and the controls that are in place in relation to those risks where appropriate.

Key appointments of third party service providers are taken after a formal process ensuring the required skills and experience are satisfied. An annual review of service providers is carried out by the Management Engagement Committee.

Internal control reports on the systems and processes of the Company’s service providers are reviewed at least annually and as appropriate and any findings discussed where appropriate.
Supervision of third party service providers has been maintained in the year.

The Board, through its review process has agreed that the Company’s Administrator will change from Capita Sinclair Henderson Limited to Personal Assets Trust Administration Company Limited with effect from 1 October 2016 and a thorough handover process is being undertaken.

In order to ensure the Company is compliant with the EU Audit Regulation 2014, on the rotation of audit firms, the Audit Committee undertook a tender process in December 2015 for the role of external auditor and KPMG was appointed with effect from 17 February 2016.

The Board through its review process did not identify any other specific new actions.
Regulatory Compliance and Legislation
The Company is a UK incorporated company with a premium listing on the London Stock Exchange, is an authorised investment trust and has appointed GVQIM as Alternative Investment Fund Manager (“AIFM”) and Cannaccord Genuity as Broker. The Board is comprised of individuals whose background qualifications and experience ensure that the relevant regulatory and legislative requirements are understood. Where appropriate advice and training are sought from service providers. Board selection and performance review processes support this approach. In the year under review, following the retirement of Ian Dighé as a Director, the Board engaged an external independent search consultant to conduct a selection process to identify a new Director. William Barlow was appointed as a Director as his mix of skills and experience fit well within the search criteria set by the Board.
Discount/Premium
A significant share price discount or premium to the Company’s NAV per share, or related volatility, could lead to high levels of uncertainty or speculation and the potential to reduce investor confidence. The Board has established share issuance and share buy-back processes to assist in the moderation of share price premium and discount to net asset value.

Shareholders are kept informed of developments as far as practicable and are encouraged to attend briefings such as the Company’s Annual General Meeting to understand the implementation of the investment strategy to achieve the objectives.
During the year under review, the Company’s shares moved from trading at a premium to NAV at the start of the period to a discount of c.10% at the end of the year.

The Directors authorised the issuance of 7.3 million shares during the first six months of the year. Once the shares moved to trading at a discount during the second half of the year, the Board agreed that no further shares would be issued until the share price returned to trading at a premium.
Economic, Political and External Factors
The Company invests predominantly in UK shares and therefore performance may be impacted by economic, political and other factors which affect either the operation of the markets that portfolio companies trade in, the UK stock market or currency movements. In particular small changes can have a larger impact on small companies. Within this broad category the UK Referendum and its subsequent implications are an important current uncertainty. The exposure to these external factors is considered largely outside of the Company’s control so regular monitoring is carried out with regards to the likely effects should any potential mitigation be possible.

Limits are set for investment in overseas based investments.

Hedging of currency is not chosen as a mitigator due to the relative cost benefit not being compelling.
The position of the Company as a whole and that of each portfolio investment was considered in the run up to and following the UK Referendum and this remains an area of focus as to potential impact to performance. The Board monitors and reviews the position of the Company, ensuring that adequate cash balances exist to allow flexibility. In the portfolio the Investment Manager deemed that only limited changes were needed as a result of the UK Referendum outcome.

Viability Statement

The Board has assessed the prospects of the Company over the three years to 30 June 2019. This assessment period has been chosen as the Board believes it represents an appropriate period given the long-term investment objectives of the Company, the low working capital and simplicity of the business model.

In making this three year assessment, the Board has taken the following factors into account:

• The nature of the Company’s portfolio

• The Company’s investment strategy

• The potential impact of the Principal Risks and Uncertainties

• Annual continuation vote

• Tender offers

• The liquidity of the Company’s portfolio

• Market falls and gains

• The nature and composition of the share register

• The level of existing and potential long-term liabilities

The Company’s portfolio currently includes a large position in cash or liquid money market funds. Over the last five years, cash and liquid money market funds have averaged c.8.4% of the NAV. Cash balances can be varied due to changes in market conditions, but positive cash levels are expected to be maintained over the period.

The Company has not been geared for many years and the current policy of the Board is not to have a gearing facility.

Investment companies face other challenges such as significant decreases in size due to share buy backs or tender offers to help manage situations where the share price of the companies trade at a persistent and large discount to the NAV. Over the past five  years, the Investment Manager and Broker have been active in reshaping the investor base through proactive marketing initiatives, as well as providing managed liquidity through small tender offers. As a result, the Shareholder register has diversified significantly. Combined with maintaining good ongoing investor relations and investment performance, the Board believes that this reshaped investor base should reduce the discount volatility over time.

Based on this assessment, the Directors are confident that the Company’s investment approach, portfolio management and balance sheet approach will ensure that the Company will be able to continue in operation and meet its liabilities as they fall due over the period to 30 June 2019.

Going Concern

A continuation vote is proposed at each Annual General Meeting of the Company. In the event that any such resolution is not passed, then the Directors will be required to bring forward proposals to liquidate, open-end or otherwise reconstruct the Company. The Directors have considered the application of the Statement of Recommended Practice for Financial Statements of Investment Trust Companies and Venture Capital Trusts, which states that, even if an investment company is approaching a wind-up and shareholders have yet to vote on the issue and provided that the Board has not concluded that there is no realistic alternative to winding up the company, it will usually be more appropriate for the financial statements to be prepared on a going (rather than non-going) concern basis.

In assessing the Company’s ability to continue as a going concern the Directors have also considered the Company’s investment objective, detailed above, risk management policies, capital management (see Note 17 to the financial statements), the nature of its portfolio and expenditure projections and believe that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future. In addition, the Board has had regard to the Company’s investment performance, the price at which the Company’s shares trade relative to their NAV and ongoing investor interest in the continuation of the Company (including feedback from meetings and conversations with Shareholders by the Company’s advisers).

Based on their assessment and considerations, the Directors have concluded that they should continue to prepare the financial statements of the Company on a going concern basis and the financial statements have been prepared accordingly.

