Net Investor PLC, which invests primarily in technology focused US venture capital funds, today announces maiden results for the 14 months ended 31 March 2001.
The Company's investment objective is to seek long term capital growth for the holders of ordinary shares in a sector of the market which has shown considerable growth over recent years. The Company seeks to achieve substantial capital appreciation by investing in emerging growth companies through specialised venture capital funds focused on the information technology sector.
"It gives me great pleasure to present the first annual report to the shareholders of Net Investor. This report covers the period from flotation on 3 February 2000 until 31 March 2001.
Net Asset Value
During the period net assets attributable to ordinary shareholders rose from £97 million at flotation to £107,201,000 as at 31 March, 2001 after deducting the dividend of £2,125,000. Our undiluted net asset value per share at flotation was 193.73p and our audited net asset value as at 31 March 2001 was 214.40p after deducting the dividend of 4.25p.
During the period, technology orientated public market indices around the globe suffered significant corrections; NASDAQ fell from a peak of 5048.86 in March 2000 to 1840.26 at the end of March 2001. TechMark and most other technology indices suffered similar falls. Net Investor has not been completely immune to the forces at play in the markets. For a number of reasons, however, the Company has been less affected than commentators might have expected, and has performed well on a relative basis.
Firstly, the funds in which we have invested are managed by some of the world's most sought after venture managers including Oak Investment Partners, based in Silicon Valley, and New Enterprise Associates headquartered in Baltimore. It is our belief that high quality investment management is a pre-requisite to successful long-term venture capital investing and we remain confident of the abilities of the managers that we have chosen to achieve outstanding long-term capital growth for investors.
Secondly, having raised our funds in February 2000 most of our investments were made after technology valuations had begun to fall. Consequently, companies seeking venture capital investors during the period have had to lower their valuation expectations and therefore we, through our limited partnerships, have been investing at lower prices.
Thirdly, our portfolio of partnerships was originally constructed to gain equal exposure to early expansion and late stage investments. Since the downturn in valuations, however, managers have largely eschewed later stage investments, skewing their individual portfolios towards earlier stage companies where valuations are less correlated to public markets.
Lastly, as economic growth has been perceived to slow, our managers, in line with the industry, have significantly reduced their investment pace. As at 31 March 2001 we had over $90 million invested in cash and high quality Triple A $ denominated bonds.
Valuations
The valuations of both the private and the public companies held within our Limited Partnerships have been taken directly from the General Partner reports for the quarter ended 31 March 2001. Although there are some minor variations between the valuation methodologies of the various funds in our portfolio, the principles on which they are based are very similar to the guidelines set out by the British Venture Capital Association.
Public companies held directly by us following stock distribution are valued on a mark to market basis.
During the period the value of the Company's investments in Limited Partnerships, which comprise investments in 375 portfolio companies remained resilient, registering an overall decline of just 13.4%, after all fees, against an extremely difficult market backdrop.
Change of Name
Your Board is proposing a change of name for the Company, from Net Investor plc to Private Equity Investor plc. The new name has been chosen to more accurately reflect the Company's activities; investments, in unquoted investment funds focusing on information technology companies. In investing terms the internet is a subset of information technology alongside e-commerce, intranet technologies, communications, information services and high value added electronic components. From this it is clear that the current name of the Company is too narrow and inadequately reflects our investment policy.
Your Board therefore recommends that you vote in favour of this name change at our Annual General Meeting.
Amendment to Articles of Association
The Directors of Net Investor consider that they have been successful in developing their contacts in the US venture capital industry during the time which they have been responsible for investing the funds of Net Investor and accordingly, further attractive investment opportunities become available to them on a regular basis. It is expected that stock market conditions in the UK will permit a further fund raising for this type of investment to be undertaken in due course. Consideration has been given to issuing further shares in Net Investor. However, the advice of Net Investor's advisers has been that it will be almost impossible to fix a fair value for the new shares vis-a-vis the existing shares. Consideration is now being given to launching a new investment trust to take up these opportunities and shareholders in Net Investor will be notified of any such offering. The Directors consider that the activities of a new trust will be beneficial to Net Investor. Unless the Directors have access to further funds to invest, the benefits of the contacts which they have developed in the course of investing the Company's funds may diminish rather than continuing to be preserved and enhanced for the benefit of the Company when the Company comes to reinvest the proceeds of its initial investments. In addition if both Net Investor and a new trust are making new investments at the same time this may increase their collective ability to negotiate favourable terms for their investments.
The Directors propose to amend the Company's Articles of Association to permit any Director to be a director or officer or otherwise involved or financially interested in any such other company without being liable to account to or compensate the Company for any benefit received by him or her for his or her interest in such other company. The proposed alteration to the Articles will also relieve any Director from any liability to the Company in respect of any decision made in good faith as a director of any such other company.
