REG - Dunedin Enterprise - Annual Financial Report
For release 15 March 2021
Dunedin Enterprise Investment Trust PLC ("the Company")
Year ended 31 December 2020
Dunedin Enterprise Investment Trust PLC, the private equity investment trust, announces its results for the year ended 31 December 2020.
Financial Highlights:
· Share price total return of -9.3% in the year to 31 December 2020
· Net asset value total return of -5.6% in the year to 31 December 2020
· Realisations of £14.5m in the year
· £10m returned via tender offer in November 2020
· Final dividend of 2.0p per share proposed for the year ended 31 December 2020
Comparative Total Return Performance
Year to 31 December 2020
Net Asset value
Share price
FTSE
Small Cap
(ex Inv Cos)
Index
One year
-5.6%
-9.3%
1.7%
Three years
14.9%
22.9%
3.1%
Five years
46.2%
115.6%
34.2%
Ten years
63.8%
161.7%
145.4%
For further information please contact:
Graeme Murray
Dunedin LLP
0131 225 6699
0131 718 2310
07813 138367
Chairman's Statement
The total return in the year to 31 December 2020 was -5.6% and -9.3% in terms of net asset value per share and share price respectively.
Your Company's net asset value per share reduced from 444.4p to 413.9p in the year. This is stated after allowing for the final dividend for 2019 of 5.0p paid in May 2020.
The share price of 336p at 31 December 2020 represented a discount of 18.8% to the net asset value of 413.9p per share. The share price currently stands at 335p.
In November 2020 a tender offer returned £10m to shareholders.
Portfolio
During the year there were two follow-on investments: an additional £0.9m was invested in GPS, the payments processing platform, and £0.6m was invested in RED, the supplier of software permanent and contract staff.
The investment in Kingsbridge, which provides insurance services to contractors, was realised generating £10.4m and a return of 3.2 times original cost. A refinancing was completed at FRA, the forensic accounting business, generating proceeds of £4.0m. A refinancing at Hawksford, a leading provider of services to the asset management sector, generated proceeds of £6.9m. The refinancing was subject to regulatory approval and completed on 25 February 2021.
The trading performance of the portfolio has been impacted by coronavirus and the resulting disruption to economic activity. Unrealised valuation increases of £10.6m were offset by larger value decreases of £15.8m. Valuation uplifts were achieved at GPS, U-POL and Incremental, offset by reductions in the valuations of FRA, Formaplex, Hawksford and EV. Further details are provided in the Manager's Review.
Cash, Commitments & Liquidity
The original investment periods of all funds to which the Company has made a commitment have now ended. In future the Company is only required to meet drawdowns for follow-on investments, management fees and expenses during the remainder of the life of the funds.
At 31 December 2020 the Company held cash and near cash equivalents totalling £13.9m. There are outstanding commitments to limited partnership funds of £14.7m at 31 December 2020, consisting of £13.9m to Dunedin managed funds and £0.8m to Realza. Assuming these funds are held to maturity, it is estimated that only £11.9m of this total outstanding commitment will be drawn over the remaining life of the funds to meet follow-on investments and ongoing expenses. The Company has a revolving credit facility with Lloyds Bank of £5m which was undrawn at 31 December 2020 and is available until 31 May 2021.
Tender offer
A tender offer was approved by shareholders in November 2020 for 12.3% of the issued share capital at a 2.1% discount to the net asset value at 30 September 2020 of 393.1p per share. Under the tender offer £10m was returned to shareholders.
The tender offer replaced the B Share scheme previously operated by the Company as the preferred route for making capital distributions as the Company now has insufficient capital reserves available to issue B shares for new consideration. . In 2019 £5.2m was returned to shareholders by way of the B share scheme.
Dividends
It is proposed that a final dividend of 2.0p per share be paid on 19 May 2021. This will distribute to shareholders the net revenue profit generated by the Company during 2020.
