GCP Asset Backed Inc GCP Asst Bckd - GABC - Annual report and financial statements
14/04/2023 07:00
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RNS Number : 1942W GCP Asset Backed Income Fund Ltd 14 April 2023
GCP ASSET BACKED INCOME FUND LIMITED
(the "Company" or "GCP Asset Backed")
LEI: 213800FBBZCQMP73A815
Annual report and financial statements for the year ended 31 December 2022
14 April 2023
The Directors of the Company are pleased to announce the Company's annual
results for the year ended 31 December 2022. The full financial report and
audited financial statements can be accessed via the Company's website at
www.gcpassetbacked.com (http://www.gcpassetbacked.com) and will be posted to
shareholders who elected to receive full copy statutory documents over the
course of the next few weeks.
For further information please contact:
Gravis Capital Management Limited
+44 (0)20 3405 8500
Joanne Fisk
Philip Kent
Investec Bank plc
+44 (0)20 7597 4000
Helen Goldsmith
Denis Flanagan
Neil Brierley
Buchanan/Quill
+44 (0)20 7466 5000
Helen Tarbet
Sarah Gibbons-Cook
Henry Wilson
ABOUT THE COMPANY
GCP Asset Backed Income Fund Limited (the "Company") is a listed investment
company which focuses predominantly on investments in UK asset backed loans.
The Company seeks to provide shareholders with attractive risk-adjusted
returns through regular, growing distributions and modest capital appreciation
over the long term.
The Group is currently invested in a diversified portfolio of asset backed
loans across the social infrastructure, property, energy and infrastructure,
and asset finance sectors, located predominantly in the UK.
The Company is a closed-ended investment company incorporated in Jersey. It
has a premium listing on the Official List of the FCA with its shares admitted
to trading on the Premium Segment of the Main Market of the LSE since 23
October 2015.
At 31 December 2022, its market capitalisation was £364.7 million. The
Company is a constituent of the FTSE All-Share Index.
AT A GLANCE - 31 DECEMBER 2022
2020 2021 2022
Market capitalisation £m 401.9 426.6 364.7
Value of investments(1) £m 446.0 447.0 435.1
Dividends for the year p 6.225 6.30 6.325
Dividends for the year p 0.25(2) - -
Ordinary share price p 91.30 97.00 84.00
NAV per ordinary share p 102.18 99.29 94.90
Profit for the year £m 27.4 15.0 7.7
HIGHLIGHTS FOR THE YEAR
- Dividends of 6.325(3) pence per share declared in respect of the year, in
line with the dividend target for the year and continuing its stated aim of
growing the dividend year-on-year.
- Total shareholder return(4) of -7.3%, total NAV return(4) of 1.9% (31
December 2021: 13.2% and 3.4%) and an annualised total shareholder return(4)
since IPO of 3.5%.
- Profit for the year of £7.7 million (31 December 2021: £15.0 million). The
decrease year-on- year reflects net unrealised valuation losses on the
portfolio and a reduction in fee income. Further information on financial
performance is included below.
- NAV per ordinary share of 94.90 pence at 31 December 2022, a decrease from
99.29 pence in the prior year, primarily due to the write-down taken against
the Co-living group loan of 3.3 pence per share and discount rate adjustments
made by the Valuation Agent in respect of UK property exposure. Further
information is included in the Investment Manager's report below.
- Exposure to a diversified, partially inflation and/or interest
rate-protected portfolio of 59 asset backed loans with a third party valuation
of £431.0(5) million at 31 December 2022.
- Loans of £102.0 million (new and follow-on) advanced by the Group during
the year, secured against 32 projects with a further £13.9 million secured
against four projects, advanced post year end.
- Repayments of £95.6 million during the year generating repayment fees of
£0.8 million, with a further £12.5 million of repayments received post year
end.
1. Includes the valuation of the Subsidiary, refer to note 11 to the financial
statements for further information.
2. Special dividend of 0.25 pence per share declared in respect of the year
ended 31 December 2020.
3. Total dividend of 6.325 pence includes a quarterly dividend of 1.58125
pence per share for the quarter to 31 December 2022, which was declared post
year end.
4. Alternative performance measure - refer below for definitions and
calculation methodology.
5. Valuation of the portfolio held by the Subsidiary. The Company makes its
investments through its wholly owned Subsidiary. Refer to note 1 to the
financial statements for further information.
INVESTMENT OBJECTIVES AND KPIS
The Company's purpose as a closed‑ended investment company is to meet its
investment objective, which is to generate attractive risk‑adjusted returns
through regular, growing distributions and modest capital appreciation over
the long term.
Attractive risk adjusted returns Regular, growing distributions Capital appreciation
To provide shareholders with returns that are attractive with regard to the To provide shareholders with regular, growing dividend distributions. To achieve modest appreciation in shareholder value over the long term.
level of risk taken.
Key performance indicators
The Company has generated an The Company has grown its The Company's shares were
annualised total shareholder return(1) dividend year-on-year⁴, achieving trading at 84.00 pence per share
since IPO of 3.5%. its stated aim for the seventh at the year end.
consecutive year.
-7.3% 6.325p 84.00p
Total shareholder return(1) for the year Dividends in respect of the year Share price at 31 December 2022
31 December 2021: 13.2% 31 December 2021: 6.30p 31 December 2021: 97.00p
8.0%(2) 53% 11.5%
Weighted average annualised yield(1) on investment portfolio Percentage of portfolio with partial inflation and/or interest rate protection Discount(1) to NAV at 31 December 2022
31 December 2021: 7.3% 31 December 2021: 46% 31 December 2021: 2.3% discount(1)
(8.0% excl. Co-living group loan)
Sustainability indicators
Portfolio by value with an EPC Portfolio by value providing Gender diversity of the Board of
rating of B or above benefits to end users in society(5) Directors of the Company
44%(3) 30% 50:50
Further information on Company performance can be found below.
1. Alternative performance measure - refer below for definitions and
calculation methodology.
2. Including the Company's Co-living group loan which is held at net
realisable value. Excluding this loan, the weighted average annualised
yield(1) is 8.3%.
3. Percentage of portfolio with an EPC rating of B or above, 14% rated C, 5%
rated D, E, and F, with the remainder either not applicable or not found.
4. The dividend is fully covered by adjusted earnings(1) of 6.58 pence per
share.
5. Measured in alignment with the UN SDGs: housing for vulnerable adults, care
for the elderly, nurseries, urban regeneration and affordable housing.
PORTFOLIO AT A GLANCE
Portfolio of 59 asset backed loans with an average life of six years which are
partially inflation and/or interest rate protected. The loans fall within the
following sectors and are secured predominantly against physical assets and
contracted cash flows in the UK.
59 assets
Asset finance Property Social infrastructure Energy and infrastructure
£55.1m £195.7m £164.3m £15.9m
Percentage of portfolio by value
13% 45% 38% 4%
Number of loans within sector
11 19 24 5
Senior ranking security UK exposure(1) Secured against physical assets
69% 80% 87%
1. The Company has exposure to overseas assets located in Europe, the US,
Australia and Hong Kong.
CHAIRMAN'S STATEMENT
I am pleased to present the annual report of the Company for the year ended 31
December 2022.
Introduction
The Company continues to offer investors exposure to an attractive and
diversified portfolio of secured loans. The relatively short-dated duration of
the portfolio continues to allow the portfolio to refresh its characteristics
and take advantage of changing levels of risk and return opportunities as a
result of the macro-economic environment.
This year has seen continued challenges for the Company, with the headwinds in
the UK economy, and the availability of a broader range of income producing
investments arising from increased interest rates. These factors have
contributed to the Company's shares trading at a persistent discount(1) to
NAV. Notwithstanding these challenges, the shifts in the market have presented
exciting new opportunities and we believe that the Company is well placed to
adapt to the new macro-economic environment while continuing to provide
risk-adjusted returns to investors, through its diversified portfolio of
loans.
Across the loan portfolio, four loans have experienced challenges in the year.
These are the Co-living group loan, where the impact of the ongoing resolution
has resulted in further write-downs, two loans to multi-use community
facilities and a loan for which a small number of the underlying supported
living assets have been impacted by issues at the registered provider. In
total, impacted assets across these four loans represent 4%(2) of the total
portfolio by value at year end. Further information on these assets is
included below.
Importantly, elsewhere in the portfolio, borrowers have continued to perform
well with a number expanding their operations into new sites and geographies
over the year. Within the student accommodation sector, we have seen occupancy
on assets in the UK and Ireland achieve an average of 98.5% albeit with slower
recovery being seen on assets in Australia.
Equally, whilst operational assets are seeing cost inflation, we have seen
good demand on care home assets achieving an average occupancy of 90% and
stabilised nurseries (operating for more than 18 months) at 93%.
Consistent with challenges seen across the market and reflecting the higher
interest rate environment, the Company's shares have traded at a persistent
discount(1) to NAV through the year. The Board has therefore undertaken a
buyback programme to demonstrate support for the NAV, to benefit from the
consequent accretion to NAV and to provide confidence to the market. The Board
stepped in to initiate a similar programme of support in 2020 in response to
the Covid-19 pandemic and remains supportive of taking strategic action where
this represents value to the Company and to its shareholders.
Throughout the year, both the Board and Investment Manager have sought to
engage with shareholders through regular communication, including webinars,
meetings and factsheets. The aim is to ensure that shareholders receive timely
and comprehensive information on the portfolio and any other significant
matters as appropriate. The Board and the Investment Manager also engaged with
shareholders in the latter part of 2022 to discuss the resignation of David
Conlon, the lead fund manager. The Board and Investment Manager remain keen to
engage with shareholders to answer any questions.
Looking to the future, the Investment Manager has an attractive pipeline of
new investments in well-understood sectors and is working with existing
borrowers to understand their future funding requirements. Both new and
follow-on investments are being made at higher rates of return to reflect the
shift in rates seen across the lending market in 2022. Repayments in the year
on existing loans were at an average interest rate of 7.7% against new
investments made during the year at an average interest rate of 8.6%.
1. Alternative performance measure - refer to below for definitions and
calculation methodology.
2. Calculation comprises 50% of the supported living loan to reflect only the
impacted assets. Including the full loan this percentage would increase to
5.6%.
Financial performance
In the period, the Company's portfolio generated total income of £14.4
million with profit for the period of £7.7 million, decreasing from £15.0
million in the prior year reflecting net unrealised valuation losses on the
portfolio as detailed below, and a reduction in fee income. Further
information is included in the financial review below.
Net assets
At the year end, the net assets of the Company were £412.0 million. The NAV
per share decreased from 99.29 pence at 31 December 2021 to 94.90 pence at the
year end. The valuation of investments decreased during the year to £435.1
million from £447.0 million at 31 December 2021, with the largest single
asset exposure comprising 3.7% of total portfolio by value.
The decrease in NAV per share is primarily as a result of the write-down taken
against the Co-living group loan, which represents 3.3 pence per share, and
discount rate adjustments made by the Valuation Agent in respect of UK
property exposure. These are reflected through net unrealised valuation
movements in accordance with IFRS. Further information is included in the
Investment Manager's report below.
Financing
The Company has been utilising the RCF to efficiently deploy available capital
and take advantage of increases in prevailing market rates. Utilisation over
the last year has averaged 11% and at the year end, £32.1 million of the RCF
was utilised, representing 7.2% of total assets.
The performance of the RCF has been positive: the Company has demonstrated
coverage on all financial covenants and compliance with other covenants. The
RCF commitment (which has not to date been fully drawn) does not constitute an
aggressive level of gearing and that the Company has met, and continues to be
able to meet, all financial commitments and covenants of the RCF.
The £50.0 million RCF with RBSI includes an optional extension (with lender
approval) in August 2023, which will allow for an additional term of one year.
The Company, through the Investment Manager, has commenced a review of its
financing arrangements with the intention of extending the RCF in advance of
the date of expiry, as well as exploring alternatives should the RCF not be
renewed. As such, the Board is satisfied that the Company can continue to meet
its liabilities as they fall due over the next twelve months.
Further information on the RCF is given in notes 2.1 and 14 to the financial
statements.
Investments
During the year, the Group advanced £102.0 million in the form of 32
investments: 8 new and 24 follow-on transactions. Investments made during the
year have been consistent with the Company's investment objective and policy.
Further information is provided below.
Co-living group loan
The Co-living group loan breached a liquidity covenant in May 2021 and has
been in a work-out process over the last two years. The loan is a syndicated
loan and the Group is part of a consortium of lenders.
Since the loan defaulted, the consortium of lenders has been looking to
achieve the sale of the assets of the Co-living group to recover as much value
as possible. Significant progress has been made in this regard, with the
flagship Canary Wharf asset sold in late 2022. Further details on the work-out
process and plans for the remaining assets are set out below.
As noted later in the Investment Manager's report, the key features of this
loan are not present in any other loan in the portfolio. Further detail is
included below.
Key highlights
£102.0m £95.6m £31.9m £27.8m 21
Investments made Principal repaid Interest received Dividends paid Asset classes
Share price performance
The Company's shares have persistently traded at a discount(1) to NAV
throughout the year, with an average discount(1) of 6.0%. At 31 December 2022,
the share price was 84.00 pence, representing a discount(1) to NAV of 11.5%.
Since IPO, the shares have traded at an average discount(1) of 1.2%.
The total shareholder return(1) for the year was -7.3% (31 December 2021:
13.2%) which was driven by a reduction in the Company's share price. Total NAV
return(1) for the year was 1.9% (31 December 2021: 3.4%).
As discussed above, in recognition of the continued discount, the Board has
sought to undertake a buyback programme. During the year, the Company
repurchased a total of 5,682,459 shares at a weighted average price of 81.39
pence per share, a discount(1) to the prevailing NAV. This activity was NAV
accretive and contributed 0.2 pence per share since the programme was
recommenced in October 2022. Where the Board considers there to be a continued
benefit for the Company and for shareholders, it will look to the continuation
of the buyback programme. Post year end, a further 6,325,000 shares have been
repurchased, contributing 0.2 pence per share to the NAV.
Dividend policy
The Company paid 6.325 pence per share in interim dividends, compared to 6.30
pence per share paid in interim dividends for 2021, meeting the target set for
2022 and fulfilling the Company's stated aim to grow its annual dividend
year-on-year. The dividend was 0.28 times covered by EPS of 1.75 pence and
1.04 times covered by an adjusted EPS¹ of 6.58 pence.
Key risks
The year has seen shifts in the economic, political and regulatory risks
relevant to the Company and to all UK-focused businesses. However, some
clarity has been reached on the impact of Brexit and the Covid-19 pandemic on
the Company with reduced uncertainty on how borrowers are able to operate.
Rising interest rates in the year and post year end present both risks and
opportunities for the Company. The economic environment has seen some lenders
reduce their lending activity, presenting opportunities for investment and
allowing for higher yielding loans, particularly on loans with rate linkage.
However, the interest rate environment also presents challenges to the
Company, as evidenced in part by the Company's share continuing to trade at a
discount(1) to NAV.
In the year, the war in Ukraine has had a profound impact on geopolitical
relations. Whilst there are no loans in the portfolio that have been advanced
to companies based in Ukraine, Russia or Belarus and no borrowers have been
subject to sanctions, the conflict has seen impacts across a variety of
businesses, particularly on supply chains in construction and energy prices.
Construction projects across the portfolio have the benefit of fixed price
construction contracts with experienced counterparties. To date, whilst there
has been cost inflation across the portfolio, none of the Group's loans to
construction projects have had cost overruns in excess of budgeted
contingencies.
The loan portfolio has a significant exposure to residential property,
particularly in the UK. Whilst house prices in the UK rose in the year, given
the current inflationary environment, commentators are anticipating a
reduction in residential property value in the UK over the coming year. The
property portfolio retains headroom for reductions with an average LTV¹ of
c.70%. Equally, the Investment Manager works closely with borrowers to
understand exit strategies for all residential property investments. In a
downturn, this could include sale of assets, refinancing with another lender
or holding assets for rental income.
The Company's portfolio includes 20% of overseas investment. Of this exposure,
10% is hedged and 90% is held in Sterling loans. In the year, currency markets
experienced increased volatility but there was limited impact on the portfolio
due to the hedging strategy adopted.
The Board and Investment Manager carry out stress and viability testing on the
Company to assess the impact of these risks. Further detail on stress and
viability testing and the risks and uncertainties facing the Company is set
out below.
1. Alternative performance measure - refer below for definitions and
calculation methodology.
Governance and compliance
The Board recognises the importance of a strong corporate governance culture
and continues to maintain principles of good corporate governance as set out
in the AIC Code. Refer below for further details.
Responsible investment
The Board has continued to work closely with the Investment Manager to make
progress against the Company's stated aims in respect of ESG and to identify
ways in which the Company can embed the principles of responsible investment
within its operations. Although the Company, as an investment company, is
currently excluded from the requirement to report against the recommendations
of the TCFD, this year, as progress towards future compliance, the Company has
provided description on the four TCFD pillars of governance, strategy, risk
management and metrics and targets; refer to the sustainability section below.
Of particular note has been the data collection project undertaken by the
Investment Manager, to develop, quantify and report material ESG metrics from
the underlying portfolio. Further details of the work the Board and Investment
Manager have undertaken on ESG are detailed below.
Investment Manager
In October 2022, David Conlon resigned from the Investment Manager. Mr Conlon
had acted as lead fund manager since IPO and we would like to thank him for
his contribution to the Company over this period. Since his departure, Joanne
Fisk, Philip Kent and Rollo Wright have taken over responsibility for the
management of the Company and an update on the Investment Manager's plan for
resourcing is included below.
Outlook
The Company continues to operate in a challenging macro-economic environment
and this is impacting the performance of a small proportion of the portfolio,
particularly the Co-living group loan which has seen further reductions in
fair value throughout the year.
Aside from the four loans that have experienced challenges during the year,
performance across the remaining 55 assets has been stable with £127.5
million in principal and interest repaid. Post year end, one of the football
finance positions representing 0.5% of the loan portfolio missed a payment
comprising interest and principal amounts due to a change in legislation in
the asset jurisdiction. Further information is included below.
Whilst there are challenges, the current environment also presents
opportunities for the Company to make new investments and reset the portfolio
yield. Over the year, yields on new investments averaged 8.6% respectively,
contributing to an increase in the weighted average annualised yield(1) from
7.3% at 31 December 2021 to 8.0% at 31 December 2022. This trend is set to
continue for the forthcoming year.
We believe that the Company is well placed to adapt to the new environment and
meet its three stated investment objectives. We would like to thank our
shareholders for their continued support and engagement over the year.
Alex Ohlsson
Chairman
13 April 2023
1. Alternative performance measure - refer below for definitions and
calculation methodology.
2. Including the Company's Co-living group loan which is held at net
realisable value. Excluding this loan, the weighted average annualised
yield(1) is 8.3%.
STRATEGIC OVERVIEW
The Company's investment objective is to generate attractive risk-adjusted
returns through regular, growing distributions and modest capital appreciation
over the long term.
Investment objective
The Company's investment objective is to generate attractive risk-adjusted
returns through regular, growing distributions and modest capital appreciation
over the long term.
Investment policy
The Company seeks to meet its investment objective through a diversified
portfolio of investments which are secured against, or comprise, contracted,
predictable medium to long-term cash flows and/or physical assets. The
Company's investments will predominantly be in the form of medium to long-term
fixed or floating rate loans which are secured against cash flows and/or
physical assets which are predominantly UK based.
The Company's investments will typically be unquoted and will include, but not
be limited to, senior loans, subordinated loans, mezzanine loans, bridge loans
and other debt instruments. The Company may also make limited investments in
equities, equity-related derivative instruments such as warrants, controlling
equity positions (directly or indirectly) and/or directly in physical assets.
The Company will at all times invest and manage its assets in a manner which
is consistent with the objective of spreading investment risk.
Investment restrictions
The Company observes the following investment restrictions:
- any single investment, or any investments with a single counterparty, will
be limited to 20% of the gross assets of the Company;
- investments in equities and equity-related derivative instruments, including
controlling equity positions and any direct investments in physical assets,
will be limited to 10% of the gross assets of the Company;
- no more than 30% of the gross assets of the Company will be used to finance
investments outside the UK; and
- the Company will not invest in other listed closed-ended funds.
The limits set out above shall all apply at the time of investment, as
appropriate.
Structure of investments
The Company typically makes investments directly or indirectly through one or
more underlying special purpose vehicles which will usually be wholly owned by
the Company and over which the Company will exercise control as regards
investment decisions. The Company may from time to time invest through
vehicles which are not wholly owned by it. In such circumstances, the Company
will seek to secure controlling rights over such vehicles through shareholder
agreements or other legal arrangements.
In the event of a breach of the investment restrictions set out above, the
Investment Manager shall inform the Directors upon becoming aware of the same
and if the Directors consider the breach to be material, notification will be
made to a regulatory information service.
No material change will be made to the investment policy without the approval
of shareholders by ordinary resolution.
Non-financial objectives of the Company
The key non-financial objectives of the Company are:
- to maintain strong, long-term and positive working relationships with all
stakeholders, including shareholders and borrowers;
- to promote the development of emerging asset backed sectors by developing
financial products that match the requirements of these sectors; and
- to operate a long-term, viable business model, which does not detrimentally
impact the environment and provides tangible benefits to society.
Key policies
Borrowing and gearing policy
The Company may, from time to time, use borrowings for investment purposes, to
manage its working capital requirements or in order to fund the market
purchase of its own shares. Gearing, represented by borrowings, will not
exceed 25% of NAV, calculated at the time of borrowing.
