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HG Capital Trust PLC - Final Results - Part 1
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RNS Number:3144Q HG Capital Trust PLC 18 March 2008 HgCapital Trust plc Preliminary Results for the year ended 31 December 2007 London, 18 March 2007: HgCapital Trust plc (or "the Trust"), the Private Equity Investment Trust managed by HgCapital, the European sector-focused private equity investor, today announces preliminary results for the 12 months ended 31 December 2007. Financial highlights • Total return (NAV plus dividend) increased by 30%. • One year total return share price performance of 8% against FTSE All-share of 5%. • Ten year total return of 18% per annum versus 6% per annum from the FTSE All-Share Index. • NAV increased by 28% to £238.8 million (2006: £187.1 million). • An investment of £1,000 ten years ago, with dividends reinvested, would now be worth £5,183 based on the Company's share price at 31 December 2007 compared with £1,824 for the FTSE All-Share Index. • Dividend of 25p per share (2006: 14p per share). • The NAV per share at 31 January 2008 was 979.5p and at 29 February 2008 it was 1,002.1p. Operational Highlights • Another record year for realisations with proceeds of £106.3 million (2006: £62.3 million), principally from the sale of Schenck, Hirschmann and the combined sale of IRIS Software and CS Group. • European focus and sector expertise resulted in investing a record £50.8 million (2006: £45.3 million) in eight new investments including Fabory (Netherlands, €345 million EV), Mondo Minerals (Finland, €230 million EV), SLV (Germany, €320 million EV) and Americana (UK, £186 million EV). • The Trust won the private equity investment trust of the year for an unprecedented third consecutive year at the Investment Week Awards, again demonstrating the consistent strong performance of the company. • A further €3.5 million out of its €21 million commitment invested in the €300 million Hg Renewable Power Partners fund. • Since the year-end, one new investment made in Casa Reha (Germany, €327 million EV) and three realisations with the sales of Hofmann Menu, The Sanctuary Spa and Clarion Events. Roger Mountford, the Chairman, commented: "In 2007, we saw the beginning of the credit crisis, which has had a severe impact on the financial services industry. Despite this, the Trust has continued to perform well, thanks to the Manager's mid market focus and ability to create strong returns across all market cycles. It is this strength that allows us to remain confident about the outlook for the Trust in 2008. The asset class retains its attractive long-term prospects for growth." For further details: HgCapital Ian Armitage +44 (0)20 7089 7888 Maitland Peter Ogden +44 (0)20 7379 5151 About HgCapital HgCapital is a sector focused private equity investor in the European mid-market. We focus on investments with an enterprise value in the range of £50-£500 million. Our business model combines sector specialisation with dedicated, pro-active support to our portfolio companies as well as the corresponding management expertise across all phases of the investment process. HgCapital manages more than €2.3 billion for some of the world's leading institutional and private investors. Our goal is to achieve outstanding results for our investors, management team and intermediaries. For further details, see www.hgcapital.com HgCapital Trust plc Private equity investment trust of the year Investment Week Awards 2005, 2006 & 2007 Annual report and accounts 31 December 2007 Contents Investment objective Financial highlights Chairman's statement Ten year track record Investing in private equity Manager's strategy Manager's review Investments Realisations Review of principal investments Renewable energy Investment portfolio Income statement Balance sheet Cash flow statement Reconciliation of movements in shareholders' funds Notes to the financial statements Top ten investments Analysis of registered shareholders Board of Directors Directors' report and business review (including investment policy) Directors' remuneration report Corporate governance and Directors' responsibilities Report of the independent auditor Shareholder information Glossary Notice of Annual General Meeting Management and administration Investment objective The objective of the Company is to provide shareholders with long-term capital appreciation in excess of the FTSE All-Share Index by investing in unquoted companies. The Company provides investors with exposure to a diversified portfolio of private equity investments primarily in the UK and Continental Europe. Financial highlights +30% Strong growth in net assets (including dividend) +8% Share price and dividend (total return) versus the FTSE All-Share Index total return of 5% +18% Ten year total return per annum versus 6% per annum from the FTSE All-Share Index >5x Growth in value of shares over 10 years £106m Another record year for realisations £51m Record year for new investments, which deep sector knowledge helped us to identify 25p Dividend per share declared on 17 March 2008 The NAV per share at 31 January 2008 was 979.5p and at 29 February 2008 it was 1002.1p. Chairman's statement The Board believes the Company is well placed to continue growing while taking advantage of improved market conditions for the acquisition of good businesses at reasonable prices Performance I am pleased to report that over the year to 31 December 2007 the Company again created value for shareholders through strong growth in net asset value. The total return (NAV plus dividend) was 30.0%, which compares well against the total return of 5.3% of the FTSE All-Share Index and a decrease of 10.5% in the FTSE Small-Cap Index. The Company's net asset value at year-end was 948.2 pence per share. Two successful realisations that completed shortly after the year-end, The Sanctuary and Clarion Events, have added 47 pence per share. The NAV per share at the end of February was 1,002.1 pence. The Company's long-term returns to shareholders continue to be strong, with a total return (share price plus dividend) over the last ten years of 17.9% p.a., some 11.7% p.a. above the total return on the FTSE All-Share Index. The strong long-term performance delivered by HgCapital as Manager was recognised when the Company was chosen, for the third consecutive year, as Private Equity Investment Trust of the Year in the Investment Week awards. We congratulate the Manager and its staff for their hard and dedicated work in achieving this consistently high level of performance. During the year, the Company received £106.4 million from the realisation of investments (2006: £62.3 million) and invested £50.8 million (2006: £45.3 million) in new and follow-on investments. Both are new records. The Company's share price at the end of the year was 775.0 pence, an increase of 6% over the year. Total return (share price growth plus dividend) was 8%, which also represented a substantial out-performance of the relevant FTSE indices despite the trend of widening discounts against NAV that was observed across the whole sector of private equity investment trusts and investment trusts in general. At year-end the market capitalisation of the Company had grown to £195 million. Revenue return was 29.6 pence per share, compared with 17.9 pence in the previous year. The Company's revenue varies from year to year in accordance with the structure of the underlying investments and the Company's holding of liquid funds available for reinvestment. Each year the Board recommends a dividend based on the revenue return that year, to maintain its status as an investment trust; this year the Board recommends a final dividend of 25.0 pence per share (2006: 14.0 pence). Performance record Year ended 31 December Net assets Net aseet Revenue Earnings Dividends attributable value per Ordinary available per per to ordinary ordinary share Gross for ordinary ordinary ordinary shareholders share price revenue shareholders share share £'000 p p £'000 £'000 p p 1998 66,851 257.8 208.0 2,495 1,359 5.2 4.95 1999 89,863 346.5 289.0 3,901 2,481 9.6 8.00 2000 103,521 411.0 356.5 7,332 4,623 17.9 14.50 2001 95,795 380.3 294.0 3,893 2,420 9.6 8.00 2002 83,837 332.9 219.5 3,528 2,148 8.5 8.00 2003 99,987 397.0 289.5 7,106 3,969 15.8 -** 2004 122,040 484.5 451.5 4,905 2,649 10.5 12.00 2005 156,487 621.3 583.5 4,963 2,965 11.8 8.00 2006 187,135 743.0 731.0 7,769 4,519 17.9 10.00 2007 238,817 948.2 775.0 12,129 7,446 29.6 14.00* * Final dividend for the year ended 31 December 2006, declared on 23 March 2007, paid on 1 May 2007. ** Change in accounting standards relating to recognition of dividends Realisations Our Manager made six major realisations during the year: Doc Morris, Hirschmann Electronics, IRIS and CS Group in the first half and Schenck and Hofmann Menu (cash received in early January 2008) in the second half. The process of selling The Sanctuary and Clarion Events began before year-end and these sales were completed in January and February respectively. All of these realisations have been achieved for proceeds above the values at which they were held in the Company's balance sheet. Brief descriptions of these investments can be found in the Manager's review. As I noted in the Interim statement, in current market conditions, value creation will rely all the more on organic growth and margin enhancement, rather than on arbitrage between entry and exit multiples. The Board is reassured that HgCapital's investment style, which has always been to take a controlling position and then work actively with management to define and deliver strategies that add value to the underlying business, is well suited to more uncertain times. Investments The first half of the year, during most of which equity markets were at peak levels, did not provide good conditions for acquiring sound businesses at reasonable prices. Some owners of businesses are only adjusting their expectations slowly to changed market conditions; however, HgCapital has completed a number of suitable acquisitions in the second half, especially in Continental Europe, leading to an increased rate of investment. £23.8 million has been invested by the Company in three businesses in Continental Europe alongside the Manager's Hg5 fund. As I have reported before, the Manager has continued to seek buyout and development capital opportunities that fall outside the investment parameters of Hg5 but which offer the Company attractive returns through co-investment with other clients of HgCapital. £12.4m has been invested in two UK businesses that offer potential for successful roll-out, alongside other investors including (on the same terms as the Company) some members of the Manager's staff. Further information on all new investments can be found in the Manager's report and on the Company's web-site at www.hgcapitaltrust.com. The Company's portfolio is well diversified, both geographically and by sector. The portfolio contains a wide range of businesses with potential for organic growth and value creation over coming years: following recent realisations, 74% by value of the portfolio (excluding liquid funds) is in investments acquired in the last three years and 48% is still valued by the Board at cost. With £79.8 million in liquid funds at year-end available for reinvestment and a £25 million borrowing facility, the Company is well positioned to take up opportunities to invest on attractive terms. Board and AGM In last year's report the Board stated that as part of its long-term succession planning it intended to identify an additional Director. After a formal process in which the Board employed a specialist recruitment agency we invited Richard Brooman to join the Board. He is a chartered accountant with long experience as a finance director and on the board of another investment trust. Mr Brooman has been appointed chairman of the Company's Audit and Valuation Committee with effect from 1 July 2008, in succession to Tim Amies who has made a huge contribution to the Company's progress through his leadership of the Committee. Mr Brooman's election as a Director of the Company will be proposed at this year's AGM. The Board will also ask shareholders to renew the power to purchase shares in the market for cancellation, which the Board may use to return capital to shareholders if conditions for new investment are unfavourable and the Company appears to have surplus capital. Resolutions will also be proposed to amend the Articles to take account of those provisions of the Companies Act 2006 that are coming into effect, and to increase the total available for payment of directors' fees, to take account of increases in fees and the enlargement of the Board. Walker Report It has been the Board's consistent policy to publish reports that are transparent and comprehensive in describing the portfolio, the sources of value creation and risk. In November 2007 Sir David Walker published his report "Guidelines for Disclosure and Transparency in Private Equity", which