Resolution 11 at this year’s Annual General Meeting represents the annual continuation vote by Shareholders on the Company’s future. The Board believes this resolution to be in the best interests of the Company and its members as a whole, and strongly recommends that Shareholders should vote in favour of Resolution 11 as it intends to do in respect of its own beneficial shareholdings.

Environmental, Social and Governance Issues

As an investment trust, the Company has no employees, property or activities other than investment. The Company has no greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emission-producing sources under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013.

The Board is comprised entirely of non-executive Directors and the day-to-day management of the Company’s business is delegated to the Investment Manager (details of the Investment Management Agreement are set out in the full Annual Report). Therefore the Directors do not consider it necessary for the Company to have environmental, human rights or community policies in place.

However, in carrying out its activities and in its relationships with service providers, the Company aims to conduct itself responsibly, ethically and fairly. The Investment Manager aims to be a responsible investor and believes it is important to invest in companies that act responsibly in respect of environmental, ethical and social issues. The Investment Manager’s responsible investment policies and beliefs can be found on the Company’s website. The Investment Manager is a signatory of the UK Stewardship Code and aims to comply with the majority of its recommendations.

The Investment Manager has considerable experience in corporate engagement. Its corporate engagement principles and engagement policy can be found on the Company’s website.

Modern Slavery

The Company is not within the scope of the Modern Slavery Act 2015 because it has insufficient turnover and is therefore not obliged to make a human trafficking statement.

Diversity

The Board of Directors comprises four male directors and one female director and their biographical details are set out in the full Annual Report.

The Board’s policy on diversity, including gender, is to consider this during the recruitment process. The Board is committed to appointing the most appropriate candidate who is the best fit for the Company regardless of gender or other forms of diversity.

On behalf of the Board

Richard Hills
Chairman
20 September 2016

Extracts from the Report of the Directors

Directors

The Directors in office at the date of this report, all of whom are non-executives, are as follows:

Richard Hills (Chairman) – Independent Director
Sir Clive Thompson (Deputy Chairman) – Non-independent Director
William Barlow – Independent Director
Josephine Dixon – Independent Director
Richard Locke – Independent Director

Mr Ian Dighé retired as a Director on 11 November 2015 and Mr William Barlow was appointed on 1 February 2016.

Share Capital

On 22 January 2015, the Company applied to the UK Listing Authority (“UKLA”) for a block listing of 5,607,878 further Ordinary shares (the “January Block listing”), being the number of shares which the Company had authority to issue non-pre-emptively, following Shareholder approval at the Annual General Meeting held in 2014. The block listing became effective on 23 January 2015. 5,407,878 shares were issued during the year ended 30 June 2015 and a further 200,000 shares were issued during the current year. The January Block listing had been exhausted by 14 August 2015, raising total gross proceeds of £12,191,000.

The Company sought approval from Shareholders for the establishment of a share issuance programme in respect of 20 million shares (the “Share Issuance Programme”) at a general meeting held on 31 July 2015. A prospectus in respect of the Share Issuance Programme was published by the Company on 3 August 2015 which allowed the Company to issue shares on an ad hoc basis under the Share Issuance Programme in order to manage the premium to NAV at which the Company’s shares traded, to satisfy continuing market demand and to raise further money for investment in accordance with the Company’s published investment policy. Pursuant to the authority granted by Shareholders, the Company undertook an over-subscribed placing of 4 million shares on 4 August 2015.

The Company applied to the UKLA for a block listing of 6 million further shares,which became effective on 10 August 2015 (the “August Block listing”). 3,075,000 Ordinary shares have been issued bythe Company under the August Block listing.

In all, 7,275,000 Ordinary shares were issued by the Company prior to the closure of the Share Issuance Programme on 2 August 2016, raising total gross proceeds of £16,497,000.  No shares were repurchased during the year.

The Company’s issued share capital consists of 69,858,891 Ordinary shares as at 30 June 2016, each with a nominal value of 10 pence, representing the Company’s issued share capital. All shares have equal voting rights. No shares are held in treasury.

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards (“IFRS”) adopted by the European Union (“EU”).

Under company law the Directors must not approve the financial statements unless they are satisfied that they present fairly the financial position, the financial performance and cash flows of the Company for that period. In preparing these financial statements, the Directors are required to:

• select suitable accounting policies in accordance with IAS 8: Accounting Policies, Change in Accounting Estimates and Errors, and then apply them consistently;

• 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 IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company’s financial position and financial performance;

• state that the Company has complied with IFRS, subject to any material departures disclosed and explained in the financial statements;

• make judgements and estimates that are reasonable and prudent; and

• prepare the Financial Statements on the 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 to 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, to the best of their knowledge, state that:

• the financial statements, prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and return of the Company;

• the Strategic Report and Report of the Directors 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 Directors consider that 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.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

On behalf of the Board

Richard Hills
Chairman
20 September 2016

NON-STATUTORY ACCOUNTS

The financial information set out below does not constitute the Company’s statutory accounts for the year ended 30 June 2016 and 30 June 2015 but is derived from those accounts. Statutory accounts for 2015 will be delivered to the Registrar of Companies in due course. The Auditor has reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditor’s report can be found in the Company’s full Annual Report and Accounts at http://www.strategicequitycapital.com/.

STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30 June 2016

Year ended 30 June 2016 Year ended 30 June 2015


Note
Revenue 
return 
£’000 
Capital 
return 
£’000 

Total 
£’000 
Revenue
return
£’000
Capital 
return 
£’000

Total 
£’000
Investments
(Losses)/gains on investments held at fair value through profit or loss 8 (13,784) (13,784) - 26,992 26,992
(13,784) (13,784) - 26,992 26,992
Income
Dividends 2 2,306  2,306  2,142 223 2,365
Interest 2 74  74  34 - 34
Other Income 21  21  - - -
Total income 2,401  2,401  2,176 223 2,399
Expenses
Investment Manager’s fee 3 (1,419) (1,419) (1,064) - (1,064)
Investment Manager’s performance fee 3 - (2,371) (2,371)
Other expenses 4 (632) (632) (532) (67) (599)
Total expenses (2,051) (2,051) (1,596) (2,438) (4,034)
Net return/(loss) before taxation 350  (13,784) (13,434) 580 24,777 25,357

Taxation

5

(48)


(48)

(5)

-

(5)
Net return/(loss) and total comprehensive income for the year 302  (13,784) (13,482) 575 24,777 25,352
pence  pence  pence  pence pence pence
Return per Ordinary share
Basic and diluted 7 0.44  (20.07) (19.63) 0.99 42.77 43.76

The total column of this statement represents the Statement of comprehensive income. The supplementary revenue and capital return columns are both prepared under guidance published by the AIC. All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year.


STATEMENT OF CHANGES IN EQUITY
for the year ended 30 June 2016


 
Note

Share
capital
£'000
Share
premium
account
£'000

Special
reserve
£'000

Capital
reserve
£'000
Capital
redemption
reserve
£’000

Revenue
reserve
£'000


Total 
£'000
For the year ended 30 June 2016
1 July 2015 6,258  16,330  38,932  71,358  2,264  1,100  136,242 
Net (loss)/return and total comprehensive income for the year (13,784) 302  (13,482)
Dividends paid 6 (534) (534)
Share Issues 728  15,769  16,497 
Share issue costs (362) (362)
30 June 2016 6,986  31,737  38,932  57,574  2,264  868  138,361 
For the year ended 30 June 2015
1 July 2014 5,955 5,246 42,650 46,581 2,026 971 103,429
Net return and total comprehensive income for the year - - - 24,777 - 575 25,352
Dividends paid 6 - - - - - (446) (446)
Share issues 541 11,171 - - - - 11,712
Share issue costs - (117) - - - - (117)
Shares bought back for cancellation & treasury (238) - (3,900) - 238 - (3,900)
Shares sold from treasury - 30 182 - - - 212
30 June 2015 6,258 16,330 38,932 71,358 2,264 1,100 136,242

The notes form part of these financial statements.

BALANCE SHEET
for the year ended 30 June 2016



Note
30 June 
2016 
£’000 
30 June
2015
£’000
Non-current assets
Investments held at fair value through profit or loss 8 125,157  121,439
Current assets
Trade and other receivables 10 356  363
Cash and cash equivalents 14 13,303  17,312
13,659  17,675
Total assets 138,816  139,114
Current liabilities
Trade and other payables 11 455  2,872
Total assets less current liabilities 138,361  136,242
Net assets 138,361  136,242
Capital and reserves:
Share capital 12 6,986  6,258
Share premium account 13 31,737  16,330
Special reserve 13 38,932  38,932
Capital reserve 13 57,574  71,358
Capital redemption reserve 13 2,264  2,264
Revenue reserve 13 868  1,100
Total shareholders’ equity 138,361  136,242
pence  pence
Net asset value per share
Basic 15 198.06  217.69
number number
Shares in issue
Ordinary shares 12 69,858,891  62,583,891

The financial statements were approved by the Board of Directors on 20 September 2016. They were signed on its behalf by

Richard Hills
Chairman
20 September 2016

Company Number: 05448627

The notes form part of these financial statements.

STATEMENT OF CASH FLOWS
for the year ended 30 June 2016



Note
Year ended 
30 June 2016 
£’000 
Year ended 
30 June 2015 
£’000
Operating activities
Net (loss)/return before taxation (13,434) 25,357
Adjustment for losses/(gains) on investments 13,784  (26,992)
Irrecoverable withholding tax (48) (5)
Share buy back expenses 67
Operating cash flows before movements in working capital 302  (1,573)
Decrease/(increase) in receivables 37  (27)
(Decrease)/increase in payables (2,324) 2,130
Purchases of portfolio investments (43,867) (44,643)
Sales of portfolio investments 26,243  42,335
Net cash flow from operating activities (19,609) (1,778)
Financing activities
Equity dividend paid 6 (534) (446)
Shares bought back in the year 13 (3,900)
Shares issued 16,497  11,712
Shares sold from treasury 13 212
Share issue expenses 13 (362) (117)
Tender offer expenses (67)
Net cash flow from financing activities 15,601  7,394
(Decrease)/increase in cash and cash equivalents for year (4,008) 5,616
Cash and cash equivalents at start of year 17,312  11,696
Revaluation of foreign currency balances 14 (1) -
Cash and cash equivalents at 30 June 14 13,303  17,312

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016

1.1 Corporate information

Strategic Equity Capital plc is a public limited company incorporated and domiciled in the United Kingdom and registered in England and Wales under the Companies Act 2006 whose shares are publicly traded. The Company is an investment company as defined by Section 833 of the Companies Act 2006.

The Company carries on business as an investment trust within the meaning of Sections 1158/1159 of the UK Corporation Tax Act 2010.

The financial statements of Strategic Equity Capital plc for the year ended 30 June 2016 were authorised for issue in accordance with a resolution of the Directors on 20 September 2016.

1.2 Basis of preparation and statement of compliance

The financial statements of the Company have been prepared in accordance with IFRS issued by the International Accounting Standards Board (as adopted by the EU), interpretations issued by the International Financial Reporting Interpretations Committee, and applicable requirements of United Kingdom company law, and reflect the following policies which have been adopted and applied consistently. Where presentational guidance set out in the Statement of Recommended Practice (“SORP”) for investment trusts issued by the AIC (as revised in 2014) is applied to the extent it is consistent with the requirements of IFRS, the Directors have sought to prepare financial statements on a basis compliant with the recommendations of the SORP.

The financial statements of the Company have been prepared on a going concern basis, on the assumption the continuation vote is passed by Shareholders at the forthcoming Annual General Meeting.

Convention

The financial statements are presented in Sterling, being the currency of the Primary Economic Environment in which the Company operates, rounded to the nearest thousand, unless otherwise stated to the nearest one pound.