Hedging and derivatives
The Company may invest through derivatives for investment purposes and
efficient portfolio management. In particular, the Company may engage in
interest rate hedging or otherwise seek to mitigate the risk of interest rate
changes as part of the Company's efficient portfolio management.
Investments will be denominated primarily in Sterling. However, the Company
may make limited investments denominated in currencies other than Sterling,
including US Dollars, Euros and Australian Dollars. In the event of the
Company making such investments, the Investment Manager will use its
judgement, in light of the Company's investment policy, in deciding whether or
not to effect any currency hedging in relation to any such investments. In
addition, the Company may do so where the Investment Manager considers such
hedging to be in the interests of efficient portfolio management and may
utilise derivative instruments to seek to achieve this. The Company will not
engage in currency trading for speculative purposes.
Any use of derivatives for investment purposes will be made on the basis of
the same principles of risk spreading and diversification that apply to the
remainder of the Company's investment portfolio and will be subject to the
investment restrictions described above.
Dividend policy
The Company pays dividends on a quarterly basis, with dividends typically
declared in January, April, July and October and paid in or around February,
May, August and November in each financial year.
The Company has authority to offer a scrip dividend alternative to
shareholders. The offer of a scrip dividend alternative was suspended at the
Board's discretion, for all 2022 dividends, as a result of the discount
between the likely scrip dividend reference price and the relevant quarterly
NAV per share of the Company. The Board intends to keep the payment of future
scrip dividends under review.
Conflicts of interest
Where there is any overlap for a potential investment with GCP Infra, GCP
Infra has a right of first refusal over such investment. GCP Infra has not
exercised this right of first refusal since the Company's IPO.
In the event that the Investment Manager or any shareholders, directors,
officers or employees of the Investment Manager are directly or indirectly
interested in any entity or asset in relation to any investment proposal, the
potential investment is presented to the Board for its approval. Further
details can be found below.
BUSINESS MODEL
The Group's purpose is to invest in a diversified portfolio of asset backed
loans to provide regular, growing distributions and modest capital
appreciation over the long term.
Investment Sustainability Implementation Key performance Sustainability
objectives considerations of investment strategy indicators indicators
Attractive risk adjusted returns Governance INDEPENDENT BOARD | STRONG GOVERNANCE Annualised total shareholder return(1) since IPO was 3.5%. Governance
To provide shareholders with returns that are attractive with regard to the Read how the Company is governed and the activities of the Board during the 50:50
level of risk taken. year in the governance section below.
Read more below. -7.3% Board gender diversity at 31 December 2022
Total shareholder return(1) for the year
Regular, growing distributions
INVESTMENT MANAGER
To provide shareholders with regular, growing dividend distributions.
Capital appreciation
To achieve modest appreciation in shareholder value over the long term.
Environmental LOAN ORIGINATION AND EXECUTION OPERATIONAL MANAGEMENT The Company has increased its dividend year‑on-year. Environmental
Read about how the Company's activities benefit the environment in the 44%(2)
sustainability section below.
ESG due diligence ESG data collection 6.325p Portfolio by value with an EPC rating of B or above
Dividends in respect of the year
The Group invests in asset backed loans utilising the Investment Manager's The operations of the Company are delegated to the Investment Manager and
expertise and a proven track record in loan originating and monitoring. The overseen by the Board. The Investment Manager maintains a robust control
Group is able to provide bespoke lending solutions where traditional lenders environment and undergoes an internal controls review from an external audit
cannot due to reasons other than credit quality. provider on an annual basis.
Social FINANCIAL MANAGEMENT RISK MANAGEMENT The shares have traded at an average discount(1) to NAV throughout the year. Social
Read about how the Company's activities contribute to society in the 1,319
sustainability section below.
ESG positive investment Assessing climate risk 11.5% FTEs at portfolio level at 31 December 2022
Discount(1) to ordinary share NAV at year end
The Company operates a disciplined approach to financial management, only The Company operates a robust risk management and mitigation process along
increasing its capital when it has a highly executable pipeline of with active controls monitoring and stress testing procedures. The Investment
investments. The Company uses hedging where appropriate to manage foreign Manager is appointed as AIFM to the Company and is responsible for the
exchange exposure. management of risk alongside the Board.
Financial
Read about the Company's financial performance and dividend cover in the
financial review and its long-term viability below.
Financial
0.28x
Dividend cover (IFRS) at 31 December 2022(3)
THIRD PARTY SERVICE PROVIDERS ADVISORY AND ADMINISTRATION
1. Alternative performance measure - refer below for definitions and
calculation methodology.
2. Percentage of portfolio with an EPC rating of B or above, 14% rated C, 5%
rated D, E, and F, with the remainder either not applicable or not found.
3. The dividend of 6.325 pence per share is fully covered by an adjusted
EPS(1) of 6.58 pence per share.
INVESTMENT MANAGER'S REPORT
The Company's target market remains underserviced by mainstream lenders and
therefore presents an opportunity for generating attractive risk‑adjusted
returns.
Asset backed lending
Asset backed lending is an approach to structuring investments used to fund
infrastructure, industrial or commercial projects and asset financing. Asset
backed lending relies on the following to create security against which
investment can be provided:
- the intrinsic value of physical assets; and/or
- the value of long-term, contracted cash flows generated from the sale of
goods and/or services produced by an asset.
Asset backed lending is typically provided to a Project Company, a corporate
entity established with the specific purpose of owning, developing and
operating an asset. Financing is provided to the Project Company with recourse
solely to the shares held in, and assets held by, that Project Company.
Cash generation to service loans and other financing relies on the
monetisation of the goods and/or services that a Project Company's assets
provide. Lenders implement a security structure that allows them to take
control of the Project Company and its assets to optimise the monetisation of
goods and/or services associated with such assets if the Project Company has
difficulties complying with its financing terms.
The Investment Manager uses a covenant-heavy approach to lending within these
structures as opposed to a 'covenant-lite' approach. The former is an approach
which tailors loans to each borrower and requires the borrowers to meet well
defined and specific performance measurements or covenants. The latter is a
loan facility with less restrictions on the borrower and with fewer
protections for the lender. The Investment Manager continues to see
significant benefits in a covenant-heavy approach with information reporting
requirements providing visibility of potential issues, if any arise.
Active management
The Investment Manager continues to work closely with borrower management
teams which it sees as crucial to navigating the changing macro-economic
environment. As well as receiving information mandated under the loan
documentation, the Investment Manager's designated portfolio management team
seek to maintain a regular dialogue with borrowers to ensure any potential
issues are identified early and can be escalated appropriately.
In the year, this engagement has included additional data collection relating
to climate risk and ESG factors to improve information held on the portfolio
further information is included below.
In addition, the Investment Manager has focused on the ability of operational
assets within the portfolio to meet rising energy and staffing costs. Whilst
there has been no impact on loan performance to date, this is an area the
Investment Manager continues to monitor, particularly for the nursery and care
home sectors where there is greater exposure to staff costs.
Portfolio rotation
The portfolio has a weighted average loan duration of six years which allows
for rotation of the investments over a relatively short period. This enables
the Investment Manager to maintain a diversified portfolio of investments
which reflect the prevailing market risk-adjusted rates of return.
Repayments of £95.6 million were received by the Company during the year. The
Investment Manager seeks to carefully manage repayments and match to the
pipeline of investments to efficiently deploy capital and utilise the
Company's RCF.
The table below sets out the top five full repayments received during the year
and a description of key assets.
Football finance
The Group's first three loans in the football finance sector repaid in full
during the year, representing a total of £27.3 million in principal
repayment. The loans had an average interest rate of 6.6% and were secured
against broadcasting income and player transfer contracts. Two of the loans
were to European clubs and one to a Premier League club in the UK. During the
year, these repayments were reinvested with a total of £22.8 million of new
investment into the sector at an average interest rate of 7.5% which
represents 8.0% of the loan portfolio at year end.
Residential property portfolio
The Group continues to lend against a variety of residential property and
property lending strategies. During the year, £53.4 million was received in
repayments in this sector. This included two short-term bridging loans
totalling £13.9 million for development sites in London which refinanced into
construction financing with other lenders in the market.
Student accommodation
Since 2016, the Group has provided financing to student accommodation projects
in the UK and overseas. This year, partial repayments were made on two of
these loans; one secured against an operational site in Dublin, Ireland and
the other against a portfolio of operational and development sites across
Australia. The partial repayments were met through equity contributions which
reduced the interest on these loans as well as reducing the LTV(1).
Overseas investment
The Investment Manager continues to take a cautious approach to investment
outside the UK, whilst appreciating the benefit of geographical
diversification for the Group.
At 31 December 2022, 20% of the portfolio was invested in assets outside the
UK. Some examples of these investments are:
- a student accommodation project in Dublin which opened in September 2021 and
is currently at 97% occupancy;
- a residential co-living development in Boston which reached practical
completion in December 2022, offering 477 units in an underserved area of the
city; and
- football finance deals secured against broadcasting income for clubs
competing in La Liga, a Spanish football league, and Serie A, an Italian
football league.
During the year, headwinds in the UK property sector drove an increase in
discount rates on UK property exposure from the Company's independent
Valuation Agent. Whilst a number of the overseas assets were not subject to
the same changes, downward revaluations were seen on assets within the
Co-living group exposure.
Due diligence for overseas projects involves specialist advice from relevant
advisers to ensure that issues specific to the jurisdiction of the assets is
considered and documentation of the loans meets any local requirements. In
most instances, projects overseas are with sponsors known to the Investment
Manager and often who are looking to expand their business following
successful projects in the UK.
Currently, one identified pipeline project is an overseas opportunity.
Full repayments during the year (top five by value)
Sector Amount repaid Interest rate IRR(1,2) Origination date Type of loan Description
Asset finance £15.0m 7.0% 7.0% December 2020 Senior Repayment of a football financing loan secured against broadcast revenue
Asset finance £12.3m 6.1% 6.7% August 2020 Senior Repayment of a football financing position through equity
Energy and infrastructure £10.3m 6.8% 7.4% June 2021 Senior Refinancing of a loan to a small portfolio of infrastructure assets
Property £8.1m 9.2% 10.3% November 2021 Senior Repayment for a short-term bridging loan which was refinanced into a
development loan with a different lender
Property £5.8m 9.2% 10.1% November 2021 Senior Repayment for a short-term bridging loan which was refinanced into a
development loan with a different lender
Total/weighted average £51.5m 7.4% 8.0%
1. Alternative performance measure - refer below for definitions and
calculation methodology.
2. The IRR for asset finance loans does not include the associated costs of
hedging foreign exchange exposure.
Construction projects
The portfolio has 16.9% exposure to projects currently under construction at
the year end. This continues to provide positive diversification for the
Group, often representing higher yield investments to reflect construction
risk, with completed assets giving the Group exposure to substantially
de-risked operational projects.
Across the portfolio, construction projects include:
- a purpose-built care home in an undersupplied area of South Wales;
- affordable housing units being developed on an airspace in South London,
supported by the Greater London Authority;
- an exclusive development of luxury homes outside London;
- student accommodation projects in Australia; and
- co-living developments in the US.
Through the year, there has been significant cost inflation for construction
materials following supply chain issues and energy cost increases driven by
the ongoing conflict in Ukraine. All of the construction projects in the
portfolio are under fixed-price construction contracts and the Investment
Manager has not seen any impact on the loan position, with any cost increases
agreed with contractors being absorbed by additional equity or within budgeted
contingencies.
In the due diligence process for construction projects, the Investment Manager
considers the creditworthiness and suitability of the construction
counterparty to the relevant project as a key factor of the investment
process. In addition, collateral warranties and contract assignments are taken
as part of the security package on these projects.
At the time of writing, the Investment Manager is seeing a slowing of
construction cost inflation and more competitive pricing from contractors for
their work. The current pipeline includes two construction projects.
Investment pipeline
The Investment Manager actively manages a pipeline of investment opportunities
available to the Group to ensure efficient deployment of capital. The
Investment Manager is continuing to see an attractive pipeline of
opportunities across a variety of sectors.
The current pipeline represents c.£56 million of opportunities in the social
infrastructure, asset finance and property sectors. Since the year end, £13.1
million has been successfully transacted in loans to a bridging loan company
and to residential property development.
As has historically been the case for the Group, many of the pipeline projects
are follow-on deals with existing borrowers with whom the Investment Manager
maintains close working relationships. Equally, the Investment Manager is
working closely with existing borrowers who are looking to extend their loans
to optimise sales values of their assets.
Pipeline opportunities are 93% senior loans with a weighted average yield of
9.3%, with c.7% overseas assets.
Asset update - Co-living group loan
Background
Co-living is a maturing sector in the private residential rental market which
provides studio apartments with high-quality shared living facilities at a
price point below comparable market rent. The product typically targets young
professionals or visitors to an area looking for short-term, high-quality
accommodation.
The Company first advanced a loan to the Co-living group in March 2017 with an
initial investment of £5.3 million growing over time to support the Co-living
group's growth across multiple properties.
In late 2019, the Investment Manager was approached with a proposal to enter
into a larger facility alongside Deutsche Bank, the 'Lender group'. Under the
new facility, the Company held commitments of c.38% of the total facility of
£140.0 million (£52.8 million) which comprised three tranches. Only the
first tranche of this facility was drawn due to the impact of Covid-19. Upon
entering the loan agreement, the Company's total exposure to the Co-living
group was reduced from £48.5 million to £30.0 million, although the
Co-living group's total borrowing (across multiple lenders) increased as a
result of the transaction.
Following the breach of a liquidity covenant in May 2021, driven by challenges
of operating under Covid-19 restrictions and the Co-living group's inability
to access further secondary funding for development sites, the Lender group
stepped in to progress a sale of the Co-living group.
Unfortunately, there were a number of failed sales processes for the Co-living
group. To realise maximum value from the assets, the Lender group established
a 'Bidco' to transfer key assets out of the Co-living group for stabilisation
and sale.
Process update
During the year, there was a further write-down of the net realisable value of
this loan from £18.8 million at 31 December 2021 to £4.4 million at the year
end, for the following reasons:
- multiple sales processes on the key US asset were frustrated by reduced
availability of funding packages for prospective purchasers, resulting in
write-downs on these positions;
- sale of the flagship Canary Wharf asset, whilst completed prior to the year
end, included a negotiated retention in respect of the VAT position of the
asset. Within the Company's valuation, it has been assumed that this is not
recovered in full;
- stabilisation of the Old Oak asset is ongoing, with a focus on fire
reporting required for an optimal sales process. The asset is confirmed to be
safe for operations but may require remediation works to complete a sale with
financing. As such, the valuation has been adjusted to assume complete
remediation works and reflects increased costs of operating the asset;
- development of a further key site is ongoing, but given cost inflation on
construction, headwinds in the UK property sector and the nature of the Lender
group's interest in the asset, the realisable value for the Lender group on
completion has been reduced accordingly;
- the Lender group was unable to reach agreement with senior lenders on a
number of smaller portfolio assets resulting in £nil assumed recovery on
these assets; and
- cost estimates to wind up the acquisition vehicle have been revised upwards.
In total, the Company has invested £36.3 million of cash, capitalised £4.8
million of interest and fees, and received cash repayments of £1.6 million,
resulting in a net total investment of £39.4 million. The fair valuation at
31 December 2022 was £4.4 million based on an estimate of the net realisable
value. This is clearly an extremely disappointing result for the Company and
Investment Manager, and is as a result of a complex loan structure,
involvement of multiple stakeholders and an expensive work-out process. The
structure of this loan in the portfolio was unique and whilst the Company
continues to have exposure to the co-living sector, the Investment Manager has
taken on board the lessons learnt from this process. These include changes to
the investment process and loan structuring, including:
- no other group lending facilities to retain control over lender decisions;
- no new 'holding company' positions with loans secured as close to the assets
and operations as possible; and
- investment papers to include exit strategies in both base case and downside
scenarios (e.g. steps that could be taken to dispose of the assets and
potential purchasers).
Current position
At the time of writing, the latest position on the remaining assets is:
- one large US asset is in advanced negotiations for a sale. This asset is
currently held at £nil value so any release to the Lender group would be
positive for the Company;
- advisers are working on comprehensive fire reporting on the Old Oak site.
The Lender group is working closely with the senior lender on this site; and
- post period end, the Lender group has sold its interests in the last
development asset. This transaction does not have a material impact on the
fair value of the Co-Living group loan at 31 December 2022.
Investment Manager update
Following the Investment Manager personnel changes announced by the Company in
October 2022, the Investment Manager has been working closely with the Board
to ensure the continued provision of investment management services to the
Company. Joanne Fisk and Philip Kent will continue as co-managers of the Fund
on a permanent basis with the support of 11 full-time professionals. The wider
team provides dedicated and shared credit investment resource, dedicated
portfolio management, as well as investor relations, finance, legal,
compliance and administrative services. The Investment Manager benefits from
an experienced investment team that has been responsible for over £4.2
billion of investment into the infrastructure, real asset and real estate debt
sectors since 2008. Biographies of key personnel at the Investment Manager are
listed below.
Mr Kent co-led the day-to-day management of the Company between May 2016 and
2018, thereafter remaining on the investment committee for the Company. He has
led debt investments in projects with a capital value of over £1.5 billion at
the Investment Manager and has co-managed GCP Infra since 2018. Ms Fisk has
worked exclusively on the Company since joining the Investment Manager in 2017
and has a depth of experience, including playing a key role in identifying
investments, leading negotiations, liaising with borrowers and overseeing
portfolio developments. Mr Kent has been added as a key person under the
investment management agreement between the Company and the Investment
Manager.
The Company continues to benefit from the breadth and depth of experience of
the Investment Manager's investment committee which comprises Philip Kent,
Nick Barker, Saira Johnston, Ed Simpson and Gravis founders, Nick Parker and
Stephen Ellis. Further, the Investment Manager also continues to benefit from
its strategic relationship with ORIX Corporation, which acquired 70% of the
business in 2021. ORIX is publicly traded in Tokyo and New York, with a market
capitalisation of c.$26 billion and c.$350 billion of assets under management,
including significant credit and asset management businesses in Japan, Asia
more widely, the US and Europe.
In addition to the current personnel, the Investment Manager continues to
actively recruit for a Head of Private Credit for the Company.
The intention is that this senior role will provide additional support to Ms
Fisk and Mr Kent and focus on new opportunities to complement the strategic
objectives of the Company.
Social infrastructure
Assets such as homes for the elderly, student accommodation and nurseries.
Investments into the social infrastructure space remain a core component of
the Group's activity. The Investment Manager has targeted investment into
areas where structural demand can be identified. Due diligence in this sector
focuses on management teams, demand demographics, regulatory landscape and ESG
impacts of the project.
During the year, the multi-use community facilities have continued to face
challenges. The larger of the two assets was transferred in October 2022 to a
new operator with significant experience in similar venues in London. The new
operator is undertaking capital works to the site to support greater revenue
generation from events at the site. The smaller of the two sites continues to
improve operations following the lifting of Covid-19 restrictions in early
2022. The Investment Manager is working closely with the operators and other
key stakeholders to improve top-line revenue at the site.
The Company has exposure to a portfolio of supported living properties, of
which three of the properties have seen a period of reduced rent. These
properties are managed by the Registered Provider, MySpace Housing Solutions,
who received an enforcement notice from the Regulator of Social Housing.
Whilst the properties within the portfolio continue to be well occupied and
with payments made by relevant local authorities, the challenges at the
Registered Provider have caused cash flow issues for the borrower; the
exposure equates to c.1.5% of the portfolio. The Investment Manager continues
to work closely with the borrower and the Registered Provider to seek a
resolution to this issue.
Care homes within the portfolio have performed well through the year, reaching
occupancy of 90% at year end. The Group made an additional investment of £2.7
million against these stabilised assets and agreed a small reduction in
interest rate to recognise the de-risking of these assets. One care home
remains under construction. The project is on schedule and located in an area
of significant undersupply for care provision. Practical completion is
expected in July 2023 and the Investment Manager looks forward to working with
this developer on their pipeline of further projects.
The nursery assets have performed well over the year. The nursery group has
grown to a total of 26 sites and secured new equity investment. Stabilised
sites (operating for 18 months) are operating at 93% occupancy, with good
demand for development and ramp-up sites, although occupancy on some projects
is limited by availability of staff. Again, the Investment Manager is hoping
to continue supporting the group over the coming year in their expansion.
Across both the operational care home and nursery projects, increases in
operating costs have been a key area of focus for the Investment Manager. In
particular, both asset classes are exposed to rising energy and staffing
costs. Management teams have reacted positively to date, with no impact on
loan payments.
This sector includes loans secured against assets located in the UK (79%),
Europe (8%), the US (3%) and Australia (10%).
Structural characteristics
- Provide core services
- Generate stable cash flows
- Require longer-term funding solutions
- Can benefit from partial RPI/CPI protections
- Benefit from supply/demand imbalances in particular geographies
Current investments
- Supported living
- Care homes
- Student accommodation
- Nursery facilities
- Multi-use community facilities
£164.3m
Valuation of sector within the portfolio
38%
Percentage of portfolio by value
SDG alignment¹
UN SDG 3 Good health and well-being
UN SDG 4 Quality education
1. Refer below for further information.
Energy and infrastructure
Assets such as CNG stations and solar O&M contracts.