sets out guidelines regarding the disclosure of information by private equity companies and their UK portfolio companies.The Board welcomes this report. The Manager's review details the relationship between the Company and the Manager, the firm's history and investment approach, strategy and tactics. The Investment pages describe the history of the Manager's involvement with its portfolio companies and gives details of their financial performance and any key factors that impact this. Prospects The market for debt in very large leveraged buyouts is undoubtedly very difficult; however, for the mid-market buyouts in which HgCapital specialises, large amounts of debt requiring wide syndication or refinancing in public markets are typically not necessary. With strong liquidity, HgCapital has the flexibility to underwrite acquisitions with more equity than before and refinance with debt at a later date. Future deals may include more mezzanine-level funding which, until recently, had been largely squeezed out by easy bank lending. While these factors may serve to restrain prices paid for businesses, they do not appear to be preventing deals from being completed in the mid-market sector. The private equity business finds opportunity in change and thrives on adapting to it. While deal structures may evolve, the fundamental skills involved in identifying businesses with potential, redefining their strategy, and driving improvement remain the same. The Board retains confidence in the Manager's ability to identify a regular flow of opportunities and to add value for the benefit of shareholders. With a young portfolio of investments as a base for value creation in coming years and strong liquidity, the Board believes the Company is well placed to continue growing while taking advantage of improved market conditions for the acquisition of good businesses at reasonable prices. The Board is confident that, for many investors, an allocation to a well-managed private equity portfolio remains appropriate in current market conditions, especially with the liquidity and transparency offered by an investment trust structure. HgCapital Trust has delivered consistent value creation to shareholders for more than a decade and the Board believes it will continue to provide investors with an efficient vehicle for gaining exposure to a diversified portfolio in an asset class that offers attractive long-term prospects for growth. Roger Mountford Chairman 17 March 2008 Historical total return* performance One year Three years Five years Seven years Ten years % p.a. % p.a. % p.a. % p.a. % p.a. Net asset value 30.0 27.2 25.3 14.7 16.1 Share price 7.9 21.7 31.9 14.8 17.9 FTSE All-Share Index 5.3 14.5 15.4 4.6 6.2 FTSE Small Cap Index (10.5) 9.7 16.0 3.4 6.6 Based on the Company's share price at 31 December 2007 and allowing for dividends to be reinvested, an investment of £1,000 ten years ago would now be worth £5,183 An equivalent FTSE All-Share Index return would be worth £1,824 * Total return assumes all dividends have been reinvested. Investment activity 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Invested (£m) 8 40 25 20 20 15 22 35 45 50 Realised (including income) (£m) 19 30 18 26 27 31 47 52 62 106 HgCapital Trust plc gives the investor access to a private equity portfolio run by an experienced and well-resourced Manager who makes investments in fast growing companies over a number of geographies and sectors. We believe our approach will continue to reward investors with superior performance, both relative to the public markets and its peers over the long term. Investing in private equity Strong performance in absolute terms and relative to other asset classes Private equity Private equity describes securities issued by private and unlisted companies. The securities are loans, equity and equity-related, enjoying the full rewards and risks of ownership. Investments can be in early-stage businesses, or provide expansion capital for profitable growing businesses, and can be used to finance management or leveraged buyouts of established businesses. The objective is to achieve higher returns than public equity over a rolling period of five to ten years. Investments are typically held for three to seven years and are realised through an initial public offering, a trade sale, or a sale to another financial institution. Interim proceeds are sometimes possible through recapitalisations. Investment profile Private equity investments are less liquid than public equities. To compensate for this feature they offer more control and more attractive returns. Over the ten years from 1996 to 2006 UK private equity funds outperformed the FTSE All-Share Index by 10.8% per annum and outperformed every asset class over this period*. The risk profile of an individual private equity investment depends on many factors; the principal ones are the nature of the business, the maturity and stage of the business, its size and the financial structure of the balance sheet. A diversified portfolio helps to mitigate some of these risks; more important mitigants are the quality of company selections by the private equity manager and the quality of the management teams running the company. Advantages of private equity Compared with investment in the public markets, a private equity investor has significant advantages: • More investment opportunities: significantly more private than listed companies • Better access to information: the ability to conduct detailed market, financial, legal and management due diligence • More control for the private equity manager over the management of the business and the timing of its sale • Alignment of interest of owners and management, leading to better decision making: the opportunity to act like an owner rather than a fund manager, with the benefit of representation on the Board • Management talent: the ability to attract high calibre management and the alignment of management's interests to the success of the investment through equity participation Private Equity Investment Trusts (PEITs) A Private Equity Investment Trust (PEIT) offers the opportunity to participate in a diversified portfolio of mainly unquoted companies that are generally valued at a discount to their quoted peers. By buying shares in a PEIT, which are freely traded, the investor benefits from liquidity while participating in the potentially superior returns of a private equity portfolio. The Company's objective is to provide shareholders with long-term capital appreciation rather than dividend growth. To maintain its status as an investment trust, it distributes a proportion of its income by way of a dividend each year. The earnings of a PEIT in any year are affected by various factors, including the structure of the underlying investments. Accordingly the revenue earnings per share and the dividend of a PEIT will tend to fluctuate from year to year. A PEIT should not be confused with a Venture Capital Trust (VCT) which offers tax advantages to certain investors but is highly constrained in the companies that qualify for investment. Advantages of investment via an investment trust PEITs offer investors liquidity in their shares, which can be traded in variable bargain sizes and at any time. This is of significant benefit to investors who do not wish to commit to the ten year lock-in and minimum investment required when investing in private equity via limited partnerships. Share price The major driver of a PEIT's share price is net asset value (NAV), the growth of which is driven by realisations and by revaluation of the unrealised portfolio, based on the profitability of each underlying investment and market ratings. The share price of a PEIT usually tracks NAV but it may trade at a premium or a discount, depending on the market's view of future realisations and new investments, and the investment strategy of the manager. Although not all PEITs will provide high returns, a strong manager with a carefully thought-out investment strategy that offers a diversified portfolio of companies across a number of sectors and geographies can increase the likelihood of success. Publication of net asset value Unquoted investments are revalued twice each year, as at December and June, and the NAV is adjusted to reflect these valuations in the following March and August respectively. The NAV per share of the Company is calculated monthly with respect to cash, cash equivalents and listed investments in the portfolio, and to reflect any realisations since the previous valuation. The NAV is released to the public through the London Stock Exchange's regulatory news service on the fourth day of each month. This NAV is then used as the basis for calculation of the discount or premium published in newspapers for the following month. * Source: BVCA Performance Measurement Survey 2006. Manager's strategy To produce a diversified portfolio of European mid-market companies by combining deep sector knowledge with strong operational skills OUR STRATEGY Mid-market HgCapital concentrates on mid-market buyouts with enterprise values of between £50 million and £500 million. This market comprises a high volume of companies with proven, reliable track records and defensible market positions. Companies in this range are small enough to provide opportunities to unlock incremental value through organisational changes and operational improvements, yet large enough to attract quality management and to offer multiple exit options. Pan-regional We focus on investments in Europe, with the majority of activity taking place in the UK, Benelux, Germany and the Nordic countries. Our network of local offices, combined with a common culture and consistent processes, underpins our ability to produce strong performance. Broad coverage HgCapital's dedicated sector teams continue to provide investors with exposure to the substantial majority of private equity activity within its target size range and across the relevant geographies. Clear investment criteria When evaluating an investment opportunity, HgCapital applies a rigorous and commercial investment approach. Our process governs all investment decisions, with the goal of ensuring that only the most attractive investments are completed, irrespective of an opportunity's sector or geography. In all cases we look to earn a return on the Company's capital that rewards the investor for the measured risks we take. We like situations where change is taking place and where our specialist knowledge and skills will give us an edge over others. Over the past two years we have adopted a two-pronged approach to avoid overpaying. We have been prepared to pay competitive prices for businesses that have strong management teams, leading market positions, high barriers to entry and that serve growth markets. Alternatively, we have bought companies at lower valuations that serve growth markets, have clear performance improvement potential and have a requirement for management change. OUR TACTICS Sector specialisation Our well-resourced sector teams combine the domain knowledge and expertise of a trade buyer with the flexibility of a financial investor. Our sector teams (Consumer and Leisure, Healthcare, Industrials, Services and TMT) share a similar top-down approach to screening their respective industries. By leveraging on our sector knowledge, we can concentrate our resources on converting prime opportunities and avoid spending time on transactions of less interest or value. In addition, over the last four years we have built a specialist team to identify businesses that will operate, construct and develop renewable energy projects in Western Europe. Active portfolio management We undertake intensive, continuous, informed interaction with our portfolio companies using dedicated portfolio management executives to develop, execute and monitor value-enhancement strategies for each of our investments. HgCapital will typically invest as the lead controlling owner of its portfolio companies as part of its hands-on approach to management. We appoint HgCapital executives to our companies' boards to participate in business planning and to work with management when needed, and have recently strengthened this team with a number of senior appointments. To monitor and analyse our portfolio companies throughout the investment's life cycle, we operate a Portfolio Review Committee that meets on a monthly basis to discuss our investments' performance. Particular attention is given to those that are recent, underperforming or scheduled for exit. Deep resources We invest substantially in all areas of our business to ensure that high quality resources can be applied to each aspect of an investment opportunity. Our team of over 70 people is well-positioned to produce high absolute returns over the long term from a well-diversified portfolio of investments which, we believe, will continue to be superior to the returns generated by comparable public equity markets. Manager's review 2007 was another record year for realisations and investments, with