Segmental reporting

The Directors are of the opinion that the Company is engaged in a single segment of business, being investment business.

1.3 Accounting policies

Investments

All investments held by the Company are classified as “fair value through profit or loss”. As the Company’s business is investing in financial assets with a view to profiting from their total return in the form of interest, dividends or increase in fair value, listed equities, unlisted equities and fixed income securities are designated as fair value through profit or loss on initial recognition. The Company manages and evaluates the performance of these investments on a fair value basis in accordance with its investment strategy. Investments are initially recognised at cost, being the fair value of the consideration.

After initial recognition, investments are measured at fair value, with movements in fair value of investments and impairment of investments recognised in the Statement of comprehensive income and allocated to the capital column.

For investments actively traded in organised financial markets, fair value is generally determined by reference to Stock Exchange quoted market bid prices at the close of business on the Balance sheet date, without adjustment for transaction costs necessary to realise the asset.

In respect of unquoted instruments, or where the market for a financial instrument is not active, fair value is established by using recognised valuation methodologies, in accordance with International Private Equity and Venture Capital (“IPEV”) Valuation Guidelines. New investments are initially carried at cost, for a limited period, being the price of the most recent investment in the investee company. This is in accordance with IPEV Guidelines as the cost of recent investments will generally provide a good indication of fair value. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

Trade date accounting

All “regular way” purchases and sales of financial assets are recognised on the “trade date” i.e. the day that the Company commits to purchase or sell the asset. Regular way purchases, or sales, are purchases or sales of financial assets that require delivery of the asset within a time frame generally established by regulation or convention in the market place.

Income

Dividends receivable on quoted equity shares are taken into account on the ex-dividend date. Where no ex-dividend date is quoted, they are brought into account when the Company’s right to receive payment is established. Other investment income and interest receivable are included in the financial statements on an accruals basis. Dividends receivable from UK and overseas registered companies are accounted for gross of tax where applicable. Where withholding tax is paid, the amount will be recognised in the revenue column of the Statement of comprehensive income and deemed as irrecoverable. For dividends which are of a capital nature, they are recognised in the capital column of the Statement of comprehensive income. Income on fixed income securities is recognised on a time apportionment basis, using the effective interest rate method, from the date of purchase.

Expenses

All expenses are accounted for on an accruals basis. The Company’s investment management and administration fees, finance costs (calculated using the effective interest rate method) and all other expenses are charged through the Statement of comprehensive income. These expenses are allocated 100% to the revenue column of the Statement of comprehensive income. The Investment Manager’s performance fee is allocated 100% to the capital column of the Statement of comprehensive income. In the opinion of the Directors the fee is awarded entirely for the capital performance of the portfolio. Costs incurred in relation to the tender offer process have been recognised on an accruals basis and allocated to the capital column of the Statement of comprehensive income.

Cash and cash equivalents

Cash and cash equivalents which are held to maturity are carried at fair value. Cash and cash equivalents are defined as cash in hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value. Bank overdrafts that are repayable on demand are included as a component of cash and cash equivalents for the purpose of the Statement of cash flows and Balance sheet.

Taxation

Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the Statement of comprehensive income except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the Balance sheet date, and any adjustment to tax payable in respect of previous years. The tax effect of different items of expenditure is allocated between the revenue and capital columns of the Statement of comprehensive income on the same basis as the particular item to which it relates, using the Company’s effective rate of tax.

Deferred income tax is provided on all temporary differences at the Balance sheet date between the tax basis of assets and liabilities and their carrying amount for financial reporting purposes. Deferred income tax liabilities are measured on an undiscounted basis at the tax rates that are expected to apply to the year when the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the Balance sheet date. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.

Dividends payable to shareholders

Dividends to Shareholders are recognised as a deduction from equity in the year in which they have been declared and approved by the shareholders. The final dividend is proposed by the Board and is not declared until approved by the Shareholders at the Annual General Meeting following the year end. Dividends are charged to the Statement of changes in equity.

Share issues and related accounts

Incremental costs directly attributable to the issuance of shares are recognised as a deduction from share premium arising from the transactions.

Share buybacks for capital reserve

When share capital is repurchased, the amount of the consideration paid is recognised as a deduction from special reserve.

Share buybacks for treasury

Shares which are repurchased are either classified as treasury shares and are presented as a deduction from special reserve or are cancelled.

Foreign currency transactions

The currency of the Primary Economic Environment in which the Company operates is Sterling which is also the presentational currency. Transactions denominated in foreign currencies are translated into Sterling at the rates of exchange ruling at the date of the transaction.

Investments and other monetary assets and liabilities are converted to Sterling at the rates of exchange ruling at the Balance sheet date. Exchange gains and losses relating to investments and other monetary assets and liabilities are taken to the capital column of the Statement of comprehensive income.

Critical accounting estimates and assumptions

The preparation of financial statements requires the Company to make estimates and assumptions that affect items reported in the Balance sheet and Statement of comprehensive income at the date of the financial statements. Although the estimates are based on best knowledge of current facts, circumstances, and, to some extent, future events and actions, the Company’s actual results may ultimately differ from those estimates, possibly significantly.

In respect of unquoted instruments, or where the market for a financial instrument is not active, fair value is established by using recognised valuation methodologies, in accordance with IPEV Valuation Guidelines. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

1.4 New standards and interpretations not applied

IASB and IFRIC have issued the following standards and interpretations which are not effective for the year ended 30 June 2016 and have not been applied in preparing these financial statements.

International Accounting Standards (IAS/IFRS) Effective date*
IAS 34 Interim Financial Reporting 1 January 2016
IFRS 9 Financial Instruments: Classification & Measurement 1 January 2018
*Years beginning on or after

The Directors do not anticipate that the intial adoption of the above standards will have a material impact in the period of initial application.