The Investment Manager has historically had opportunities to invest in
infrastructure supporting a sustainable future. Over the last few years,
investment in this space has become competitive with early-stage investments
by the Group into 'last-mile' water infrastructure and battery storage being
refinanced through sales to institutional funders.
The Group continues to support three CNG stations, providing alternative
fuelling for leading UK businesses and haulage companies. The three stations
supported by the Group have displaced the equivalent of 6.8 million litres of
diesel fuel over the last year with 100% renewable waste- derived biomethane.
Biomethane emits c.80% less CO(2) than diesel, meaning the CNG stations
contribute to avoiding the impact diesel has on the environment. The ability
to use these stations is supporting companies in moving towards net zero
carbon emissions.
In the year, a loan secured against a small portfolio of UK renewable energy
projects was repaid, providing an overall IRR of 6.9% to the Company.
Elsewhere in the portfolio, the Group provides financing secured against
contracted payment for operations and maintenance of solar panels. These
contracts are long-term and have met all regular principal and interest
payments over the loan life to date. Monitoring of these loans includes
updates on the underlying counterparties and service provision under the
contracts.
Rising energy prices throughout 2022 have driven further market investment in
the energy and infrastructure space. Whilst there are no assets in the
immediate pipeline, the Investment Manager is hoping to identify new areas for
investment in this sector.
This sector includes loans secured against assets in the UK (75%) and Hong
Kong (25%).
Structural characteristics
- Provide core services
- Generate stable cash flows
- Rapidly changing energy system drives need for ancillary investment
- Capital intensive sector
Current investments
- Solar O&M
- Water infrastructure
- Battery storage (repaid during 2022)
- CNG fuel stations
- Renewable energy (repaid during 2022)
£15.9m
Valuation of sector within the portfolio
4%
Percentage of portfolio by value
SDG alignment¹
UN SDG 8 Decent work and economic growth
UN SDG 9 Industry, innovation and infrastructure
1. Refer below for further information.
Asset finance
Assets such as FX contracts and football finance.
Asset finance represents a variety of sectors for the Group, encompassing
investments in football finance, management fee contracts, FX contracts and
boiler servicing.
Loans within asset finance are often secured against long-term contracted
income instead of physical assets. In assessing these loans, there is
therefore a focus on the counterparty risk for the underlying payments over
the life of the loan.
During the year, three football finance loans were repaid in full. Exposure in
this sector is secured against revenue from major football leagues in respect
of broadcasting revenue or from large clubs in respect of player transfer
receivables. In each loan, there are significant contractual, regulatory and
market protections. Repayments in the year were matched with new investment
into the sector using similar financing structures and counterparties in the
market. The Investment Manager continues to see good opportunities in this
space but is not targeting an overall increase in these investments as a
percentage of the portfolio to ensure continued diversification of risk.
Post year end, a payment comprising interest and principal amounts was missed
on one of the overseas football finance facilities due to a cashflow issue
resulting from a change in legislation in the asset jurisdiction. This loan
benefits from a partial guarantee which has been triggered and the Investment
Manager is working closely with the football club to agree a revised repayment
plan for the loan. At the time of writing, there is no expectation of a loss
on the underlying position.
In the last quarter of 2022, an additional £6.0 million was invested into
foreign exchange margin call financing. Through this structure, the Group is
able to offer margin financing for credit approved counterparties of its
borrower. The loan is secured against a profitable foreign exchange business
with a net asset value covenant ensuring an LTV of below 50% on the loan at
all times and is ultimately exposed to a diverse client pool. Equally,
rigorous reporting and approval of new credit lines are maintained to ensure
risk is minimised. This loan gives the Company access to high-quality
counterparties and allows the borrower to offer margin financing to its
diverse client pool.
Elsewhere in the portfolio, loans secured against music royalties, management
fee income and boiler contracts continue to perform in line with expectations.
This sector includes loans secured against assets located in the UK (77%),
Europe (15%) and Australia (8%).
Structural characteristics
- Strong contractual protections
- Stable cash flows from fixed contracts
- RPI/CPI linkage
Current investments
- Boiler servicing
- Management fee income
- Credit margins against FX trades
- Football finance
- Music royalties
£55.1m
Valuation of sector within the portfolio
13%
Percentage of portfolio by value
SDG alignment¹
UN SDG 8 Decent work and economic growth
UN SDG 9 Industry, innovation and infrastructure
1. Refer below for further information.
Property
Assets such as financing for property purchases or development and co‑living
spaces.
Exposure to property assets remains a key focus for the Investment Manager
with almost half of the portfolio invested into property strategies.
The Group provides bespoke financing solutions across a wide range of
different sub-sectors. This gives the Group a diversified risk profile across
the sector.
During the year, the Group's first investment into the US residential market
reached practical completion. The site, located in Boston, Massachusetts
completed in December 2022, comprising 477 units of co-living accommodation to
meet demand from young professionals and students in an undersupplied location
close to workplaces, universities and local amenities. Demand for the site has
been strong, with occupancy currently at 55% within only a few months of
operations. The Group has exposure to two further development sites in the US,
one project under development in Boston, Massachusetts and a project in San
Jose, California which is expected to reach practical completion by October
2024.
The loan to the Co-living group continued to face challenges in the year; a
further update is included below.
Over the coming year, the Investment Manager is anticipating reductions in the
value of residential property in the UK, primarily due to the macro-economic
environment. Increases in base rates over recent months have driven a slowdown
of transaction activity, as seen by a drop-off in residential mortgage
applications in Q4 2022 which is likely to lead to reduced transaction volumes
in early 2023. The impact of valuation decreases will impact differently
across the Group's different investments.
Notwithstanding the disappointing reduction in realisable value on the
Co-living group loan, the Investment Manager is comfortable that the Group has
sufficient headroom against falls in property valuation across the balance of
the portfolio with an average LTV¹ of c.70% across the property exposure.
Equally, the Investment Manager maintains good working relationships with
borrowers in the market, giving access to a wide range of exit strategies for
any problem assets, including conversion into rental portfolios, sale or
refinancing.
The Investment Manager continues to see good opportunities for investment
secured against property assets. The current pipeline includes two assets
within this sector.
This sector includes loans secured against assets based in the UK (83%),
Europe (4%) and the US (13%).
Structural characteristics
- Secured against physical assets
- Generate stable cash flows
- Short-term financing
- Well understood and valued sector
Current investments
- Bridging loans
- Buy-to-let
- Co-living
- Land
- Warehousing of buy-to-let
£195.7m
Valuation of sector within the portfolio
13%
Percentage of portfolio by value
SDG alignment²
UN SDG 8 Decent work and economic growth
UN SDG 11 Sustainable cities and communities
1. Alternative performance measure - refer below for definitions and
calculation methodology.
2. Refer below for further information.
Portfolio summary
Portfolio
The Group's investments are supported by a diverse range of assets located
predominantly in the UK. At 31 December 2022, the weighted average annualised
yield(1) was 8.0% across the portfolio (8.3% excluding the Co-living group
loan) with a weighted average expected term of six years (31 December 2021:
7.3% (8.0% excluding the Co-living group loan) and five years, respectively).
In total, 50 loans have been advanced to Project Companies with operating
assets. The remaining nine loans have been advanced to Project Companies with
assets under construction (31 December 2021: 52 operating loans and eight
under construction).
Investment valuation
The Valuation Agent carries out a fair market valuation of all the Group's
investments on behalf of the Board on a semi-annual basis. Any assets which
may be subject to discount rate changes are valued on a quarterly basis. The
valuation principles used by the Valuation Agent are based on a discounted
cash flow methodology. A fair value for each asset acquired by the Group is
calculated by applying a discount rate (determined by the Valuation Agent) to
the cash flow expected to arise from each asset.
At the year end, all assets were valued using a discounted cash flow
methodology apart from the Co-living group loan which is held at net
realisable value. Further detail on the valuation methodology is given in note
17 to the financial statements.
The weighted average discount rate(1) across the portfolio at 31 December 2022
was 8.4% (31 December 2021: 7.5%). The valuation of investments is sensitive
to changes in discount rates applied. Sensitivity analysis detailing the
impact of a change in discount rates is given in note 17 to the financial
statements.
Portfolio by sector type
Asset finance 13%
- Football finance 8%
- FX contracts 2%
- Asset finance 1%
- Domestic boilers 1%
- Music royalties 1%
Energy and infrastructure 4%
- O&M contracts 2%
- Contract income 1%
- Natural gas 1%
Property 45%
- Residential property 29%
- Co-living(2) 9%
- Buy-to-let mortgages 5%
- Land 2%
Social infrastructure 38%
- Care home 14%
- Student accommodation 10%
- Social housing 7%
- Domestic Nursery 6%
- Multi-use community facilities 1%
Portfolio by security ranking
Senior 69%
Subordinated 31%
Portfolio by term profile
<5 yrs 71%
5 - 10 yrs 7%
>10 yrs 22%
Portfolio by interest rate profile
<7% 17%
7-8% 47%
8-9% 25%
>9% 11%
Portfolio by location
UK 80%
Europe 7%
Rest of world 13%
1. Alternative performance measure - refer below for definitions and
calculation methodology.
2. The Co-living group loan represents 1.1% of the total portfolio.
Investment portfolio
Top ten investments by value
Key
1. Sector type
2. % of portfolio by value
3. Asset class
4. Multi/single asset exposure
1. Development Fin Co 6
1. Property
2. 8.0%
3. Residential property
4. Multi asset
2. Bridging Co 1
1. Property
2. 5.7%
3. Residential property
4. Multi asset
3. Student Accom 2
1. Social infrastructure
2. 4.7%
3. Student accommodation
4 Single asset
4. Development Fin
1. Property
2. 4.3%
3. Residential property
4. Multi asset
5. Care Homes Co 2
1. Social infrastructure
2. 3.7%
3. Care home
4. Single asset
6. Property Co 2
1. Social infrastructure
2. 3.6%
3. Social housing
4. Multi asset
7. Care Homes Co 3
1. Social infrastructure
2. 3.5%
3. Care home
4. Single asset
8. Property Co 7
1. Property
2. 3.4%
3. Residential property
4. Multi asset
9. Care Homes Co 5
1. Social infrastructure
2. 3.1%
3. Care home
4. Single asset
10. Mortgage Co 2
1. Property
2. 3.1%
3. Buy-to-let mortgages
4. Multi asset
Further information on the Group's portfolio can be found on the Company's
website.
Portfolio performance
The portfolio currently consists of 59 loans across 21 discrete asset classes,
providing a diversified portfolio to investors.
Four loans in the year have proved challenging: investments in the Co-living
group, the multi-use community facilities and a small number of supported
living properties.
Through a difficult macro-economic environment and continued challenges from
the recovery from the Covid-19 pandemic, the work-out process from historic
defaults on the Co-living group loan and the stabilisation of the multi-use
community facilities have continued, with delayed rental payments also
occurring on a small number of supported living units during the year; refer
above for further information.
Notwithstanding these challenges, 55 loans in the portfolio, representing 96%
by value, performed well during the year. Post year end, one further loan
representing 0.5% of the portfolio by value, missed a payment comprising
interest and principal amounts due to changes in legislation in the asset
jurisdiction. An update on this position is included above.
Given the wider market changes over the year, the Investment Manager is taking
opportunities to ensure that the loans in the portfolio generate appropriate
risk-adjusted rates of return through a number of mechanisms:
- redeployment of capital into new investments at higher rates of return,
reflecting shifts in market rates for risk;
- use of inflation and interest rate linkage mechanics within the portfolio;
and
- negotiation of increased rates on amendments and extensions for existing
loans.
Through these methods, the weighted average annualised yield(1) on the
portfolio has increased from 7.3% at 31 December 2021 to 8.0%(2) at 31
December 2022.
Loans within the property sector have performed well this year, with
securitisation on the buy-to-let mortgage portfolio in May 2022 demonstrating
continued institutional demand for portfolios of performing loans in the
sector.
Equally, in the social infrastructure sector, student accommodation has had a
positive year as the lifting of Covid-19 restrictions has allowed for a return
to high occupancy levels on assets in the UK and Ireland. The Group also has
exposure to a portfolio of student accommodation in Australia which had been
adversely impacted by the Covid-19 restrictions in place which prevented
opening of universities and entry by overseas students. Positively, occupancy
on these assets has now improved and the Investment Manager anticipates an
exit through sale of these assets by the borrower in the coming year. Assets
in Ireland and the UK have bounced back quickly with occupancy at 98.5% across
the Group's exposure.
The dividend continues to be fully covered on an adjusted EPS(1) basis and the
efficient deployment of capital into higher yielding loans is positive for the
Group's ability to continue this level of coverage.
The dividend was 0.28 times covered by EPS of 1.75 pence and 1.04 times
covered by an adjusted EPS(1) of 6.58 pence.
1. Alternative performance measure - refer to below] for definitions and
calculation methodology.
2. Including the Company's Co-living group loan which is held at net
realisable value. Excluding this loan, the weighted average annualised
yield(1) is 8.3%.
Key investment highlights
The Group made 32 advances during the year totalling £102.0 million,
comprising eight new loans and 24 follow-on investments to existing borrowers.
From these advances, three were in the energy and infrastructure sector; four
in asset finance; 13 in property; and twelve in social infrastructure
projects. The Group received capital repayments of £95.6 million, along with
prepayment fees of £0.8 million.
Post year end, the Group made a further four advances totalling £13.9 million
and received 27 repayments totalling £12.5 million. There are no investment
drawdown commitments at the date of the report.
Investments and repayments made during the year(1)
Sector Average term Security Status Investments Repayments
Asset finance 3 years Senior Operational £11.9 million £43.1 million
Energy and infrastructure 2 years Senior Operational £1.6 million £14.1 million
/construction
Property(2) 2 years Senior/subordinated Operational £61.0 million £22.2 million
/construction
Social infrastructure 8 years Senior/subordinated Operational £27.5 million £16.2 million
/construction
Total £102.0 million £95.6 million
Investments and repayments made post year end(1)
Sector Average term Security Status Investments Repayments
Asset finance 2 years Senior Operational - £2.3 million
Energy and infrastructure 5 years Senior Operational - £0.3 million
Property 1 year Senior/subordinated Operational £13.9 million £9.3 million
/construction
Social infrastructure 5 years Senior Operational - £0.6 million
Total £13.9 million £12.5 million
1. The Company makes its investments through its wholly owned Subsidiary.
Refer to note 1 to the financial statements for further information.
2. Includes development projects that were subject to review by the Board
under the Company's investment approval process; refer below.
Inflation
Inflation in the UK has continued to reach record rates throughout the year,
with the Consumer Prices Index ("CPI") rising by 10.5% in the twelve months to
31 December 2022. The increases have been driven by the ongoing conflict in
Ukraine and the global recovery from the Covid-19 pandemic, pushing increases
in energy prices in particular.
Through the year, Bank of England base rates increased from 0.25% to 3.50%
with further increases to 4.25% post year end.
Whilst there is a lag between market movements and the Group's investment
activity, the Group is able to respond to the macro-economic environment in a
number of key ways:
- including inflation and/or base interest rate linkage mechanics in the
portfolio. These mechanics are set out in more detail below but provide some
level of protection against market movements; and
- re-investment of loans at prevailing rates. Given the weighted average
duration of the portfolio of six years, the Group is able to reset rates in
the portfolio over a relatively short time period. Over the year, the weighted
average yield on repayments was 7.7% with new investments at 8.6%.
In total, 53% of the portfolio by value has partial inflation and/or interest
rate protection in three different mechanisms:
- direct interest rate linkage to CPI, RPI (primarily for social housing
assets) or Bank of England base rate (for property assets with senior lending
lines);
- indirect linkage through principal indexation (strike price on indexation
that causes step up in principal when RPI/CPI spikes above a certain level);
and
- share of any upside generated in project SPVs through profit-sharing
mechanisms or share warrant structures.
The Investment Manager works closely with borrowers when applying these
mechanisms to ensure that they are appropriate and do not place undue pressure
on a borrower's business model. However, to date these mechanics have been
applied to all loans where the contractual triggers have been met except for
two instances; one where the Company holds the equity position, so there was
no benefit in doing so, and one where the loan had amortised ahead of schedule
so the impact of triggering the increase would have been de minimis.
In the year, these mechanics had the following impacts:
- yield movements: increases in the Bank of England base rates during the year
meant that 16 loans were subject to rate increases. Increases were an average
of 80 basis points over the year on these loans; and
- NAV movements: correspondingly, increases in yield as well as principal
indexation on five loans offset some of the decreases in the NAV due to
discount rate increases and write-downs on the Co-living group loan. The
Valuation Agent does not typically forecast any future increases in rates or
loans due to inflation within the Company's NAV due to the discretionary
nature of applying these mechanics.
The year has been one of significant market changes. However, the Investment
Manager is confident in the Group's ability to adapt over a relatively short
time frame and is pleased to see the positive impact these strategies and
mechanics have had over the year.
Inflation remains a key area for monitoring, particularly on operational
assets facing cost challenges.
Portfolio optimisation
Given the strength of the pipeline, utilisation of available capital is high
and some borrowers are looking to extend their loans to maximise returns on
disposal. As such, there could be a reduced focus on deployment and this
provides an opportunity to look at ways in which the current portfolio can be
enhanced.
The Investment Manager has identified a number of strategies which could be
used to enhance the portfolio or boost returns. The Investment Manager is
keeping each of these options under consideration to ensure that the Group
adapts appropriately to the macro-economic environment and continues to offer
investors optimal returns matched to the risk profile of the portfolio.
Strategy Sub-participation or disposal of loans Extensions and amendments on existing loans Moving into senior positions and new sectors Use of inflation mechanics Extension of RCF
Description As exposure in some sectors grows, the Investment Manager has identified an The current environment may mean that borrowers look to extend loans where Rate movements in the market mean that the Company can be competitive on Mechanics on 53% of the portfolio allow for adjustment of rates and/or Given the higher utilisation at the year end, there may be an opportunity to
opportunity to syndicate some existing loan positions to other lenders. they expect to achieve better sales outcomes in 12 to 18 months. senior positions. Given the Company's appetite for both senior and principal, based on changes in bank rates or inflation rates. increase the leverage within the portfolio where pipeline opportunities exist
subordinated positions, this could allow for blended 'stretch' positions by
for investment.
taking first-ranking security but offering a higher LTV(1) threshold, akin to
subordinated loans, for a higher blended interest rate.
This would allow the Group to continue supporting key borrowers whilst Where extensions have been agreed to date, the Investment Manager has been
Ensuring these mechanics are included on longer-dated loans in the portfolio
releasing capital for reinvestment. The Group has utilised this structure in able to negotiate rate increases of between 2.00 and 3.50%. provides a form of future protection against inflationary increases. The RCF with RBSI includes an optional extension (with lender approval) in
respect of one loan secured against a student accommodation development.
August 2023, which will allow for an additional term of one year. The Company,
New sectors for exploration include electric vehicle charging and bridging through the Investment Manager, has commenced a review of its financing
loans in overseas markets. arrangements with the intention of extending the RCF in advance of the date of
expiry.
Risks to the Company Introduction of third parties could result in competition on assets and Lower rotation into new sectors could impact on ability to access future Senior positions have historically been at lower returns. Some mechanics may not be possible to enforce if the borrower's businesses Increased commitment fees for the Company.
decreased control. pipeline deals.
cannot support additional debt.
'Stretch' senior positions are typically at higher LTVs(1), akin to
subordinated investments.
Benefits to the Company Boost returns. Boost returns. Diversification across portfolio. Ensure portfolio yield is relevant in inflationary environment. Boost returns.
Reduce borrower concentration risk. Allow for rapid reinvestment, often into de-risked and stabilised assets. Improved security coverage. Allow for efficient use of available capital to reduce 'cash drag'.
Allow for reinvestment into new loans.
1. Alternative performance measure - refer below for definitions and
calculation methodology.
FINANCIAL REVIEW OF THE YEAR
The Company has generated total income of £14.4 million and paid dividends of
6.325 pence per share. The total shareholder return(1) for the year was -7.3%
and total NAV return(1) was 1.9%.
Financial performance
It has been a challenging financial year for the Company, due to the ongoing
resolution of the Co‑living group loan resulting in further write‑downs
and headwinds in the UK economy resulting in the Company's shares trading at a
persistent discount to NAV.
In the year to 31 December 2022, the Company's portfolio generated interest of
£31.9 million (31 December 2021: £32.9 million) a reduction compared to the
prior year due to lower levels of capital deployed throughout the year. New
and follow‑on investments are being made at higher rates of return to
reflect the shift in rates seen across the lending market in 2022. Further
information is given in the Investment Manager's report above.
Other income of £1.5 million (31 December 2021: £2.9 million) was generated
which included prepayment fees of £0.8 million in respect of loans prepaid in
the year (31 December 2021: £2.5 million). The prior year was a record year
for such fees with a large prepayment received in respect of a waste recycling
facility.
Total income was offset by net unrealised valuation losses of £17.7 million
primarily in respect of write‑downs on the Co‑living group loan and
increases to discount rates made by the Valuation Agent on the Group's UK
property exposure. Further information is given in the Investment Manager's
report above.
The Company invests in derivatives for investment purposes and efficient
portfolio management. Realised losses of £1.3 million relating to certain
overseas loans were incurred upon repayment during the year; these were
partially offset by gains on realisation of forward contracts totalling £0.8
million. Overall net losses on derivative financial instruments for the year
were £0.8 million. Further information is given in notes 3 and 17 to the
financial statements.