AGM and General Meetings
The Board is proposing an amendment to the articles to allow for virtual or hybrid meetings. The Directors have no present intention of holding a virtual-only meeting and nothing in the changes prohibits the holding of physical meetings. The Directors will also continue to monitor the coronavirus impact in respect of this year's AGM.
Outlook
Although the disruption created by the pandemic has continued to be the main focus for portfolio companies during the period under review, the generally strong financial position of portfolio companies has provided some protection. The onset of a comprehensive vaccination programme has improved the outlook considerably. Similarly, the agreement of a Brexit deal has provided our portfolio companies with some clarity.
The Board welcomes the realisations achieved to date this year and will continue to return capital to shareholders wherever practicable and prudent following the realisation of investments.
Duncan Budge
Chairman
15 March 2021
Manager's Review
The Company's net asset value decreased from £91.7m to £74.9m over the year. As detailed below this movement is stated following a dividend payment of £1.0m and capital of £10.0m returned to shareholders via a tender offer in November 2020.
£m
Net asset value at 1 January 2020
91.7
Unrealised value increases
10.6
Unrealised value decreases
(15.8)
Realised gain over opening valuation
(0.9)
Net income and capital movements
0.3
Net asset value prior to shareholder distributions
85.9
Dividends paid to shareholders
(1.0)
Tender offer
(10.0)
Net asset value at 31 December 2020
74.9
Portfolio Composition
The investment portfolio can be analysed as shown in the table below.
Valuation at
1 Jan
2020
£'m
Additions
in year
£'m
Disposals
in year
£'m
Realised
movement
£'m
Unrealised
movement
£'m
Valuation at
31 Dec
20201
£'m
Dunedin managed
75.9
2.3
(14.3)
(0.9)
(5.2)
57.8
Third party managed
4.6
0.1
(0.2)
-
-
4.5
Investment portfolio
80.5
2.4
(14.5)
(0.9)
(5.2)
62.3
AAA rated money market funds
8.6
12.7
(7.6)
-
-
13.7
89.1
15.1
(22.1)
(0.9)
(5.2)
76.0
1 in addition the Company held net current liabilities of £1.1m
Investment Activity
In the year to 31 December 2020 a total of £2.4m was invested in portfolio companies. An investment of £0.9m was made in GPS, the market leader in payment processing technology, to facilitate further investment in GPS's payments processing platform. A further £0.6m was invested in RED, the provider of SAP contract and permanent staff, to provide working capital support. This short-term loan was repaid by RED during the year.
A further £0.7m was drawn down by Dunedin and third-party managed funds to meet management fees and ongoing expenses.
Realisations
In the year to 31 December 2020 a total of £14.5m was realised from the portfolio of investments.
In February 2020 a further refinancing of FRA, the forensic accounting, data analytics and e-discovery business, was completed. A total of £4.0m was received by Dunedin Enterprise, consisting of £3.5m capital and £0.5m income. This was the second refinancing undertaken by FRA. A total of £5.5m has been generated from the two refinancings which compares to an original cost of £6.0m.
In March 2020 the investment in Kingsbridge, the provider of insurance services to contractors, was realised. A total of £10.4m was received by Dunedin Enterprise consisting of £10.2m capital and £0.2m income. The investment was valued at this level at 31 December 2019. The investment was originally made in May 2016 at a cost of £4.2m. Over the lifetime of the investment Dunedin Enterprise realised proceeds of £13.6m which represents a return of 3.2x cost. The transaction includes a two year earn-out which may generate further proceeds for the Company; no value has been placed on this.
In August 2020 Hawksford, a leading provider of corporate, private client and fund services, completed a refinancing. The refinancing was dependent upon regulatory approval being received which was granted on 25 February 2021. Proceeds received in February 2021 amounted to £6.9m, consisting of capital of £6.3m and income of £0.6m. The investment in Hawksford was valued at £6.9m at 31 December 2020, a reduction of £3.1m during the year. Dunedin Enterprise retains a 5% interest in Hawksford. No value has been attributed to this at 31 December 2020.