the current portfolio continuing to perform well HgCapital Trust ('the Company') invests alongside other clients of HgCapital. Typically, the Company's holding forms part of HgCapital's much larger controlling interest in buyout investments of companies with an enterprise value (EV) of between £50 million and £500 million. The Manager's review generally refers to each transaction in its entirety, apart from the tables detailing the Company's participation or where it specifically says otherwise. The Company's net asset value increased from £187.1 million to £238.8 million during the year. This arose largely from unrealised movements and realised proceeds in excess of the book value as at 31 December 2006 of £12.5 million and £43.2 million respectively. This increase is the result of strong earnings growth and cash generation by our portfolio companies, as well as a good flow of realisations. During the year, the Company invested a total of £50.8 million (2006: £45.3 million), participating in eight new investments. These new investments were made in Fabory (Netherlands, €345 million EV), Atlas (UK, £25 million EV), Mondo Minerals (Finland, €230 million EV), SLV (Germany, €320 million EV), CS Group (UK, £100 million EV), Americana (UK, £186 million EV), Cornish Bakehouse (UK, £9 million EV) and Wastebidco (UK). During the year, the Company invested a further €3.5 million out of its €21 million commitment to the €300 million Hg Renewable Power Partners fund. The fund's focus is on long-term investments in renewable power projects using proven technologies, including wind, small hydro, landfill gas and waste-to-energy in Western Europe. The Company realised record proceeds during the year (including gross income received) amounting to £106.3 million (2006: £62.3 million). These proceeds arose principally from the sale of Schenck, Hirschmann and the combined sale of IRIS Software and CS Group. Since the period end, we have made one new investment in Casa Reha (Germany, €327 million EV). We have also completed the sales of Hofmann Menu, The Sanctuary Spa and Clarion Events, with clients receiving proceeds of £58.4 million, £50.0 million and £73.9 million respectively. In addition we have sold our remaining shares in Xyratex and PRA for £23.7 million and £10 million respectively. In aggregate these realisations have returned proceeds of £216 million to clients, of which the Company received £50.3 million. Attribution analysis of current year movements in net asset value £'000 Opening net asset value as at 1 January 2007 187,135 Gross revenue 12,129 Expenditure (4,028) Taxation (2,418) Dividends paid (3,526) Realised proceeds in excess of 31 December 2006 book value (excludes gross revenue) 43,170 Net unrealised appreciation of investments 12,544 Carried interest (6,189) Closing net asset value as at 31 December 2007 238,817 Realised and unrealised movements in net asset value during 2007 Net unrealised Realised proceeds appreciation of in excess of investments £'m 31 December 2006 book value £m (excludes gross revenue) Schenck 0.3 20.5 Blue Minerva 1.4 10.4 Hofmann 6.1 - Guildford 0.9 4.9 Sanctuary 5.5 - Addison 5.2 - Hirschmann 0.7 4.1 Forex gains 3.5 - Doc Morris 0.2 2.8 Clarion Events 1.9 - Other & Gilts - 0.5 Hoseasons (1.0) - WET (1.2) - Clinphone (1.5) - Axiom (1.5) - Elite (3.4) - FTSA (4.6) - Subtotal 12.5 43.2 Manager's review continued A diverse portfolio that is performing well, with strong long-term growth potential At the end of 2007, the Company held a portfolio of 45 investments (2006: 42), of which the 20 principal investments represent over 90% of the portfolio's value. This portfolio of small- and mid-cap stocks combines strong growth with sector and geographic diversification. With the high number of realisations and new investments made during 2006 and 2007, the portfolio at year-end was relatively young. Around 54% of the portfolio by value had been acquired within the previous two years (2006: 55%). It is the Company's policy not to revalue any investment upwards until receipt of audited accounts for a full trading year following acquisition; as a result, some 48% of the portfolio by value at year-end was still held at cost (2006: 49%). The Company's ten largest investments, which represent over 60% of the Company's portfolio, are performing well, realising solid year-on-year growth in earnings. A majority of these by value continue to be held at cost. At the same time, a minority of investments performed below expectation in the year, most notably FTSA, Elite and Axiom. Over the last three years, the focus of the portfolio has shifted towards Continental Europe, with over half the Company's investments by value located outside the UK. We believe this to be advantageous, as private equity in these markets is less mature than in the UK and they therefore offer significant potential for growth over the next decade. We look forward to exploiting new opportunities that will arise from a downward adjustment in the capital markets and the economy. The Company benefits from strong liquidity, holding £79.8 million in liquid funds at year-end awaiting reinvestment. It also has a £25 million borrowing facility. Asset class+ Unquoted 62% Cash & other assets 35% Quoted 3% Geographic spread by value++ UK 45% Germany 24% Nordic region 14% Benelux 13% Europe 2% North America 2% Valuation basis++ Cost 48% Earnings 28% Third Party 10% Written down 7% Quoted 4% Net assets 3% Deal type by value++ Buyout 86% Expansion 10% Renewable energy 2% Fund 1% Venture 1% Sector by value++ TMT 29% Industrials 22% Consumer & Leisure 22% Services 17% Healthcare 7% Renewable energy 2% Fund 1% Vintage by value++ 2007 28% 2006 26% 2005 20% 2004 7% 2003 8% 2002 1% Pre 2002 10%* *includes 7.5% relating to The Sanctuary Spa, which has been sold post period end +Percentages are based on net assets ++Percentages are based on fixed assets and are shown by value Investments During 2007 HgCapital invested a total of £322 million on behalf of its clients, including £50.8 million on behalf of the Company Company Sector Activity Deal Type Cost £'000 BMFCO (t/a Fabory) Services Distributor of industrial Buyout 10,871 fasteners Atlas Energy Services E-learning products for the oil Buyout 8,153 & gas industry Mondo Minerals Industrials Talc mining Buyout 7,004 SLV Electronik Industrials Lighting products Buyout 5,962 Guildford (t/a CS Group) TMT Software services to the legal & Buyout 5,046 not-for-profit sectors Americana Consumer & Wholesaler and retailer of Buyout 4,611 Leisure fashion apparel Cornish Bakehouse Consumer & Pasty retailer Expansion 4,200 Leisure Wastebidco Industrials Investment vehicle for potential Buyout 309 acquisiton of Biffa plc New investments 46,156 Sporting Index Consumer & Spread betting Buyout 1,758 Leisure FTSA Industrials Crash test dummies Buyout 578 Axiom TMT Telecommunications software Expansion 85 Hg RPP LP Renewable Renewable energy fund Fund 2,180 energy Further investments 4,601 Total investment by the Company 50,757 Figures below refer to the total size of each acquisition, including debt raised from third parties, made by HgCapital on behalf of its clients, including the Company. New investments Fabory In October 2007, HgCapital completed the €345 million buyout of Fabory, the leading distributor of industrial fasteners in the Benelux region. Its Fabory Centres (FCs) have proved a highly successful retail format and the company is poised for an aggressive roll-out of further FCs in the high-growth markets of Central and Eastern Europe. Atlas In November 2007, HgCapital completed the £25 million buyout of Atlas. Founded in 1997, Atlas Interactive is a leading provider of interactive e-learning products, targeted at regulatory-driven health, safety and environmental training for the oil and gas sector. Over the past 10 years the business has seen rapid organic growth and its customers include leading companies such as BP, Shell and QatarGas. Mondo Minerals In November 2007, HgCapital completed the €230 million buyout of Mondo Minerals. Mondo is one of the world's leading companies in talc mining and processing and has secure reserves of raw materials for the next 40 years. Mondo's customers are active in a variety of European industries including paper, paint, plastics, and ceramics. The group supplies clients in more than 50 countries. SLV In August 2007, HgCapital completed the €320 million buyout of SLV Group. SLV Group is one of the fastest-growing manufacturers of innovative lighting systems in Europe. It combines German design excellence, low-cost production in Asia and first class logistics. CS Group In April 2007, HgCapital completed the £100 million P2P buyout of CS Group, the UK's leading provider of back-office application software to the legal and not-for-profit sectors. CS Group was sold in a combined sale with IRIS in July 2007, delivering a return of 2.2x original cost, including the unrealised value. Further details are set out in Realisations. Americana In March 2007, HgCapital completed the £186 million buyout of Americana, the branded apparel business, which owns the youth brands Bench and Hooch. Revenues are predominantly through UK wholesale channels although the business is increasing its wholesale revenues in Continental Europe and building a UK retail presence. Cornish Bakehouse In July 2007, HgCapital completed the £9 million buyout of Cornish Bakehouse, the St Ives-based pasty retailer. It sells a full take-away range, predominantly for lunchtime trade, at a higher quality level than direct competitors. We are backing a proven management team that previously grew and sold a very successful specialist retail chain. Wastebidco Wastebidco is a specially formed acquisition vehicle set up to acquire shares in Biffa plc, an integrated UK waste management company, and which now owns 2.4% of Biffa's share capital. As announced by the target on 24 January 2008, HgCapital withdrew from the consortium formed with Montagu. Assuming that a transaction occurs with the new Montagu consortium then it is intended that Wastebidco's shares in Biffa plc will be tendered at the consortium's offer price. Realisations During 2007 HgCapital realised total proceeds of £688 million on behalf of its clients, including £106.4 million for the Company Company Sector Exit Route Cost Proceeds + 2007 return + £'000 £'000 £'000 Schenck Industrials Financial sale 11,698 33,952 22,254 Blue Minerva (t/a IRIS) TMT Financial sale 2,939 17,660 14,721 Hirschmann Industrials Financial sale 2,669 14,874 12,205 Guildford (t/a CS Group) TMT Financial sale 5,031 9,967 4,936 Doc Morris Healthcare Trade sale 1,956 4,739 2,783 Worldmark Industrials Financial sale 2,389 3,569 1,180 Bertram Consumer & Trade sale 2,848 2,009 (839) Leisure Eagle Rock TMT Sale to 3,856 1,618 (2,238) management South Wharf plc* Industrials Quoted share 47 1,033 986 sale Other 96 366 270 Full realisations 33,529 89,787 56,258 Xtx t/a Xyratex** TMT Quoted share 1,895 4,957 3,062 sale Addison TMT Recapitalisation 4,203 5,441 1,238 Rolfe & Nolan TMT Recapitalisation 225 2,093 1,868 Voyage (formerly Paragon) Healthcare Loan redemption 1,991 1,991 - SHL Services Loan redemption 1,046 1,127 81 Other 4,501 994 (3,507) Partial realisations 13,861 16,603 2,742 Total realisations 47,390 106,390 59,000 by the Company + Includes gross revenue received during the year * Listed on the Dublin and London stock exchanges ** Traded on NASDAQ Realisation figures below refer to the total value of each transaction, including, where appropriate, repayment of third party debt. Proceeds to clients including the Company are stated net of any such repayment. Full realisations Schenck In December 2005, HgCapital completed the €205 million buyout of Schenck Process SA, the global market leader in high-tech applications and solutions in industrial weighing, feeding and automation. In June 2006, Schenck completed the acquisition of Stock Equipment Company (USA) Inc. In November 2007 the business was sold, returning proceeds to clients of £174 million, equal to 2.9x original cost. IRIS Software The £102 million secondary management buyout of IRIS Software Ltd was completed in July 2004. In June 2007, a deal was signed to sell IRIS to Hellman & Friedman in a combined sale with CS Group. On completion this delivered £105.1 million to clients. Of this amount, £92.5 million has been received as cash and £12.6 million as equity in the newly combined IRIS-CSG, delivering a 3.6x return, including the unrealised value. Hirschmann In March 2004, HgCapital completed the €115 million buyout of Hirschmann Electronics. Hirschmann is the market-leading global supplier of electronics equipment, components and related accessories. It has manufacturing plants in Germany and Hungary as well as sales and service operations in Europe, the USA, the Far East and South America. The business was sold in March 2007, with proceeds of €113 million received for clients. Further proceeds of €25 million were received in April 2007, with the potential of a further €15 million over