The Company incurred total expenses of £5.7 million (31 December 2021: £5.6
million) which includes the Investment Manager's fee, other third party
service provider costs and Directors' remuneration. Total expenses have
remained broadly in line with the prior year, reflecting a decrease in
variable fees due to a reduction in the NAV and an increase in operating
expenses due to inflationary factors. Further information is given in notes
18, 4 and 6 to the financial statements respectively.
Finance costs have remained broadly static for the year with the Company
utilising its RCF throughout the year. At the year end, £32.1 million was
drawn (31 December 2021: £19.9 million).
The RCF is due to expire in August 2023 and includes an optional extension for
an additional term of one year with lender approval. The Company, through the
Investment Manager, has commenced a review of its financing arrangements with
the intention of extending the RCF in advance of the date of expiry, as well
as exploring alternatives should the RCF not be renewed. As such, the Board is
satisfied that the Company can continue to meet its liabilities as they fall
due over the next twelve months. Further information on the RCF is given in
notes 2 and 14 to the financial statements.
Total profit and comprehensive income for the year was £7.7 million, a
reduction from £15.0 million in the prior year.
Dividends
The Company met its stated aim of growing the dividend year‑on‑year, with
interim dividends increasing from 6.30 pence per share in the prior year. The
Company paid 6.325 pence per share in interim dividends, meeting the target
set by the Board for the year ended 31 December 2022.
The total dividend was 0.28 times covered by EPS of 1.75 pence for the year
and 1.04 times covered by an adjusted EPS(1) of 6.58 pence. Further
information on dividends is given in note 9 to the financial statements.
Ongoing charges
The Company's ongoing charges ratio(1), calculated in accordance with the AIC
methodology, was 1.2% (31 December 2021: 1.2%) for the year to 31 December
2022.
Earnings
The Company generated EPS of 1.75 pence (31 December 2021: 3.40 pence).
Earnings for the year were primarily impacted by the additional write‑down
of the net realisable value of the Co-living group loan and increases to
discount rates. As noted previously, EPS excluding these factors (adjusted
EPS(1)) for the year was 6.58 pence per share (31 December 2021: 7.22 pence),
which would have more than fully covered the dividend for the year of 6.325
pence per share.
Adjustments to discount rates result in the revaluation of investments, which
are reflected through fair value movements in the statement of comprehensive
income, in accordance with IFRS.
NAV and share price
Net assets attributable to equity holders at 31 December 2022 were £412.0
million, down from £436.7 million at 31 December 2021. The Company's NAV per
ordinary share has decreased from 99.29 pence at 31 December 2021 to 94.90
pence at 31 December 2022 primarily due to the write‑downs of the net
realisable value of the Co-living group loan and increases in discount rates
that have reduced the fair value of certain loans.
Prior to the market volatility seen since the Covid‑19 pandemic, the
Company's share price had predominantly traded at a premium(1) to NAV since
the IPO of the Company in 2015, with an average premium¹ of 3.0%. Since that
period, the Company has predominantly traded at a discount¹, with an average
discount¹ of 7.0% since March 2020. The current geopolitical and market
uncertainties have further negatively impacted the Company's share price this
financial year with the shares trading at an average discount(1) of 6.0%.
1. Alternative performance measure - refer below for definitions and
calculation methodology.
Share repurchases
The Company continued its share buyback scheme during the year to demonstrate
support for the NAV, to benefit from the consequent accretion to NAV and
provide confidence to the market. A total of 5.7 million shares were
repurchased during the year at a weighted average price of 81.39 pence per
share. At 31 December 2022, there were 442.0 million ordinary shares in issue,
of which 7.9 million were held in treasury.
Conflicts of interest
The Company has continued to finance existing construction projects of a
number of private student accommodation and co‑living developments in
Australia and the US, with £16.8 million drawn during the year (31 December
2021: £15.9 million). Certain of the directors and/or shareholders of the
Investment Manager directly or indirectly own an equity interest in these
development projects. In accordance with the Company's investment approval
process, these investments were reviewed and approved by the Board.
Where there is any overlap for a potential investment with GCP Infra, a third
party company advised by the Investment Manager, GCP Infra has a right of
first refusal over such investment. GCP Infra has not exercised this right of
first refusal since the Company's IPO.
Cash position
The Company received interest payments of £31.9 million and capital
repayments of £95.6 million from its Subsidiary in the year (31 December
2021: £32.9 million and £117.7 million respectively). The Company paid cash
dividends of £27.8 million during the year and a further £6.8 million post
year end (31 December 2021: £27.7 million and £6.9 million respectively).
The Company advanced £102.0 million (31 December 2021: £134.5 million) to
the Subsidiary to make investments in accordance with the investment policy.
Further information is included above.
Post year end, the Group made a further advances totalling £13.9 million and
received repayments totalling £12.5 million. There were £nil investment
commitments at the date of the report. Total cash reserves at the year end
were £10.3 million (31 December: £10.1 million).
SUSTAINABILITY
The Company aims to operate a long-term, viable business model which does not
detrimentally impact the environment and provides benefits to society where
possible.
Governance
50:50
Board gender diversity at 31 December 2022
565
ESG data points collected from borrowers at 31 December 2022
24%
Portfolio assets visited during the year by value
Introduction
ESG is increasingly becoming a prominent factor that investors consider when
making investment decisions. Companies are facing new challenges when
considering value creation for their investors, sustainable strategies are
being adopted and business models are changing. Considering ESG factors is
helping businesses to assess how their activities impact the environment, and
allows them to make informed decisions on how to create a more sustainable
society and improve the environment.
Through its influence on companies, ESG is increasing corporate transparency
and accountability. ESG reporting allows investors to assess whether companies
are meeting their commitments in terms of environmental, social and governance
issues. The Board and the Investment Manager are committed to improving the
Company's ESG disclosures in the drive for more consistent reporting across
the industry.
Institutions are being held accountable for the impacts their operations have
on the environment through ESG reporting, which has become a driving force for
positive change across the world, aligning organisations to frameworks such as
the UN SDGs. Further information on Company alignment with the UN SDGs is
given below.
ESG, however, is not just about reporting information, it is about its
integration into day-to-day operations, which is why incorporating Responsible
Investment principles into investment decisions and investment management
processes is important for the Board, Investment Manager and the Group.
Responsible Investment
The Investment Manager has been a signatory to the PRI since 2019. The PRI,
established in 2006, is a global collaborative network of investors working
together to put the six principles of Responsible Investment into practice.
The Investment Manager recognises that applying these principles better aligns
investment activities with the broader interests of society and has committed
to their adoption and implementation.
Responsible Investment incorporates ESG issues into the Investment Manager's
investment analysis and decision making processes, as detailed below. ESG
management for the Company at the Investment Manager is led by the investment
team. The Investment Manager has established a Responsible Investment policy
and a dedicated Responsible Investment committee to monitor and implement ESG
initiatives across its organisation. Further information is provided below and
information on the PRIs can be found on the PRI website: www.unpri.org
(http://www.unpri.org) .
ESG framework
The Company has embedded governance protocols into the way it manages its
business. In order to develop this further, the Directors have aligned the
Company's ESG framework with the PRIs. A summary of the framework is included
below. Further information can be found on the Company's website.
1. Decision making 2. Ownership 3. Partnership
ESG considerations are part of our decision‑making process We will include ESG issues in our policies and procedures We will consider the ESG approach of those
we chose to engage with and invest in
The Company The Company The Company
Decisions are governed by the terms of reference of the Board and its A full review of the key operating manual and Prior to appointment of each service provider, full due diligence is carried
committees, which include ESG considerations.
out which includes a summary of approach to ESG issues.
policies will be carried out to ensure ESG requirements and considerations are
fully incorporated.
The portfolio The portfolio The portfolio
The Investment Manager takes ESG considerations into account in its The Investment Manager has put in place a Responsible Investment policy which Through relationships with borrowers and appropriate provisions in key
decision‑making processes in line with its Responsible Investment policy. includes deal screening and ESG due diligence. agreements, the Investment Manager will seek access to appropriate disclosure
on ESG issues.
4. Acceptance 5. Enhancement 6. Reporting
We will promote acceptance and We will ensure our ESG framework is We will report on our progress against our
implementation of ESG considerations maintained ESG framework
The Company The Company The Company
The Board promotes acceptance and implementation of ESG considerations through The Board will continue to engage with the key service providers to monitor The Board will provide regular and transparent reporting to investors on
engagement with the Company's stakeholders and review of its service and assess their proposals to enhance the ESG framework, and to seek advice specific ESG considerations.
providers. where required.
The portfolio The portfolio The portfolio
Through reporting and investor engagement, the Investment Manager will share The Investment Manager will continue to engage with advisers and stakeholders, The Investment Manager will report on how investment processes incorporate
progress on implementation of the PRIs and look to utilise examples of best including borrowers, to seek ways to enhance the ESG framework. ESG, including incentive mechanisms and any new transactions in social or
practice in the market. energy infrastructure.
Responsible Investment policy
The Investment Manager's Responsible Investment policy is integrated into
investment management processes and incorporates pre-investment, active
ownership and governance processes, as detailed below.
Pre-Investment Active ownership
Deal screening ESG due diligence processes Monitoring and engagement Reporting
Investment management processes screen for investments that promote Prior to a new investment being approved, the relevant investment team assess Following execution and investment, key relevant ESG indicators are monitored The Investment Manager reports on an annual basis, with its Responsible
sustainability, conform with the Investment Manager's values and benefit how the investment fares against key relevant ESG criteria using a checklist by the Investment Manager's portfolio management team. It seeks to engage with Investment report published each year and can be found on the Investment
society, including, but not limited to, the areas of climate change mitigation which includes an assessment of ESG characteristics and is included with every equity owners and/or operators of projects to understand the ESG factors Manager's website. The Responsible Investment report sits alongside a PRI
and adaptation, energy transition, critical infrastructure, affordable living, investment proposal submitted to the Investment Manager's Investment relevant to those projects or properties, and, where relevant, use influence report, which summarises its Responsible Investment activities.
social housing, education and healthcare. committee. as a lender of capital or investor to manage exposure to ESG risks.
It applies the recommendations of the TCFD and encourages the application of
The screening excludes investments which focus on non-medical animal testing, The assessment typically covers ESG-related risks and opportunities, and, to As developed, ESG indicators are to be reported to the Board for consideration the TCFD framework in its funds.
armaments, alcohol production, pornography, tobacco, coal production and the extent applicable, relevant policies and procedures, alignment with as part of the quarterly Board reporting cycle.
power, and nuclear fuel production. industry or investment-specific standards and ratings, and compliance to
relevant ESG- related regulation and legislation.
Investments with ongoing or persistent involvement in human rights abuses are
also excluded.
Governance and responsibilities
The Investment Manager operates a Responsible Investment committee which The Investment Manager has a clearly defined governance structure with
comprises senior personnel from across the business, including a detailed processes that cover business operations, including investment
representative from the team responsible for managing the Company. This management and portfolio monitoring and reporting. It obtains assurance over
ensures that the Board is kept informed of any relevant developments at the the design and operation of its controls annually through the completion of an
Investment Manager and that best practice can be shared across the different ISAE 3402 audit by external auditor, Deloitte LLP.
managed investment funds.
In addition to the board of the Investment Manager, the Investment Manager
The committee is responsible for all aspects of the Investment Manager's employs a team of professionals with in-depth experience in the investment
Responsible Investment policy, including oversight of ESG initiatives, industry and asset classes.
reporting, regulatory compliance, staff training and making recommendations to
the board of the Investment Manager.
The Investment Manager's approach to stewardship and engagement is based on
the Principles of the UK Stewardship Code 2020 and is in line. with its
philosophy on responsible investing.
Data collection project
The Investment Manager has developed and quantified material ESG metrics for
the underlying portfolio; refer to table below. The Investment Manager chose
to carry out the data collection process in-house rather than outsource, as
leveraging its detailed knowledge of the portfolio and existing relationships
with the borrowers offered the most efficient approach and provided best value
for shareholders.
The process involved the Investment Manager's portfolio management team
liaising with each asset operator to obtain relevant ESG data on the
underlying portfolio assets. This is the first year of collection and
reporting and the initial data will be used to identify and set baseline
metrics for future ESG reporting by the Company. The initial data points
considered material are detailed in the table below. When considering
materiality, the Investment Manager was advised by an external consultant, MJ
Hudson, using framework guidance provided by GRESB, the EDCI and alignment
with the UN SDGs. The scope of data collection will be kept under review.
MJ Hudson is a business with over 15 years of experience in the sustainability
sector, assisting companies with their ESG implementation and transition
plans. They advised on the ESG data collection process and conducted an
independent review of the data for any significant inconsistencies.
Furthermore, they assisted the Investment Manager in the creation of an ESG
dashboard to report on performance against relevant themes and KPIs across the
portfolio.
The Investment Manager will continue to liaise with asset operators to improve
and refine the availability of future ESG data which will be collected and
used as part of its regular reporting to shareholders in the Company's annual
report. It will also consider obtaining independent assurance over the data.
This was the first year such a detailed ESG-focused data collection exercise
has been undertaken and there were several challenges faced in respect to the
availability of the data requested, insofar as the Company is a debt provider
and does not own or control the assets in the portfolio.
For future investments, the Investment Manager intends to include additional
data clauses in any loan documentation to facilitate the collection of ESG
data more easily.
The Board and the Investment Manager are committed to improving the Company's
data capture and disclosure in the drive for more consistent reporting across
the industry.
ESG area Data points Portfolio coverage¹
Environmental EPC ratings, green certifications, environmental targets and board oversight, 30%
target formation processes, energy conservation strategies, promotion of green
initiatives, electricity and gas usage and energy use from renewable energy.
water consumption, waste generated and disposed.
Social Total FTEs, attrition rates, staff training/career development programmes, 29%
satisfaction surveys, employee health and wellbeing programmes, absenteeism
rate, employee fatalities, H&S lost time incidents, hours worked and
s106/CIL contributions.
Governance Gender diversity of board and employees, ISO alignments/certifications, 42%
memberships/signatories, policies on: bribery and corruption, diversity and
discrimination, whistleblowing, supplier code of conduct, ESG, modern slavery
and data protection.
Impact People housed, nursery places, bursary places, residents in care homes, 34%
renewable energy exported, biogas exported, new homes built, homes renovated
and client satisfaction.
Total 34%
1. Percentage of data responses received per ESG area, weighted by portfolio
value.
Corporate ESG initiatives
The Investment Manager is working towards running operations on a
carbon-neutral basis for its financial year 2023 to support the transition to
net zero. The Investment Manager's premises in London holds a BREEAM
'Excellent' rating and the offices are powered by renewable energy. This year,
the Investment Manager revised its business travel policy to further encourage
use of public transport and minimise flight travel to support its carbon
neutral target.
To encourage employees to travel in more carbon efficient ways, the Investment
Manager operates an electric vehicle scheme and a bike to work scheme. It
operates an office consumables and paper recycling scheme, and all staff are
provided with stainless steel, BPA-free, reusable water bottles and insulated
cups to reduce the impact of single-use plastic. Furthermore, the Investment
Manager offsets carbon emissions by contributing to a portfolio which is run
by provider Climate Impact Partners, whose aim is to reduce one billion tonnes
of CO2 by 2030.
Whilst the Board and the Investment Manager do not consider offsetting to be
by any means a perfect solution to the impact activities have on the
environment, both parties believe that it is a useful starting point. The
ultimate aim is to reduce emissions and the intention is to continue to
investigate and follow best practice in this area.
This year, the Investment Manager was awarded an 'Investors in People'
accreditation. As part of the assessment, a business-wide survey was conducted
to collate employee feedback, which has been used to drive better
communication and introduce non-financial reward schemes. The Investment
Manager has committed to working with Investors in People over the next three
years; it encourages everyone in the business to reach their potential and it
provides regular training to staff including funding specific industry
qualifications. This year it also held formal ESG training for key employees
and across the wider business. The Investment Manager also has a range of
measures in place to support the physical and mental health of its employees,
including a private healthcare package, weekly fitness classes and guidance on
healthy home working. It offers hybrid working arrangements to all employees.
The Investment Manager actively supports diversity and inclusion and ensures
that all employees are valued and treated with dignity and respect. To further
efforts in this area, it has introduced annual diversity and inclusion
training for all employees and is working on enhancing recruitment processes
to provide a framework that supports a diverse and inclusive culture. It has
also carried out a diversity survey to establish a baseline and facilitate
improved reporting going forward.
The Investment Manager also operates a volunteering initiative which supports
employees to volunteer for charitable or not-for-profit purposes by giving an
additional two days' paid leave plus two days' unpaid leave per year.
Furthermore, it partners with a charity of the year, to engage with in
fundraising, events and through volunteering. The charity chosen this year was
Little Village, a charity that supports local families. Since partnering with
the charity, 39 employees have participated across the business with more than
170 hours spent volunteering at the Little Village depot, assisting the
charity in cleaning and packaging items to be sent to families they support.
This provided employees with an opportunity to work as a team, engage with the
local community and understand more about the hardships low-income families
with young children face. At the date of publication, total amounts raised for
Little Village were over £40,000.
UN Sustainable Development Goals
Through its investments in assets which are integral to society, the Company's
activities can align with certain of the UN SDGs. These goals were created in
2015 by the United Nations to create a better and more sustainable world by
2030. Examples include good health and well-being, quality education and
sustainable cities and communities.
Through its investments in the development of social infrastructure, the
Company can help to make a positive contribution to the provision of
high-quality and safe buildings for vulnerable adults, healthcare patients and
students. Further, through the Company and the Investment Manager's approach
to governance, and to labour and health and safety, a positive contribution to
the employees, customers, suppliers and local communities in which the assets
operate can be made.
UN SDG alignment of the Company's portfolio
UN SDG 3 UN SDG l 4 UN SDG 5 UN SDG 8 UN SDG 9 UN SDG 11
UN SDG target 3.8 UN SDG target 4.2 UN SDG target 5.5 UN SDG target 8.3 UN SDG target 9.3 UN SDG target 11.1
Achieve universal health coverage, including financial risk protection, access By 2030, ensure that all girls and boys have access to quality early childhood Ensure women's full and effective participation and equal opportunities for Promote development-oriented policies that support productive activities, Increase the access of small-scale industrial and other enterprises, in By 2030, ensure access for all to adequate, safe and affordable housing and
to quality essential healthcare services and access to safe, effective, development, care and pre-primary education so that they are ready for primary leadership at all levels of decision-making in political, economic and public decent job creation, entrepreneurship, creativity and innovation, and particular in developing countries, to financial services, including basic services and upgrade slums.
quality and affordable essential medicines and vaccines for all. education. life. encourage the formalisation and growth of micro-, small- and medium-sized affordable credit, and their integration into value chains and markets.
enterprises, including through access to financial services.
UN SDG target 4.a
Build and upgrade education facilities that are child, disability and gender
sensitive and provide safe, non-violent, inclusive and effective learning
environments for all.
£60.6m 1,566 50:50 £36.0m
Invested in care home projects since IPO Nursery places at 31 December 2022 Board gender diversity at 31 December 2022 Invested in affordable housing
projects(2) since IPO
251 £31.2m 38:62 1,319 £850.8m 203
Care home residents at 31 December 2022 Invested in nursery projects since IPO Investment Manager gender diversity(1) at 31 March 2023 FTEs at portfolio level at 31 December 2022 Total investment since IPO Supported living residents at 31 December 2022
1. 38% female employees compared to 62% male at the Investment Manager.
2. Projects that meet the definition of 'affordable housing' under the UK
Government's National Planning Policy Framework.
Portfolio sustainability
Environment The Group has invested in a number of green energy projects, including three
operational CNG stations supplying 100% renewable waste-derived biomethane.
The three stations are located in strategically important hubs, providing
fuelling services to a variety of UK businesses and logistics providers. As a
form of transportation, CNG trucks play a part in avoiding the negative impact
of diesel consumption on air quality and the environment, emitting c.80% less
CO(2) than diesel trucks. In total, 6.8 million litres of diesel have been
displaced during the year by vehicles fuelling at these stations.
The Group has also invested in loans to support battery storage projects for
the deployment of renewable energy projects throughout the UK by providing
flexible capacity and balancing services to the National Grid. These loans
were repaid during the year. The assets comprised large units connected to the
electricity grid and contain battery units which charged from the grid, stored
electricity and released stored energy back into the grid as required.
The Group continues to support one project which has benefited from increased
volatility in energy markets, by providing balancing service and market demand
through wholesale trading.
Further, the Group has lent to companies who provide operation and maintenance
services for rooftop solar panels, in turn contributing to increased renewable
capacity in the UK, and has exposure to anaerobic digestion facilities.
Social One social investment that has been made is in a portfolio of private care
homes providing care
to the elderly. The portfolio is operated by Dormy Care Communities who aim to
offer high-quality accommodation and care to their residents including
nursing, residential, respite and palliative care and care for dementia
patients.
The operator's mission is to provide the highest standards of care and
support, in the very best environment.
The operator encourages residents to live as independently as possible with
the aim to maintain wellbeing through various activities ensuring that the
next chapter of the residents' lives is active, rewarding and enriching, with
a varied and diverse activity programme so the psychological and social needs
of each individual are met.
Each location for the homes has been carefully chosen, taking into account the
local area, the facilities available and the factors that are important to
elderly care. The homes have a range of facilities as well as different types
of care and support to meet individual needs and requirements.