2 Income



Year ended 30 June 2016


Year ended 30 June 2015
Revenue
return
£'000
Capital
return
£’000

Total
£’000
Revenue
return
£’000
Capital
return
£’000

Total
£’000
Income from investments:
UK dividend income 2,048 - 2,048 1,998 223 2,221
Overseas dividend income 258 - 258 144 - 144
2,306 - 2,306 2,142 223 2,365
Liquidity interest 74 - 74 34 - 34
2,380 - 2,380 2,176 223 2,399
Other Income:
Underwriting commission

21

-

21

-

-

-
2,401 - 2,401 2,176 223 2,399
Total income comprises:
Dividends 2,306 - 2,306 2,142 223 2,365
Interest 74 - 74 34 - 34
Underwriting commission 21 - 21 - - -
2,401 - 2,401 2,176 223 2,399
Income from investments:
Listed UK 2,048 - 2,048 1,998 223 2,221
Listed overseas 258 - 258 144 - 144
Liquidity interest 74 - 74 34 - 34
2,380 - 2,380 2,176 223 2,399

3 Investment Manager’s fee

Year ended 30 June 2016 Year ended 30 June 2015
Revenue
return
£’000
Capital
return
£’000

Total
£’000
Revenue
return
£’000
Capital
return
£’000

Total
£’000
Management fee 1,419 - 1,419 1,064 - 1,064
Performance fee - - - - 2,371 2,371
1,419 - 1,419 1,064 2,371 3,435

A basic management fee is payable to the Investment Manager at the lower of (i) the annual rate of 1.0% of the adjusted NAV of the Company or (ii) 1.0% per annum of the market capitalisation of the Company. The basic management fee accrues weekly and is payable quarterly in arrears. The Investment Manager is also entitled to a performance fee, details of which are given in the Strategic Report above.

4 Other expenses

Year ended 30 June 2016 Year ended 30 June 2015
Revenue
return
£’000
Capital 
return 
£’000 

Total
£’000
Revenue
return
£’000
Capital  
return  
£’000 

Total
£’000
Secretarial services 98 - 98 90 90
Current Auditors’ remuneration for:
Audit services* 20 - 20 - -
Previous Auditors’ services 2 - 2 23 23
Directors’ remuneration 129 - 129 126 126
Other expenses 383 - 383 293 67+ 360
632 - 632 532 67  599

All expenses include VAT where applicable, apart from audit services which is shown net.

* No non-audit fees were incurred during the year.

+ Expenses incurred in relation to the tender offer process.

5 Taxation

Year ended 30 June 2016 Year ended 30 June 2015
Revenue
return
£’000
Capital
return
£’000

Total
£’000
Revenue
return
£’000
Capital
return
£’000

Total
£’000
Corporation tax at 20%
(2015: 20.75%)
- - - - - -
Overseas dividend withholding tax* 48 - 48 5 - 5
48 - 48 5 - 5

The Company is subject to corporation tax at 20.0%. As at 30 June 2016 the total current taxation charge in the Company’s revenue account is lower than the standard rate of corporation tax in the UK (20.0%). The differences are explained below:

* IFG Group withholding tax paid £48,094 (2015: £5,460).

Year ended 30 June 2016 Year ended 30 June 2015
Revenue 
return 
£’000 
Capital 
return 
£’000 

Total 
£’000 
Revenue 
return 
£’000
Capital 
return 
£’000

Total 
£’000
Net return on ordinary activities before taxation 350  (13,784) (13,434) 580 24,777 25,357
Theoretical tax at UK corporation tax rate of 20% (2015: 20.75%) 70  (2,757) (2,687) 120 5,141 5,261
Effects of:
- UK dividends that are not taxable (410) (410) (415) (46) (461)
- Overseas dividends that are not taxable (52) (52) (30) - (30)
- Unrelieved expenses 392  392  321 492 813
- Overseas dividend withholding tax 48  48  5 - 5
- Non-taxable investment gains 2,757  2,757  - (5,601) (5,601)
- Disallowable expenses 4 14 18
48  48  5 - 5

Factors that may affect future tax charges

At 30 June 2016, the Company had no unprovided deferred tax liabilities (2015: £nil). At that date, based on current estimates and including the accumulation of net allowable losses, the Company had unrelieved losses of £16,135,000 (2015: £14,178,000) that are available to offset future taxable revenue. A deferred tax asset of £3,227,000 (2015: £2,836,000) has not been recognised because the Company is not expected to generate sufficient taxable income in future periods in excess of the available deductible expenses and accordingly, the Company is unlikely to be able to reduce future tax liabilities through the use of existing surplus losses.

Deferred tax is not provided on capital gains and losses arising on the revaluation or disposal of investments because the Trust meets (and intends to continue for the foreseeable future to meet) the conditions for approval as an Investment Trust company.

6 Dividends

Under the requirements of Sections 1158/1159 of the Corporation Tax Act 2010 no more than 15% of total income may be retained by the Company. These requirements are considered on the basis of dividends declared in respect of the financial year as shown below.

30 June 2016 
£’000 
30 June 2015 
£’000
Final dividend proposed of 0.78p (2015: 0.78p) per share (545) (488)

Dividends have been solely paid out of the Revenue.

The following dividends were declared and paid by the Company in the financial year:

30 June 2016
£’000
30 June 2015
£’000
Final dividend 0.78p per share (2015: 0.78p) 534 446

The proposed dividend of £488,000 for the year ended 30 June 2015 differs from the £534,000 dividend paid because 5,900,000 new shares were issued between the year end and the dividend ex-date.