Share buy-backs
At the forthcoming Annual General Meeting, we are seeking authority for the Company to buy-back up to 14.99% of its shares. The Directors will use this authority with the objective of enhancing shareholder value. Purchases would only be made through the market for cash at prices below the prevailing net asset value per ordinary share, which would have the effect of enhancing net asset value per ordinary share for the remaining shareholders. Any ordinary shares, which are purchased, will be cancelled.
The Directors consider that it would be advantageous to shareholders for the Company to have the authority to make such purchases as and when it considers the timing to be favourable. However, use of this authority, if given, will depend upon market conditions and the Board's judgement of its likely effectiveness in enhancing net asset value per share and/or reducing the discount.
The proposed amendment to the Articles of Association will also clarify that the Company can use its capital reserve to purchase its own shares following a recent change in the law which permits this.
Outlook
Since the listing of Net Investor in February 2000, valuations in the public technology sector have retreated significantly. NASDAQ stands at less than 50% of its peak value that was reached around the time of our floatation. Some major companies in the sector have reported that it is hard to predict their company earnings over the next few quarters.
Many sector commentators, however, believe that the fundamental drivers for technology remain in place and that demand for innovative technology will rebound strongly when growth in the world's major economies picks up, particularly in the US. Indeed, many believe that now is an exciting time to be investing, at the lower valuations that are currently on offer, and now that most of the "hot money" that existed last year has left the market. In fact, following the exit of many "angel investors" and investment banks from venture capital investing, the focused venture funds, such as the ones in which we are invested, are the only significant players in the sector. Our fund managers see this as an opportunity to apply their expertise in order to extract future capital growth from the strong deal flow that they are seeing today.
The technology landscape is constantly changing. Innovation continues unabated. We believe that great companies will arise out of the current environment. The challenge for our investment managers is to identify, invest in and help build tomorrow's leaders, just as they did many of today's.
Over the past 20 years, as an asset class, venture capital has achieved average annual returns in excess of 19%, in US$ terms, outperforming most other investment sectors. Your Board believes that, given the quality of the funds to which we have been able to gain access, the Company is well positioned to take advantage of the inevitable sector recovery to come, and to achieve outstanding long-term capital growth."
"Overview
The unprecedented expansion in the pace of technology venture investing from 1997 to 2000 has been followed by an unprecedented slowdown during the last 15 months. According to the recent PricewaterhouseCoopers' Moneytree report, quarter ended 31 March 2001, US venture investing declined from $26.1 billion in the quarter ended 31 March 2000 to $10.1 billion in the corresponding period in 2001.
Clearly we have witnessed significant sentiment change towards the technology sector. Yet, according to the Gartner Group, the demand for IT spending by enterprises worldwide is expected to grow from $2.4 trillion in 2000 to $3.3 trillion in 2003, an annual compound growth of over 11%.
Partly as a consequence of this slowdown, the Company had over $90 million in cash and high quality Triple A $ denominated bonds at the period end.
The rate of investment is likely to increase when our fund managers perceive that the major world economies, and in particular the US economy, have turned the corner and that the capital growth prospects are attractive for investment in the technology sector.
Last year the expansion and late-stage funds in our portfolio increasingly focused on earlier stage investments in order to limit exposure to companies whose valuations were more closely correlated to the then highly rated public markets. Generally, during the period, companies have had to lower their valuation expectations and accordingly our fund managers have been investing at lower prices.
Limited Partnership Portfolio
The £97 million net of expenses raised in February 2000 was converted into approximately $155 million and in turn $198.5 million has been committed to 18 Limited Partnerships. This represents an over-commitment of 28% which the Directors consider prudent given the historic rate at which monies are drawn down by such funds, normally up to four years following commitment, and the historic rate at which realisation by trade sale or flotation are received.
During the period the net asset value per share rose from £1.94 to £2.14. As at 31 March 2001 Net Investor had 42% of its net asset value invested in 375 underlying companies managed by 18 funds.
In the period under review, 9 companies in our investment portfolio achieved listings for their shares on public markets. In addition, 29 private companies had their valuations written-up, 66 had them written-down, 16 were written-off and 1 company was sold. Collectively, these re-valuations had an overall negative impact of 6% on the net asset value of the Company.
Bond Portfolio Report
The Net Investor bond portfolio remained positioned in high quality Triple A $ denominated bonds of intermediate maturity and performed well. As at 31 March 2001 it was valued at $83.4 million.
New data seems to indicate that the pace of economic growth is not as strong as the market previously anticipated. This was evidenced by the moderation of annualised growth in real consumer spending that in the US slowed from 7.5% in the quarter to 31 March 2001 to 2% in May. The Federal Reserve's monetary policy easing with a further cut of 50 basis points on 16 May, may not yet be over, but it is thought likely that we are approaching the trough of the cycle.
Since the start in February 2000 to the end of March 2001, the portfolio enjoyed a gain of 22.3%.
Post balance sheet events
Since the period end, two companies in which we were invested, have been taken over and we have realised our investment of $779,288 against a book cost of $700,301 representing a gross profit on these investments of over 11%."