the next 2-3 years, subject to any warranty claims. This investment has returned 5.8x original cost, including the unrealised value of potential future payments. CS Group In April 2007 HgCapital completed the £100 million P2P buyout of CS Group, the UK's leading provider of back-office application software to the legal and not-for-profit sectors. CS Group was sold in a combined sale with IRIS in July 2007, delivering £87 million to clients. As with IRIS, of this amount, £76.6 million has been received in cash and £7.4 million as equity in the newly combined IRIS-CSG. This has delivered a 2.2x return, including the unrealised value. DocMorris Founded in 2000 as a mail order business, DocMorris has grown to become the largest pharmacy serving the German market. It offers prescription drugs at attractive prices by sourcing direct from the pharmaceutical manufacturers. In April 2007 HgCapital, together with 3i and Neuhaus Partners, sold their stakes to Celsio AG, Europe's largest pharmaceutical distributor. This investment returned 2.5x original cost, including the unrealised value of future escrow payments. Worldmark Worldmark is a supplier of labels to the electronics industry. We bought the business in 2000, then its market deteriorated rapidly. We changed its focus and board leadership, and the business recovered. The business was sold in January 2007. Clients received proceeds amounting to £29.2 million, representing a 1.5x multiple of cost. Bertram Bertram is a book wholesaler and distributor of books, games and audio-visual titles to public libraries. Following the acqusition of Bertram in 1999, the business made mistakes in the execution of its strategy. We changed the management team, trading improved and eventually in February 2007, the business was sold to Woolworths plc. Proceeds of £13.1 million were received for clients, representing an overall return of 0.7x original cost. Eagle Rock Eagle Rock creates and acquires audio and audio-visual entertainment productions with a strong focus on rock music by mature and established international artists. It exploits these intellectual property rights through DVD, TV licensing and CD. All manufacturing and distribution are outsourced, as is most of the production. In April 2007, the company was sold to management and an investment consortium. Proceeds of £7.5 million were received for clients, representing a return of 0.4x original cost. South Wharf Following the demerger of the glass business, South Wharf became a property company, owning 26 acres of long-leasehold land and a small glass trading activity. Title to the land was improved significantly so that it could be sold. We sold our quoted shares for proceeds of £49.8 million. Over its life, this investment has returned a multiple of 7.3x original cost. Partial realisations Xyratex Xyratex has been a world leader in the hard disk and network storage technology market for over 20 years. It completed its IPO on NASDAQ on 24 June 2004 at a price of $14 per share, realising £10.2 million for HgCapital clients at the time. HgCapital has since selectively sold stock with a total value of approximately £80 million from the time when our lock-up period expired in early 2005 until July 2007. Since the period end, the residual stake was sold for £23.7 million, resulting in a total return of 2.25x original cost. Addison Addison is a leading German applications software company that provides business-critical solutions to two related markets - tax accountancy and small to medium enterprises (SMEs). It develops, licenses and manages standard and sector-specific software for bookkeeping, accounts production, tax, cost accounting, payroll administration and financial planning. Addison is the clear number two player in the German market and the fastest-growing. The business was recapitalised in October 2007, returning £28 million to clients. Rolfe & Nolan Rolfe & Nolan is the number two global supplier of back-office processing software to the exchange traded derivatives industry. It supports over 250 bank, brokerage and exchange clients in 20 countries. Customers include Deutsche Bank, Goldman Sachs, HSBC, Lehman Brothers and MAN Financial. The business has been recapitalised a number of times, most recently in June 2007, which returned £12 million to clients. Over its lifetime this investment has returned 2.2x original cost, including the unrealised value. Loan redemptions During the period, partial redemptions of loan stock from Voyage and SHL returned proceeds of £13 million and £9 million respectively. Other realisations Other realisations received during the period include deferred considerations from earn-outs on PBR and Mednova and cash distributions received from residual overseas fund investments. The restructuring of Pulse Staffing Limited (formerly Match) resulted in the original loan stock being cancelled and the remaining investment is now held in an equity instrument. Review of principal investments 1 VISMA Sector: TMT Location: Nordic region Year of investment: 2006 www.visma.com In May 2006, HgCapital completed the £382 million buyout of Visma, the number one provider of business software in the Nordic region. HgCapital's clients hold a 57% stake in this business. Headquartered in Oslo, with significant revenues throughout the Nordic region, the company provides its customer base of over 200,000 enterprises with accounting, resource planning and payroll software, outsourced book-keeping and payroll services, in addition to debt collection and procurement. 2 The Sanctuary Spa Sector: Consumer and Leisure Location: UK Year of investment: 1995 www.thesanctuary.co.uk In July 2005, our original investment in the Sanctuary Spa Group was acquired by the newly incorporated The Sanctuary Spa Holdings Limited (SSHL). Simultaneously, SSHL acquired the licence to sell beauty products branded The Sanctuary Spa, the rights to which had previously been held by a third party licensee. HgCapital's clients took a 78% stake in the business. The Sanctuary Spa operates the women's day spa 'The Sanctuary', based in Covent Garden, and also owns a range of beauty products distributed through the spa and Boots the Chemist. In 2006, we received £9 million from loan stock repaid. Post year-end, The Sanctuary Spa has been sold to PZ Cussons for £75 million, returning £50 million to clients. 3 Fabory Sector: Services Location: Benelux Year of investment: 2007 www.fabory.com In October 2007, HgCapital acquired Fabory from AAC Capital Partners for a consideration of €345 million. HgCapital's clients hold a 79% stake in this business. Fabory is a full-line wholesale distributor of industrial fasteners with a market-leading position in the Benelux markets. Key features of Fabory's business model are its well-invested infrastructure and very high service and availability levels, enabling it to charge premium prices to a relatively price-insensitive customer base. Fabory delivers fasteners direct to customers or through its B2B retail concept ('Fabory Centres'). The company plans to roll out the Fabory Centre concept in the high growth economies of Central & Eastern Europe. 4 Hofmann Sector: Industrials Location: Germany Year of investment: 2005 www.hofmann-menue.de In November 2005, HgCapital successfully completed the €138 million buyout of Hofmann Menu for a 78% equity stake in the business. Hofmann is a market-leading provider of frozen food products as well as related on-site catering for small business canteens and social organisations such as care homes, hospitals and schools in Germany. Hofmann differentiates itself from its competition by focusing on quality and a wide choice of healthy, tasty menus. The company's centralised production also allows for significant cost advantages over traditional catering firms. Since the year-end the sale of the business to Gilde Buy Out Partners has completed, returning £58.4 million to clients. Cost and valuation of the Company's holdings Company Deal type Residual Valuation Valuation Portfolio cost £'000 basis value £'000 % VISMA Holdings * Buyout 13,268 13,812 Cost 8.9 The Sanctuary Spa Holdings Ltd Expansion 631 11,628 Earnings 7.5 BMFCO UA (t/a Fabory) * Buyout 10,871 11,428 Cost 7.4 Hofmann M.M. SA Buyout 4,747 10,774 Third Party 7.0 * The difference between cost and valuation is due to foreign exchange rate movements 5 Voyage Group Sector: Healthcare Location: UK Year of investment: 2006 www.milburycare.com In April 2006, HgCapital completed the £322 million buyout of Voyage Group (formally known as Paragon Healthcare). HgCapital's clients have a 52% stake in this business. Voyage owns and operates small community-based homes for adults with learning disabilities and associated physical disabilities, autistic spectrum disorders, complex needs and acquired brain injury. The company uses a variety of techniques as therapy, including working with animals. The company currently operates 1,750 places in 242 homes across England and Scotland. 6 Atlas Sector: Services Location: UK Year of investment: 2007 www.atlasinteractive.co.uk In November 2007, HgCapital completed the £25 million acquisition of Petrolearn Limited, also known as Atlas Interactive. HgCapital's clients have a 57% stake in the business. Atlas Interactive is a leading provider of interactive e-learning products, targeted at regulatory-driven health, safety and environmental training for the oil and gas sector. Atlas Interactive has a global market share of around 1-1.25% (25% to 38% UK market share), making it a relatively large player in this fragmented space. It benefits from deep-rooted customer relationships with major companies such as BP, Shell and QatarGas, and maintains a high level of repeat business. In addition, it has amassed over 1,000 hours of standardised intellectual property-protected e-learning content that it resells to its customer base. 7 Clarion Events Sector: TMT Location: UK Year of investment: 2004 www.clarionevents.co.uk The £50 million buyout of Clarion Events, the largest independent exhibition and events business in the UK, completed in October 2004, with HgCapital's clients taking a 65% equity stake in the business. The company has a portfolio of fifty business and consumer shows, including the 'Top Drawer' giftware trade shows, 'Fine Art & Antiques', 'Baby', 'Caravan & Outdoor' and 'House & Garden'. Clarion's subsidiary ATE, acquired in June 2005, runs the leading international show for the amusements and gaming sector, and related conference and publishing services. Since the year-end the business has been sold, returning £73.9 million to clients. 8 Addison Sector: TMT Location: Germany Year of investment: 2005 www.addison.de The €78 million buyout of Addison was completed in June 2005. HgCapital's clients have a 93% equity stake in the business. Addison is a leading German applications software company that provides business-critical solutions for tax accountants and SMEs. It develops, licences and manages standard and sector-specific software for bookkeeping, accounts production, tax, cost accounting, payroll administration and corporate planning. In December 2005, HgCapital made a further investment in Addison of €14 million to fund the acquisition of its competitor PBSG, and in November 2007 a recapitalisation of the business was completed to enable the company to pursue its growth strategy, returning £28 million to clients. Cost and valuation of the Company's holdings Company Deal type Residual Valuation Valuation Portfolio cost £'000 basis value £'000 % Voyage Group Ltd (formerly Paragon) Buyout 8,755 8,755 Cost 5.7 Atlas Energy Group Ltd Buyout 8,153 8,153 Cost 5.3 Clarion Events Holdings Ltd Buyout 4,965 7,594 Earnings 4.9 Addison Luxembourg SA Buyout 2,296 7,547 Earnings 4.9 9 Mondo Minerals Sector: Industrials Location: Nordic region Year of investment: 2007 www.mondominerals.com In November 2007, HgCapital completed the €230 million acquisition of Mondo Minerals OY. HgCapital's clients have a 91% stake in the business. Mondo is the world number two in talc mining and processing with 2007 revenues of €134 million. The core markets for Mondo are the paper and paint industries, where it holds a market share of 65% and 40% respectively in Europe. Mondo supplies the majority of the talc demand for paper producers in Finland, a highly regional market. Talc is a base chemical with multiple proven applications and Mondo has secure raw material reserves of more than 40 years. 10 Sporting Index Sector: Consumer and Leisure Location: UK Year of investment: 2005 www.sportingindex.com The £75.8 million buyout of Sporting Index was completed in November 2005. HgCapital's clients acquired a 70% equity stake in the business. Founded in 1992, Sporting Index is the recognised leader in sports spread betting, with a market share of approximately 70% in the UK. It offers a greater variety of bets (approximately 23,000) and more choice than any other sports spread betting company. It is also the only sports spread betting company to offer continuous 24-hour betting and sports spread betting on Sky TV. It is regulated by the FSA and does not have a US presence. 