7 Return per Ordinary share


 
Net 
return 
£’000 
Year ended
30 June 2016
Weighted
average
number of
Ordinary
shares

 
Per 
share 
pence 

 
Net
return
£’000
Year ended
30 June 2015
Weighted
average
number of
Ordinary
shares

 
Per
share
pence
Total
Return per share (13,482) 68,687,443 (19.63) 23,352 57,935,809 43.76
Revenue
Return per share 302  68,687,443 0.44  575 57,935,809 0.99
Capital
Return per share (13,784) 68,687,443 (20.07) 24,777 57,935,809 42.77

8 Investments

30 June
2016

£’000
30 June 2015
£’000
Investment portfolio summary
Listed investments at fair value through profit or loss 123,509 119,597
Unlisted investments at fair value through profit or loss 1,648 1,842
125,157 121,439

   


Listed 
£’000 

Unlisted 
£’000 
30 June 2016 
Total 
£’000 
Analysis of investment portfolio movements
Opening book cost 72,371  163 72,534 
Opening investment holding gains 47,226  1,679 48,905 
Opening valuation 119,597  1,842 121,439 
Movements in the year:
Purchases at cost 43,774  43,774 
Sales – proceeds (25,470) (803) (26,273)
         – realised gains on sales 8,988  746  9,734 
Decrease in unrealised appreciation (23,380) (137) (23,517)
Closing valuation 123,509  1,648  125,157 
Closing book cost 99,663  106  99,769 
Closing investment holding gains 23,846  1,542  25,388 
123,509  1,648  125,157 

A list of the top 10 portfolio holdings by their aggregate market values is given in the Investment Manager’s report above. Transaction costs incidental to the acquisitions of investments totalled £225,000 (2015: £183,000) and disposals of investments totalled £50,000 (2015: £49,000) respectively for the year.

30 June 2016 
Total 
£’000 
30 June 
2015 
Total 
£’000
Analysis of capital gains
Gains on sale of investments 9,734  15,753
Foreign exchange gains on purchase of investments 15
Foreign exchange losses on settlement at bank (1) (24)
Movement in investment holding gains (23,517) 11,248
(13,784) 26,992

The Company is required to classify fair value measurements using a fair value hierarchy that reflects the subjectivity of the inputs used in measuring the fair value of each asset. The fair value hierarchy has the following levels:

Investments whose values are based on quoted market prices in active markets are classified within level 1 and include active listed equities. The Company does not adjust the quoted price for these instruments.

The definition of level 1 inputs refers to ‘active markets’, which is a market in which transactions take place with sufficient frequency and volume for pricing information to be provided on an ongoing basis. Due to the liquidity levels of the markets in which the Company trades, whether transactions take place with sufficient frequency and volume is a matter of judgement, and depends on the specific facts and circumstances. The Manager has analysed trading volumes and frequency of the Company’s portfolio and has determined these investments as level 1 of the hierarchy.

Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within level 2. As level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information.

Level 3 instruments include private equity, as observable prices are not available for these securities the Company has used valuation techniques to derive the fair value. In respect of unquoted instruments, or where the market for a financial instrument is not active, fair value is established by using recognised valuation methodologies, in accordance with IPEV Valuation Guidelines.

Level 3 investments consist of an investment in a private equity fund of funds managed by 3i (‘the Fund’) and is valued at the Company’s attributable proportion of the reported Fund Net Asset Value in accordance with the IPEV Valuation Guidelines. The Net Asset Value of the Fund is derived from the Fair Value of the underlying funds based on the most recent financial statements of the underlying funds adjusted for any subsequent cash movements to and from the underlying funds.

The underlying funds primarily invest in private companies which are recorded at cost or Fair Value derived from private equity valuation models and techniques. The main inputs into the valuation models of the underlying funds include industry performance, company performance, quality of management, the price of the most recent financing round or prospects for the next financing round, exit opportunities which are available, liquidity preference and net present value analysis.

The level in the fair value hierarchy within which the fair value measurement is categorised is determined on the basis of the lowest level input that is significant to the fair value of the investment.

The following table analyses within the fair value hierarchy the Company’s financial assets and liabilities (by class) measured at fair value at 30 June 2016.

Financial instruments at fair value through profit and loss

Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
30 June 2016
Equity investments and limited partnership interests 123,509 - 1,648 125,157
Liquidity funds - 12,091 - 12,091
Total 123,509 12,091 1,648 137,248

   

30 June 2015
Equity investments and limited partnership interests 119,597 - 1,842 121,439
Liquidity funds - 16,946 - 16,946
Total 119,597 16,946 1,842 138,358

There were no transfers between levels for the year ended 30 June 2016 (2015: none).

The following table presents the movement in level 3 instruments for the year ended 30 June 2016 by class of financial instrument.

Total 
equity 
investments 
£’000 
Opening balance at 1 July 2015 1,842
Proceeds from disposals during the year (803)
Gains on disposals during the year included in the Statement of Comprehensive Income 746
Total losses for the year included in the Statement of Comprehensive Income (137)
Closing balance 1,648

9 Significant interests

The Company had holdings of 3% or more in the following companies:

Name of
investment
Class of
Share
30 June 2016
Percentage held
Tribal Group Ordinary 9.35
Goals Soccer Centre Ordinary 7.50
Servelec Group Ordinary 6.99
Wilmington Group Ordinary 5.43
IFG Group Ordinary 5.14
OMG Ordinary 3.79
Gooch & Housego Ordinary 3.50
E2V Technologies Ordinary 3.09

10 Trade and other receivables

30 June 2016
£’000
30 June 2015
£’000
UK dividends receivable 28 72
Amount due from brokers 302 272
Overseas dividends receivable - 9
Accrued income 1 -
Other receivables and prepayments 25 10
356 363

11 Trade and other payables

30 June 2016
£’000
30 June 2015
£’000
Amounts due to brokers for settlement of trades - 93
Investment Manager’s performance fee - 2,371
Other payables and accruals 455 408
455 2,872

12 Nominal share capital

Number £’000
Allotted, called up and fully paid Ordinary shares of 10p each:
At 1 July 2015 62,583,891 6,258
Share issues 7,275,000 728
Ordinary shares in circulation at  30 June 2016 69,858,891 6,986

13 Reserves


 
For the year
ended 30
June 2016


Share 
premium 
account 
£’000 

 
Special
reserve
£’000
Capital
reserve
arising on
investments
sold
£’000
Capital 
reserve 
arising on 
investments 
held 
£’000 


