21 November 2008, 17:01
Private Equity Inv: Half-yearly Report - Part 1
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PRIVATE EQUITY INVESTOR PLC
HALF YEARLY REPORT
FOR THE PERIOD ENDED 30 SEPTEMBER 2008
INVESTMENT OBJECTIVE AND POLICY
Investment Objective
The Company was launched in February 2000 and provides both private and
institutional investors with a means to participate in specialised venture
capital funds in the USA, a category of funds that is not otherwise accessible
to many investors. The Company's objective is to achieve substantial capital
appreciation for shareholders over its intended life.
Investment Policy
Risk Diversification
The Company has invested in high quality venture capital funds, managed by
several different management groups, focused on various stages of growth from
early stage to pre-IPO, so as to obtain exposure to a diversified underlying
portfolio of investments in unlisted companies in the IT and other technology
sectors. Such funds have been selected with regard to the experience and track
record of the managers, their investment strategy and their strength and
quality of their deal flow.
As an Investment Trust, it is the Company's policy that no single investment
will represent more than 15% by value of the Company's investments at the time
of investment.
The Company's policy is that it will invest no more than 15% of its gross
assets in other closed-end listed investment companies (including investment
trusts). The Company currently has made no such investments and the Directors
do not envisage circumstances in which it is likely to do so.
Asset Allocation
The Company's investments are in funds based in the USA ("the Funds"). The
Managers of the Funds invest principally in the USA and in unlisted companies.
As a result of the flotation or sale of their investments, the Funds may hold
listed securities and these may be distributed to the Company so that the
Company may from time to time hold listed securities which, however, are
unlikely to represent a significant part of the Company's investments.
The Company continues to invest in the Funds to meet existing commitments but
is not making commitments to new investments. The Company proposes to make
periodic returns of capital to shareholders from the return cash flows from the
Funds.
Gearing
In normal circumstances the Company does not expect to borrow. The Company's
Articles of Association limit borrowing to an amount broadly equal to its
capital and reserves. Some investments made by the Funds may be geared but the
Company does not review the level of gearing of these underlying investments.
Liquidity
Because of distributions from the Funds, the Company may hold substantial
balances of liquid funds. These are held principally in open-ended investment
funds pending investment in the Funds or distribution to shareholders.
Derivatives
The Company does not make use of financial derivatives and does not hedge
against currency fluctuations.
Distribution
The Funds provide little, if any, income. Income may be generated from liquid
funds and the Company may be required to pay dividends to continue to qualify
as an Investment Trust. Such dividends are, however, likely to be small and
irregular. In 2007, the Company made a Tender Offer to shareholders with a
value of up to £12.5 million, which was fully taken up. In May 2008,
shareholders approved the cancellation of the Company's Share Premium account
which, subject to the necessary court approval, which was obtained on 29
October 2008, permits the creation of a special distribution reserve. This will
enable the Company to make further returns of capital to shareholders from time
to time.
Benchmark
NASDAQ Composite Index.
Continuation Vote
Shareholders will have the opportunity to vote at the Annual General Meeting in
2014 whether to continue the Company and at five yearly intervals thereafter.
Management
The Company is self-managed. The Company has appointed Campton Group, Inc.
("Campton") which is based in San Francisco as its investment adviser and has
provided it with finance with a view to developing Campton's private equity
fund-of-funds management and advisory business.
SUMMARY OF RESULTS AND FINANCIAL HIGHLIGHTS
30 September 31 March 2008 % change
2008
Group Group
Net assets and $147,245,000 $153,435,000 (4.03)
shareholders'
funds in US$
Net assets per 344.65c 359.14c (4.03)
ordinary share
in US$ "NAV"
Net assets and £82,608,000 £77,200,000 7.01
shareholders'
funds
Net assets per 193.36p 180.70p 7.01
ordinary share
"NAV"
Benchmark - 2082.30 2279.10 (8.63)
NASDAQ Composite
Index
Mid-market price 132.50p 144.50p (8.30)
per ordinary
share
Discount to NAV 31.47% 20.03%
Total return per 13.80p 8.19p
ordinary share
Exchange rate - 1.78245 1.98750
US$/£
Number of 42,723,408 42,723,408
ordinary shares
in issue
Chairman's Statement
I am pleased to present the unaudited interim results for Private Equity
Investor PLC ("PEI" or "the Company") for the six months ended 30 September
2008.
