JZ Capital Partners Ltd - Annual Financial Report

JZ Capital Partners, the London listed fund that invests in US and European micro-cap companies and US real estate, announces its annual results for the twelve-month period ended 28 February 2018.

Results and Portfolio Highlights

·      NAV of $837.6 million (FYE 28/02/17: $848.8 million)

·      NAV per share of $9.98 (FYE 28/02/17: $10.12)

·      Total investments of $96.5 million, including: Felix Storch, ABTB (Taco Bell franchises) and properties in Brooklyn, New York and South Florida.

·      Realisation proceeds of $133.7 million, primarily through the sale of Factor Energia, Fidor Bank, K2 Towers and Neilsen-Kellerman.

·      As of 28 February 2018, the portfolio comprised:

o  US micro-cap: 21 businesses including four ‘verticals’ and 12 co-investments, across nine industries.

o  European micro-cap: 17 companies across six industries and seven countries.

o  US real estate: 59 properties across five major assemblages in New York and South Florida all in various stages of (re)/development.

·      JZCP made two significant post-period realisations (March 2018), both above net asset value: Paragon Water Systems and Bolder Healthcare Solutions.

·      Current and post-period realisations provide approximately $250 million[1] (including escrows and distributions) in gross proceeds to JZCP.

Outlook

·      Balance sheet remains strong with a healthy pipeline of realisation and investment opportunities over the next 12 months.

·      Renewed focus on rebalancing the Company’s debt maturity profile over the course of the next fiscal year.

·      Discussions underway with potential institutional joint venture partners to deleverage the real estate portfolio.

David Zalaznick, JZCP’s Founder and Investment Adviser, said: “We have made significant progress in realising portfolio assets, at or above NAV.

The positive uplifts to NAV from realisations over the past year were offset by pre-development and carrying costs in our real estate portfolio. However we are exploring partnerships with several institutional investors to reduce the impact of these costs going forward.

Our goal in the coming year is to continue to realise investments and use the proceeds to buy back stock, make new investments and pay down debt.”

David Macfarlane, Chairman of JZCP, said: “The Board is delighted with the level of investment and realisation activity during the period. The Company continues to make excellent progress in building a diversified portfolio of assets, both by geography and asset type. We look ahead to the rest of the year with continued confidence.”

Presentation details:

There will be an audiocast presentation for investors and analysts at 2pm UK (BST) / 9am US (EDT) on 22 May 2018. The presentation can be accessed via https://bit.ly/2rNx2bm and by dialing +44 (0)330 336 9411 (UK) or +1 323-794-2094 (US) with the participant access code 9762398.

A playback facility will be available two hours after the conference call concludes. This facility may be accessed via the following dial in details, using the same participant access code as above: +44 (0) 207 660 0134 (UK) or +1 719-457-0820 (US).

For further information:

Ed Berry / Kit Dunford                                                                         +44 (0) 20 3727 1046 / 1143

FTI Consulting

David Zalaznick                                                                                    +1 212 485 9410

Jordan/Zalaznick Advisers, Inc.

Paul Ford                                                                                              +44 (0) 1481 745383

JZ Capital Partners

About JZ Capital Partners

JZ Capital Partners (“JZCP”) is one of the oldest closed-end investment companies listed on the London Stock Exchange. It seeks to provide shareholders with a return by investing selectively in US and European microcap companies and US real estate. JZCP receives investment advice from Jordan/Zalaznick Advisers, Inc. (“JZAI”) which is led by David Zalaznick and Jay Jordan. They have worked together for more than 35 years and are supported by teams of investment professionals in New York, Chicago, London and Madrid. JZAI’s experts work with the existing management of micro-cap companies to help build better businesses, create value and deliver strong returns for investors. For more information please visit www.jzcp.com.

Chairman's Statement

I am pleased to report the results of JZ Capital Partners (“JZCP” or the “Company”) for the twelve-month period ended 28 February 2018.

Performance

The Company’s performance over the last twelve months was set against a backdrop of renewed business confidence and improving global growth outlook, whilst the year was also marked by a series of natural disasters, continued geopolitical tensions, and deep political divisions in many countries.

Global GDP growth experienced its broadest cyclical upswing since the start of the decade, boosted by a recovery in investment, global trade growth and higher employment levels.

Meanwhile, the US economy continued to gain momentum in 2017, delivering annual net growth of 2.7%, driven primarily by an uptick in consumer confidence, strong corporate profits and a booming stock market – currently the second-longest bull market in history.

In Europe, the economy ended 2017 with its strongest growth in almost seven years, boosted by an increase in service sector and manufacturing activity, and also reflects years of monetary stimulus employed by the ECB aimed at staving off deflation.

Within this market environment, the Board is pleased to announce that JZCP has made excellent progress in realising a series of investments (some post-period) at or above NAV. On a combined basis, these realisations have returned gross proceeds to JZCP of approximately $250.0 million and have contributed a combined net 55 cents in uplift to NAV during the fiscal year ended 28 February 2018.

