31 July 2008, 15:47
Private Equity Inv: Final Results - Part 3
<pre>- Part 3: For the preceeding part double click [ID:nPRrVD437b]
commitments of $24,745,000 to these US
venture capital funds, which will be financed through future distributions
received and from cash and easily liquidated assets.
The Board manages liquidity risk by regularly reviewing its easily liquidated
assets, which mainly comprise of open-ended investment funds and can be
converted to cash at short notice. Commitments to fund investments are reviewed
and approved by the Board. In order to reduce risk, research and due diligence
work is performed before any commitment is made to a fund manager.
Interest rate risk
The Company's revenue will be affected by changes in prevailing interest rates
since a large portion of its income ordinarily derives from money market
instruments and bank interest.
The Company's objective is to achieve capital returns from its investments and,
as such, the main exposure to interest rate risk is indirect, through its
impact on the valuation of the private equity funds, although it is not
possible to quantify such effects. Interest rates are one of the key
determinants of economic growth. At a more specific level, interest rates and
credit spreads also have an important role in the ability of private equity
funds to secure profitable deals, as many transactions are partly financed by
debt. The effect of interest rate changes on the valuation of investments and
debt forms part of valuation risk, which is considered separately.
At 31 March 2008, the Company held investments in AAA-rated money market funds
valued at £23.6 million (2007: £31.6 million), earning cash dividends at market
rates. The money market funds are redeemable on less than 24 hours notice.
Other floating rate financial assets comprised cash at bank.
As at 31 March 2008, the average interest rate profile of the Company's
financial assets was as follows:
Fixed Floating Non Fixed Floating Non
rate rate interest rate rate interest
Group bearing Company Company bearing
Group Group Company
£'000 £'000 £'000 £'000 £'000 £'000
Open-ended - 23,648* - - 23,648* -
investment funds
Quoted equities - - 511 - - 511
Unlisted equities - - 14 - - 14
Unlisted funds - - 48,293 - - 48,293
Cash - 4,611** - - 4,527** -
Other net current - - 222*** - - 237***
assets
- 28,259 49,040 - 28,175 49,055
As at 31 March 2007, the average interest rate profile of the Company's
financial assets was as follows:
Fixed Floating Non Fixed Floating Non
rate rate interest rate rate interest
Group bearing Company Company bearing
Group Group Company
£'000 £'000 £'000 £'000 £'000 £'000
Open-ended - 31,611* - - 31,611* -
investment funds
Quoted equities - - 394 - - 394
Unlisted equities - - 13 - - 13
Unlisted funds - - 53,090 - - 53,090
Cash - 765** - - 723** -
Other net current - - 803*** - - 803***
assets
- 32,376 54,300 - 32,334 54,300
* The objective of the funds is to achieve a wholesale money market rate of
return.
** Exposure to floating interest rate risk is based on an adjusted LIBOR rate.
***Other net current assets exclude prepayments which under IFRS7 are not
classified as
financial assets.
If interest rates had reduced by 1 % from those obtained at 31 March 2008, it
would have had the effect, with all other variables held constant, of reducing
the net revenue return before taxation and equity by £283,000 (2007: £324,000).
If there had been an increase in interest rates of 1% there would have been an
equal and opposite effect in the net revenue before taxation and equity. The
calculations are based on cash at bank and open-ended investment funds as at 31
March 2008 and these may not be representative of the year as a whole.
Credit risk
The Company is exposed to credit risk through its loan to Campton Group Inc.
The loan notes issued under the terms of this loan are convertible to equity.
The risk is deemed to be low as the Company maintains a close working
relationship with Campton Group Inc, its investment advisor and subsidiary.
Market price risk
Private equity investments are not immediately sensitive to market moves.
However, over the medium/long term, the valuation multiples applied to private
equity will be affected by significant changes in the listed equity markets.
The Company's portfolio consists of US dollar investments, except one Canadian
investment, detailed below which are affected by movements in the sterling/
dollar exchange rate (refer to foreign currency risk below).