Results and Dividend
During the period, the Group's Net Asset Value ("NAV") increased by 7.01% from
180.70 pence per share to 193.36 pence per share, largely as a result of the
strengthening of the dollar, in which the Company's principal assets are
denominated. In dollar terms, however, the NAV fell by 4.03% from 359.14 cents
per share to 344.65 cents per share reflecting some reduction in the value of
the Company's portfolio. By comparison the NASDAQ Composite Index fell by 8.63%
(from 2279.1 to 2082.3). The dollar exchange rate moved 10.1% in the Company's
favour, from $1.98 at 1 April 2008 to $1.78 at 30 September 2008.
No dividend is proposed for the period.
Portfolio Review
As at 30 September 2008 the Company was invested in 23 venture funds, all based
in the USA, with a value of $93.0 million. The original portfolio from the 1999
/2000 period accounted for $86.2 million in value, with the balance of $6.8
million from the five "warehoused" limited partnership investments made in 2006
/2007. PEI's cash and readily realisable assets totalled $51.7 million,
compared with outstanding commitments of $19.9 million. Of this figure
approximately $5.6 million is due to be called from the original portfolio and
$14.3 million from the five new "warehoused" funds. In the six month period the
Company paid $4.9 million in capital drawdowns to its Limited Partnerships, of
which $2.8 million was for calls to the original Limited Partnerships, compared
with $3.3 million for the equivalent period to 30 September 2007.
Distributions received in the period from PEI's Limited Partnerships were $3.64
million compared with $19.9 million in the six months to March 2008 and $9.0
million for the equivalent period to 30 September 2007. Of this figure
approximately $2.8 million came from the original portfolio, of which cash
distributions accounted for $1.2 million and stock for $1.6 million. The
largest amounts of cash came from Oak Investment Partners X and Focus Ventures
II. PEI received $620k from the sale by Oak of their holding in CBORD Group,
resulting in a 4.1x gross return on the underlying investment, and a further
$350k was received from Focus Ventures II as a result of the sale of part of
their shares in Starent Networks which resulted in a 7.0x gross multiple return
on that tranche.
During the period under review none of the underlying portfolio companies
undertook IPO's.
Tender Offer
Following the Tender Offer made last November, which resulted in the return of
£12.5 million to shareholders, a similar exercise is planned for this year. In
order to facilitate this, the Company has applied for and received court
approval for the cancellation of its entire share premium account which amount
has been used to create a special reserve which can be used for, amongst other
things, share buy-backs. Allowing for all outstanding portfolio commitments and
current liabilities, the Company has excess cash of approximately £20 million.
We plan to return £17.5 million to shareholders before year-end through a
further Tender Offer. Assuming this tender is fully taken up the Company will
have returned £30 million to shareholders of the £100 million originally
subscribed.
Campton
As reported previously, Campton advises the Company on its existing portfolio
and intends to develop a fund-of-funds management and advisory business. PEI
has made commitments totalling $22 million to five highly regarded venture
capital funds with the intention of transferring these to a new fund-of-funds
vehicle which Campton is currently in the process of raising. Progress on this
fundraising has inevitably slowed as a result of the global financial crisis.
However, based on recent discussions with a number of potential investors, and
provided that market and economic conditions stabilise, Campton's management is
optimistic that it will ultimately be successful in raising its new
fund-of-funds vehicle. The five "warehoused" funds - which have shown
encouraging progress - will be the cornerstone of Campton's new fund-of-funds.
The Company will benefit from this fundraising exercise by having a majority
interest in Campton.