Unrealised valuation uplifts
In the year to 31 December 2020 there were valuation uplifts generated from the following investments: U-POL (£3.1m), GPS (£3.0m) and Incremental (£1.9m).
U-POL, the manufacturer of automotive refinish products, has achieved a 12% increase in EBITDA (being EBITDA for the last twelve months adjusted for exceptional items) in the year. Online and US retail sales have been strong with US sales up 83% on prior year. This has been driven in part by access to a greater number of US retailers. Given strong EBITDA growth during the year the EBITDA multiple applied has been increased from 9.0x to 10.2x. Net debt at the company has also reduced by £17m in the year.
GPS, a market leader in payment processing technology, has shown revenue growth of 34% in the year. This is in spite of the impact of coronavirus on the level of revenue generating transactions. The company has been protected from coronavirus by agreements which stipulate a base level of fee income and new business wins. During the year GPS secured an investment from Visa. This will enable GPS to accelerate its investment in technology and developing its presence in Singapore and the Asia-Pacific.
Incremental, the market leading IT services platform which designs, implements and supports clients with ERP/CRM systems and cloud infrastructure, achieved a 60% increase in EBITDA in the year. A restructuring in 2019 resulted in Incremental reducing the workforce and cutting overheads. Subsequently it has successfully built its order book over the past year to record levels. Incremental has benefited from the impact of coronavirus pushing many businesses to improve their IT systems to cope with increased home working.
Unrealised valuation reductions
In addition to the valuation reduction in Hawksford referred to above of £3.1m, the most significant valuation reductions in the year to 31 December 2020 were at FRA (£5.5m), Formaplex (£3.6m) and EV (£1.9).
FRA has experienced a slowdown in new business wins during the coronavirus outbreak. Utilisation rates have been lower than normal, leading management to take actions to rationalise costs including the closure of one office. FRA has continued to win new work although the start date for new projects in some cases has been delayed by the impact of coronavirus.
Formaplex, the provider of tooling and lightweight components, principally services high-end automotive producers. As a result of the coronavirus the factories of automotive producers were closed for periods of between one and three months. The factories have now reopened but at much reduced levels of production. This has had a direct impact on trading at Formaplex where management are managing costs closely. Given the reduction in the profitability of the company a full provision has been made against this investment. Following the year end the trading businesses within Formaplex required further finance and were sold to Elaghmore at the year end valuation.
EV, the provider of high performance, video cameras and other visualisation technology used in the oil and gas industry, experienced a significant impact to trading from the fall in the price of oil in the early part of the year but has seen stronger performance in the second half. Turnover decreased 35% in the year to date. Management has taken action to reduce costs, learning the lessons from previous periods of oil price volatility. The company has also renegotiated the terms of its banking package.
Cash and commitments
The Company had outstanding commitments to limited partnership funds of £14.7m, consisting of £13.9m to Dunedin managed funds and £0.8m to Realza, the one remaining European fund. Assuming these funds are held to maturity, it is estimated that only some £11.9m of this total outstanding commitment will be drawn over the remaining life of the funds.
The original investment periods of all funds to which the Company has made a commitment have now ended. In future the Company is only required to meet drawdowns for follow-on investments, management fees and expenses during the remainder of the life of the funds.
The Company has a revolving credit facility with Lloyds Bank of £5m which was undrawn at 31 December 2020 and is available until 31 May 2021. The Board and the Manager keep the cash and commitment position under regular review.
Coronavirus
The coronavirus has created significant disruption around the world which, to varying degrees, has had an impact on each of the portfolio companies. Your Manager has representation on the Board of each portfolio company. Regular contact is maintained with the portfolio companies to monitor the impact of the coronavirus on trading and financial stability. Each portfolio company has developed a contingency plan to mitigate the impact of the coronavirus and the measures implemented have included: staff being placed on furlough, redundancies, re-negotiation of banking terms and payment holidays on HP contracts. The contingency plans will continue to evolve as the impact of the coronavirus evolves.