11 SHL Sector: Services Location: UK Year of investment: 2006 www.shl.com In November 2006, HgCapital completed the £100 million buyout of SHL, taking a stake of 72%. SHL is the UK market leader in objective psychometric testing and has a global presence. The core business consists of the development and sale of 300 psychometric tests to corporate clients, covering areas such as numerical ability, verbal reasoning and personality fit. SHL also provides psychologists for the administration and interpretation of tests. 12 SLV Sector: Industrials Location: Germany Year of investment: 2007 www.slv.de In August 2007, HgCapital completed the €320 million acquisition of SLV Group. HgCapital's clients have a 67% stake in the business. SLV is a fast-growing and highly profitable German provider of innovative lighting systems. Since 2000, the company has established a unique business model focused on B2B. SLV has a competitive advantage in the areas of product development and design, production, warehousing, and logistics and distribution. SLV is positioned at the lower end of the premium market, providing superior quality at attractive prices. Today SLV generates 45% of sales abroad. Manufacturing is outsourced predominately to China, providing a considerable cost advantage. The company also benefits from long-established relationships with suppliers. Cost and valuation of the Company's holdings Company Deal type Residual Valuation Valuation Portfolio cost £'000 basis value £'000 % Mondo Minerals Co-op * Buyout 7,004 7,358 Cost 4.8 Sporting Index Group Ltd Buyout 7,186 7,186 Cost 4.7 SHL Group Holdings 1 Ltd Buyout 6,489 6,489 Cost 4.2 SLV Electronic SARL * Buyout 5,962 6,438 Cost 4.2 * The difference between cost and valuation is due to foreign exchange rate movements 13 Sitel Semiconductor Sector: TMT Location: Benelux Year of investment: 2005 www.sitelsemi.com The $74 million buyout of the digital cordless business unit of National Semiconductor Corporation completed in June 2005. HgCapital's clients acquired an 81% equity stake in the business. Elite creates products and systems to support wireless voice and data applications for the home. These include: baseband and radio transceivers for cordless DECT (Digital Enhanced Cordless Telephony); telephones and base stations for VoIP (Voice over Internet Protocol); and cordless game pads and voice modules. The company, which was formerly part of National Semiconductor Corporation, is based in Den Bosch and Hengelo, Netherlands, and employs approximately seventy people. 14 W.E.T. Sector: Industrials Location: Germany Year of investment: 2003 www.wet.de The €169 million public-to-private transaction to acquire W.E.T. Automotive Systems AG was declared unconditional in September 2003, with acceptances of over 76.3%. HgCapital's clients acquired a 70% equity stake in the business. W.E.T. Automotive Systems is the world market leader for seat-heating systems, supplying most of the major European and North American passenger car seat manufacturers as well as Asia from its Chinese facility. The weak US dollar and a slow North American market have both had an impact on profitability, although within Europe and China the business is performing well. A profit-improvement programme has been implemented and the sensors business has been divested. 15 Schleich Sector: Consumer and Leisure Location: Germany Year of investment: 2006 www.schleich-s.de In December 2006, HgCapital completed the €165 million buyout of Schleich acquiring an 80% stake in the business. Schleich is the leading producer of plastic toy figurines, such as farm and wildlife animals, historical characters and The Smurfs. Its products, trading under the highly recognised name Schleich-S, are sold in over thirty countries, including Germany, the US, the UK and France. Growth drivers are product innovation and internationalisation. Toy figurines provide an attractive product offering for retailers as they are purchased on different occasions throughout the year in contrast to traditional toy sales patterns, where typically 50% of sales happen in the two months before Christmas. 16 Americana Sector: Consumer and Leisure Location: UK Year of investment: 2007 www.bench.co.uk In March 2007, HgCapital completed the £186 million buyout of Americana. HgCapital's clients have a 43% stake in the business. Americana is a branded apparel business, manufacturing and marketing two brands targeted at the youth market, Bench and Hooch. The Bench brand is aimed at both men and women in the 16 to 25 age group. Hooch is a fashion clothing brand targeted at the female 13 to 17 age group. Revenues are predominantly through UK wholesale channels, though the business is increasing its wholesale revenues in Continental Europe and building a UK retail presence. A significant upgrade of Americana's management team has recently been completed. Further opportunities are being explored in international wholesale expansion beyond Continental Europe and in product range extension. Cost and valuation of the Company's holdings Company Deal type Residual Valuation Valuation Portfolio cost £'000 basis value £'000 % Elite Holding SA (t/a Sitel Semiconductor) Buyout 5,749 6,103 Earnings 4.0 W.E.T. Holding Luxembourg SA Buyout 7,590 5,417 Written down 3.5 Schleich Luxembourg SA * Buyout 4,634 5,059 Cost 3.3 Americana International Holdings Ltd Buyout 4,611 4,611 Cost 3.0 * The difference between cost and valuation is due to foreign exchange rate movements 17 Cornish Bakehouse Sector: Consumer and Leisure Location: UK Year of investment: 2007 www.cornishbakehouse.com In July 2007, HgCapital completed the £9 million buyout of Cornish Bakehouse (shortly to be renamed Cornish Kitchen). HgCapital's clients have a 57% stake in the business. Cornish Bakehouse is a pasty retailer founded in 1993 by a St Ives based entrepreneur. It sells a full take-away offer, predominately for lunchtime trade, including pasties, sandwiches, baguettes, cakes, pizza, snacks and drinks. All bakery products are delivered frozen and cooked on site. A rapid roll-out of outlets is planned under the direction of the high calibre and experienced management team led by Phillip Newton, former CEO of the Merchant Retail Group plc, which owns The Perfume Shop, the highest density retail format in the UK. 18 Xyratex Sector: TMT Location: UK Ticker: XRTX:US Year of investment: 2003 www.xyratex.com In September 2003, HgCapital completed the £50 million buyout of Xyratex for a fully-diluted stake of 45%. Xyratex is a global provider of enterprise-class data storage subsystems and storage process technology. Storage technology provides the means by which business and personal IT data can be captured, processed, stored and retrieved in a digital form. Since our investment the company has been trading ahead of plan and, in June 2004, completed an initial public offering on NASDAQ. Total proceeds to December 2007 were £89.9 million. Since the year-end, the residual stake has been sold for £23.7 million, resulting in a total return of 2.25x original cost. 19 Hg Renewable Power Partners LP Sector: Renewable energy Location: Europe Year of investment: 2006 www.hgcapital.com/en/energy The first closing of the fund at €147.1 million took place in June 2006. A final closing in December 2006 took the fund up to €303 million, including a 1% co-investment by HgCapital and its employees. The fund was 26% called as at 31 December 2007. It has made investments to date valued at €60.0 million including accrued loan stock interest as at 31 December 2007. 20 IRIS Software Sector: TMT Location: UK Year of investment: 2004 www.iris.co.uk The £102 million buyout of IRIS Software completed in July 2004, with HgCapital's clients holding a 63% stake in the business. IRIS is the UK's leading provider of financial, practice management and tax software to accountancy practices and has an outstanding reputation within its sector. Under HgCapital's ownership, IRIS acquired four companies for a total consideration of £31 million and the core business grew revenue by 12-13%. In July 2007 IRIS was sold to Hellman & Friedman in a combined sale with CS Group, returning £150 million to clients over the life of the investment, including the residual unrealised value, resulting in a return of 3.6x original cost. Cost and valuation of the Company's holdings Company Deal type Residual Valuation Valuation Portfolio cost £'000 basis value £'000 % Cornish Bakehouse Investments Ltd Expansion 4,200 4,200 Cost 2.7 Xtx Ltd (t/a Xyratex) Buyout 1,277 3,721 Quoted 2.4 Hg Renewable Power Partners LP Renewable energy 3,803 3,555 Net Assets 2.3 Software (Cayman) LP - re IRIS Buyout 17 1,999 Third Party 1.3 Hg Renewable Power Partners LP In June 2006 the Company made a commitment of €21 million to Hg Renewable Power Partners LP, a dedicated renewable energy fund managed by HgCapital. The €303 million fund is the largest raised to date for renewable energy investments in Europe. The fund's focus is on long-term investments in renewable power projects using proven technologies, including wind, small hydro, landfill gas and waste-to-energy in Western Europe. Renewable energy benefits from a highly favourable regulatory and policy environment with climate change solidly on the political agenda. The investment in the fund will give the Company exposure to a diversified portfolio of assets offering both income and capital appreciation in a rapidly growing sector. The fund has investments in eight wind projects in construction or operation totalling 125 MW and four biogas projects that are in construction totalling 1.4 MW, and has made investments in companies that develop wind and biogas projects giving it the right to acquire a further 400+ MW of wind projects and 75+ MW of biogas projects. The fund's investments are in France, Germany, Ireland, Italy and the United Kingdom. The fund's portfolio now includes the following investments: Tir Mostyn A 21.25 MW operating wind farm in North Wales. The original investment was made in November 2004, with construction completed in October 2005. The wind farm has now been operating for over two years. Sorne Wind A 32 MW operating wind farm in Donegal, Ireland. This investment was made in July 2005, with the farm entering operation in November 2006. Picardy Wind A portfolio of four wind farms in Northern France in operation or under construction with a total capacity of 47.5 MW. This investment commenced in July 2006 with the first operational wind farm located near Bougainville. All four projects sell or will sell power to Electricite de France (EdF) under 15 year power sales contracts. Wind Direct A business that installs, owns and operates wind turbines on UK industrial sites, providing its customers with low cost, direct energy supplies. The investment was made in 2006 and includes one site in operation and one entering construction, with 35 sites in development. Aufwind Schmack Neue Energien A company that develops and operates biogas plants in Germany. Biogas plants ferment agricultural, household and industrial residues, or purpose-grown energy crops, producing biogas, which is used to generate electricity and heat or which may be used directly in other gas-dependent processes. This investment was made in January 2007. Four biogas projects are under construction with a combined capacity of 1.4 MW. Schmack Biogas Framework Agreement The rights to acquire 10 German biogas projects totalling 30 MW from the leading biogas equipment supplier. This agreement was entered into in December 2007. Bagmoor Wind Farm A 16 MW wind farm in construction in Lincolnshire, England. Construction is due to start in March 2008 with commercial operation expected to begin in 2009. RidgeWind A United Kingdom wind farm developer with over 200 MW of wind farms in development, including a 28 MW project that has secured planning permission. Rewind An investment of €2.1 million provided in August 2006 in return for the option to acquire a 120 MW portfolio of wind farms in Sicily. Cost and valuation of the Company's holdings Company Deal type Residual Valuation Valuation Portfolio cost £'000 basis value £'000 % Hg Renewable Power Partners LP Renewable energy 3,803 3,555 Net assets 2.3 The difference between cost and valuation is due to establishment and running costs, fees, foreign exchange movements in the fund and the revaluation of investments Investment portfolio Company Sector Principal Residual Year of Portfolio Cum Location cost Valuation investment value Value £'000 £'000 % % 1 VISMA TMT Nordic 13,268 13,812 2006 8.9% 8.9% Holdings + region 2 The Sanctuary Consumer & UK 631 11,628 1995 7.5% 16.4% Spa Holdings Leisure Ltd + 3 BMFCO UA (t/a Services Benelux 10,871 11,428 2007 7.4% 23.8% Fabory) + 4 Hofmann M.M. Industrials Germany 4,747 10,774 2005 7.0% 30.8% SA + 5 Voyage Group Healthcare UK 8,755 8,755 2006 5.7% 36.5% Ltd (formerly Paragon) + 6 Atlas Energy Services UK 8,153 8,153 2007 5.3% 41.8% Group