Outlook
According to a new study released from PricewaterhouseCoopers LLP, the venture
capital-backed IPO market is at a 30-year low, with the second quarter of 2008
being the first time since 1978 that there have been no venture capital-backed
IPO's in a given quarter. There was just one venture capital-backed IPO during
the third quarter of 2008 (Rackspace Hosting). In the first three quarters of
2008, there have been six IPOs of venture-backed companies, representing the
lowest volume for the first three quarters of any year since 1977. As of 30
September 2008, thirty-eight venture-backed companies had filed with the SEC
for an IPO. This level falls short of Q2 2008 when 42 venture-backed companies
were in registration. Additionally, 28 venture-backed companies have withdrawn
from registration in the year-to-date period.
In view of the crisis in the financial markets it looks unlikely that the low
levels of IPOs will change much in the short term. Similarly, the number of M&A
exits, for venture-backed companies, is also likely to be at a lower level.
Consequently, venture capital groups are likely to have to hold on to and, in
some cases, finance their companies for longer than was originally anticipated
which is likely to cause them to take a more cautious attitude. Venture
Capitalists are advising their investee companies to cut costs, try to get to
profitability more quickly and take all possible steps to conserve cash. One
result of this trend is that the Company's receipt of distributions is likely
to slow down until this situation improves.
Up until recently venture groups had been investing steadily but we consider
that this level of investing is likely to slow. On the other hand, several
venture groups have recently commented favourably on the attractive
opportunities which they now expect to find as a result of this crisis. In this
environment it is clear that venture capitalists will be highly selective with
regard to the companies in which they invest and, at the same time, will want
to ensure that they do not over-pay for deals. If history is a reliable guide,
these disciplines should prove very beneficial to investors in terms of future
returns.
PETER F.DICKS
Chairman
21 November 2008
INTERIM MANAGEMENT REPORT
The important events that have occurred during the period under review are set
out in the Chairman's Statement. The key factors influencing the financial
statements are also set out in the Chairman's Statement.
The principal risks and uncertainties for the remaining six months of the
financial year are reviewed in the Outlook section of the Chairman's Statement.
Responsibility Statement
The Directors confirm that to the best of their knowledge:
# the condensed set of financial statements contained within the Half-Yearly
Report has been prepared in accordance with applicable accounting standards in
the United Kingdom, and give a true and fair view of the assets, liabilities,
financial position and profit of the Company as required by the Disclosure and
Transparency Rules ("DTR") 4.2.4R;
# the interim management report includes a fair review of the information
required by:
(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of
the important events that have occurred during the first six months of the
financial year and their impact on the condensed set of financial statements;
and a description of the principal risks and uncertainties for the remaining
six months of the year; and
(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party
transactions that have taken place in the first six months of the current
financial year and that have materially affected the financial position or
performance of the entity during that period; and any changes in the related
party transactions described in the last annual report that could do so.
This Half-Yearly Report was approved by the Board of Directors on 21 November
2008 and the above responsibility statement was signed on its behalf by Peter
F. Dicks, Chairman.
CONSOLIDATED INCOME STATEMENT (UNAUDITED)
for the six months to 30 September 2008
2008 2007
restated restated restated
* * *
Revenue Capital Revenue Capital
return return Total return return Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) - 5,783 5,783 - (849) (849)
on investments
at fair value
through profit
and loss
Exchange gains - 159 159 - (103) (103)
/(losses) on
other items
- 5,942 5,942 - (952) (952)
Operating
income
Investment 417 - 417 788 - 788
income
Other (10) - (10) 61 - 61
operating
income
Total 407 - 407 849 - 849
operating
income
Operating
expenses
Administrative (455) - (455) (457) - (457)
expenses
Total expenses (455) - (455) (457) - (457)
Operating (48) 5,942 5,894 392 (952) (560)
profit
Profit before (48) 5,942 5,894 392 (952) (560)
tax
Tax - - - - - -
Profit for the (48) 5,942 5,894 392 (952) (560)
period
Attributable
to:
Equity holders (48) 5,942 5,894 372 (952) (560)
of the parent
Minority - - - 20 - 20
interest
Earning per
share
From
continuing
activities
Basic (0.11)p 13.91p 13.80p 0.74p (1.90)p (1.16)p
The total column of this statement represents the Group's income statement,
prepared in accordance with IFRS. The supplementary revenue return and capital
return columns are both prepared under guidance published by the Association of
Investment Companies. All items in the above statement derive from continuing
operations.