Brexit
The board of each portfolio company meets regularly and continues to assess the impact of Brexit on their business now that an agreement has been reached. Portfolio company business plans are kept under constant review as implementation of the Brexit agreement takes effect.
Valuations and Gearing
The average earnings multiple applied in the valuation of the Dunedin managed portfolio was 9.2x EBITDA (2019: 8.9x). These multiples continue to be applied to maintainable profits.
Within the Dunedin managed portfolio, the weighted average gearing of the companies was 2.4x EBITDA (2019: 2.8x).
Analysing the portfolio gearing in more detail, the percentage of investment value represented by different gearing levels was as follows:
Less than 1 x EBITDA
10%
Between 1 and 2 x EBITDA
56%
Between 2 and 3 x EBITDA
-%
More than 3 x EBITDA
34%
Of the total acquisition debt in the Dunedin managed portfolio companies the scheduled repayments are spread as follows:
Less than one year
24%
Between one and two years
4%
Between two and three years
17%
More than three years
55%
Fund Analysis
The chart below analyses the investment portfolio by investment fund vehicle.
Dunedin Buyout Fund II
56%
Dunedin Buyout Fund III
34%
Equity Harvest Fund
3%
Third party managed
7%
Portfolio Analysis
Detailed below is an analysis of the head office of the investment portfolio companies by geographic location as at 31 December 2020.
UK
94%
Rest of Europe
6%
Sector Analysis
The investment portfolio of the Company is broadly diversified. At 31 December 2020 the largest sector exposure of 43% remains to the diverse Support Services sector.
Automotive
4%
Consumer products & services
3%
Financial services
30%
Industrials
20%
Support services
43%
Valuation Method
Earnings - provision
16%
Earnings - uplift
37%
Revenue - uplift
20%
Assets basis
17%
Exit value
10%
Year of Investment
In the vintage year chart below, current value is allocated to the year in which either Dunedin Enterprise or the third-party manager first invested in each portfolio company.
<1 year
-%
1-3 years
25%
3-5 years
13%
>5 years
62%
Dunedin LLP
15 March 2021
Ten Largest Investments
(both held directly and via Dunedin managed funds) by value at 31 December 2020
Approx.
Percentage
percentage
Cost of
Directors'
of net
of equity
investment
valuation
assets
Company name
%
£'000
£'000
%
GPS
8.5
8,220
14,073
18.8
FRA
5.2
1,413
9,403
12.6
U-POL
5.0
5,657
8,998
12.0
RED
20.1
9,665
8,894
11.9
Weldex
15.1
9,505
8,274
11.0
Hawksford
17.8
6,746
6,944
9.3
Realza
8.9
4,189
4,330
5.8
Incremental
8.2
2,993
3,408
4.5
Premier Hytemp
23.0
10,136
3,287
4.4
EV
10.6
8,321
1,713
2.3
66,845
69,324
92.6
Income Statement
2020
2019
Revenue
Capital
Total
Revenue
Capital
Total
£'000
£'000
£'000
£'000
£'000
£'000
Investment income
764
-
764
1,390
-
1,390
Gains on investments
-
(5,993)
(5,993)
-
11,293
11,293
Total income
764
(5,993)
(5,229)
1,390
11,293
12,683
Expenses
Investment management fee
(23)
(69)
(92)
(15)
(46)
(61)
Other expenses
(372)
(30)
(402)
(390)
(39)
(429)
Profit before finance costs and tax
369
(6,092)
(5,723)
985
11,208
12,193
Finance costs
(24)
(71)
(95)
(27)
(80)
(107)
Profit before tax
345
(6,163)
(5,818)
958
11,128
12,086
Taxation
-
-
-
(25)
25
-
Profit for the year
345
(6,163)
(5,818)
933
11,153
12,086
Basic return per ordinary share
(basic & diluted)
1.70p
(30.37)p
(28.67)p
4.52p
54.02p
58.54p
The total column of this statement represents the Income Statement of the Group, prepared in accordance with the requirements of the Companies Act 2006. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies. All items in the above statement derive from continuing operations.