Governance The Investment Manager's designated portfolio monitoring team engages with
borrowers on an ongoing basis through regular interaction. The Investment
Manager's origination and portfolio monitoring teams were able to undertake
site visits in the UK and Ireland. The regular monitoring of information and
financial covenant obligations is also carried out to ensure compliance and
the early identification of potential issues.
Site visits are an important aspect of the portfolio management role and can
facilitate both technical and commercial benefits. They allow the Investment
Manager to assess the performance of both asset and operator, and investigate
any important project issues. Further, site visits give the Investment Manager
an opportunity to understand the operations and relationships important to
each asset and its long-term success.
The Board and the Investment Manager value relationships with borrowers, and
recognise the importance of ensuring time is spent building and maintaining
these relationships. By engaging with borrowers and understanding their needs,
the Group is able to provide bespoke lending solutions which reflect the
contractual fundamentals and inherent risks of the underlying assets and cash
flows.
Social
£62,781
Amounts waived for ESG incentive schemes since introduction in 2021
30%
Portfolio by value providing benefits to society(1) at 30 December 2022
1,319
FTEs at portfolio level at 31 December 2022
Societal benefits
The Company's business model aims to provide investment in assets which are
integral to society. The Group can provide benefits to society through the
provision of funding of assets, such as housing for vulnerable adults, care
for the elderly and urban regeneration. The Group also provides finance for
property purchases or developments which mainstream lenders cannot serve, for
reasons other than credit quality.
At the year end, FTEs at portfolio level comprise c.1,300, of which c.1,000
are in the social infrastructure sector and c.200 in the property sector, with
the remainder at asset finance and energy and infrastructure projects. The
Group intends to continue to support borrowers that have a positive impact on
society, as it enhances the security of the portfolio and brings wider
benefits to the communities that the assets operate in.
ESG incentive schemes
Recognising the Company's role as a responsible debt provider, the Board
approved a policy in 2021 for ESG target incentives on selected loans. Through
this mechanism, agency fees (typically between £10,000 to £20,000 per annum
for each loan) can be waived if agreed ESG targets or schemes are implemented
by the borrower. The incentive mechanism is included in all term sheets issued
by the Investment Manager on behalf of the Group.
To date, the Company has funded three initiatives through this mechanism as
follows.
Nurseries
Bursary scheme for full-time nursery places for underprivileged children
across the nurseries.
Every child should be afforded the opportunity of an outstanding education,
but years of underfunding in the early years means accessing high-quality
provision is not possible for all, especially in areas of deprivation. The
rise in social inequalities due to the Covid-19 pandemic has only exacerbated
the problem.
The bursary scheme gives children access to high-quality early years
education. The nurseries themselves aim to be best in class, with four of the
nurseries in the group awarded 'outstanding' ratings from Ofsted. The
operational assets are fully occupied with significant waiting lists. By
removing the challenges of accessing affordable, high-quality early years
education for these families, we hope the futures of these children will be
positively impacted.
The curriculum at the nurseries includes a heavy environmentalism focus and is
designed to enable children to become informed and inspired changemakers, with
one of the key four pillars being Global Responsibility. The nurseries are a
participant in the Eco Schools programme and are working to achieve a green
flag status. In addition, in 2020 they signalled their intention to become a B
corporation and are working towards becoming net zero.
1. Measured in alignment with the UN SDGs: housing for vulnerable adults, care
for the elderly, nurseries, urban regeneration and affordable housing.
Community facilities
Reduced-rent desk or studio spaces for entrepreneurs in the community
facilities in which it invests.
One such facility is Hackney Bridge, a new, canalside public destination close
to Hackney Wick, on a site that once housed part of the Clarnico sweet
factory. These spaces are structured as affordable and the organisation
actively connects members and the community.
The location is home to a diverse group of independent, creative local
businesses; workspaces and studios, a street food market, bars, restaurants,
local independent retailers, community gardens and an event space.
The developer worked with the local community to ensure what was being offered
met their wants and needs. As well as providing the space local enterprises
need to thrive, the organisation works with members to make a positive
difference in the community. They invest time and skills into charitable
projects and provide free space for community events.
The supported spaces give local entrepreneurs and enterprises the opportunity
to see their business thrive. The spaces are available at a reduced rental
value, with successful applicants to the scheme typically paying from 35% to
50% of the usual full rental value.
Co-living
Free co-living beds to support refugees fleeing from the conflict in Ukraine
at the co-living properties.
One person took up the offer and lived in a co-living property for six months
through the Ukraine family scheme. The Ukraine visa schemes were launched by
the Government in March 2022. The schemes allowed individuals, charities,
community groups and businesses to offer a route to safety for Ukrainians,
even if they have no ties to the UK. The scheme played an important role in
providing safe, temporary homes to people in need of urgent sanctuary after
fleeing persecution, trauma, and conflict in Ukraine.
Those arriving under the scheme were able to live and work in the UK for up to
three years and access healthcare, benefits, employment support, education,
and English language tuition. The scheme has been a significant success with
over 100,000 Ukrainian refugees arriving in the UK. A total of 37,500 more
have valid visas and may choose to travel to the UK if circumstances change.
Environmental
44%(1)
Property portfolio with EPC rating of B or above at 31 December 2022
35%
Borrowers reporting green initiatives(2) at 31 December 2022
6.8m
Litres of diesel displaced by 100% renewable waste-derived biomethane(3)
TCFD
Compliance statement
For accounting periods beginning on or after 1 January 2022, companies with a
UK premium listing are required to report on a comply or explain basis against
the recommendations of the TCFD. Although the Company, as an investment
company, is currently excluded from such requirement, this year, as it
progresses towards future compliance, the Company has provided a description
under the four TCFD pillars of governance, strategy, risk management and
metrics and targets, giving consideration to the TCFD 'Guidance for All
Sectors' and the supplemental guidance for the financial sector.
The Company is working towards disclosure of all eleven recommendations under
the four pillars and will ensure full compliance when applicable regulation
applies to the Company.
Governance
The Company does not have an investment objective of sustainable investing nor
does it use ESG criteria to evaluate investments or assess their societal
impact within its stated investment appetite. The Directors do, however,
believe in the integration of Responsible Investment principles across all
aspects of the Company's operations including the application of ESG screening
to ensuring its long-term success and the success of sectors within which it
operates.
The Company has delegated investment management in accordance with the
investment mandate to the Investment Manager; as such, the key decisions made
by the Board in the ordinary course of business relate to the Company's
strategy, stakeholder engagement and oversight of risk management.
These decisions are governed by the matters reserved for the Board and the
terms of reference of the Board's committees. Ownership of ESG, including the
oversight of climate-related risks and opportunities, is the responsibility of
the Board, with the Board's committees having been delegated responsibility
for ESG specific items through their terms of reference as follows:
- Audit committee: those relating to controls and processes over material
financial data, valuations and reporting, internal assurance, third party
review of data and external reporting and metrics.
- Risk committee: those relating to the impact of identified and emerging
risks, initial borrower screening, ongoing due diligence and investment
monitoring.
- Management Engagement committee: those relating to service provider ongoing
compliance with their internal policies and alignment with the Company's
strategy.
- Remuneration and Nomination committee: those relating to the composition,
director skills and shareholder proxy company engagement and reports.
1. Percentage of portfolio with an EPC rating of B or above, 14% rated C, 5%
rated D, E, and F, with the remainder either not applicable or not found.
2. Percentage of portfolio reporting green initiatives such as recycling
schemes, low energy lighting, reduced use of paper, staff transport schemes,
food waste and water collections.
3. Equivalent litres of diesel displaced by trucks in 2022 refuelling at the
CNG stations in which the Company invests.
In addition, Joanna Dentskevich is the Director allocated responsibility for
ESG to further facilitate the development of the Company's ESG framework, and
to ensure the Company's ESG focus remains current and considered by the Board
in their decisions, processes and policies. The Company's ESG framework is
detailed further above and its ESG policy can be found on the Company's
website.
The Investment Manager has a ten-year record of identifying assets with a core
environmental and social benefit. Responsible Investment is at the core of
investment management processes and is led by the investment team. These
investment processes are overseen by the Responsible Investment committee,
which reports into the board of the Investment Manager. Further information is
provided above.
When evaluating and approving new investments, the Investment Manager directly
and/or indirectly addresses climate-related physical and transition risks and
opportunities. The Investment Manager's Investment committee reviews ESG
impacts as part of the investment process. An ESG indicators dashboard is
being developed to ensure consistent reporting to the Board for consideration
as part of the quarterly reporting cycle.
The Investment Manager has carried out its first climate risk assessment for
the Company for each underlying asset to assess climate-related risks and
opportunities across the portfolio. Further information is given below. The
Investment Manager also undertook a data collection project to help inform
assessment of ESG impacts and climate risk within the portfolio; further
information on the data collection project can be found above. Data
collection, verification and analysis will be an ongoing process by the
Investment Manager in order that annual ESG reporting can be kept up to date
and relevant.
Strategy
Physical risks
Through the climate risk assessment, the Investment Manager, based on current
climate conditions, believes the physical risk the portfolio is most exposed
to arises from extreme weather events in the short, medium and long term. Time
horizons have been defined as:
- short term: zero to three years;
- medium term: four to eight years; and
- long term: over eight years.
At this stage, the Investment Manager believes the main extreme weather event
in the short term would be from flooding and may affect some of the assets
within the property and social infrastructure sectors that are reliant on
physical premises located in areas that have a higher risk of flooding. The
possible impact on the borrower in these cases might be increased costs
arising from water damage, remediation, impact on operations and higher
insurance premiums.
In the medium to long term, the Investment Manager believes that extreme
weather events such as higher temperatures and water shortages may also impact
borrowers with loans associated with care homes, social housing and nurseries
where further installation of air conditioning units and the additional costs
associated with operating these assets may impact operators' profitability.
Higher temperatures may also impact the valuation of properties which are
poorly insulated or which were not designed to withstand extreme weather.
The majority of physical assets in the portfolio are located in the UK, in
regions with no specific threat from earthquakes, storms or other natural
disasters. For projects located in a region known for earthquake risk, storm
or natural disasters, specific design features that have been incorporated
will be considered to understand the impacts.
Transition risks
The Investment Manager believes the main transition risk the portfolio may be
exposed to in the short, medium and long term will arise from changes to
climate-related government policy and regulation. The introduction of the
Minimum Energy Efficiency Standards ('MEES') may impact some properties with a
focus on insulation and reduction of energy usage. Less modern properties with
designs that currently do not comply with MEES may require further capital
works to meet improved EPC ratings and/or specific air quality targets.
As the property sector within the portfolio mainly comprises short-dated loans
across a diversified geography and sub-sectors, a level of mitigation to the
impact of such government policy and regulatory changes has been identified.
New loans to projects within the property sector are more likely to support
more modern properties for which the design is more likely to comply with the
MEES.
The impact on the portfolio of physical and transition risks may result in
increased LTVs(1) from a reduction in property values of older stock and
increased credit risk due to operators' lower profitability potentially
impacting their ability to meet payments. However, the results from the first
climate change impact assessment indicate that whilst there exists some
exposure to physical and transitional risks for some assets, the impact and
probability of occurrence overall is considered by the Investment Manager to
be low and that the financial impact in the context of the Company's
diversified portfolio is likely to be immaterial.
As this was the first year the Investment Manager has undertaken a detailed
climate risk assessment, the scope considered the impact of more extreme
weather events but excluded consideration to a 2ºC or lower scenario. The
Investment Manager will seek to carry out further analysis for future years.
Risk management
The way in which the Company manages risk and the principal risks and
uncertainties are described below. The Board considers ESG risks, including
those relating to climate change, to be a transverse risk to be managed within
the existing risk categories identified in the Company's risk register.
To support the integration of ESG risks, including that of climate risk, into
the Company's procedures, an ESG analysis was undertaken during the year to
assess the impact of ESG on the Company's existing risk categories and any new
categories that might emerge as a result. This assessment has led to clear
actions to work towards over the coming years; refer below for further detail.
The Investment Manager directly and/or indirectly seeks to address
climate-related risks and opportunities when evaluating and approving new
investments. This includes the completion of a Responsible Investment
checklist for each new investment. Given the diversity of sectors which the
Company invests in, the approach to assessing and measuring ESG risks
(including climate risks) naturally needs to reflect the unique
characteristics of each investment.
Ongoing due diligence is carried out during the life of each asset to identify
any new risks and changes to existing risks, including changes to Government
and industry legal and regulatory requirements and assessment and the impact
of flooding along with any other appropriate considerations.
Following the investment, its performance is monitored against the relevant
covenants and information requirements that are contained within the terms of
the loan agreement. The requirements are tailored to manage risks specific to
each project and typically include financial, regulatory, operational and
construction reporting, where relevant. Through the Responsible Investment
checklist process, the Investment Manager seeks to identify ESG indicators to
include in reporting and monitoring of borrowers to inform the way in which
the investment is managed.
The Investment Manager is developing an ESG dashboard with the aim of
providing regular and consistent reporting to the Board on how investment
activities have incorporated ESG, including climate risk.
1. Alternative performance measure - refer below for definitions and
calculation methodology.
Climate risk assessment
To understand the potential impact on the portfolio posed by climate risks,
the Investment Manager has conducted a detailed portfolio-wide climate risk
assessment on each of the 59 loans in the portfolio. The risk assessment
considered nine risk factors associated with physical and transition risks
deemed to be the most material to the overall portfolio. These were:
- Physical risks (events driven by a shift in temperatures and
weather patterns):
- flooding; heat stress; water stress; fires and wildfires; and
natural disasters.
- Transition risks (risks related to the transition to a low-carbon
economy): policy or regulatory; technological; market; and reputational risks.
External and internal data points were used to assess the portfolio's exposure
to changes to energy efficiency standards and to flooding. EPC ratings and
flood risk data available for UK assets were obtained using databases provided
by the UK Government.
A loan-by-loan assessment was also undertaken internally by the Investment
Manager's portfolio management team to consider the specifics of each
investment and to understand the overall exposure to climate change and any
mitigating factors. The results from the risk assessment will be used as part
of decision making in relation to portfolio management, to help identify with
the borrower any further risk mitigation strategies, to better inform the
impact, if any, on the underlying borrower's cash flows, to assess how that
may impact on the performance of the loan and ultimately the financial
forecasts of the Company.
Metrics and targets
The Company reports to stakeholders through its financial reporting and,
through the Investment Manager, by way of quarterly updates. In turn, the
Investment Manager provides regular reporting to the Board at its quarterly
Board and committee meetings.
The Investment Manager is developing an ESG dashboard with the aim of
providing regular and consistent reporting to the Board on how investment
activities have incorporated ESG, including climate risk. The reporting will
also include ESG metrics regarding fee incentive mechanisms, new transactions,
due diligence issues raised on new transactions highlighted as a result of the
Responsible Investment checklist and ongoing monitoring.
Greenhouse gas emissions
Being an externally managed investment company, the Company has no employees,
does not own any property, nor purchase electricity, heat, steam or cooling
for its own use and is therefore exempt from the new Streamlined Energy and
Carbon Reporting disclosure requirements relating to Scope 1 (direct) and
Scope 2 (indirect) GHG emissions. However, to meet UK introduced legislation
regarding achieving net-zero greenhouse gas emissions by 2050, the Company
will need to report Scope 3 emissions, which fall under two categories as
defined by the GHG Protocol:
Category 1: Purchased goods and services
The emissions from services provided by the Investment Manager and the
Administrator and emissions from travel of the Board are deemed to be the most
material in the context of the Company's outsourced service model. The Board
has elected not to disclose this information until further data points can be
obtained and verified.
Category 15: Investments
As this is the first year a detailed data collection exercise has been
undertaken to obtain emissions of the underlying portfolio, there were several
challenges faced in respect to the availability of the data requested, insofar
as the Company is a debt provider and does not own or control the assets in
the portfolio. As such, emissions data points were only obtained from 22% of
portfolio assets by value and the Company has therefore elected not to
disclose this information until further data points can be obtained and
verified.
The Investment Manager will continue to liaise with asset operators to improve
and refine the availability of future ESG data which will be collected and
reported on an annual basis. Further information on the data collection
exercise can be found above.
The Board and the Investment Manager are committed to improving the Company's
data capture and disclosure to help drive more consistent reporting across the
industry. It is the Investment Manager's intention to develop the Company's
approach to targets in the coming year to enable more detailed reporting.
Integration
The Company and the Investment Manager have made considerable progress with
ESG integration over the past years.
Governance
The Company
In 2021, the Directors developed a Company ESG policy and framework, as
detailed further above. The policy is based upon the PRIs to ensure alignment
across its business and with its stakeholders.
To support the integration of ESG risks, including that of climate risk, into
the Company's procedures, an ESG analysis was undertaken during the year to
assess the impact of ESG on the Company's existing risk categories and any new
categories that might emerge as a result. This assessment has led to clear
actions to work towards over the next few years. Further details can be found
below.
Investment Manager
In 2019, the Investment Manager became a signatory to the PRI and commenced
work to integrate Responsible Investment criteria into investment processes.
The Investment Manager published a Responsible Investment policy in 2020
outlining its commitments as a business and continued with its work to fully
integrate ESG considerations in accordance with the PRI. Further information
is included above.
In 2021, the Investment Manager formed a Responsible Investment committee. The
committee comprises senior personnel from across the business and is
responsible for all aspects of the Investment Manager's Responsible Investment
policy; further information is given above. This year, the Investment Manager
committed additional resource by recruiting a senior member of staff to lead
on ESG and legal matters.
Reporting
The Company
The Board is committed to full compliance with applicable reporting standards
in line with regulatory requirements and has included further detail in the
annual report in regard to ESG and climate change. It is intended that this
will include compliance with TCFD once it becomes applicable to investment
companies.
In 2021, the Investment Manager commenced an assessment of flood risk across
physical assets and analysed data for available EPC ratings. The assessment
was expanded post year end to comprise a comprehensive review of all climate
risks. Further information on the climate risk assessment can be found above.
Investment Manager
In 2021, the Investment Manager published its first Responsible Investment
report for the financial year and further expanded the report in 2022 whilst
also launching a dedicated area for Responsible Investment on its website.
Further information can be found on the Investment Manager's website.
This year, the Investment Manager's Responsible Investment committee continued
its work to achieve compliance with the core elements of the TCFD. As a
company, it is currently exempt from the requirements, however the Investment
Manager believes companies must be transparent on the financial implications
of climate change to their business and clearly set out the actions they are
taking to manage climate change risks and opportunities. The Investment
Manager encourages the application of the TCFD framework in its funds.
Awareness
The Company
In 2021, recognising the Company's role as a responsible debt provider, the
Board approved ESG target incentives with selected loans. Through this
mechanism, agency fees can be waived if agreed ESG targets or schemes are
implemented by the borrower. The incentive mechanism clause is included in all
term sheets issued by the Investment Manager on behalf of the Company. To
date, the Company has funded three ESG initiatives; these are further detailed
above.
The Investment Manager has engaged with ESG rating agencies during the year
and intends to further engage to understand how ESG ratings impact investor
perceptions of the Company and share price.
Investment Manager
This year, the Investment Manager revised its business travel policy and set
up a charity of the year scheme to contribute as an organisation. To further
efforts with diversity across the business, the Investment Manager has
introduced annual diversity and inclusion training for all employees and is
working on enhancing recruitment processes to provide a recruitment framework
that supports an inclusive culture. Further information can be found above.
Aims for 2023 and beyond
1. Decision making 2. Ownership 3. Partnership
ESG considerations will be part of our decision‑making process We will include ESG issues in our policies and procedures We will consider the ESG approach of those we chose to engage with and invest
in
The Company The Company
The Company
Review ESG strategy and policy to ensure the investment objective remains Review of Company policies to ensure ESG is considered and reflected.
valid.
Review ESG checklist to consider inclusion
of additional climate analysis and review of
borrower policies.
The portfolio
The portfolio
All term sheets issued to potential borrowers
Further develop ESG due diligence processes for different sectors and
The portfolio
borrowers. to include incentive schemes.
Explore further incentive mechanisms at the
portfolio level, to promote ESG.
4. Acceptance 5. Enhancement 6. Reporting
We will promote acceptance and implementation of ESG considerations We will ensure our ESG framework is maintained We will report on our progress against our ESG framework
The Company The Company The Company
Promote acceptance and implementation of ESG considerations through engagement Develop and improve the ESG engagement Continue to develop ESG metrics and targets in line with applicable frameworks
with the Company's stakeholders.
to better monitor and report ESG impacts and progress.
with stakeholders and advisers.
The portfolio
The portfolio
Report selected ESG metrics from the
Share progress on implementation of the PRIs and look to utilise examples of
portfolio as part of sustainability reporting.
best practice in the market. The portfolio
Engage with borrowers, to seek feedback on
ways in which they can be supported to meet
their ESG goals.
STAKEHOLDERS
The Board values the importance of maintaining a high standard of business
conduct and stakeholder engagement and ensuring a positive impact on the
environment in which the Group operates.
Stakeholders
The Company engages with its stakeholders in different ways. This section
outlines the key stakeholder groups, the importance of engagement and how the
Company and the Board interacts. Stakeholders have been grouped into six key
categories, with an overview of why and how the Company engages including,
where relevant, key Board decisions which impacted these groups and the ways
in which the Board considered their interests.