* These values have been adjusted for the adoption of IFRS from those presented
in the half-yearly report to 30 September 2007. An explanation of the prior
year adjustment is shown in the notes to the accounts.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
for the six months to 30 September 2008
Share Capital Currency
Share premium redemption Capital translation Retained
capital account reserve reserve reserve earnings Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Six months
to 30
September
2008
As at 1 4 96,862 1 (20,117) 9 441 77,200
April 2008
Group - - - 5,942 (16) (48) 5,878
profit for
the period
Dividends - - - - - (470) (470)
paid
As at 30 4 96,862 1 (14,175) (7) (77) 82,608
September
2008
Six months
to 30
September
2007
As at 1 5 96,862 - (10,732) 4 430 86,569
April 2007
Group - - - (952) 4 372 (576)
profit for
the period
Minority - - - - - 20 20
interest
As at 30 5 96,862 - (11,684) 8 822 86,013
September
2007
Year ended
31 March
2008
As at 1 5 96,862 - (10,732) 4 430 86,569
April 2007
Group - - - 3,356 5 561 3,922
profit for
the year
Dividends - - - - - (550) (550)
paid
Tender (1) - 1 (12,741) - - (12,741)
offer
As at 31 4 96,862 1 (20,117) 9 441 77,200
March 2008
COMPANY STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
for the six months to 30 September 2008
Share Capital
Share premium redemption Capital Retained
capital account reserve reserve earnings Total
£'000 £'000 £'000 £'000 £'000 £'000
Six months
to 30
September
2008
As at 1 4 96,862 1 (20,117) 586 77,336
April 2008
Profit for - - - 5,942 (173) 5,769
the year
Dividends - - - - (470) (470)
paid
As at 30 4 96,862 1 (14,175) (57) 82,635
September
2008
Six months
to 30
September
2007
As at 1 5 96,862 - (10,732) 573 86,708
April 2007
Profit for - - - (952) 229 (723)
the year
As at 30 5 96,862 - (11,684) 802 85,985
September
2007
Year ended
31 March
2008
As at 1 5 96,862 - (10,732) 573 86,708
April 2007
Profit for - - - 3,356 563 3,919
the year
Dividends - - - - (550) (550)
paid
Tender (1) - 1 (12,741) - (12,741)
offer
As at 31 4 96,862 1 (20,117) 586 77,336
March 2008
SUMMARISED CONSOLIDATED BALANCE SHEET (UNAUDITED)
As at As at As at
30 September 2008 31 March 2008 30 September 2007
£'000 £'000 £'000
Non-current assets
Investments at 81,465 72,466 82,540
fair value through
profit or loss
Property, plant 5 4 4
and equipment
Net current assets 1,138 4,730 3,469
Net assets 82,608 77,200 86,013
Capital and
reserves
Share capital 4 4 5
Share premium 96,862 96,862 96,862
account *
Capital redemption 1 1 -
reserve
Capital reserve (14,175) (20,117) (11,684)
Currency (7) 9 8
translation
reserve
Retained earnings (77) 441 802
Shareholders' 82,608 77,200 85,993
funds
Minority Interest - - 20
Total equity 82,608 77,200 86,013
Net asset value 193.36p 180.70p 172.03p
per ordinary share
("Shareholders'
funds")
* The share premium account was converted to a special reserve on 29 October
2008 following court approval.