All income is attributable to the equity shareholders of Dunedin Enterprise Investment Trust PLC.
Statement of Changes in Equity
for the year ended 31 December 2020
Year ended 31 December 2020
Share
capital
£'000
Capital
redemption
reserve
£'000
Capital
Reserve
realised
£'000
Capital
reserve -
unrealised
£'000
Special
Distributable
Reserve
£'000
Revenue
account
£'000
Total
retained earnings
£'000
Total
equity
£'000
At 31 December 2019
5,161
49,214
34,258
(3,877)
1,151
5,840
37,372
91,747
Profit for the year
-
-
6,317
(12,480)
-
345
(5,818)
(5,818)
Purchase and cancellation of shares
(636)
636
(9,975)
-
-
-
(9,975)
(9,975)
Dividends paid
-
-
-
-
-
(1,032)
(1,032)
(1,032)
At 31 December 2020
4,525
49,850
30,600
(16,357)
1,151
5,153
20,547
74,922
Year ended 31 December 2019
Share
capital
£'000
Capital
redemption
reserve
£'000
Capital
Reserve
realised
£'000
Capital
reserve -
unrealised
£'000
Special
Distributable
Reserve
£'000
Revenue
account
£'000
Total
retained earnings
£'000
Total
equity
£'000
At 31 December 2018
5,161
44,053
37,419
(13,030)
6,312
5,320
36,021
85,235
Profit for the year
-
-
2,000
9,153
-
933
12,086
12,086
B shares issued during the year
5,161
-
-
-
(5,161)
-
(5,161)
-
B shares redeemed during the year
(5,161)
5,161
(5,161)
-
-
-
(5,161)
(5,161)
Dividends paid
-
-
-
-
-
(413)
(413)
(413)
At 31 December 2019
5,161
49,214
34,258
(3,877)
1,151
5,840
37,372
91,747
Balance Sheet
As at 31 December 2020
31 December
2020
£'000
31 December
2019
£'000
Non-current assets
Investments held at fair value
75,985
89,105
Current assets
Other receivables
1,057
1,073
Cash and cash equivalents
151
3,735
1,208
4,808
Current liabilities
Other liabilities
(2,271)
(2,166)
Net assets
74,922
91,747
Capital and reserves
Share capital
4,525
5,161
Capital redemption reserve
49,850
49,214
Capital reserve - realised
30,600
34,258
Capital reserve - unrealised
(16,357)
(3,877)
Special distributable reserve
1,151
1,151
Revenue reserve
5,153
5,840
Total equity
74,922
91,747
Net asset value per ordinary share (basic and diluted)
413.9p
444.4p
Cash Flow Statement
for the year ended 31 December 2020
31 December
2020
£'000
31 December
2019
£'000
Cash flows from operating activities
(Loss) / profit before tax
Adjustments for:
(5,818)
12,086
Gains on investments
5,993
(11,293)
Interest paid
95
107
Decrease/(increase) in debtors
16
4,658
Increase in creditors
105
594
Net cash from operating activities
391
6,152
Cash flows from investing activities
Purchase of investments
(2,242)
(2,696)
Drawdown from subsidiary
(86)
(112)
Purchase of 'AAA' rated money market funds
(12,683)
(12,862)
Sale of investments
14,414
3,401
Distribution from subsidiary
187
5,480
Sale of 'AAA' rated money market funds
7,537
6,410
Net cash used in investing activities
7,127
(379)
Cash flows from financing activities
Redemption of B shares
-
(5,161)
Tender offer
(9,975)
-
Dividends paid
(1,032)
(413)
Interest paid
(95)
(107)
Net cash from financing activities
(11,102)
(5,681)
Net increase/(decrease) in cash and cash equivalents
(3,584)
92
Cash and cash equivalents at 1 January
3,735
3,645
Effect of exchange rate fluctuations on cash held
-
(2)
Cash and cash equivalents at 31 December
151
3,735
Statement of Directors' Responsibilities in respect of the Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report and financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with international accounting standards and applicable law.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these financial statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgments and estimates that are reasonable and prudent;
- state whether they have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006;
- assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
- use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. As explained in note 2, the Directors do not believe that it is appropriate to prepare these financial statements on a going concern basis.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the annual financial report
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