Capital 
redemption 
reserve 
£’000 

 
Revenue 
reserve 
£’000 

Opening balance

16,330 

38,932

22,454

48,904 

2,264 

1,100 

Net gain on realisation of investments

 
-

 
-

 
9,733

 
-

 
-

 
-

Decrease in unrealised appreciation

 
-

 
-

 
-

 
(23,517)

 
(23,517)

 
-

Share issues

15,769

-

-

-

-

-
Share issue costs (362) - - - - -
Net return for the year
-

-

-

-

-

302

Dividends paid

-

-

-

-

-

(534)
As at
30 June 2016
31,737  38,932 32,187 25,387  2,264  868 

   


 
For the year
ended 30
June 2015

 
Share
premium
£’000

 
Special
reserve
£’000
Capital 
reserve 
arising on 
investments 
sold 
£’000
Capital
reserve
arising on
investments
held
£’000


Capital
redemption
reserve
£’000

 
Revenue
reserve
£’000
Opening balance 5,246  42,650  8,924  37,657 2,026 971 
Net gain on realisation of investments

-


-


15,753


-


-


-

Foreign exchange losses on settlement


-


-


(8)


-


-


-

Increase in unrealised appreciation

 
-

 
-

 
-

 
11,247

 
-

 
-
Share Tender Offer expenses
-

-

(67)

-

-
-
Shares Issues 11,171 - - - - -
Share issue costs (117) - - - - -
Shares sold from treasury
30

182

-

-

-

-
Shares bought back for cancellation & treasury

-


(3,900)


-


-


238


-
Capital dividend - - 223 - - -
Investment Manager’s performance fee

-


-


(2,371)


-


-


-
Net Return for the year
-

-

-

-

-

575
Dividends paid - - - - - (446)
As at
30 June 2015

16,330

38,932

22,454

48,904

2,264

1,100

14 Reconciliation of net cash flow to net funds

30 June 2016 
£’000 
30 June 2015
£’000
Opening net funds 17,312  11,696
(Decrease)/increase in cash and cash equivalents in year (4,008) 5,616
Non cash movement:
  • Foreign exchange losses on bank
(1) -
Closing net funds 13,303  17,312

   

At
30 June 2015
£’000
Net 
cash flow 
£’000
At
30 June 2016
£’000
Cash at bank 366 846 1,212
Liquidity funds 16,946 (4,855) 12,091
17,312 (4,009) 13,303

15 Net asset value per Ordinary share

The net asset value per Ordinary share is based on net assets of £138,361,000 (2015: £136,242,000) and on 69,858,891 (2015: 62,583,891) Ordinary shares, being the number of shares in issue at the year end.

16 Capital commitments and contingent liabilities

The Company has a commitment to invest €1,560,000 (2015: €1,560,000) in Vintage 1, details of which are given in the Investment Management Report above.

17 Analysis of financial assets and liabilities

The Company’s financial instruments comprise securities, cash balances (including amounts held in liquidity funds) and debtors and creditors that arise from its operations, for example, in respect of sales and purchases awaiting settlement and debtors for accrued income.

The Company has little exposure to credit and cash flow risk. Credit risk is due to uncertainty in a counterparty’s ability to meet its obligations. The Company has no exposure to debt purchases and ensures that cash at bank is held only with reputable banks with high quality external credit ratings. All the assets of the Company which are traded on listed exchanges are held by The Northern Trust Company, the Company’s Custodian. Bankruptcy or insolvency of the Custodian may cause the Company’s rights with respect to securities held by the Custodian to be delayed or limited. The Board reviews the Custodian’s annual controls report and the Investment Manager’s management of the relationship with the Custodian.

The Company invests in markets that operate DVP (Delivery versus Payment) settlement. The process of DVP mitigates the risk of losing the principal of a trade during the settlement process. The Manager continuously monitors dealing activity to ensure best execution, a process that involves measuring various indicators including the quality of trade settlement and incidence of failed trades. Counterparty lists are maintained and adjusted accordingly.

Due to timings of investment and distributions, at any one time the Company may hold significant amounts of surplus cash. Any funds in excess of those required to meet daily operational requirements are invested in Institutional Liquidity Funds. These are highly liquid assets that are redeemable on less than 24 hours notice. The Company only invests in funds that have an AAA rating and the funds’ performance is monitored by the Investment Manager. As at 30 June 2016 the Company had £12,091,000 (2015: £16,946,000) invested in such funds. The maximum exposure to credit risk is £13,659,000 (2015: £17,675,000). There are no assets past due or impaired (2015: none).

The Company finances its operations through its issued capital and existing reserves.

The principal risks the Company faces in its investment portfolio management activities are:

– market price risk, i.e. the movements in value of investment holdings caused by factors other than interest rate movement;

– interest rate risk;

– liquidity risk; and

– foreign currency risk.

The Investment Manager’s policies for managing these risks are summarised below and have been applied throughout the year:

Policy

(i) Market price risk

The Company’s investment portfolio is exposed to market price fluctuations which are monitored by the Investment Manager.

Adherence to the investment objectives and the limits on investment set by the Company mitigates the risk of excessive exposure to any one particular type of security or issuer.

If the investment portfolio valuation fell by 20% from the 30 June 2016 valuation (2015: 20%), with all other variables held constant, there would have been a reduction of £25,031,000 (2015: £24,288,000) in the return after taxation and equity. An increase of 20% in the investment portfolio valuation would have had an equal and opposite effect on the return after taxation and equity. The calculations are based on the fair value of investments at 30 June 2016 and these may not be representative of the year as a whole.

(ii) Cash flow interest rate risk exposure

The Company’s bank accounts earn interest at a variable rate which is subject to fluctuations in interest rates.

The Company holds cash in liquidity funds. Income from these funds is dependent on the performance of the funds, which is subject to fluctuations in interest rates (along with other factors).