SUMMARISED BALANCE SHEET (UNAUDITED)
As at As at As at
30 September 2008 31 March 2008 30 September 2007
£'000 £'000 £'000
Non-current assets
Investments at 81,465 72,466 82,540
fair value through
profit or loss
Investment in 253 226 221
subsidiary
undertaking
Net current assets 917 4,644 3,224
Net assets 82,635 77,336 85,985
Capital and
reserves
Share capital 4 4 5
Share premium 96,862 96,862 96,862
account *
Capital redemption 1 1 -
reserve
Capital reserve (14,175) (20,117) (11,684)
Retained earnings (57) 586 802
Total equity 82,635 77,336 85,985
Net asset value 193.42p 181.02p 171.97p
per ordinary share
* The share premium account was converted to a special reserve on 29 October
2008 following court approval.
SUMMARISED CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)
for the six months to 30 September 2008
2008 2007
Notes £'000 £'000
Cash flows from
operating
activities
Consolidated net 5,894 (560)
return/(loss)
before tax
Adjustments to
reconcile net
return before tax
to net cash flows
from operating
activities:
(Gains)/losses on (5,942) 952
investments
Exchange gains/ 68 (10)
(losses)
Decrease in trade (65) (18)
and other payables
Decrease in trade 55 48
and other
receivables
Purchases of (9,499) (2,694)
investments
Sales of 6,351 4,696
investments
Net cash flows (3,138) 2,414
(used in)/generated
from operating
activities
Net cash used in (470) -
financing
activities
Net (decrease)/ (3,608) 2,414
increase in cash
and cash
equivalents
Cash and cash 4,611 765
equivalents at
beginning of year
Effect of foreign 72 (74)
exchange rates on
cash and cash
equivalents
Cash and cash 3 1,075 3,105
equivalents at end
of year
SUMMARISED COMPANY CASH FLOW STATEMENT (UNAUDITED)
for the six months to 30 September 2008
2008 2007
Notes £'000 £'000
Cash flows from
operating
activities
Company net return 5,768 (714)
/(loss) before tax
Adjustments to
reconcile net
return before tax
to net cash flows
from operating
activities:
(Gains)/losses on (5,942) 944
investments
Exchange gains/ 59 (19)
(losses)
Decrease in trade (22) (15)
and other payables
Decrease/ 37 (98)
(increase) in
trade and other
receivables
Purchases of (9,499) (2,694)
investments
Sales of 6,351 4,696
investments
Net cash flows (3,248) 2,100
(used in)/
generated from
operating
activities
Net cash used in - (40)
investing
activities
Net cash used in (470) -
financing
activities
Net (decrease)/ (3,718) 2,060
increase in cash
and cash
equivalents
Cash and cash 4,527 723
equivalents at
beginning of year
Effect of foreign 72 (74)
exchange rates on
cash and cash
equivalents
Cash and cash 3 881 2,709
equivalents at end
of year
INVESTMENT PORTFOLIO
At 30 September 2008
% of
Total Fair Fair Net
Commitment Value Value Assets
US$'000 US$'000 £'000 2008
Unquoted Venture Capital Funds
APV Technology Partners III 5,000 441 247 0.3
Bay III 5,000 395 222 0.2
Crescendo IV 10,000 4,531 2,542 3.0
Dawntreader Fund II 30,000 15,337 8,605 10.4
Draper Fisher Jurvetson ePlanet 30,000 13,276 7,448 9.0
Ventures
Draper Fisher Jurvetson Fund VI 2,000 1,447 812 1.0
Draper Fisher Jurvetson Fund VII 5,000 3,711 2,082 2.5
Draper Fisher Jurvetson Gotham 3,000 2,164 1,214 1.5
Venture Fund
Focus Ventures II 30,000 8,338 4,678 5.7
Francisco Partners II 5,000 2,434 1,366 1.7
Institutional Venture Partners XII 5,000 1,399 785 1.0
New Enterprise Associates 9 5,000 1,484 832 1.0
New Enterprise Associates 10 10,000 5,671 3,181 3.9
New Enterprise Associates 12 3,000 1,458 818 1.0
Oak Investment Partners X 10,000 6,604 3,705 4.5
Sprout Capital IX 3,750 1,687 946 1.1
Technology Crossover Ventures IV 25,000 9,022 5,062 6.1
Vanguard VII 3,000 1,311 736 0.9
VantagePoint Venture Partners IV 10,000 8,807 4,941 6.0
VantagePoint Venture Partners 2006 5,000 1,162 652 0.8
Fund
Vector Capital IV 4,000 330 185 0.2