Ltd + 7 Clarion TMT UK 4,965 7,594 2004 4.9% 46.7% Events Holdings Ltd + 8 Addison TMT Germany 2,296 7,547 2005 4.9% 51.6% Luxembourg SA + 9 Mondo Industrials Nordic 7,004 7,358 2007 4.8% 56.4% Minerals region Co-op + 10 Sporting Consumer & UK 7,186 7,186 2005 4.7% 61.1% Index Group Leisure Ltd + 11 SHL Group Services UK 6,489 6,489 2006 4.2% 65.3% Holdings 1 Ltd + 12 SLV Industrials Germany 5,962 6,438 2007 4.2% 69.5% Electronik SARL + 13 Elite Holding TMT Benelux 5,749 6,103 2005 4.0% 73.5% SA + 14 W.E.T Holding Industrials Germany 7,590 5,417 2003 3.5% 77.0% Luxembourg SA + 15 Schleich Consumer & Germany 4,634 5,059 2006 3.3% 80.3% Luxembourg SA Leisure + 16 Americana Consumer & UK 4,611 4,611 2007 3.0% 83.3% International Leisure Holdings Ltd 17 Cornish Consumer & UK 4,200 4,200 2007 2.7% 86.0% Bakehouse Leisure Investments Ltd + 18 Xtx Ltd (t/a TMT UK 1,277 3,721 2003 2.4% 88.4% Xyratex) ** 19 Hg Renewable Renewable Europe 3,803 3,555 2006 2.3% 90.7% Power energy Partners LP 20 Software TMT UK 17 1,999 2006 1.3% 92.0% (Cayman) LP - re IRIS 21 FTSA Holdings Industrials North 6,813 1,961 2004 1.3% 93.3% Ltd + America 22 PRA Healthcare Benelux 1,478 1,789 2002 1.2% 94.5% International Inc ** 23 Classic TMT UK 6,033 1,486 2003 1.0% 95.5% Copyright (Holdings) Ltd (t/a Boosey & Hawkes) + 24 Weston Fund North 1,733 1,181 1998 0.8% 96.3% Presidio America Capital III, LP 25 Hoseasons Consumer & UK 2,197 965 2003 0.6% 96.9% Group Ltd + Leisure 26 Software TMT UK 15 927 2007 0.6% 97.5% (Cayman) LP - re Guildford 27 Rolfe & Nolan TMT UK 14 836 2003 0.5% 98.0% Holdings plc + 28 Hirschmann Industrials Germany - 718 2004 0.5% 98.5% Electronics Holdings SA + 29 Orbiscom TMT Ireland 2,981 584 2001 0.4% 98.9% Ltd 30 Clinphone plc Healthcare UK 7 499 1996 0.3% 99.2% * 31 Wastebidco Industrials UK 309 473 2007 0.3% 99.5% Ltd ^ 32 Axiom TMT UK 1,888 413 2001 0.2% 99.7% Holdings Ltd 33 Schenck Industrials Germany - 258 2005 0.1% 99.8% Process SA + 34 Pulse Healthcare UK 400 207 1999 0.1% 99.9% Staffing Ltd 35 Doc M SARL Healthcare Germany - 206 2004 0.1% 100.0% 36 ACT Venture Fund Ireland - 36 1994 - 100.0% Capital Ltd 37 Euroknights Fund Europe 968 1 1996 - 100.0% III LP 38 Orbis plc * Services UK 3,378 - 1997 - 100.0% 39 Burns TMT UK 3,245 - 2001 - 100.0% e-Commerce Solutions 40 SGI Services UK 1,721 - 1999 - 100.0% (Holdings) Ltd + 41 Profiad Ltd Healthcare UK 1,653 - 1999 - 100.0% + 42 Newchurch Healthcare UK 1,297 - 2000 - 100.0% Ltd 43 Azinger Ltd Services Ireland 204 - 1993 - 100.0% 44 Lantor plc Industrials Ireland - - 1992 - 100.0% (formerly South Wharf plc) 45 Weston Fund North - - 1995 - 100.0% Presidio America Capital II, LP Total 148,542 154,367 100.0% * Listed on the London Stock Exchange ** Traded on NASDAQ ^ Underlying investment listed on the London Stock Exchange + HgCapital controls more than 50% of the voting equity shares through its management of the Company and other funds Income statement for the year ended 31 December 2007 Note Revenue return Capital return Total return 2007 2006 2007 2006 2007 2006 £'000 £'000 £'000 £'000 £'000 £'000 Gains on investments and government securities 10 - - 55,714 34,919 55,714 34,919 Carried interest 3(b) - - (6,189) (4,737) ( 6,189) (4,737) Income 2 12,129 7,769 - - 12,129 7,769 Investment management fee 3(a) (840) (730) (2,519) (2,191) (3,359) (2,921) Other expenses 4(a) (669) (636) - - (669) (636) Return on ordinary activities before taxation 10,620 6,403 47,006 27,991 57,626 34,394 Taxation on ordinary activities 6 (3,174) (1,884) 756 657 (2,418) (1,227) Transfer to reserves 7,446 4,519 47,762 28,648 55,208 33,167 Return per ordinary share 7 29.56p 17.94p 189.63p 113.74p 219.19p 131.68p The total return column of this statement represents the Company's profit and loss. The supplementary revenue and capital return columns are prepared under guidance published by the Association of Investment Companies. All recognised gains and losses are disclosed in the Revenue and the Capital columns of the Income Statement and as a consequence no Statement of Total Recognised Gains and Losses has been presented. The movements in reserves are set out in note 17 to the financial statements. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The notes on the following pages form part of these financial statements. Balance sheet as at 31 December 2007 Note 2007 2006 £'000 £'000 Fixed assets Investments held at fair value Quoted at market valuation 6,482 14,255 Unquoted at Directors' valuation 147,885 134,287 9 154,367 148,542 Current assets Debtors 11 13,906 10,005 Government securities 12 79,723 34,284 Cash 13(a) 117 2,268 93,746 46,557 Creditors - amounts falling due within one year 14 (9,296) (7,964) Net current assets 84,450 38,593 Net assets 238,817 187,135 Capital and reserves Called up share capital 16 6,296 6,296 Share premium account 17 14,123 14,123 Capital redemption reserve 17 1,248 1,248 Capital reserve - realised 17 197,852 152,787 Capital reserve - unrealised 17 5,682 2,985 Revenue reserve 17 13,616 9,696 Total equity shareholders' funds 238,817 187,135 Net asset value per ordinary share 7 948.2p 743.0p The financial statements were approved and authorised for issue by the Board of Directors on 17 March 2008 and signed on its behalf by: Roger Mountford, Chairman Timothy Amies, Director The following notes form part of these financial statements. Cash flow statement for the year ended 31 December 2007 Note 2007 2006 £'000 £'000 Net cash outflow from operating activities 4(b) (2,259) (2,273) Taxation (paid)/recovered (2,137) 2,666 Capital expenditure and financial investment Purchase of fixed asset investments (50,757) (45,266) Proceeds from the sale of fixed asset investments 103,283 59,805 Net cash inflow from capital expenditure and financial investment 52,526 14,539 Equity dividends paid (3,526) (2,519) Net cash inflow before management of liquid resources 44,604 12,413 Management of liquid resources Purchase of government securities (181,486) (111,342) Sale/redemption of government securities 134,731 100,334 Net cash outflow from management of liquid resources (46,755) (11,008) (Decrease)/increase in cash in the period 13 (2,151) 1,405 Reconciliation of movements in shareholders' funds for the year ended 31 December 2007 Note Called Share Capital Capital Revenue Total up premium redemp reserves reserve share Accout tion capital reserve £'000 £'000 £'000 £'000 £'000 £'000 At 31 December 2006 6,296 14,123 1,248 155,772 9,696 187,135 Net return from ordinary activities after tax - - - 47,762 7,446 55,208 Dividends paid 8 - - - - (3,526) (3,526) At 31 December 2007 16,17 6,296 14,123 1,248 203,534 13,616 238,817 At 31 December 2005 6,296 14,123 1,248 127,124 7,696 156,487 Net return from ordinary activities after tax - - - 28,648 4,519 33,167 Dividends paid 8 - - - - (2,519) (2,519) At 31 December 2006 16,17 6,296 14,123 1,248 155,772 9,696 187,135 The following notes form part of these financial statements. Notes to the financial statements 1. Principal activity and accounting policies The principal activity of the Company is that of an investment company within the meaning of section 266 of the Companies Act 1985 and section 842 of the Income and Corporations Taxes Act 1988. Basis of preparation The accounts have been prepared in accordance with applicable UK law and Accounting Standards (GAAP) and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies' (SORP), dated January 2003 and revised in December 2005. All of the Company's operations are of a continuing nature. Associated undertakings Certain investments deemed to be associated undertakings are carried at fair value in accordance with the Company's Investments accounting policy and Financial Reporting Standard (FRS) 9. Investment income and interest receivable Income from equity investments, including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend. Where the Company elects to receive dividends in the form of additional shares rather than cash dividends, the equivalent of the cash dividend is recognised as income in the revenue account and any excess in the value of the shares received over the amount of the cash dividend is recognised in Capital reserve - realised. Interest income is accounted for on an accruals basis. Dividends receivable on equity shares where there is no ex-dividend date and on non-equity shares are brought into account when the Company's right to receive payment is established. Management fee and finance costs The annual investment management fee and finance costs are charged 75% to Capital reserve - realised and 25% to the revenue account. This is in line with the board's expected split of long-term returns, in the form of capital gains and income respectively, from the investment portfolio of the Company. Expenses All expenses are accounted for on an accruals basis. All administrative expenses, excluding the management fee, are charged wholly to the revenue account. Expenses that are incidental to the purchase or sale of an investment are included within the cost or deducted from the proceeds of the investment. Foreign currency All transactions in foreign currencies are translated into sterling at the rates of exchange ruling at the dates of such transactions. Foreign currency assets and liabilities at the balance sheet date are translated into sterling at the exchange rates ruling at that date. Exchange differences arising on the translation of foreign currency assets and liabilities are taken to Capital reserve - realised. Taxation Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future, or the right to pay less, have occurred at the balance sheet date. This is subject to deferred assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences between the Company's taxable profits and its results, as stated in the financial statements, which are capable of reversal in one or more suitable periods. Investments The general principle applied is that investments should be reported at "fair value" in accordance with FRS26 and the International Private Equity and Venture Capital Association (IPEVCA) valuation guidelines issued jointly by the British Venture Capital Association (BVCA) and the European Venture Capital Association (EVCA) in February 2005. Quoted: Quoted investments are designated as held at fair value, which is deemed to be bid market prices. Unquoted: Unquoted investments are also designated as held at fair value and are valued using the following guidelines: (i) initially, investments are valued at cost, including fees and transaction costs; (ii) after the receipt of the first audited financial statements following initial investment, companies are valued on the level of maintainable earnings and an appropriate earnings multiple. A marketability discount is applied to the value attributable to shareholders, ranging from 20% to 30%. (iii) where more appropriate, investments are valued with reference to their net assets rather than earnings; and (iv) appropriate provisions are made against all individual valuations where necessary to reflect unsatisfactory financial performance leading to diminution in value. Both realised and unrealised gains and losses arising on investments are taken to capital reserves. Capital reserves Capital reserve - realised The following are accounted for in this reserve: (i) gains and losses on the realisation of investments (ii) losses on investments within the portfolio where there is little prospect of realisation or recovering any value; (iii) realised exchange differences of a capital nature; and (iv) expenses, together with the related taxation effect, charged to this reserve in accordance with the above policies. Capital reserve - unrealised The following are accounted for in this reserve: (i) increases and decreases in the valuation of investments held at the year end; and (ii) unrealised exchange differences of a capital nature. Organisational structure In May 2003, the Company entered into a partnership agreement with HGT General Partner Limited and MUST 4 Carry LP. A limited partnership, HGT LP, was constituted to carry on the business of an investor with the Company being the sole limited partner in this entity. Under the partnership agreement, the Company made a capital commitment of its non-cash investment portfolio to HGT LP with the result that all fixed asset investments are now held through HGT LP. Note 9 and the Investment portfolio present the underlying investments held in HGT LP. The income and capital accruals relating to the investments held in HGT LP are shown in notes 11 and 14. Carried interest paid to the Founder Partner is shown on the face of the Income Statement as it is the first charge on investment gains. The agreement stipulates that the associated income and capital profits, after payment of the carried interest and the General Partner share, are distributed to the Company and consequently these amounts (including the associated cash flows) are shown in the appropriate lines within the Income Statement, Cash Flow Statement and the related notes. 