- the Strategic Report and Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
We consider the annual report and financial statements taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
Duncan Budge
Chairman
15 March 2021
Notes to the Accounts
1. Preliminary Results
The financial information contained in this report does not constitute the Company's statutory accounts for the years ended 31 December 2020 or 2019. The financial information for 2019 is derived from the statutory accounts for 2019 which have been delivered to the Registrar of Companies. The auditor has reported on those accounts. Their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006. The audit of the statutory accounts for the year ended 31 December 2020 is not yet complete. These accounts will be finalised on the basis of the financial information presented by the Directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's annual general meeting.
2. Going Concern
The financial information for 2019 and 2020 has not been prepared on a going concern basis, since the Company's current objective is to conduct an orderly realisation of the investment portfolio and return cash to shareholders. Following the Director's assessment, no adjustments were deemed necessary to the investment valuations or other assets and liabilities included in the financial information as a consequence of the change in the basis of preparation.
3. Dividends
Year to 31
December
2020
£'000
Year to 31
December
2019
£'000
Dividends paid in the year
1,032
413
A final dividend of 2.0p per share for the year ended 31 December 2020 is proposed and if approved, will be paid on 19 May 2021 to shareholders on the register at close of business on 23 April 2021. The ex-dividend date is 22 April 2021.
4. Earnings per share
Year to
31 December
2020
Year to
31 December
2019
Revenue return per ordinary share (p)
1.70
4.52
Capital return per ordinary share (p)
(30.37)
54.02
Earnings per ordinary share (p)
(28.67)
58.54
Weighted average number of shares
20,289,587
20,644,062
The earnings per share figures are based on the weighted average numbers of shares set out above. Earnings per share is based on the revenue profit in the period as shown in the consolidated income statement.
References to page numbers and notes in the disclosures below are to page numbers and notes to the annual report and accounts of the Company for the year ended 31 December 2020.
5. Principal Risks and Uncertainties (Strategic Report page 23)
The principal risks and uncertainties identified by the Board which might affect the Company's business model and future performance, and the steps taken with a view to their mitigation, are as follows:
Coronavirus: the profitability of the Company's investments is adversely impacted due to an adverse economic impact on the UK and world economy from the Coronavirus. Mitigation: A representative of your Manager, Dunedin LLP, sits on the Board of each portfolio company. These companies hold regular board meetings at which the financial position of the company is monitored. Between board meetings there is an ongoing dialogue between the Manager and the senior management of the portfolio company. Each portfolio company monitors all risks pertinent to their businesses including the coronavirus, the potential impact these risks may have on their businesses, and develop contingency plans where appropriate. The Board and the Manager keep under regular review the liquidity available to the Company, including bank facilities, required to meet the expected outstanding commitments that will be drawn and the ongoing expenses of the Company. The Board is satisfied that the liquidity position of the Company is sufficiently strong to mitigate the threat.
Brexit: the profitability of the Company's investments is adversely impacted due to an adverse economic impact on the UK economy from Brexit and restricted access to European markets. Mitigation: Brexit has been an ongoing board agenda item for all our portfolio companies. Each portfolio company has developed plans to cater for the Brexit agreement.