Zone Ventures II 10,000 1,768 992 1.2
Zone Ventures II Annex 400 259 145 0.2
Total Unquoted Venture Capital 219,150 93,036 52,196 63.2
Funds
Open-ended Investment Funds
Global Treasury Funds Plc - USD - 6,500 3,647 4.4
Fund
Global Treasury Funds Plc - GBP - 8,912 5,000 6.1
Fund
JP Morgan USD Liquidity - 18,000 10,098 12.2
Distribution Fund
Merrill Lynch Institutional USD - 18,000 10,098 12.2
Fund
Total Open-ended Investment Funds 51,412 28,843 34.9
Other Investments held directly by the Company
Common Stock*
Artemis International Solutions - - - 0.0
Auxilium Pharmaceuticals - 57 32 0.0
Broadcom Corporation Class A - 11 6 0.0
Divx Inc - 691 388 0.5
Total other investments - 759 426 0.5
Total investments 219,150 145,207 81,465 98.6
Other non-current assets 9 5 0.0
Net current assets 2,029 1,138 1.4
Net assets 147,245 82,608 100.0
* These were acquired as distributions from the portfolio of Venture Capital
Funds
NOTES TO THE FINANCIAL STATEMENTS
at 30 September 2008
1 Financial information
The financial information contained in this report does not constitute full
statutory accounts as defined in section 240 of the Companies Act 1985. The
financial information for the six months ended 30 September 2008 and 30
September 2007 has not been audited nor reviewed by the Company's Auditor
pursuant to the Auditing Practices Board guidance on such reviews.
The information for the year ended 31 March 2008 has been extracted from the
latest published audited financial statements, which have been filed with the
Registrar of Companies. The report of the Auditor on those financial statements
contained no qualification or statement under sections 237 (2) or (3) of the
Companies Act 1985.
Basis of Accounting
The consolidated half-yearly financial statements of the Group have been
prepared under International Financial Reporting Standards ("IFRS"), which
comprise standards and interpretations approved by the International Accounting
Standards Board ("IASB"). The half- yearly financial statements of the Company
have been prepared in accordance with IFRS as adopted by the European Union,
and as applied in accordance with provisions of the Companies Act 1985. The
financial statements have also been prepared in accordance with the Statement
of Recommended Practice ("SORP") (as amended December 2005) for investment
trust companies except to any extent where it conflicts with IFRS.
This is the first year in which the group has prepared its financial statements
under IFRS and the comparatives have been restated from UK Generally Accepted
Accounting Practice (`UK GAAP') to comply with IFRS. As a result of the group's
transition to IFRS there are no reconciling items from the previously published
UK GAAP financial statements.
The Group and Company financial statements are presented in Sterling and all
values are rounded to the nearest thousand pounds (£'000) except when indicated
otherwise.
Basis of Consolidation
The consolidated financial statements incorporate the financial statements of
the Company and its principal subsidiary Campton Group Inc.
Campton Group Inc is consolidated from the date of its acquisition, being the
date on which the Group obtained control, and will continue to be consolidated
until the date that such control ceases. Control comprises the power to govern
the financial and operating policies of the investee so as to obtain benefit
from its activities and is achieved through direct or indirect ownership of
voting rights. The Company currently has an investment of £253,000 in Campton
Group Inc by way of a secured promissory note agreement and a secured
convertible promissory note agreement. If the Company were to exercise its
conversion rights then it would hold a majority stake in
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