At 31 March 2008, a 10% movement in the valuation of the Group's aggregate
investments designated as fair value through profit or loss, would result in a
9.4% change in shareholders' funds.
The Review of investments in the full Report provides information in respect of
the investments. The method of valuing the investments is discussed in the
accounting policies note.
Foreign currency risk
The Company is exposed to currency risk directly since the majority of its
assets and liabilities are denominated in foreign currency and their sterling
value can be significantly affected by movements in foreign exchange rates. The
Company does not, nor does it intend to, hedge against foreign currency
movements affecting the value of its investments.
The Company settles its transactions from its bank accounts at an agreed rate
of exchange on the date on which any bargain was made. For the year ended 31
March 2008, realised exchange gains of £120,000 (2007: losses of £116,000) and
unrealised losses relating to currency and other capital items of £149,000
(2007: losses of £501,000), have been taken to the capital reserve.
Details of the foreign currency exposure are detailed in the table below.
At 31 March 2008 Investment Cash Other Investment Cash Other
portfolio Group current portfolio* Company current
* Group assets Company assets
Group Company
£'000 £'000 £'000 £'000 £'000 £'000
USA 72,451 4,569 150 72,451 4,485 122
UK - 42 129 - 42 129
Canada 15 - - 15 - -
72,466 4,611 279 72,466 4,527 251
At 31 March 2007 Investment Cash Other Investment Cash Other
portfolio Group current portfolio* Company current
* Group assets Company assets
Group Company
£'000 £'000 £'000 £'000 £'000 £'000
USA 85,095 708 615 85,095 666 609
UK - 57 247 - 57 247
Canada 13 - - 13 - -
85,108 765 862 85,108 723 856
* All portfolio stocks are US dollar denominated, with the exception of the
Canadian investment.
If the sterling/dollar exchange rate had reduced by 10% from that obtained at
31 March 2008, it would have the effect, with all other variables held
constant, of increasing the equity shareholders' funds by £8,052,000 (2007: £
9,278,000).
If there had been an increase in the sterling/dollar exchange rate of 10% it
would have the effect of decreasing the equity shareholders' funds by £
6,588,000 (2007: £7,915,000).
The calculations are based on the investments held at fair value through profit
or loss and the exchange rate of 1.9875 as at 31 March 2008 and these may not
be representative of the year as a whole.
Financial liabilities
The Company finances its operations primarily through equity and retained
revenue although trade creditors and accruals arise from its operations. At 31
March 2008 and 31 March 2007, all financial liabilities were due within one
year. Other financial liabilities amounted to £126,000 (2007: £157,000)
resulting from operating activities, and £8,000 (2007: Nil) from financing.
There were no borrowing facilities either drawn or undrawn at any time during
the year.
Managing Capital
Capital structure
The capital structure of the Group consists of cash held and shareholders'
equity. The Group's equity is analysed into its various components in note 13.
Capital is managed so as to maximise the return to shareholders while
maintaining a capital base to allow the Company to operate effectively in the
marketplace and sustain future development of the business. Strong realisations
from the investment portfolio in recent years have led to the return of capital
to shareholders. This has been achieved through the buy back of shares.
Capital constraints
The Company operates so as to qualify as a UK Investment Trust for UK tax
purposes which requires that any investment does not exceed 15% of the
Company's portfolio at the point of investment.
The Group's capital requirement is reviewed regularly by the Board of the
Company.
19 RELATED PARTY TRANSACTIONS
There have been no related party transactions in the year to 31 March 2008,
other than the transactions between the Company and its Subsidiary, Campton
Group Inc. as disclosed in note 10.
20 BUSINESS COMBINATION
Private Equity Investor plc and Campton Group Inc have entered into three
separate agreements: a Secured Convertible Promissory Note Agreement as of
November 3, 2006; a Secured Convertible Promissory Note Agreement as of
December 11, 2006; and a Secured Promissory Note Agreement as of February 13,
2007. The Company currently has a total investment of £226,415 in Campton Group
Inc. If the Company was to exercise its conversion rights then it would hold a
majority stake in Campton Group Inc.
END
31 July 2008
END</pre>
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