Despite the uplifts from realisations over the past year, JZCP’s net asset value ("NAV") per share declined 1.4% from $10.12 to $9.98; the positive underlying performance of the US and European micro-cap portfolio was offset principally by the pre-development and carrying costs in our real estate portfolio.

Portfolio Update

It has been an active investment period for the Company, putting $96.5 million to work across our three major asset classes – whilst realising $133.7 million, primarily through the sale of Factor Energia (“Factor”), K2 Towers and Fidor Bank.

At the end of the period, the Company’s portfolio consisted of 38 US and European micro-cap businesses across nine industries and five primary real estate ‘assemblages’ (59 total properties) located in Brooklyn, New York and South Florida. The portfolio continues to become more diversified geographically across Western Europe with investments in Spain, Italy, Portugal, Luxembourg, Scandinavia and the UK.

US and European Micro-cap

The Board is pleased with the positive performance of the US micro-cap portfolio, which has delivered a net valuation increase of 91 cents per share during the period. This was primarily due to net accrued income (23 cents), increased earnings at Felix Storch (17 cents) and our water vertical (4 cents), and the successful realisations of the Healthcare Revenue Cycle Management vertical (44 cents), K2 Towers (11 cents) and Nielsen Kellerman (2 cents).

The portfolio was valued at 8.3x EBITDA, after applying an average 25% marketability discount to public comparables.

JZCP continues to implement its disciplined and value-oriented investment approach targeting high quality micro- cap companies in Western Europe, which now consists of 17 companies across six industries and seven countries. JZCP now, principally invests in the European micro-cap sector through its 18.8% ownership of JZI Fund III, L.P. (“Fund III”). The portfolio continues to perform well and has seen a valuation increase of 2 cents per share.

Europe continues to be a fertile ground for originating attractive investment opportunities and during the period, the Company invested in four new businesses through Fund III: Treee, Italy’s first nationwide recycler of electric and electronic goods; Eliantus, a build-up of solar plants in Spain; Bluemint, a build-up of cell tower land leases in Portugal; and Luxida, a buy-and-build of electricity distribution businesses in Spain.

Real Estate

The Company continues to make significant progress in building a diversified portfolio of retail, office and residential properties in Brooklyn, New York and South Florida.

As of 28 February 2018, JZCP, in partnership with its long-term real estate partner, RedSky Capital, had invested approximately $388.5 million in 59 properties, all currently in various stages of development and re-development.

Whilst the real estate portfolio is performing in line with expectations, it produced a net decrease of 60 cents per share, primarily due to operating expenses and debt service at the property level. The Company’s ongoing discussions with a number of institutional joint venture partners will look to address the impact of these costs on JZCP’s NAV. The Company will update the market accordingly when those discussions conclude.

Realisations

The Company generated realisations totalling $133.7 million, primarily through the sale of two US micro-cap companies and two European micro-cap companies.

The Company realised its investment in Factor, a Spanish electricity supplier to SMEs, for a gross multiple of capital invested of 9.2x and a gross IRR of 42.3%. In addition, the Company received proceeds of $28.7 million from the sale of K2 Towers, a national acquirer of wireless communication towers based in the US.

Post-period

As previously announced, the Board and the Investment Manager consider that the ability to buy back Ordinary Shares and ZDPs is beneficial to shareholders. As part of this, the Company commenced its share buyback programme in April 2018.

Furthermore, the Board is delighted with two significant post-period realisations significantly above net asset value, in March 2018. JZCP expects to receive gross proceeds of $110.0 million from the sale of Bolder Healthcare Solutions, representing a 4.5% uplift to NAV. The Company also expects to receive gross proceeds of $16.2 million from the sale of Paragon Water Systems, representing a gross multiple of invested capital of approximately 1.8x and a gross internal rate of return of approximately 18.4%.

Board

Patrick Firth has served as Chairman of JZCP’s Audit Committee since the incorporation of the Company in 2008. Patrick therefore intends to retire as Chairman of the Audit Committee and as a Director. The Board is grateful to him for the substantial contribution that he has made to the Company and wishes him well. The process for appointing Patrick’s successor is underway and he has kindly agreed to continue on the board for a sufficient period to ensure a smooth transition to his successor. The Board is also reviewing the wider issues of board refreshment and succession.

Outlook

We are pleased with the strong performance of the underlying portfolio and the level of realisation activity during the period.

The Company remains focused on unlocking liquidity from its mature investments, refinancings and partnerships, and redeploying capital into investment opportunities in Western Europe and the US and the Company’s share buyback programme. We also intend to refocus our efforts on rebalancing the Company’s debt maturity profile and paying down existing debt over the course of the next fiscal year.

The Board remains confident that the Company is well-positioned to tackle the ongoing discount to NAV through positive investment performance, further successful realisations and the ability of the Company to buy back shares.

David Macfarlane

Chairman

21 May  2018

Investment Adviser's Report

Dear Fellow Shareholders,

Our primary goal during the past fiscal year has been to achieve liquidity through realisations and refinancings. Once achieved, we plan to use the proceeds to make new investments, buy back stock or repay company debt. Importantly, with each successive realisation at or above net asset value (“NAV”), we hope to prove to the market that JZCP’s NAV is solid.