All Board discussions involve careful consideration of the longer-term
consequences of any decisions and their implications for stakeholders. The
Board values the importance of maintaining a high standard of business conduct
and stakeholder engagement and ensuring a positive impact on the environment
in which the Group operates.
Section 172:
Promoting the success of the Company
As a member of the AIC, the Company reports against the AIC Code on a comply
or explain basis. Whilst the Company is not domiciled in the UK, by reporting
against the AIC Code, the Company voluntarily meets any obligations in
relation to the UK Code and specifically section 172 of the Companies Act
2006.
The Board of Directors consider, both individually and together, that they
have acted in the way they consider, in good faith, would be most likely to
promote the success of the Company for the benefit of its members as a whole
(having regard to the stakeholders and matters set out in section 172 of the
Companies Act 2006) in the decisions taken during the year as set out below.
The interests of the Company's employees Refer to stakeholder engagement section and governance section below.
The Company has no employees but has close working relationships with the
employees of the Investment Manager and the Administrator to which it
outsources its main functions.
The impact of the Company's operations on the community and the environment Refer to sustainability section on below.
The Company has an ESG policy and framework, as detailed further above. The
policy is based upon the PRIs to ensure alignment across its business and with
stakeholders.
The need to foster the Company's business relationships with suppliers, Refer to stakeholder engagement section below.
customers and others
The Board has a close working relationship with all its advisers and regularly
engages with all parties.
The desirability of the Company maintaining a reputation for high standards of Refer to Board culture and purpose of the corporate governance statement
business conduct below.
Under the leadership of the Chairman, the Board operates with core values of
integrity and impartiality with an aim of maintaining a reputation for high
standards in all areas of the business it conducts.
The need to act fairly between shareholders of the Company Refer to stakeholder engagement section below.
The Board actively engages with shareholders and considers their interests
when setting the Company's future strategy.
The stakeholder model below demonstrates how the Company interacts with all of
its stakeholders.
Shareholders
All investors in the Company, be they institutional, such as pension funds or
wealth managers, or retail, such as private individuals.
Why engage
Through the provision of capital, shareholders enable the Company to pursue
its investment objective. In return, the Company generates earnings for
shareholders as well as growing the capital value of the portfolio over the
long term.
How the Company engages
The Company, primarily through its Investment Manager and Broker, engages in
ongoing communication with its shareholders via market interactions, webinars
and shareholder, analyst and marketing presentations.
Shareholder engagement is reported to the Board on a quarterly basis. Feedback
obtained through this engagement is taken into consideration when setting the
future strategy of the Company and any Board decisions which may impact
shareholders.
The Board encourages shareholders to attend and vote at general meetings of
the Company so they may discuss governance and strategy and to understand
shareholders' issues and concerns.
The Investment Manager has been engaging with shareholders throughout the year
by holding meetings, hosting webinars and portfolio updates for investors,
including holding a separate webinar to discuss the resignation of the lead
fund manager, David Conlon.
The following engagement actions were taken subsequent to Mr Conlon's
resignation:
- the Broker contacted the largest shareholders to ensure they were made aware
of the change;
- one-to-one telephone calls were held with shareholders and the Investment
Manager;
- the Chairman and the Broker engaged with shareholders on multiple occasions
either through telephone calls or responded
- in writing to those who had requested information regarding the departure of
Mr Conlon; and
- the Investment Manager organised a webinar with smaller shareholders.
Alongside the Investment Manager, the Company has continued to engage with
shareholders by increasing both the quality and detail of its portfolio
disclosures and this year its disclosures in respect of ESG. Feedback has been
positive to date and both the Board and the Investment Manager are keen to
engage with shareholders to address any questions or concerns they may have.
Key Board decision:
Share buybacks
Decision:
In October 2022, the Company recommenced its buyback programme in response to
market volatility driven by the war in Ukraine, the recovery from the Covid-19
pandemic, high inflation, a cost-of-living crisis and subsequent impact on the
share price.
The Directors have the authority to repurchase up to 14.99% of the Company's
share capital if they believe it to be in the Company's and shareholders'
interests as a whole and as a means of correcting any imbalance between supply
of and demand for the shares. The latest authority was granted at the 2022 AGM
and the Board will be seeking a renewal of the authority at the 2023 AGM.
At the date of recommencement of the scheme, the share price offered value to
shareholders with the shares trading at significant discount¹, meaning any
buybacks would be NAV accretive.
Process:
In October 2022, the Investment Manager and the Broker recommended that the
Board consider reinstating the buyback programme.
A Board meeting was held to discuss the proposal with the Investment Manager
and Broker present, to decide whether it would be in the best interests of the
Company and shareholders. The Board considered, amongst other matters:
- whether the scheme would have an impact on the NAV and the share price
discount(1);
- the current investment pipeline; and
- the total cash available and investment opportunity.
It is recognised that the repurchase of shares does not have a significant
impact on the share price.
During the latter half of 2022, the Chairman, the Investment Manager and the
Broker met with a number of the Company's largest shareholders to understand
their views on the buyback programme and the Company as a whole. The
shareholders expressed their support for the buyback strategy.
Outcomes:
Based on the buyback being in the interest of the Company and shareholders,
and the positive impact it would have on the NAV, the Board authorised the
recommencement of the buyback programme. The programme is authorised in
increments in order for it to be monitored by the Board against the Company's
cash position, share price and investment pipeline.
During the year the Company bought back 5,682,459 shares which are currently
held in treasury. The repurchase of shares has contributed to a NAV uplift of
0.2 pence per share since recommencement of the scheme in October 2022.
1. Alternative performance measure - refer below for definitions and
calculation methodology.
Suppliers
Suppliers across the UK and Jersey who provide services to the Company.
Why engage
The Company's suppliers include third party service providers engaged to
provide corporate or administration services, in addition to the investment
management services provided by the Investment Manager. These services are
critical to the ongoing operational performance of the Group.
How the Company engages
The Board has a close working relationship with all its advisers and regularly
engages with all parties. The Management Engagement committee regularly
monitors the performance and reviews the terms of each service contract
annually. To ensure suppliers meet the Company's high level of conduct, all
suppliers are required to confirm on an annual basis, in the form of a
questionnaire, that they have adequate policies and procedures in place for
ensuring business continuity planning; cyber security; and prevention of
corruption and bribery.
For the year ended 31 December 2022, the questionnaire has been expanded to
cover policies and procedures in relation to ESG, compliance with the General
Data Protection Regulation and MAR, as well as a requirement by service
providers to rate their own service and the conduct of other service
providers.
This informs decision making at Board level in regard to the continuing
appointment of service providers.
Post year end, the annual Management Engagement committee meeting was held
where the committee reviewed the performance, and considered the continued
appointment, of the Company's service providers. Refer below for further
information.
The committee also worked closely with the Investment Manager on its
resourcing and recruitment plans following the resignation of the lead fund
manager, David Conlon.
In addition, the Board typically attends the offices of the Investment Manager
at least once a year to perform an oversight review and consider matters such
as strategy, portfolio performance and principal risks.
Borrowers
Owners of the Project Companies to which the Group advances loans.
Why engage
By engaging with borrowers and understanding their needs, the Group is able to
offer bespoke lending solutions which reflect the contractual fundamentals and
inherent risks of the underlying assets and cash flows. Borrower contact
enables direct feedback and informs strategic decision making at Board level.
How the Company engages
The Investment Manager's designated portfolio monitoring team engages with
borrowers on an ongoing basis. Engagement is in the form of regular
interaction with the borrowers. Visits to projects in Dublin, London,
Birmingham, Wigan and Coventry were undertaken by the origination and
portfolio management teams.
The Investment Manager reports to the Board on asset performance on a
quarterly basis. The regular monitoring of information and financial covenant
obligations is also carried out to ensure compliance with financial covenants
to ensure the early identification of potential issues.
The Board engages with the Investment Manager with regard to 'conflicted
investments', where the Investment Manager or any shareholders, directors or
employees of the Investment Manager are directly or indirectly interested in
any entity or asset in relation to the investment.
Lender
Provider of the Company's credit facilities.
Why engage
The Company's lender, RBSI, provides a credit facility used in the making of
investments in accordance with the investment policy, access to which creates
an efficient method of investing capital and minimises the effect of cash
drag.
How the Company engages
The day-to-day management of the credit facility is delegated to the
Investment Manager, who engages with the lender to ensure that they remain
fully informed on all relevant business of the Company. This high level of
engagement helps to support the relationship with the lender.
The Investment Manager reports to the Board on a quarterly basis on current
and future financing requirements, as well as the quantum and duration of the
RCF. This information forms the basis of decision making at Board level. The
Company's RCF is due to expire in August 2023 and includes an optional
extension for an additional term of one year with lender approval.
The Company, through the Investment Manager, has commenced a review of its
financing arrangements with the intention of extending the RCF in advance of
the date of expiry as well as exploring alternatives should the RCF not be
renewed. Further information on the RCF is given in notes 2.1 and 14 to the
financial statements.
Government and regulators
Governmental organisations providing public services for society, or financial
services regulators.
Why engage
Good governance and compliance with applicable regulations is vital in
ensuring the continued success of the Company and the regimes within which it
operates.
How the Company engages
The Board encourages openness and transparency and promotes proactive
compliance with new regulation. The Company engages with local government and
regulatory bodies at regular intervals and participates in focus groups and
research projects where relevant.
The Company, through its Investment Manager and Administrator, files UK AIFM
Regime and Jersey regulatory statistics on a quarterly basis and assists the
JFSC in collecting data to conduct a national risk assessment of money
laundering and terrorist financing threats to Jersey.
Government and regulatory policy informs strategic decision making at Board
level with consideration given to the impact the Company has on the sector and
vice versa.
Society
The Company positively impacts society through its investing activities,
providing funding for assets which are integral to society.
Why engage
Through responsible investing the Company can ensure the long-term success of
not only itself but also of the environments within which it operates. As part
of the investment process, ESG due diligence is carried out by the Investment
Manager to ensure that sustainability and impact on society is considered.
How the Company engages
Indirectly, the Company engages with society through its social infrastructure
investing, providing funding for housing for vulnerable adults, student
accommodation, care for the elderly, nurseries and urban regeneration.
The Company reports on the benefits to society through its normal methods of
shareholder engagement. Further information can be found in the sustainability
section above.
The Company has published an ESG policy and framework in line with good
governance and social responsibility. The policy can be found on the Company's
website.
RISK MANAGEMENT
The Board and the Investment Manager recognise that risk is inherent in the
operation of the Group and are committed to effective risk management to
protect and maximise shareholder value.
Risk management strategy and risk appetite
The Board has the ultimate responsibility for risk management and internal
controls within the Company. The Board and the Investment Manager recognise
that risk is inherent in the operation of the Group and are committed to
effective risk management to protect and maximise shareholder value. When
setting the Company's risk management strategy, the Board also considers the
nature of the risks they are willing to take and the appetite they have for
those risks to achieve the Company's strategic objective.
Risk management process
At least twice a year, the Board, with the assistance of the Risk committee,
undertakes a robust assessment of the principal and emerging risks facing the
Company, including those that might threaten its business model, future
performance, solvency and liquidity.
The Board also reviews the effectiveness of the Company's risk management
process and internal control systems. Refer to the Risk committee report below
for further information. This review covers the strategic, investment,
financial, operational and financial crime risks facing the Company, as well
as any emerging risks.
During the year, the Board discussed with the Company's key service providers
how their services comply with the Company's policies, procedures and the
terms of the service agreements to mitigate these risks. These discussions are
ongoing. All recommendations arising from the review to enhance the control
framework will be evaluated by the relevant Board committees and appropriate
recommendations will be presented to the Board for its approval during 2023.
The Board will continue to assess these risks and will review the Company's
procedures and service agreements to mitigate the principal risk of its
reliance on its key service providers. In relation to the AIC Code, the Board
is confident that the procedures that the Company has put in place are
sufficient to ensure that the necessary monitoring of risks and controls was
carried out throughout the year under review.
Role of the AIFM
The Investment Manager has been appointed as AIFM to the Company since
September 2015. The AIFM is required to operate an effective and suitable risk
management framework to allow the identification, monitoring and management of
the risks to which the AIFM and the AIFs under its management are exposed.
The AIFM's permanent risk management function has a primary role alongside the
Board in shaping the risk policy of the Company. In addition, it has
responsibility for risk monitoring and risk measuring to ensure that the level
of risk remains within the Company's risk profile and tolerance.
Principal risks and uncertainties
Principal uncertainties
The Board considers the principal uncertainties faced by the Company during
the year to be as detailed below. As part of the review of the principal
uncertainties, the Board has concluded that the uncertainties relating to the
'Covid-19 pandemic' and 'Brexit' are no longer considered as uncertainties as
their impacts are addressed as part of the Company's normal course of
business. In addition, the previous uncertainty relating to the 'Conflict in
Ukraine' has been updated to be 'Geopolitical uncertainty', as detailed below.
Uncertainty 1: Geopolitical uncertainty
The Board considers extensive effects from geopolitical uncertainty seen in
2022 to be a principal uncertainty for the Company. The war in Ukraine has
clouded the outlook for the global economy and exacerbated disruptions in
supply chains, energy prices, market volatility and created inflationary
pressures and investor unease. The Company is predominantly invested in the UK
and has no investments in Ukraine, Russia or Belarus. Equally, no borrowers
have been subject to sanctions imposed due to the war.
Principal risks
The Board considers the principal risks faced by the Company during the year,
together with the potential effects, controls and mitigating factors, to be as
detailed below. As part of the review of the principal risks, the Board has
identified a new risk 'Reliance on third party service providers' which is
included as part of 'Key resource risk' below.
Category 1: Credit risk
Risk Impact How the risk is managed Change in residual risk over the year
Borrower default, loan non‑performance and collateral risks The success of the Group is dependent upon borrowers fulfilling their payment The Investment Manager continuously monitors the actual performance of Increased
obligations when they fall due. Failure of the Group to receive payments or to projects and their borrowers, taking action where appropriate, and reports on
Borrowers to whom the Group has provided loans default or become insolvent. recover part or all amounts owed together with potential additional costs performance of the Group's portfolio to the Board each quarter. Inflationary increases over the year have seen higher operational costs for
incurred from the renegotiation and/or restructuring of loans can result in borrowers, particularly operational businesses with staffing and energy
substantial irrecoverable costs being incurred. This could have a material expenditure.
adverse effect on the NAV of the Company and its ability to meet its stated
target returns and dividend.
Increases in operating costs for borrowers without corresponding inflationary
increases in revenue could put pressure on the ability of borrowers to service
their debt.
Monitoring of inflation and its impact on operational budgets for borrowers
has been an area of focus for the Investment Manager. During the year, there
have not been any defaults on loans directly related to operational cost
inflation.
Category 2: Economic risk
Risk Impact How the risk is managed Change in residual risk over the year
Property If the market value of any property investments to which the Group has The Group's property investments are at an average LTV(1) of c.70% across the Increased
provided finance is found to be materially lower than assumed or projected, property exposure. In addition, the credit risk associated with each Project
Loans made by the Group to projects involved in property or the development of this may adversely impact the Group's ability to recover the value of its Company is mitigated as the cash flows receivable are secured against the Whilst the portfolio retains c.70% average LTV(1) coverage, the Investment
property are indirectly exposed to the performance of the underlying real investments in the event of a borrower default or sale process. assets of the Project Company. The Project Company in turn holds security over Manager is anticipating downward valuations across the property market in
estate market in the relevant area. multiple assets at the underlying project level, providing diversification of response to current levels of inflation and the potential of a broader
credit risk on the Group's position. economic recession reducing confidence in the market.
Macro-economic Continued high inflation, increases in energy prices, increases in interest The portfolio has partial inflation protection, in particular on Increased
rates and geopolitical uncertainty could have a material adverse effect on (i) longer‑dated loans, through a number of different mechanisms including
The Company invests in a variety the underlying Project Companies e.g. by reducing the value of underlying direct rate linkage, profit sharing and principal indexation. These are Through the year, the macro-economic landscape has shifted rapidly with rates
assets or stressing cash flow where revenue does not keep pace with rising described in more detail above. In addition, the weighted average loan life of of inflation and increases in base rates which has not been seen for decades.
of sectors and geographies which costs and (ii) the ability of the Company to meet the investment objective. the portfolio is six years, allowing for reinvestment of the funds at The rapid changes in the year impact differently across the diversified
prevailing rates. portfolio.
could be impacted in different ways by changes in interest rates, inflation,
growth and as a result of the geopolitical environment.
The diversification of the portfolio This landscape presents both threats and opportunities for the Company. The
Investment Manager has been responding through lending rate increases on new
across 21 asset classes and multiple geographies also offers additional investments, triggering of inflation protections and by working closely with
protection in a changing environment. borrowers to identify challenges in the new macro-environment.
The Investment Manager is continuing to see opportunities for reinvestment in At the time of writing, there has been volatility in the banking sector. The
attractive sectors and at appropriate risk-adjusted rates. It is monitoring Investment Manager is tracking developments closely to mitigate against
changes in inflation and interest rates closely. potential risks but also possible opportunities for new lending in the market.
Valuation risk Uncertainty about valuation assumptions and estimates could result in outcomes The Company has engaged an experienced Valuation Agent to carry out the Increased
that require a material adjustment to the carrying amount of the assets in the valuation of investments on a regular basis. In addition, the Investment
Due to the nature of the investments made by the Group, observable market data portfolio in the future. Manager, as part of its due diligence process, uses market‑recognised Whilst the previous impacts of the Covid-19 pandemic and associated
or comparable prices may not exist for some of the assumptions used professionals to provide initial valuations where possible. regulations has reduced, the impacts of the rapidly changing macro‑economic
market and rising inflation and interest rates present challenges to the
in their valuation. judgements, assumptions and estimates in modelling future cash flows. As a
result, valuation risk has increased.
Category 3: Key resource risk
Risk Impact How the risk is managed Change in residual risk over the year
Reliance on key personnel at An inability by the Investment Manager to retain and recruit the required The Company has entered into a Increased
level of personnel with the appropriate skills and experience may adversely
the Investment Manager impact contractual engagement with the Investment Manager. The performance of the During the year, David Conlon, the lead fund manager, resigned from the
Investment Manager is monitored by the Board along with the Company's other Investment Manager. An update on recruitment and the wider investment
The Company is dependent on its ability to service the needs of the Company. key service providers on an ongoing basis. The Investment Manager provides management team is included above.
regular updates to the Board on its resourcing plans and has a competitive
key people within the Investment remuneration plan focused on key employees.
Manager to meet its investment
objective
Reliance on third party service providers Failure by a third party service provider to carry out its obligations in The performance of the Company's service providers is closely monitored by the Increased
accordance with the terms of its appointment, or to exercise due skill and Management Engagement committee, which also carries out an annual review to
The Company has no employees and is reliant on the ability of its service care, could have a material effect on the Group's performance, conduct, monitor service levels and ensure undertakings are met. The Company has experienced changes in personnel across many of its service
providers and their internal controls for its successful functioning, compliance or misrepresentation and damage to the reputation of the Company.
providers, resulting in a loss of corporate history. Together with increased
including, but not limited to, successful implementation of the investment regulatory requirements and expectations, increasing attacks on cyber
objective, their ability to retain and recruit appropriately qualified and
resilience, the increase on digital dependency from work from home models and
experienced staff, as well as compliance, cyber security, data privacy and Through the Audit committee and the Risk committee, the Company's internal the complexity of the investment process due to the nature of the borrowers,
business resilience. controls are monitored to identify the root cause of any risks or issues in the Directors believe that the potential cumulative impact of all these risks
order to address and mitigate. across the Company should now be considered a principal risk notwithstanding
the more minor potential impact of any individual risk.
Category 4: Regulatory risk
Risk Impact How the risk is managed Change in residual risk over the year
Change in laws, regulation and/or policy Any change in the laws, regulations and/or Government policy affecting the The Company has a comprehensive compliance monitoring programme relevant to Stable
Company or the underlying Project Companies may have a material adverse effect its operations that ensures compliance with developments and changes in
The Company, its operations and the underlying Project Companies are subject on the ability of the Company to successfully pursue the investment policy and legislation and regulation in the Channel Islands and the UK, including During 2020/21, there was significant regulatory risk due to changes imposed
to laws and regulations enacted by national and local governments. meet its investment objective, which therefore may impact the value of the monitoring the impact of Brexit in the jurisdictions in which the Group to manage the Covid-19 pandemic. During the year, this risk has reduced as
Company. invests. The programme also monitors compliance with listing and FCA marketing restrictions were lifted and there is increased certainty regarding future
rules. management of the pandemic.
As noted above, the impact of the war in Ukraine poses risks to the underlying
borrower businesses, particularly in relation to energy pricing and
immigration of migrant workers. The Investment Manager will continue to
monitor the impact of any changes in policy on these borrowers.
Category 5: Execution risk
Risk Impact How the risk is managed Change in residual risk over the year
Reinvestment risk and availability of suitable investments The decline or lack of availability of suitable investments meeting the risk The Investment Manager is continuously in contact with the market, seeking new Increased
and return profile of the Company's investment strategy within the required deals, and builds a specific investment pipeline before recommending the
The Company is not able to deploy capital in a timely manner or does not have timescales may have a negative impact on the Company's returns as a result of raising of additional finance to ensure that capital is deployed in a timely As a result of the macro-economic environment, the Investment Manager is
the capital available to make investments. holding uninvested cash balances. manner. Furthermore, the Investment Manager is aware of alternative forms of seeing reduced competition in some sectors from traditional lenders. This is
financing which could utilised as part of any funding strategy, along with a leading to an increased pipeline of opportunities. Equally, the Investment
potential sale of assets. Manager has seen a decrease in re-financing activity from existing borrowers
and an increase in requests for extensions and follow-on loans to allow
The lack of availability of capital or the withdrawal of the RCF may limit the borrowers to retain stabilised assets for sale in subsequent periods.