2. Income 2007 2006 £'000 £'000 Income from investments UK unquoted investment income 8,305 5,370 UK dividends 41 82 8,346 5,452 Other income Gilt interest 3,650 2,056 Deposit interest 133 95 Other interest income - 166 3,783 2,317 Total income 12,129 7,769 Total income comprises: Dividends 41 82 Interest 12,088 7,687 12,129 7,769 3 (a) Investment management fee Revenue return Capital return Total return 2007 2006 2007 2006 2007 2006 £'000 £'000 £'000 £'000 £'000 £'000 Investment management fee 745 621 2,235 1,865 2,980 2,486 Irrecoverable VAT thereon 95 109 284 326 379 435 840 730 2,519 2,191 3,359 2,921 Details of the investment management, custodian and administration contracts are disclosed in the Directors' report. The investment management fee is levied quarterly in arrears. Investment management fees are charged 75% to capital and 25% to revenue. 3 (b) Carried interest Revenue return Capital return Total return 2007 2006 2007 2006 2007 2006 £'000 £'000 £'000 £'000 £'000 £'000 Carried interest - - 6,189 4,737 6,189 4,737 The carried interest payable ranks as a first distribution of capital gains on the investments held in HGT LP, a limited partnership established solely to hold the Company's investments, and is deducted prior to such gains being paid to the Company in its capacity as Limited Partner. The gross amount of capital gains of HGT LP during the period is shown on the Income Statement. Details of the carried interest contract are disclosed in the Directors' report. 4. Other expenses (a) Operating expenses 2007 2006 £'000 £'000 Custodian and administration fees 249 197 Directors' remuneration (note 5) 138 104 Auditors' remuneration - audit services 32 27 - taxation and interim review 7 4 Other administration costs 243 304 The Company's total expense ratio (TER) calculated as a percentage of average net assets and including expenses, after relief for taxation, was: 1.32% 1.45% (b) Reconciliation of net return before taxation to net cash flow from operating activities 2007 2006 £'000 £'000 Total return before taxation 57,626 34,394 Gains on investments held at fair value (55,714) (34,919) Movement on carried interest 1,452 1,761 Increase in accrued income (5,237) (3,613) Decrease/(increase) in debtors 15 (20) (Decrease)/increase in creditors (397) 385 Tax on investment income included within gross income (4) (261) Net cash outflow from operating activities (2,259) (2,273) 5. Directors' remuneration The aggregate remuneration of the Directors, excluding VAT where applicable, for the year to 31 December 2007 was £133,000 (2006: £103,500). Further information on the Directors' remuneration is disclosed in the Directors' remuneration report. 6. Taxation on ordinary activities (a) Analysis of charge in the year Revenue return Capital return Total return 2007 2006 2007 2006 2007 2006 £'000 £'000 £'000 £'000 £'000 £'000 Current tax: UK corporation tax 3,174 1,896 (756) (657) 2,418 1,239 Prior year adjustment - (12) - - - (12) Total current tax (note 6(b)) 3,174 1,884 (756) (657) 2,418 1,227 (b) Factors affecting current tax charge for the period The tax assessed for the period is lower than the standard rate of corporation tax in the UK for a large company (30%). The differences are explained below: 2007 2006 £'000 £'000 Revenue return on ordinary activities before taxation 10,620 6,403 UK corporation tax at 30% thereon 3,186 1,921 Effects of: Non taxable UK dividends (12) (25) Tax deductible expenses in capital (756) (657) Tax relief to the capital account 756 657 Tax in relation to the prior year - (12) (12) (37) Current revenue tax charge for the period (note 6(a)) 3,174 1,884 In the opinion of the Directors the Company has complied with the requirements of Section 842 ICTA 1988 and will therefore be exempt from corporation tax on any capital gains made in the year. 7. Return and net asset value per ordinary share 2007 2006 Revenue and capital returns per share are shown below and have been calculated using the following: Net revenue attributable to equity shareholders after taxation £7,446,000 £4,519,000 Net capital gains for the year £47,762,000 £28,648,000 Total return £55,208,000 £33,167,000 Number of shares in issue 25,186,755 25,186,755 Revenue return Capital return Total return 2007 2006 2007 2006 2007 2006 Return per ordinary share 29.56p 17.94p 189.63p 113.74p 219.19p 131.68p The net asset value per share of 948.2p (2006: 743.0p) was calculated by dividing equity shareholders' funds of £238,817,000 (2006: £187,135,000) by the number of shares in issue at the year end of 25,186,755 (2006: 25,186,755). 8. Dividends on ordinary shares Company Register date Payment date 2007 2006 £'000 £'000 Final dividend (10.00p) for the year ended 31 December 2005 24 March 2006 2 May 2006 - 2,519 Final dividend (14.00p) for the year ended 31 December 2006 23 March 2007 1 May 2007 3,526 - 3,526 2,519 The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The total dividends payable in respect of the financial year, which form the basis of the retention test as set out in section 842 of the Income and Corporation Taxes Act 1988, are set out below: 2007 £'000 Revenue available for distribution by way of dividend for the year 7,446 Proposed final dividend of 25.00p for the year ended 31 December 2007 (6,297) (based on 25,186,755 ordinary shares in issue at 31 December 2007) Undistributed revenue for section 842 purposes * 1,149 * Undistributed revenue comprises 9.6% of income from investments of £11,996,000 (see note 2). 9. Investments held at fair value 2007 2006 £'000 £'000 Investments held at fair value through profit and loss Investments quoted on the London or Dublin Stock Exchanges 2,761 3,034 Investments traded on NASDAQ 3,721 11,221 Unquoted investments 147,885 134,287 154,367 148,542 Equity shares 57,655 85,803 Convertible securities 200 1,401 Fixed income securities 96,512 61,338 154,367 148,542 Quoted Unquoted Total £'000 £'000 £'000 Opening valuation as at 1 January 2007 14,255 134,287 148,542 Opening unrealised (appreciation)/depreciation (6,173) 2,806 (3,367) Opening book cost 8,082 137,093 145,175 Movements in the year: Additions at cost 309 50,448 50,757 Disposals - proceeds (5,991) (95,971) (101,962) - realised gains on sales 4,049 50,523 54,572 Closing book cost of investments 6,449 142,093 148,542 Closing unrealised appreciation 33 5,792 5,825 Closing valuation of investments as at 31 December 2007 6,482 147,885 154,367 The Company has equity holdings of 10% or more of the following classes of share in the companies listed below: Company Country of Shareholding % of class* incorporation Addison Luxembourg SA Germany Class A Shares 19.5% Atlas Energy Group Ltd UK Ordinary Shares 58.8% BMFCO UA The Netherlands Membership Rights 10.2% Clarion Events Holdings Ltd UK A Ordinary Shares 17.0% Classic Copyright (Holdings) Ltd UK A Ordinary Shares 15.8% Cornish Bakehouse Investments Ltd UK Ordinary Shares 38.2% Doc M SARL Germany Ordinary Shares 17.0% Elite Holding SA The Netherlands Ordinary Shares 19.3% FTSA Holdings Ltd UK Ordinary Shares 19.5% Hirschmann Electronics Germany A Redeemable Shares 12.6% Holdings SA Hirschmann Electronics Germany C Redeemable Shares 12.6% Holdings SA Hofmann M.M. SA Germany Ordinary Shares 15.1% Hoseasons Group LTD UK Ordinary Shares 12.0% Mondo Minerals Co-op Finland Registered Shares 11.4% Newchurch Ltd UK Subordinated £1 shares 11.6% Orbiscom Ltd UK Non - Convertible 23.0% Redeemable Prefs Profiad Ltd UK B Ordinary Shares 13.9% Rolfe and Nolan Holdings Ltd UK Hg Preferred Ordinary 17.2% Shares Schenck Process SA Germany Ordinary Shares 16.6% SGI (Holdings) Ltd UK A Ordinary Shares 14.8% Sporting Index Group Ltd UK Ordinary Shares 13.7% The Sanctuary Spa Holdings Ltd UK Ordinary Shares 29.4% W.E.T Holding Luxembourg SA Germany Ordinary Shares 14.5% * Investee companies may issue a number of different classes of share. The percentage of the total issued ordinary share capital of the ten largest investments held by the Company is shown in the table entitled 'top ten investments'. Further information on those investments which, in the opinion of the Directors, have a significant effect on the Company's financial statements, is contained in the Review of principal investments. 10. Gains on investments and government securities 2007 2006 £'000 £'000 Realised gains on sales 53,017 20,516 Foreign exchange losses - (4) Change in unrealised appreciation 2,697 14,407 55,714 34,919 11. Debtors 2007 2006 £'000 £'000 Sales for future settlement - 1,321 Prepayments and accrued income 13,901 8,664 Other debtors 5 20 13,906 10,005 12. Government securities 2007 2006 £'000 £'000 Investments held at fair value through profit and loss Opening valuation 34,284 24,515 Purchases at cost 181,486 111,342 Sales and redemptions (134,731) (100,334) Movement in unrealised capital gains/(losses) 239 (65) Realised capital losses (1,555) (1,174) Closing valuation 79,723 34,284 13. Movement in net funds (a) Reconciliation of net cash flow to movement in net funds 2007 2006 £'000 £'000 Change in net funds (2,151) 1,405 Exchange movements - (4) Net funds at 1 January 2,268 867 Net funds at 31 December 117 2,268 (b) Analysis of changes in net funds At 1 Cash Exchange At 31 Jan flows movements Dec 2007 2007 2007 £'000 £'000 £'000 £'000 Cash 2,268 (2,151) - 117 14. Creditors - amounts falling due within one year 2007 2006 £'000 £'000 Carried interest 6,189 4,737 Corporation taxation payable 2,564 2,287 Sundry creditors 543 940 9,296 7,964 15. Risk The following disclosures relating to the risks faced by the Company are provided in accordance with Financial Reporting Standard 29, "Financial instruments: disclosures". Financial instruments and risk profile As a private equity investment trust, the Company's primary investment objective is to achieve long-term capital appreciation by investing in unquoted companies, mostly in the UK and Europe. Additionally, the Company holds Government gilts and cash and items such as debtors and creditors arising directly from its operations. In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction of the Company's net assets or a reduction in the profits available for distribution by way of dividends. These risks, valuation risk, market risk (comprising currency risk and interest rate risk) and liquidity risk and and the directors' approach to the management of them, are set out below. The Company Secretary, in close cooperation with the board of directors and the Manager, coordinates the Company's risk management. The objectives, policies and processes for managing the risks, and the methods used to manage the risks, that are set out below, have not changed from the previous accounting period. Valuation risk The Company's exposure to valuation risk comprises mainly movements in the value of its underlying investments, the majority of which are unquoted. In accordance with the Company's accounting policies, all underlying unquoted investments are valued by the Directors with regard to the current guidelines issued by the International Private Equity and Venture Capital Association. The Company does not hedge against movements in the value of these investments. The Company has exposure to interest rate movements, through cash and gilt holdings. In the opinion of the Directors, the diversified nature of the Company's portfolio significantly reduces the risks of investing in unquoted companies. Market risk The fair value of future cash flows of a financial instrument held by the Company may fluctuate due to changes in market prices. This market risk comprises: currency risk (see below), interest rate risk (see following page) and equity price risk (see following page). The Board of Directors reviews and agrees policies for managing these risks. The Manager assesses the exposure to market risk when making each investment decision, and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis. Currency risk and sensitivity The Company is exposed to currency risk as a result of investing in funds and companies in foreign currencies. The sterling value, being the Company's functional currency, of these assets can be significantly influenced by movements in foreign exchange rates. The Company does not normally hedge against foreign currency movements affecting the value of its investments, but takes account of this risk when making investment decisions. The Manager monitors the Company's exposure to foreign currencies and reports to the board on a regular basis. The following table illustrates the sensitivity of the Revenue and Capital return for the year in relation to the Company's year-end financial assets for movements in foreign exchange rates against the Company's functional currency. The rates represent the high and low positions during the year for the currencies listed. Revenue return Capital return £'000 NAV per £'000 NAV per ordinary ordinary share share (pence) (pence) Low Euro (1.3532) 9 - 364 1.4 Norwegian Kroner (10.8223) (1) - (17) (0.1) US Dollar (1.9180) 64 0.3 559 2.2 72 0.3 906 3.5 High Euro (1.5296) (168) (0.7) (6,525) (25.9) Norwegian Kroner (12.7668) (148) (0.6) (2,118) (8.4) US Dollar (2.1161) (100) (0.4) (875) (3.5) (416) (1.7) (9,518) (37.8) In the opinion of the Directors, the above sensitivity analyses are not representative of the year as a whole, since the level of exposure changes frequently as part of the currency risk management process used to meet the Company's objectives. Interest rate risk and sensitivity The Company has exposure to interest rate movements as this may affect the fair value of funds awaiting investment, interest receivable on cash and interest payable on borrowings. The Company has little immediate direct exposure to interest rates on its fixed assets as the majority of these are fixed rate assets and equity shares that do not pay interest. Therefore, and given that the Company has no borrowings and maintains low cash levels, the Company's revenue return is not materially affected by changes in interest rates. However, funds awaiting investment are invested in Government securities and as stated above, the valuation is affected by movements in interest rates. The sensitivity of the capital return of the Company to movements on interest rates has been based on the UK base rate. With all other variables constant, a 0.5% decrease in the above should increase the capital return for the year by £400,000, with a corresponding decrease if the UK base rate were to increase by 0.5%. In the opinion of the Directors, the above sensitivity analyses are not representative of the year as a whole, since the level of exposure changes as investments are made and repaid throughout the year. Liquidity risk Investments in unquoted companies, which form the majority of the Company's investments, may not be as readily realisable as investments in quoted companies, which might result in the Company having difficulty in meeting obligations associated with financial liabilities. Liquidity risk is currently not significant as more than 33% of the Company's net assets at the year-end are invested in liquid funds. The Board gives guidance to the Manager as to the maximum amount of the Company's resources that should be invested in any one company. For details refer to the investment policy. Equity price risk Equity price risk is the risk that the fair values of equities (including loans) decrease as a result of changes in the values of individual assets. The Board of Directors manages the risks inherent in the investment portfolios by ensuring full and timely access to relevant information from the Manager. The Board meets regularly and at each meeting reviews investment performance. The Board monitors the Manager's compliance with the Company's objectives, and is responsible for investment strategy and asset allocation. The Manager's best estimate of the effect on the net assets and total return due to a reasonably possible change in quoted indices and the value of unquoted securities, with all other variables held constant, is as follows: NAV per ordinary % share Change £'000 (pence) Quoted 10% 648 2.6 Unquoted 10% 14,789 58.7 15,437 61.3 Financial assets of the Company 2007 2006 Non Non Fixed Floating interest Fixed Floating interest rate rate bearing Total rate rate bearing Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Sterling 124,958 117 21,223 146,298 72,996 2,268 28,524 103,788 Euro 38,607 - 20,734 59,341 19,000 - 39,138 58,138 Norwegian Kroner 7,203 - 7,553 14,756 5,027 - 16,940 21,967 US dollar 5,667 - 8,145 13,812 - - 1,201 1,201 Total 176,435 117 57,655 234,207 97,023 2,268 85,803 185,094 The fixed rate assets comprise gilts and fixed rate lendings to investee companies. Fixed rate lendings have a weighted average interest rate of 10.9% per annum (2006: 11.3%) and a weighted average life to maturity of 7.9 years (2006: 6.8 years). The floating rate assets consist of cash. The non interest-bearing assets represent the equity content of the investment portfolio. The Company did not have any outstanding borrowings at the year end (2006: £nil). The numerical disclosures above exclude short-term debtors and creditors. Currency exposure The currency denomination of the Company's financial assets is shown above. Short-term debtors and creditors, which are excluded, are predominantly in sterling, the functional currency of the Company. Capital management policies and procedures The Company's capital management objectives are to ensure that it will be able to finance its business as a going concern and to maximise the revenue and capital return to its equity shareholders, through an appropriate balance of equity capital and debt. The Company's capital at 31 December comprises: 2007 £'000 Equity Equity share capital 6,296 Share premium 14,123 Capital redemption reserve 1,248 Retained earnings and other reserves 217,150 Total capital 238,817 As stated above, the Company did not have any outstanding borrowings at the year end. The Board with the assistance of the Manager monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes: • the planned level of gearing, which takes into account the Manager's view on the market; • the need to buy back equity shares, either for cancellation or to hold in treasury, which takes account of the difference between the net asset value per share and the share price (ie the level of share price discount or premium); • the need for new issues of equity shares, including issues from treasury; and • the extent to which revenue in excess of that which is required to be distributed should be retained, whilst maintaining its Section 842 status. The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period. 16. Share capital 2007 2006 Nominal £'000 Nominal £'000 No.'000 No.'000 Authorised: 40,000,000 ordinary shares of 25p each 40,000 10,000 40,000 10,000 Allotted, called up and fully paid: Ordinary shares At 1 January & 31 December 25,187 6,296 25,187 6,296 17. Share premium account and reserves Share Capital premium redemp Capital Capital account tion reserve reserve Revenue reserve realised unrealised Reserve £'000 £'000 £'000 £'000 £'000 As at 1 January 2007 14,123 1,248 152,787 2,985 9,696 Transfer on disposal of investments - - 9,847 (9,847) - Losses on sale of government securities - - (1,555) - - Net gain on sale of investments - - 44,725 - - Net movement in unrealised appreciation of investments - - - 12,544 - Dividends paid - - - - (3,526) Net revenue for the year after tax - - - - 7,446 Carried interest - - (6,189) - - Management fee charged to capital, after taxation - - (1,763) - - As at 31 December 2007 14,123 1,248 197,852 5,682 13,616 18. Contingent liabilities As at 31 December 2007, investment purchases of £11,900,000 (31 December 2006: £12,941,000) had been authorised and contractually committed, including uncalled commitment to Hg Renewable Power Partners LP. 19. VAT recoverable On 28 June 2007 the European Court of Justice announced that it had found in favour of the Association of Investment Companies and JPMorgan Claverhouse Trust plc in declaring that management expenses of investment trusts should be exempt from VAT. Her Majesty's Revenue and Customs ("HMRC") has recently announced that it has accepted that fund management services are exempt from VAT and it has withdrawn from the appeal in the JPMorgan Claverhouse Trust case. The Company will therefore no longer be charged VAT on management expenses and it is expected that it will be able to recover some or all of the VAT previously charged on management fees. Clarification as to how claims will be processed is awaited from HMRC. Between February 2001 and September 2007 the Company paid approximately £2,310,000 of VAT on its management expenses. No recovery of VAT has been recognised in respect of this or any other period in these financial statements. The extent of any recovery will be determined by negotiation, taking into account the VAT position of the Company's managers over the period. Top ten investments % of total % of share total income capital Net accrued held Accounting assets/ 2007 by the date Currency Turnover PBIT* (liabilities) £'000 company 2007 2006 Addison Luxembourg SA Dec-06 €'m 37.7 11.2 19.5 36 18.1% 4.9% 4.5% Atlas Energy Group Ltd Sep-07 £'m 5.1 2.5 2.0 69 47.1% 5.3% - BMFCO UA (t/a Fabory) Dec-06 €'m 248.9 29.2 5.7 270 10.2% 7.4% - Clarion Events Holdings Ltd Jan-07 £'m 47.8 6.7 (6.1) 1,740 11.0% 4.9% 3.8% Hofmann M.M. SA Sep-07 €'m 102.8 21.5 7.2 347 15.1% 7.0% 3.1% Mondo Minerals Co-op Oct-07 €'m 134.1 19.8 79.3 133 11.4% 4.8% - Sporting Index Group Ltd May-07 £'m 24.3 7.8 (15.1) 2,245 13.7% 4.7% 3.7% The Sanctuary Spa Holdings Ltd Aug-07 £'m 26.3 6.0 5.2 - 29.4% 7.5% 4.1% Visma Holdings Dec-06 NOK'm 2,305.6 316.0 591.0 968 9.2% 8.9% 8.2% Voyage Group Ltd Mar-07 £'m 107.4 24.0 (20.7) 2,866 7.9% 5.7% 7.2% (formerly Paragon) * Profit Before Interest and Taxation and, where applicable, before amortisation of goodwill This table does not form part of the financial statements. Analysis of registered shareholders as at 27 February 2008 By type of holder % of total % of total Number of 27 Feb 31 Dec Number of 27 Feb 31 Dec shares 2008 2006 holders 2008 2006 Nominee companies 23,599,389 93.7 80.4 373 56.2 54.2 Direct private investors 1,112,008 4.4 7.5 241 36.3 38.2 others 475,358 1.9 12.1 50 7.5 7.6 25,186,755 100.0 100.0 664 100.0 100.0 By size of holding % of total % of total Number of 27 Feb 31 Dec Number of 27 Feb 31 Dec shares 2008 2006 holders 2008 2006 1 - 5,000 678,805 2.7 2.9 465 70.0 67.5 5,001 - 50,000 2,277,447 9.0 10.6 128 19.3 22.2 50,001 - 100,000 1,963,355 7.8 7.1 27 4.0 3.5 over 100,000 20,267,148 80.5 79.4 44 6.7 6.8 25,186,755 100.0 100.0 664 100.0 100.0 This table does not form part of the financial statements. Board of Directors Roger Mountford (Chairman) Aged 59, Roger Mountford was appointed to the Board in 2004 and became Chairman in April 2005. He spent 30 years as a merchant banker in the City of London and in the Far East, latterly as Managing Director in the Corporate Finance Department of SG Hambros, leading the Bank's practice in the private equity market. He now serves on several boards, including the Civil Aviation Authority, where he is chairman of the CAA Pension Scheme, and the Port of Dover. He is Chairman of The Housing Finance Corporation and of Enterprise LSE Limited, the commercial subsidiary of the London School of Economics. Timothy Amies Aged 69, Timothy Amies was appointed to the Board in 1991. He is a chartered accountant with over 30 years' experience of working in the City. He was a partner at Laurie Milbank & Co, stockbrokers for 16 years prior to its acquisition by Chase Manhattan Bank. He then became a director of Chase Investment Bank involved in mergers and acquisitions. He is Chairman of the Audit and Valuation Committee of the Company. Piers Brooke Aged 67, Piers Brooke was appointed to the Board in 2001. He worked for 38 years in both commercial and merchant banking, holding a variety of general management positions in the UK, Continental Europe, the Far East and North America. Most recently he was Director of Financial Strategy at National Westminster Bank. He is a non-executive director of Focus Solutions Group plc and Lothbury Property Trust. Richard Brooman Aged 52, Richard Brooman was appointed to the Board on 11 October 2007. He is a chartered accountant and is Deputy Chairman and Chairman of the Audit Committee of Invesco Perpetual UK Smaller Companies Investment Trust plc. He was formerly Chief Financial Officer of Sherwood International plc and Group Finance Director of VCI plc. Prior to this, he served as CFO of the global Consumer Healthcare business of SmithKline Beecham and held senior financial and operational positions at Mars after qualifying with Price Waterhouse. Peter Gale Aged 52, Peter Gale was appointed to the Board in 1991 and is Deputy Chairman of the Company. He has worked in many divisions of National Westminster Bank, specialising in investment management. In 1990 he became responsible for the investment management of National Westminster Bank Group Pension Funds, which subsequently became RBS Pension Trustee Ltd. Upon the purchase of Gartmore Investment Management plc in 1996, he became a principal of the enlarged fund management company and in 2003 became Managing Director of Gartmore Private Equity. He is a non-executive director of Lothbury Property Trust plc. Andrew Murison Aged 59, Andrew Murison was appointed to the Board in 2004. He was Senior Bursar of Peterhouse, Cambridge for nine years and spent the previous twelve years as a principal in private equity partnerships in the USA. Prior to that he was a fund manager, financial journalist and investment banker in the City of London. He now serves on the board of Aberdeen Growth Opportunities Venture Capital Trust plc and is Chairman of the JPMorgan European Investment Trust plc. All Directors are members of the Audit and Valuation, Nomination, Directors' Remuneration and Management Engagement Committees. All Directors are non-executive. This information is provided by RNS The company news service from the London Stock Exchange END FR FKOKBDBKBBND