Over the past six months, we have realised five investments at or above NAV: Factor Energia, K2 Towers, Nielsen-Kellerman, Paragon (post-period) and Bolder Healthcare (post-period). On a combined basis, these realisations have returned gross proceeds to JZCP of approximately $250.0 million¹ (including escrows and interim distributions) and have contributed a combined net 55 cents in uplift to NAV during the fiscal year ended 28 February 2018.

Post year end, we have begun to buy back our stock at a significant discount to NAV and plan to continue doing so as it represents an excellent investment opportunity for the Company. We also intend to pay down a portion of JZCP’s existing debt over the coming fiscal year.

Even though we had significant uplifts from realisations over the past year, JZCP’s NAV per share fell 1.4%, from $10.12 at 28 February 2017 to $9.98 at 28 February 2018, primarily due to pre-development and carrying costs at our real estate portfolio. We are in the process of discussing joint venture partnerships with a number of institutional investors which will reduce this drag on NAV as well as provide liquidity from our real estate portfolio. We hope to have further news regarding this in the coming months. Unless otherwise stated, figures included in this report refer to the twelve-month period ended 28 February 2018.

We have had a very busy year in each of our major asset classes - US and European micro-cap and US real estate - which continue to perform well. During the period, JZCP invested a total of $96.5 million, including new investments in Felix Storch and ABTB (Taco Bell franchises) and follow-on investments in Avante Health Solutions, Peaceable Street Capital and properties in Brooklyn, New York and South Florida. We are very excited about these investments, a number of which are featured in the Investment Review section of this annual report.

As of 28 February 2018, our US micro-cap portfolio consisted of 21 businesses, which includes four ‘verticals’ and 12 co-investments, across nine industries; this portfolio was valued at 8.3x EBITDA, after applying an average 25% marketability discount to public comparables. The average underlying leverage senior to JZCP’s position in our US micro-cap portfolio is 3.5x EBITDA. Consistent with our value-oriented investment strategy, we have acquired our current US micro-cap portfolio at an average 6.1x EBITDA; we paid 4.1x EBITDA on average for US micro-cap acquisitions made during the period.

Our European micro-cap portfolio consisted of 17 companies across six industries and seven countries. The European micro-cap portfolio has low leverage senior to JZCP’s position, of under 2.0x EBITDA.

Our US real estate portfolio consists of 59 properties and can be grouped primarily into five major ‘assemblages’, located in the Williamsburg, Greenpoint and Downtown/Fulton Mall neighbourhoods of Brooklyn, New York, and the Wynwood and Design District neighbourhoods of Miami, Florida. Our assemblages are comprised of adjacent or concentrated groupings of properties that can be developed, financed and/or sold together at a higher valuation than on a stand-alone basis.

1 Factor Energia total gross proceeds of approximately €69.7 million ($85.0 million) (including interim distributions and future expected proceeds all multiplied by a theoretical, illustrative exchange rate of $1.22 to €1.00, which is current as of 25 April 2018 per Oanda.com). K2 Towers total expected gross proceeds of approximately $31.3 million. Nielsen-Kellerman total gross proceeds of approximately $8.6 million. Paragon (post-period) expected total gross proceeds of $16.2 million. Bolder Healthcare Solutions (post-period) expected total gross proceeds of approximately $110.0 million.

Net Asset Value ("NAV")

JZCP’s NAV per share fell 1.4% during the period, from $10.12 at 28 February 2017 to $9.98 at 28 February 2018.

NAV bridge

2 Includes FX gains of 22 cents relating to currency translation of investments and FX losses of 7 cents relating to the translation of CULS.

3 Includes an incentive fee provided for on capital gains of 4 cents.

The US micro-cap portfolio performed well during the period, delivering a net increase of 91 cents. This was primarily due to net accrued income of 23 cents, increased earnings at co-investment Felix Storch (17 cents) and writing our Healthcare Revenue Cycle Management vertical, K2 Towers and Nielsen Kellerman investments up to their sale values (44 cents, 11 cents and 2 cents, respectively). Also contributing to the positive portfolio performance were increases at our logistics vertical (1 cent), water vertical (4 cents) and co-investment business Avante (2 cents). We also received 2 cents of escrow payments during the period.

Offsetting these increases were declines at our Industrial Services Solutions (“ISS”) vertical (13 cents) and Nationwide, our school photography business (2 cents).

The European micro-cap portfolio continued its positive trajectory, posting a net increase of 2 cents, primarily due to accrued income of 8 cents, write-ups at JZI Fund III, LP (“Fund III”) portfolio companies Collingwood and S.A.C (4 cents combined) and a net positive carried interest adjustment of 2 cents. These gains were offset by write-downs at Factor Energia (6 cents) and Oro Direct (6 cents).

The real estate portfolio experienced a net decrease of 60 cents, primarily due to operating expenses, including significant pre-development costs, and debt service at the property level.

Returns

The chart below summarises cumulative total shareholder returns and total NAV returns for the most recent three-month, one-year, three-year and five-year periods.

4Total returns are cumulative and assume that dividends were reinvested.

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