Group's ability to make investments in line with the Company's investment
strategy and may impact the financial position and results of the Group.
Given the continued share price discount, investment is limited by the
Company's available capital from repayments and ability to draw on the RCF.
The RCF includes an optional one year extension (with lender approval) in
August 2023. The Company, through the Investment Manager, has commenced a
review of its financing arrangements with the intention of extending the RCF
in advance of the date of expiry, as well as exploring alternatives should the
RCF not be renewed.
1. Alternative performance measure - refer below for definitions and
calculation methodology.
Emerging risks
Emerging risks include trends which are characterised by a high degree of
uncertainty in terms of their occurrence, probability and their potential
impact. As part of the Company's risk management processes, emerging risks are
considered at the formal reviews of the Company's risks, described above and
in the Risk committee report below.
During the year, the Board identified inflation as an emerging risk due to the
potential impact on its borrowers. However, at the year end, the committee did
not consider it to be an emerging risk as its impact is being addressed within
specific risks already identified and managed.
ESG risks
The Board considers ESG risks, including those relating to climate change, to
be a transverse risk and which are to be managed within the existing risk
categories identified in the Company's risk register. To support the
integration of these risks, into the Company's procedures, an ESG analysis was
undertaken during the year to assess the impact of ESG on the Company's
existing risk categories and any new categories that might emerge as a result.
This assessment has led to clear actions to work towards over the next few
years. Further details can be found above.
Furthermore, the Investment Manager has carried out a climate risk assessment
for each underlying portfolio asset to assess the actual and potential impacts
of climate-related risks and opportunities across the portfolio. Further
information is given above. Based on the climate risk analysis undertaken, the
Investment Manager does not currently propose to make any changes to financial
forecasts due to climate risk.
Going concern and viability assessment
Assessment
The Directors have assessed the financial prospects of the Company for the
foreseeable future, being a period of at least twelve months from the date
these financial statements were approved, and made an assessment of the
Company's ability to continue as a going concern.
The Investment Manager has prepared cash flow forecasts which were challenged
and approved by the Directors, including a stressed cash flow downside
scenario whereby the Company has to repay the RCF should it not be extended
beyond the termination date, and the reasonableness of other available finance
options including alternative finance facilities and the sale of specific
assets.
The Directors are satisfied that the Company has the resources to continue in
business for the foreseeable future and furthermore are not aware of any
material uncertainties that may cast significant doubt upon the Company's
ability to continue as a going concern. Refer to note 2.1 to the financial
statements for further details on the assessment.
The Board regularly reviews the risks that it has identified that might
threaten its strategy. The Board also assesses the Company's policies and
procedures for monitoring, managing and mitigating its exposure to these
risks. The Directors have carried out a robust assessment of each of the
Company's risks, including its principal risks that would threaten its
business model, future performance, solvency or liquidity, uncertainty, as
detailed above and, through stress testing as described below, have also
assessed the prospects of the Company over a longer period than the twelve
months required by the going concern provision.
Stress testing
In order to analyse the effect of the principal risks and uncertainties on the
Company's net cash flows, key financial ratios, viability and dividend cover,
the Investment Manager has stress tested the Company's financial model by
flexing a number of key assumptions used in order to model the impact of
plausible scenarios, including:
- significant reduction of 25% of interest income received;
- borrower default probabilities by sector and recovery rates of 64%;
- cash requirements arising from maintaining FX hedges in a downside FX
scenario, calculated at a 95% confidence level;
- significant increases in the Company's operating expenses and debt financing
costs of 25% and increase of 2.00% on SONIA respectively;
- a combined scenario with a combination of the factors described above;
- the RCF extension is not approved by the Company's lender and the facility
becomes payable in full in August 2023; and
- impact on the portfolio of downside stress tests on a sector-by-sector
basis.
The Investment Manager believes that the above scenarios represent a robust
sensitivity analysis. The Company's principal activity is investing in loans
to third parties supported by the value of physical assets and contracted cash
flows. The Company is reliant on the performance of interest and principal
repayment obligations as part of these loans in order to meet its overheads,
service its borrowings and to pay the discretionary dividends.
Time period
The Board has determined that a five year period constitutes an appropriate
period over which to provide its viability statement. The weighted average
term of the loans within the investment portfolio is six years and in the view
of the Board and the Investment Manager, financial forecasts that support the
analysis may be subject to further capital raising for which the impact beyond
a five year term is difficult to assess.
In addition, the extent to which macro-economic, political, social,
technological and regulatory changes beyond a five year term may have a
plausible impact on the Company are difficult to forecast. The assessment
involved an evaluation of the potential impact on the Company of these risks
occurring through the use of stress testing as detailed above.
Conclusion
Based on this assessment and the stress testing performed on the Company's
prospects, the Directors confirm that they have a reasonable expectation that
the Company will be able to continue in operation and meet its liabilities as
they fall due over the five year period of their assessment to 31 December
2027.
Approval of strategic report
The strategic report has been approved by the Board and is signed on its
behalf by the Chairman.
Alex Ohlsson
Chairman
13 April 2023
BOARD OF DIRECTORS
The Directors are responsible for the effective stewardship of the Company's
activities in order to ensure its long-term success in the interest of
stakeholders.
Alex Ohlsson
Chairman
Alex Ohlsson, a Jersey resident, is the managing partner of the law firm Carey
Olsen, and is recognised as an expert in corporate and finance law in Jersey
with a particular focus on international real estate finance and structures.
Mr Ohlsson joined Carey Olsen in 1991, became a Jersey solicitor in 1994 and
an Advocate of the Royal Court of Jersey and a partner of Carey Olsen in 1995.
He was educated at Queens' College, Cambridge, where he obtained an MA (Hons)
in Law. Mr Ohlsson served as the independent chairman of the States of
Jersey's audit committee from 2009 until 2018. He is an advisory board member
of Jersey Finance, Jersey's financial services promotional body. He acts as a
non‑executive director of a number of companies. He is also chairman of the
LSE Main Market listed company Foresight Solar Fund Limited.
Skills and experience:
Substantial board level and legal experience in the corporate and finance
sectors in Jersey.
Date of appointment:
14 September 2015
Joanna Dentskevich
Senior Independent Director and chair of the Risk committee
Joanna Dentskevich, a Jersey resident, has over 30 years of risk,
finance and investment banking experience gained in leading global banks
worldwide, alternative investments and the offshore funds industry.
Previously, she was a director at Morgan Stanley heading up its Global
Customer Valuation Group, a director of risk at Deutsche Bank and chief risk
officer of a London‑based hedge fund. Mrs Dentskevich has a BSc (Hons) in
Maths and Accounting. Mrs Dentskevich is also chair of the board of the LSE
listed company EJF Investments Limited.
Skills and experience:
Substantial relevant risk, finance and board level experience in the
investment sector.
Date of appointment:
7 September 2015
Colin Huelin FCA
Chair of the Audit committee
Colin Huelin, a Jersey resident, graduated in mechanical engineering with a
first class honours BSc degree and Diploma at Southampton University in June
1982. He completed his graduate management development and monitored
professional development scheme with Shell UK and the Institute of Mechanical
Engineers in 1986. Mr Huelin qualified as a chartered accountant with Ernst
& Young in 1989 and was appointed finance director for Computer Patent
Annuities ("CPA") in February 1990. He was appointed CEO for CPA in 1995. In
November 1998, he joined Abbey National Offshore as head of financial
planning, was promoted to finance director in 2003 and then managing director
of Santander Private Banking in Jersey in November 2007, a position he held
until 31 May 2015.
Skills and experience:
Substantial board level and financial experience in the banking and private
sectors in Jersey.
Date of appointment:
7 September 2015
Marykay Fuller
Chair of the Management Engagement committee and the Remuneration and
Nomination committee
Marykay Fuller, a UK resident, is a banking and finance professional with 30
years' experience in debt and equity markets, working with a broad range of
businesses across a variety of jurisdictions including the UK, US, Europe,
South America and Asia. Most recently, she was a senior deal advisory partner
at KPMG LLP where she also represented the firm on the board of the trade
group, British American Business. Ms Fuller is currently the chair of Intu
Milton Keynes Limited and the senior independent director of the UK Civil
Aviation Authority, where she is a member of the audit committee and sits on
the CAA International management board. She is the chair of the Air Travel
Trust, is a non‑executive director at TDBico, the ultimate parent of Tilbury
Douglas, and serves on the Alumni Advisory Board of Heinz College, Carnegie
Mellon University in the US.
Skills and experience:
Substantial business and debt experience across a variety of jurisdictions.
Date of appointment:
6 November 2019
THE INVESTMENT MANAGER
The Board of Directors has appointed the Investment Manager to provide
day-to-day investment management services to the Group.
Investment team
Joanne Fisk
Director
Joanne Fisk is a director of the Investment Manager and acts as lead co‑fund
manager for the Company.
Background:
Ms Fisk has worked on the Company since 2017 and has a depth of experience,
including playing a key role in identifying investments, leading negotiations,
liaising with borrowers and overseeing portfolio developments. Prior to
joining the Investment Manager in 2017, Ms Fisk qualified as a lawyer in the
project finance team of UK‑based law firm Burges Salmon, where she focused
on structuring and financing of infrastructure projects.
Skills and experience:
Experience in a wide range of sectors including residential development,
student accommodation, infrastructure, renewables, care homes and football
finance.
Philip Kent
Director
Philip Kent is a director of the Investment Manager and acts as co‑fund
manager for the Company.
Background:
Mr Kent joined Gravis from Foresight Group, where he was responsible for
investments in the waste and renewables sectors, including large waste wood
combustion projects and a pipeline of anaerobic digestion projects across the
UK. He has been involved in the energy sector for over ten years, working
initially as a consultant within PA Consulting's energy practice, focusing on
energy markets and energy asset valuations. In 2008, he moved to Gazprom
Marketing and Trading, working in risk management across a number of
commodities before moving into the clean energy team.
Skills and experience:
Extensive experience in the infrastructure sector, including energy markets,
asset valuations and renewables transactions.
Financial and corporate advisory
Saira Johnston
Chief financial officer
Chloe Marlow
Head of corporate reporting
Sarah Bowe
Compliance and risk officer
William Parry-Jones
Fund financial controller
Portfolio administration
Luther Ward-Faint
Portfolio manager
Martie Chawla
Assistant fund financial controller
Kate Arnold
Portfolio manager
Justyna Kolarovic
Portfolio administrator
BOARD LEADERSHIP AND PURPOSE
Corporate governance statement
I am pleased to present the Company's corporate governance statement for the
year ended 31 December 2022.
Introduction from the Chairman
In this corporate governance statement, the Company reports on its compliance
with the AIC Code, sets out how the Board and its committees have operated
during the year and describes how the Board exercises effective stewardship
over the Company's activities for the benefit of its members as a whole.
The Board recognises the importance of a strong corporate governance culture
and has established a framework for corporate governance which it considers to
be appropriate to the business of the Company. All Directors contribute to
Board discussions and debates. The Board believes in providing as much
transparency for shareholders as is reasonably possible.
The AIC Code
As a member of the AIC, the Company reports against the principles and
provisions of the AIC Code.
The Board has considered the principles and provisions of the AIC Code. The
AIC Code addresses the principles and provisions set out in the UK Code, as
well as setting out additional provisions on issues that are of specific
relevance to the Company. The AIC Code can be found on the AIC website at
www.theaic.co.uk. The AIC Code includes an explanation of how it adapts the
principles and provisions set out in the UK Code to make them relevant for
investment companies.
The Board considers that reporting against the principles and provisions of
the AIC Code, which has been endorsed by the FRC and supported by the JFSC,
provides information to shareholders.
Statement of compliance with the AIC Code
The Board has made the appropriate disclosures in this report to ensure that
the Company meets its continuing obligations. It should be noted that, as an
investment company, most of the Company's day‑to‑day responsibilities are
delegated to third party service providers. The Company has no employees and
the Directors are all non‑executive, therefore not all of the provisions of
the UK Code are directly applicable to the Company. The Board considers that
the Company has complied with the principles and provisions of the AIC Code.
The Board
At 31 December 2022, the Board comprised four Directors, all of whom are
non‑executive and are considered independent. Biographical details of the
Directors are shown above.
Under the leadership of the Chairman, the Board is responsible for the
long‑term success of the Company. It provides overall leadership, sets the
strategic aims of the Company and ensures that the necessary resources are in
place for the Company to meet its objectives and fulfil its obligations to
shareholders within a framework of high standards of corporate governance and
effective internal controls. The Board has overall responsibility for the
Company's investment policy, investment strategy and activities, including the
review of investment activity and performance and internal controls of the
Investment Manager.
Matters reserved for the Board
The Board has approved a formal schedule of matters reserved for its approval
which is available on the Company's website and upon request from the Company
Secretary. The principal matters considered by the Board during the year
included:
- the declaration of dividends;
- share buybacks;
- the interim and annual financial statements;
- the Company's annual expenditure budget;
- conflicted investments;
- the resignation of the fund manager;
- the Co‑living group loan (further details above);
- ESG matters; and
- recommendations from its committees.
Culture and purpose
The Chairman, Alex Ohlsson, leads the Board and is responsible for its overall
effectiveness in directing the Company. He demonstrates objective judgement,
promotes a culture of openness and debate and facilitates constructive Board
relations and the effective contribution of all Directors. In liaison with the
Company Secretary, he ensures that the Directors receive accurate, timely and
clear information. The Directors are required to act with integrity, lead by
example and promote this culture within the Company.
The Board seeks to ensure the alignment of its purpose, values and strategy
with this culture of openness, debate and integrity through ongoing dialogue
and engagement with its service providers, principally the Investment Manager.
The culture of the Board is considered as part of the annual performance
evaluation process which is undertaken by each Director. The culture of the
Company's service providers, including their policies, practices and
behaviour, is considered by the Board as a whole during the annual review of
the performance and continuing appointment of all service providers.
DIVISION OF RESPONSIBILITIES
The Board is responsible for the effective stewardship of the Company's
affairs, including corporate strategy, corporate governance, risk management
and overall investment policy.
The Board
Purpose: Provides overall leadership, sets out the strategic aims of the Company and
ensures that the necessary resources are in place for the Company to meet its
Responsible for the long-term success of the Company. objective and fulfil its obligations to shareholders within a framework of
high standards of corporate governance and effective internal controls.
Composition at 31 December 2022:
Chairman: Alex Ohlsson Joanna Dentskevich Colin Huelin FCA Marykay Fuller
Board committees
Audit committee Management Engagement committee Remuneration and Nomination committee Risk committee
Purpose: Purpose: Purpose: Purpose:
Ensures that the Company's financial performance is properly monitored, Reviews the performance and continuing appointment of the Investment Manager Considers appointments to the Board and its individual committees, makes Reviews, monitors and assesses the risks the Company is exposed to, its risk
controlled and reported, in addition to engaging with the Company's external and other service providers. recommendations in regard to changes to maintain a balanced and effective appetite and the effectiveness of the risk management framework.
Auditor. Board and reviews the remuneration of the Directors.
Composition at 31 December 2022
Chair: Colin Huelin FCA Chair: Marykay Fuller Chair: Marykay Fuller Chair: Joanna Dentskevich
Joanna Dentskevich Joanna Dentskevich Joanna Dentskevich Alex Ohlsson
Marykay Fuller Alex Ohlsson Alex Ohlsson Colin Huelin FCA
Colin Huelin FCA Colin Huelin FCA Marykay Fuller
See Audit committee report below. See Remuneration and Nomination committee report below. See Risk committee report below.
The terms of reference of the Board committees can be found on the Company's
website.
Chairman and Senior Independent Director
The Chairman, Alex Ohlsson, is deemed by his fellow independent Board members
to be independent in character and judgement and free of any conflicts of
interest.
He considers himself to have sufficient time to spend on the affairs of the
Company. He has no significant commitments other than those disclosed in his
biography above. The Chairman's independence has previously been noted by
Institutional Shareholder. Services, a proxy adviser which publishes voting
recommendations for its clients in respect of listed issuers, in their report
for the Company's AGM, due to his position as managing partner of Carey Olsen,
the Company's advisers on Jersey law. The relationship between the Company and
Carey Olsen is not material in nature and is not considered to present a
conflict of interest. The fees paid to Carey Olsen in the financial year ended
31 December 2022 represented 0.03% of the total expenses of the Company.
Furthermore, the Company and Carey Olsen, a firm of over 50 partners, maintain
procedures to ensure that the Chairman has no involvement in either the
decisions concerning the engagement of Carey Olsen or the provision of legal
services to the Company.
Joanna Dentskevich is Senior Independent Director of the Company. She acts as
a sounding board for the Chairman, meets with major shareholders as
appropriate, provides a channel for any shareholder concerns regarding the
Chairman and takes the lead in the annual evaluation of the Chairman by the
Directors.
In the event the Company experiences a period of stress, the Senior
Independent Director would work with the Chairman, the other Directors and
shareholders to resolve any issues.
A schedule of responsibilities of the Chairman and the Senior Independent
Director is available on the Company's website.
Committees
At the year end, the structure included an Audit committee, a Risk committee,
a Management Engagement committee and a Remuneration and Nomination committee.
The terms of reference for each of the committees are available on the
Company's website or upon request from the Company Secretary.
Audit committee
The membership and activities of the Audit committee are described in its
report below.
Risk committee
The membership and activities of the Risk committee are described in its
report below.
Management Engagement committee
The Management Engagement committee comprises all Directors. It meets at least
once a year to consider the performance of the Company's key service
providers, including the Investment Manager, the terms of their engagement,
remuneration and their continued appointment.
Following the committee's assessment of the Investment Manager and the third
party service providers whom the committee independently evaluates, their
continued appointment on the terms agreed was considered to be in the best
interest of shareholders as a whole. Thus, it was recommended to, and approved
by, the Board that the Investment Manager and the third party service
providers be retained.
Remuneration and Nomination committee
The membership and activities of the Remuneration and Nomination committee are
described in its report below.
Meetings
The Board holds meetings on a quarterly basis and additional meetings are held
when necessary. The number of scheduled meetings of the Board and committees
held during the year and the attendance of individual Directors are shown
below:
Quarterly Board Audit Risk
Directors Number Number attended Number Number attended Number Number attended
entitled entitled entitled
to attend to attend to attend
Alex Ohlsson 4 4 - - 5 4
Joanna Dentskevich 4 4 4 4 5 5
Colin Huelin FCA 4 4 4 4 5 5
Marykay Fuller 4 4 4 4 5 5
Management Engagement Remuneration and Nomination
Directors Number Number attended Number Number attended
entitled entitled
to attend to attend
Alex Ohlsson 3 3 3 3
Joanna Dentskevich 3 3 3 3
Colin Huelin FCA 3 3 3 3
Marykay Fuller 3 3 3 3
During the year, six additional Board meetings were held. These meetings were
in respect of:
- share buybacks;
- Jersey compliance matters;
- the Co‑living group loan;
- approval of the half‑yearly and annual financial statements; and
- conflicted investments.
The Directors also held an annual strategy meeting with the Investment Manager
in November 2022, by video conference.
Directors are encouraged when they are unable to attend a meeting to give the
chair their views and comments on matters to be discussed, in advance. In
addition to their meeting commitments, the non‑executive Directors also
liaise with the Investment Manager whenever required and there is regular
contact outside the Board meeting schedule.
At each Board and committee meeting, the Directors follow a formal agenda,
circulated in advance by the Company Secretary, which may include a review of
the Group's investments and associated matters such as gearing, dividend
policy, asset allocation, risks, marketing and investor relations, economic
and sector issues, regulatory changes and corporate governance best practice.
The Company's service providers also provide the Board with relevant
information to support each formal agenda.
The Board also considers the Company's investment policy, objective and
strategy at these meetings.
Company Secretary
The Board has access to the Company Secretary to advise on governance and
day‑to‑day administrative matters. The Company Secretary is also
responsible to the Board for ensuring the timely delivery of the information
and reports which the Directors require and that the statutory obligations of
the Company are met.
Market Abuse Regulation
Following the implementation of MAR on 3 July 2016, the Board formally adopted
revised procedures in relation to the management, identification and
disclosure of inside information and share dealing in accordance with MAR.
Anti-bribery and tax evasion
The Company has developed appropriate anti‑bribery policies and procedures.
The Company has a zero‑tolerance policy towards bribery and is committed to
carry out its business fairly, honestly and openly.
The Company does not tolerate tax evasion in any of its forms in its business.
The Company complies with the relevant UK law and regulation in relation to
the prevention of facilitation of tax evasion and supports efforts to
eliminate the facilitation of tax evasion worldwide. The Company works to make
sure its stakeholders share this commitment.
UK AIFM Regime
The Company is classed as an externally managed AIF under the UK AIFM Regime.
The Board has appointed the Investment Manager as the authorised AIFM to the
Company and Apex Financial Services (Corporate) Limited as the Company's
Depositary under the UK AIFM Regime.
AIFM remuneration
The Investment Manager is authorised as an AIFM by the FCA under the UK AIFM
Regime. The Company has provided disclosures on its website incorporating the
requirements of the UK AIFM Regime.