Investment and liquidity risk: the Company's investments are in small and medium-sized unquoted companies, which by their nature entail a higher level of risk and lower liquidity than investments in large quoted companies. Mitigation: the Manager aims to limit the risk attaching to the portfolio as a whole by closely monitoring individual holdings, including the appointment of investor directors to the board of portfolio companies. The Board reviews the portfolio, including the schedule of projected exits, with the Manager on a regular basis with a view to ensuring that the orderly realisation process is progressing.
Portfolio concentration risk: following the adoption of the Company's revised investment policy in May 2016 the portfolio will become more concentrated as investments are realised and cash is returned to shareholders. This will increase the proportionate impact of changes in the value of individual investments on the value of the Company as a whole. The Directors' valuation of the Company's investments represents their best assessment of the fair value of the investments as at the valuation date and the amounts eventually realised from such investments may be more or less than the Directors' valuation. Mitigation: the Directors and Manager keep the changing composition of the portfolio under review and focus closely on those holdings which represent the largest proportion of total value.
Financial risk: most of the Company's investments involve a medium to long term commitment and many are relatively illiquid. Mitigation: the Directors consider it appropriate to finance the Company's activities through borrowing on a short-term basis. Accordingly, the Board seeks to ensure that the availability of cash reserves and bank borrowings match the forecast cash flows of the Company both on a base and stress case basis given the level of undraw commitments to limited partnership funds.
Economic risk: events such as economic recession or general fluctuations in stock markets and interest rates may affect the valuation of portfolio companies and their ability to access adequate financial resources, as well as affecting the Company's own share price and discount to net asset value. Mitigation: the Company invests in a diversified portfolio of investments spanning various sectors and maintains access to sufficient cash reserves to be able to provide additional funding to portfolio companies should this become necessary.
Credit risk: the Company holds a number of financial instruments and cash deposits and is dependent on counterparties discharging their commitment. Mitigation: the Directors review the creditworthiness of the counterparties to these investments and cash deposits and seek to ensure there is no undue concentration of credit risk with any one party.
Currency risk: the Company is exposed to currency risk as a result of investing in companies and funds denominated in euros. The sterling value of these investments can be influenced by movements in foreign currency exchange rates. Mitigation: Currency risk is monitored by the Manager on an ongoing basis and on a quarterly basis by the Board.
Internal control risk: the Company's assets could be at risk in the absence of an appropriate internal control regime. Mitigation: the Board regularly reviews the system of internal controls, both financial and non-financial, operated by the Company and the Manager. These include controls designed to ensure that the Company's assets are safeguarded and that proper accounting records are maintained.
6. Related Party Transactions (Notes to the Accounts page 21, note 62)
The Company has investments in Dunedin Buyout Fund II LP, Dunedin Buyout Fund III LP, Dunedin Fund of Funds LP and Equity Harvest Fund LP. Each of these limited partnerships are managed by Dunedin. The Company has paid a management fee of £0.6m (2019: £0.6m) in respect of these limited partnerships. The total investment management fee payable by the Company to the Manager is therefore £0.7m (2019: £0.7m).
Since the Company began investing in Dunedin Buyout Funds ("the Funds") executives of the Manager have been entitled to participate in a carried interest scheme via the Funds. Performance conditions are applied whereby any gains achieved through the carried interest scheme associated with the Funds are conditional upon a certain minimum return having been generated for the limited partner investors. Additionally, within Dunedin Buyout Fund II LP and Dunedin Buyout Fund III LP the economic interest of the Manager is aligned with that of the limited partner investors by co-investing in this fund.
As at 31 December 2020 there is a provision made within Investments for carried interest of £7.5m (2019: £7.9m) relating to Dunedin Buyout Fund III LP and £0.1m (2019: £1.4m) relating to Equity Harvest Fund LP. Current executives of the Manager are entitled to 85% of the carried interest in Dunedin Buyout Fund III LP and 14% in Equity Harvest Fund LP.
ENDS
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