If interest rates had reduced by 0.5% from those obtained at 30 June 2016 (2015: 0.5%), it would have the effect, with all other variables held constant, of reducing the net return after taxation and equity by £73,000 (2015: £62,000). If there had been an increase in interest rates of 0.5% there would have been an equal and opposite effect in the net return after taxation and equity. The calculations are based on average cash at bank and liquidity funds for the year ended 30 June 2016 and these may not be representative of the year as a whole.

Non-interest rate risk exposure

The remainder of the Company’s portfolio and current assets and liabilities are not subject directly to interest rate risk (2015: same).

Details of the interest rate risk profile of the Company are shown in the following tables.

The interest rate risk profile of the Company’s financial assets at 30 June 2016 was:


 
Total
£’000

No interest
rate risk
financial
assets
£’000
Cash flow
interest
rate risk
financial
assets
£’000
Sterling
Listed investments 123,509 123,509 -
Liquidity funds 12,091 - 12,091
Cash 1,212 - 1,212
Receivables* 331 331 -
Closing net funds 137,143 123,840 13,303
Euros
Unlisted investments 1,648 1,648 -
1,648 1,648 -
Total 138,791 125,488 13,303

* Receivables exclude prepayments which under IAS 32 are not classed as financial assets.

The interest rate risk profile of the Company’s financial assets at 30 June 2015 was:


 
Total
£’000

No interest
rate risk
financial
assets
£’000
Cash flow
interest
rate risk
financial
assets
£’000
Sterling
Listed investments 119,597 119,597 -
Liquidity funds 16,946 - 16,946
Cash 366 - 366
Receivables* 353 353 -
137,262 119,950 17,312
Euros
Unlisted investments 1,842 1,842 -
1,842 1,842 -
Total 139,104 121,792 17,312

* Receivables exclude prepayments which under IAS 32 are not classed as financial assets.

The interest rate risk profile of the Company’s financial liabilities at 30 June 2016 was:


 
Total
£’000
No interest
rate risk
financial
liabilities
£’000
Sterling
Creditors 455 455

All amounts were due in three months or less for a consideration equal to the carrying value of the creditors shown above.

The interest rate risk profile of the Company’s financial liabilities at 30 June 2015 was:


 
Sterling

 
Total
£’000
No interest
rate risk
financial
liabilities
£’000
Creditors 2,872 2,872

All amounts were due in three months or less for a consideration equal to the carrying value of the creditors shown above.

(iii) Liquidity risk

The Investment Manager may invest on behalf of the Company in securities which are not readily tradable, which can lead to volatile share price movements. It may be difficult for the Company to sell such investments. Although the Company’s AIM quoted investments and unquoted investments are less liquid than securities listed on the London Stock Exchange, the Board seeks to ensure that an  appropriate proportion of the Company’s investment portfolio is invested in cash and readily realisable investments, which are sufficient to meet any funding requirements that may arise.

(iv) Foreign currency risk

The Company invests in a private equity fund (Vintage 1) denominated in Euros and a dual listed Irish security (IFG Group), these are the only non-Sterling assets. The Company is, therefore, subject to foreign currency risk.

During the year the Sterling/Euro exchange rate fluctuated 20.25% between a low of 1.1979 on 27 June 2016 and a high of 1.4405 on 17 July 2015, before closing at 1.2033 on 30 June 2016 (2015: 1.4103).

If the Sterling/Euro exchange rate had decreased by 15% from that obtained at 30 June 2016 (2015: 15%), it would have the effect, with all other variables held constant, of increasing net profit and equity Shareholders’ funds by £1,481,000 (2015: £1,279,000). An increase of 15% (2015: 15%) would have decreased net profit and equity Shareholders’ funds by £1,094,000 (2015: £946,000). The calculations are based on the value of the investment in Vintage 1 and IFG Group as at 30 June 2016 and this may not be representative of the year as a whole. The balance exposed to foreign currency risk is £8,390,000 (2015: £7,249,000).

Fair values of financial assets and financial liabilities

The carrying value of the financial assets and liabilities of the Company is equivalent to their fair value (2015: same).

Managing Capital

Capital structure

The Company is funded through Shareholders’ equity and cash reserves. The Company’s Articles of Association permit the Board to borrow up to 25% of the Company’s net asset value at the time of borrowing. Capital is managed so as to maximise the return to Shareholders while maintaining an appropriate capital base to allow the Company to operate effectively in the marketplace and to sustain future development of the business. The Company pays such dividends as are required to maintain its investment trust status, and may also from time to time return capital to Shareholders through the purchase of its own shares at a discount to net asset value.

Capital requirement

The Company operates so as to qualify as a UK investment trust for UK tax purposes. Although no longer a requirement for obtaining and retaining investment trust status, it remains the Company’s investment policy that the maximum investment in any single investee company will be no more than 15% of the Company’s investments at the time of investment.

The Company’s capital requirement is reviewed regularly by the Board.

18 Related party transactions and transactions with the Investment Manager

The Investment Manager may draw upon advice from the IAP of which Sir Clive Thompson, a Director of the Company, is a member. The IAP was established to provide advice to the Investment Manager in relation to the strategy, operations and management of potential investee companies.

The amounts payable to the Investment Manager are disclosed in Note 3 above. The amount due to the Investment Manager for management fees at 30 June 2016 was £350,000 (2015: £309,000). The amount due to the Investment Manager for performance fees at 30 June 2016 was £Nil (2015: £2,371,000).

Fees paid to Directors are disclosed in the Directors' Remuneration Report in the full Annual Report. Full details of Directors’ interests can also be found there.

Annual General Meeting

The Company's Annual General Meeting will be held at the offices of Canaccord Genuity Limited, 88 Wood Street, London EC2V 7QR on 9 November 2016 at 12 noon.

The notice of this meeting can be found in the full Annual Report on the Company’s website http://www.strategicequitycapital.com/

National Storage Mechanism

A copy of the Annual Report and Financial Statements will be submitted shortly to the National Storage Mechanism (“NSM”) and will be available for inspection at the NSM, which is situated at: www.morningstar.co.uk/uk/NSM

ENDS

Neither the contents of the Company’s website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of, this announcement.