The total remuneration paid to the Investment Manager by the Company is
disclosed in note 18 to the financial statements.
MiFID II
The ordinary shares and C shares (while in issue) of the Company are
considered as 'non‑complex' in accordance with MiFID II.
Non-mainstream pooled investments
The Board notes the rules of the FCA on the promotion of non‑mainstream
pooled investments.
The Board confirms that it conducts the Company's affairs, and intends to
continue to conduct its affairs, so that the Company's shares will be
'excluded securities' under the FCA's rules. This is on the basis that the
Company would qualify for approval as an investment trust by the Commissioners
for HM Revenue and Customs under Sections 1158 and 1159 of the Corporation Tax
Act 2010 if resident and listed in the UK. Therefore, the Company's shares
will not amount to non‑mainstream pooled investments. Accordingly, promotion
of the Company's shares will not be subject to the FCA's restriction on the
promotion of non‑mainstream pooled investments.
COMPOSITION, SUCCESSION AND EVALUATION
REMUNERATION AND NOMINATION COMMITTEE REPORT
I am pleased to present the Remuneration and Nomination committee report for
the year ended 31 December 2022.
Marykay Fuller
Chair of the Remuneration and Nomination committee
Committee
At 31 December 2022, the committee comprised all four Directors of the
Company, all of whom are considered independent.
The committee met three times during the year. A copy of the terms of
reference within which the committee operates is available on the Company's
website or from the Company Secretary upon request.
Board composition
The Board believes that it and its committees have an appropriate composition
and blend of skills, experience, independence and diversity of backgrounds to
discharge their duties and responsibilities effectively. The Board is of the
view that no one individual or small group dominates decision making. The
Board, via its Remuneration and Nomination committee, keeps its membership,
and that of its committees, under review to ensure that an acceptable balance
is maintained, and that the collective skills and experience of its members
continue to be refreshed.
Directors' attendance at all committee meetings held during the year and their
relevant experience is detailed above.
Induction of new Directors and training
The Chairman, in conjunction with the Company Secretary, ensures that all new
Directors receive a full, formal and tailored induction on joining. An
induction pack is provided to new Directors containing relevant information
about the Company, its constitutional documents, terms of reference, policies,
processes and procedures. New Directors meet with relevant persons at the
Investment Manager and the Chairman provides guidance and mentoring as
appropriate. A programme of induction training is agreed with each new
Director.
The Directors are encouraged to keep up to date and attend training courses on
relevant matters. The Company has a continuing professional development policy
which is reviewed annually.
Independence
The committee has reviewed the conflicts, relationships, other positions and
tenure of all the Board members and continues to be satisfied that no material
interests exist which would materially impact the ability of each Director to
exercise independent judgement.
Accordingly, the Board considers all Directors on the Board to be independent
in character and judgement and entirely independent of the Investment Manager.
The Directors' conflicts of interest are detailed in note 18 to the financial
statements.
Tenure
The Board's policy regarding tenure of service, including in respect of the
Chairman, is that any decisions regarding tenure will balance the need to
provide and maintain continuity, knowledge, experience and independence,
against the need to periodically refresh the Board composition in order to
maintain an appropriate mix of the required skills, experience, age and length
of service.
The appointment date of each Director is shown above.
Performance evaluation
The Directors are aware and believe that they need to continually monitor and
improve performance and recognise that regular Board evaluation provides a
valuable feedback mechanism for improving Board effectiveness.
In line with the recommendations of the AIC Code, an external evaluation is
carried out every three years with intervening years seeing internal
evaluations by means of a questionnaire. The questionnaire is specifically
designed to assess the strengths and independence of the Board, the Chairman
and the individual Directors, the performance and focus of Board and committee
meetings, the need for additional information required to facilitate Board
discussions and each Director's continuing capacity.
Due to the circumstances around the Covid‑19 pandemic during 2021, such as
restrictions on travel and gatherings, the external evaluation was postponed
and undertaken in 2022. The committee engaged Stephenson Executive Search
Limited, a specialist consultancy firm independent of the Company and its
Investment Manager, to carry out the external evaluation.
The results of the external evaluation were presented to the Remuneration and
Nomination committee and subsequently to the Board, with the key
recommendation being a focus on the Company's succession plan. Taking into
account best practice in accordance with the AIC Code, and the independent
Board review, the Company will create a succession plan in 2023 for the
current Board rotation with the anticipation of that plan commencing in 2024.
Succession
The Board does not consider that lengthy service in itself necessarily
undermines a Director's independence nor that each Director, including the
Chairman, should serve for a finite fixed period. However, based on the
principles of the AIC Code, the committee reviewed and recommended to the
Board, subject to annual re‑election, the staged rotation of Directors to
ensure the continuity and stability of experience remains.
Diversity
Diversity is an important consideration in ensuring that the Board and its
committees have the right balance of skills, experience, independence and
knowledge necessary to discharge their responsibilities. The right blend of
perspectives is critical to ensuring an effective board and a successful
company.
Board diversity, including, but not limited to, gender, ethnicity,
professional and industry specific knowledge and expertise, understanding of
geographic markets and different cultures, is taken into account when
evaluating the skills, knowledge and experience desirable to fill vacancies on
the Board as and when they arise.
Board appointments are made based on merit and calibre with the most
appropriate candidate, who is the best fit for the Company, being nominated
for appointment and as a result no measurable targets in relation to Board
diversity have been set. At the date of this report, the Board consists of two
males and two females.
The committee believes the Directors provide, individually and collectively,
the breadth of skill and experience to manage the Company.
The committee notes the new recommendations of the FTSE Women Leaders Review
and the Parker Review on gender and diversity, as well as the FCA rules on
diversity and inclusion on company boards. Namely, that from accounting
periods starting on or after 1 April 2022:
a) at least 40% of individuals on the Board to be women;
b) at least one senior Board position to be held by a woman; and
c) at least one individual on the Board to be from a minority ethnic
background.
The committee continues to develop its succession plan in line with these
recommendations, noting that both (a) and (b) are currently satisfied. There
are two female Directors on the Board and one of these, Joanna Dentskevich,
holds the role of Senior Independent Director.
As a Jersey resident company, the Board must comprise at least two Jersey
resident Directors and, for tax purposes, each Board meeting should be held
with a majority of Directors present in Jersey. This affects the Company's
ability to source ethnically diverse Directors. The 2021 census of the
population of Jersey showed that of a population of 103,297, only 4.1% were
from a minority ethnic background, compared to England and Wales which had a
population of 66.8 million in 2019(1), of which 15.2% were from a minority
ethnic background.
In addition, the 2021/22 non‑executive director remuneration survey
conducted by PwC Channel Islands showed that there is only a single
non‑executive director identified as being a member of an ethnic minority
out of 120 non‑executive directors who participated in the survey and
representing 1,525 directorships.
The Board notes that the votes against the re‑election of Ms Fuller at the
2022 AGM were based on there being no Director on the Board from a minority
ethnic background. Together with the succession planning referenced in this
report plus the geographical restrictions noted above, the Company will
include a diversity objective in its succession planning.
1. 2019 is the latest ethnic data to be released for England and Wales.
In accordance with Listing Rule 9 Annex 2.1, the below tables, in the
prescribed format, show the gender and ethnic background of the Directors.
Gender identity¹
Number of Number of
Board Percentage on senior positions
members the Board on the Board
Men 2 50% 1
Women 2 50% 1
Not specified/prefer not to say - - -
Ethnic background¹
Number of Number of
Board Percentage on senior positions
members the Board on the Board
White British or other White (including minority white groups) 4 100% 2
Mixed/Multiple Ethnic Groups - - -
Asian/Asian British - - -
Black/African/Caribbean/Black British - - -
Other ethnic group, including Arab - - -
Not specified/prefer not to say - - -
The data in the above tables was collected through self‑reporting by the
Directors.
1. The Company is a closed‑ended investment company with no employees hence
data for executive management in Listing Rule 9 Annex 2.1 is not applicable.
Overboarding
The Directors consider that as an investment company, the Company demands less
time commitment than would be required of a non‑executive director of an
operating company. The Directors also believe that a formulaic approach to
assessing whether a director is able to effectively discharge their duties is
not appropriate given the nature of the Company and directorships.
Prior to appointment to the Board, a Director must disclose existing
significant commitments and confirm that they are able to allocate sufficient
time to the business of the Company. In addition, a Director must consult with
the Chairman or Senior Independent Director prior to taking on any listed
company, conflicted, time‑consuming or otherwise material board appointment
and promptly notify the Company Secretary of any new board appointments which
they take on.
On an annual basis, through the Board's internal evaluation, as described
above, each Director's continuing ability to meet the time requirements of the
role is assessed by considering, amongst other things, their attendance at
Board, committee and other ad hoc meetings and events of the Company held
during the year as well as the nature and complexity of other, both public and
private, roles held.
Directors' attendance at all Board and committee meetings held during the year
is detailed above. None of the Directors hold an executive position of a
public company or chair a public operating company.
The committee believes all the Directors have sufficient time to meet their
Board responsibilities.
Re-election
Beyond the requirements of the Articles, and in accordance with the AIC Code,
the Board has agreed a policy whereby all Directors will seek annual
re‑election at the Company's AGM. Any Director not re‑elected would resign
in accordance with applicable Jersey regulatory requirements.
Accordingly, all of the Directors who held office throughout the year will
offer themselves for re‑election at the AGM.
Having considered the Directors' performance and the results of the external
evaluation, the Board believes that it continues to be effective and the
Directors bring extensive knowledge and commercial experience together with
demonstrating a range of business, financial and asset management skills. The
Board therefore believes that it would be in the Company's best interests for
the Directors to be proposed for re‑election at the AGM given their material
level of contribution and commitment to the role and, hence, recommends that
shareholders vote in favour of each Director's proposed re‑election.
Remuneration
The Directors' remuneration report below details the remuneration policy and
the Directors' remuneration during the year.
Marykay Fuller
Chair of the Remuneration and Nomination committee
13 April 2023
AUDIT, RISK AND INTERNAL CONTROL
AUDIT COMMITTEE REPORT
I am pleased to present the Audit committee report for the year ended 31
December 2022.
Colin Huelin FCA
Chair of the Audit committee
Statement from the chair
The Board is supported by the Audit committee, with written terms of reference
which are available on the Company's website or on request from the Company
Secretary. The committee's primary role is to monitor the integrity of the
Company's financial reporting to ensure it is fair, balanced and
understandable and provides the information necessary for shareholders and
other users to assess the Company's position and performance, business model
and strategy.
The committee is responsible for monitoring internal controls, in conjunction
with the Risk committee, and the external audit process, which includes making
recommendations to the Board in respect of the appointment, re‑appointment
and remuneration of the Auditor.
Composition and meetings
At 31 December 2022, the committee comprised Colin Huelin FCA (Chair), Joanna
Dentskevich and Marykay Fuller. The qualifications and experience of the Audit
committee members are detailed above.
The Board has agreed that the committee chair, Colin Huelin, a chartered
accountant, has recent and relevant financial experience as required by the
provisions of the AIC Code.
The committee formally met four times during the year ended 31 December 2022.
Details of attendance at meetings held during the year are set out above.
Although not members of the committee, the Company Secretary, the Investment
Manager, the lead audit partner and representatives from the Company's Auditor
are invited to attend committee meetings. The Auditor has the opportunity to
meet with the committee without representatives of the Investment Manager
being present.
The Auditor is not present when their performance and remuneration is
discussed.
Financial reporting
The committee considered the requirements of the UK Companies Act 2006
(Strategic Report and Directors' Report) Regulations 2013 with which it is
complying voluntarily, in line with best practice reporting. The committee
specifically reviewed the Company's annual report and financial statements to
conclude whether it is fair, balanced, understandable, comprehensive and
consistent with prior year reporting and how the Board assesses the
performance of the Company's business during the financial year, as required
under the AIC Code.
As part of this review, the committee considered if the annual report and
financial statements provided the information necessary to shareholders to
assess the Company's performance, strategy and business model. It reviewed the
description of the Company's key performance indicators, alternative
performance measures, as well as reviewing and updating the governance section
of the annual report. As part of this review, and in conjunction with the Risk
committee, the committee considered the sustainability disclosures above to
ensure that they reflect a fair and balanced view of the impact of climate
change on the performance of the Company's business.
The committee presented its recommendations to the Board and the Board
concluded that it considered the annual report and financial statements, taken
as a whole, to be fair, balanced and understandable and to provide the
information necessary for the shareholders to assess the Company's position
and performance, business model and strategy.
In addition to the above matters, the committee's work was focused on the
following areas:
- the significant accounting matters to recommend to the Board, and other
narrative disclosures in the half‑yearly and annual financial statements of
the Company, including matters of judgement in relation to the valuation of
financial assets at fair value through profit or loss and an assessment of the
methodology. The committee discussed these matters with the Valuation Agent,
the Investment Manager and the Auditor;
- the effectiveness of the Company's internal control environment;
- challenge to the results of the Investment Manager's stress tests for the
purpose of the going concern and viability statements and, in conjunction with
the Risk committee, considered the going concern disclosures above and in note
2.1 to the financial statements;
- overseeing the Company's relations with its Auditor, including assessing the
conduct and effectiveness of the audit process and the Auditor's independence
and objectivity and recommending the Auditor's re‑appointment and approval
of the Auditor's fees; and
- the committee's own terms of reference.
The committee has direct access to the Auditor and to the key senior staff of
the Investment Manager and reports its findings and recommendations to the
Board, which retains the ultimate responsibility for the financial statements
of the Company. All
recommendations during the year were accepted by the Board.
Significant issues considered
After discussions with the Investment Manager and the Auditor, the committee
determined that the key risks of material misstatement of the Company's
financial statements are related to the fair valuation of the investments as
detailed below.
Fair valuation of investments Actions and conclusions
As outlined in notes 11 and 17 to the financial statements, the total value of In July 2022 and January 2023, the committee met with the Valuation Agent to
financial assets at fair value at 31 December 2022 was £435.1 million (31 discuss and challenge their June and December 2022 valuation reports
December 2021: £447.0 million). Market quotations are not available for these respectively. The Valuation Agent discussed the valuation methodology
financial assets such that their valuation is undertaken using a discounted including the key general market conditions by sector and their impact on the
cash flow methodology, with exception to the methodology adopted for valuing valuation.
the Company's Co-living group loan. These valuation methods require a series
of material judgements and estimates to be made.
The committee also met with the Investment Manager to discuss their 31
December 2022 portfolio report that was provided to the Valuation Agent. The
The discount rates adopted to determine the valuation are selected and committee challenged the judgements and key estimates applied, including those
recommended by the Valuation Agent. The discount rates are applied to the concerning the impact of inflation and/or interest rate protection and general
expected future cash flows for each investment's financial forecasts market conditions.
determined by the Investment Manager, to arrive at a valuation (discounted
cash flow valuation). The resulting valuation is sensitive to the discount
rate selected. The Valuation Agent is experienced and active in the area of
valuing these investments and adopts discount rates reflecting their current The committee was satisfied that the valuation methodology and judgements,
and extensive experience. including the range of the discount rates adopted by the Valuation Agent, were
appropriate for the valuation.
The Valuation Agent performs semi‑annual financial asset valuations and
provides valuation reports to the Board. Any assets which may be subject to The Investment Manager also prepared a specific report for the Co-living group
discount rate changes are valued and reported to the Board on a quarterly loan valuation with an analysis of the impact of the changes to their
basis. The performance of the individual investments and the fair value of the assumptions that were applied at each quarter end. The Co-living group loan is
financial assets is discussed with the Investment Manager at each quarterly valued by the Valuation Agent on the basis of the net realisable value of
Board meeting. specific assets included in the Investment Manager's report; refer to notes
2.2 and 17.9 to the financial statements for further details. The Investment
Manager's report for the Co-living group loan was reviewed by the Directors
with the Investment Manager. The judgements and estimates were challenged. The
committee also reviewed the appropriateness and application of those
judgements and estimates with the Valuation Agent. Upon completion of their
review, the committee was satisfied that the valuation methodology, judgements
and estimates adopted by the Valuation Agent for the valuation of the
Co-living group loan were appropriate.
Other matters considered during the year
Accounting policies, narrative reporting, critical accounting estimates and
key judgements
The committee reviewed the narrative reporting, accounting policies and note
2.2 to the financial statements that relate to critical accounting estimates
and key judgements and confirmed that they are appropriate for the Company.
Internal control
The committee's monitoring and review of the internal controls of the Company
was informed as follows:
Scope of reviews to monitor internal controls Results and conclusions
1. Regular monitoring of controls during the year:
1.1 Quarterly reports to the Board from the Investment Manager, Administrator, The Board's review of certain services provided by the Company's key service
Compliance Officer and Depositary. providers is ongoing. In conjunction with the other Board committees, the
committee will review any relevant recommendations arising from the review to
enhance the control framework before making recommendations to the Board for
its approval. The implementation of all relevant changes approved by the Board
will be monitored subsequently by the committee.
1.2 Bi-annual reports from the Investment Manager's risk officer to the Risk The Investment Manager's risk officer confirmed that the risk management
committee. processes are appropriate and remain compliant with AIFMD, appropriate
measures are being undertaken to resolve issues with the reported problem
loans, and senior resource has been diverted to support the team following the
resignation of the lead fund manager, David Conlon.
2. Thematic and other monitoring of controls:
2.1 ISAE 3402 Type II reports on the operations of the key service providers, The committee reviewed the independent reports, which confirmed that for the
namely the Investment Manager, Administrator and its delegated accounting controls tested within the scope of the review undertaken for such service
services, and the Registrar's parent company. providers, the controls operated effectively throughout the relevant periods.
The committee also obtained bridging letters from the relevant service
providers that confirmed that the controls remained in place and were active.
2.2 Annual assurance confirmations provided by key service providers to the The committee reviewed the annual assurance compliance confirmations and no
Management Engagement committee, which covered matters in relation to compliance exceptions were noted.
financial crime, cyber security, fraud prevention and detection, ESG and other
compliance.
2.3 Independent testing of the Investment Manager's system for managing the The committee considered the Investment Manager's plan to enhance their system
Group's loans. and will continue to review updates on the implementation.
Going concern and viability statement
The committee reviewed the Investment Manager's analysis, including the terms
of the RCF agreement that provide for an optional extension for an additional
term of one year which is subject to lender approval. Under the terms of the
RCF, the Company is required to give written notice of extension no earlier
than 60 days prior (June 2023) and no later than 30 days prior (July 2023) to
the termination date on 21 August 2023. The committee acknowledged that the
extension of the RCF is at the discretion of RBSI, that the RCF represents
leverage of 7.2% of total assets at the year end, and that the Company has met
and continues to be able to meet all financial commitments and covenants of
the RCF. In addition, the Committee's review challenged the Investment
Manager's cash flow forecasts, including a stressed cash flow downside
scenario whereby the Company has to repay the RCF should it not be extended
beyond the termination date. The reasonableness of other available finance
options including alternative finance facilities and the sale of specific
assets were also considered. On this basis, the committee is satisfied that
the Company can continue to meet its liabilities as they fall due within a
period of at least the next twelve months from the date of approval of the
financial statements and recommended to the Board that the going concern basis
of preparation of the financial statements is appropriate. Whilst there is
some uncertainty with regards to the extension of the RCF, the committee
concluded that the above options are sufficient to mitigate the potential
liquidity risk which may be faced by the Company.
The committee also reviewed the Investment Manager's five year stress test
analyses for the purpose of assessing the Company's viability. This review
challenged the assumptions applied as well as being satisfied with the
rationale for selecting the duration of five years for the viability period.
In addition, the committee considered how the Investment Manager had assessed
the impact of climate risk across the physical assets in the portfolio and the
impact on income generation as described above.
The committee concluded that the Investment Manager's assessment, that the
Company's exposure to climate risk is low, is reasonable. This assessment will
continue to be monitored as the Investment Manager's climate risk assessment
is developed.
Further detail on the basis of the going concern and viability assessment by
the Directors is set out in the strategic report above and in notes 2.1 to the
financial statements.
External audit
The committee met with the Auditor in December 2022 to review, challenge and
agree their audit plan, and in particular their approach to the valuation of
investments.
Independence and objectivity of the Auditor
PwC has been the Auditor of the Company since its first annual reporting
period in 2016. Lisa McClure is the current audit partner for the financial
year ended 31 December 2022. There are no contractual obligations restricting
the choice of auditor and the Company will consider placing the audit service
contract out for tender at least every ten years, being no later than for the
financial year ending 31 December 2026.
To fulfil its responsibility regarding the independence and objectivity of the
Auditor, the Audit committee considered:
- a report from the Auditor describing its arrangements for maintaining
independence; and
- the extent and nature of the non‑audit services provided by the Auditor.
The committee has agreed a policy whereby, in order to avoid any potential
impact on the independence and objectivity of the Auditor, the Company and its
subsidiaries will not seek to obtain any non‑audit services from the
Auditor, with the exception of the review of the half‑ yearly report and
financial statements which is included in the FRC's whitelist of permitted
non‑audit services.
External audit results
The committee met with the Auditor in April 2023 to discuss their audit report
and opinion, after the conclusion of their audit.
The Auditor explained the results of their audit and confirmed that there were
no adjustments proposed that were material in the context of the financial
statements as a whole.
Effectiveness of the external audit
The committee reviewed the effectiveness of the external audit process during
the year, considering the performance, objectivity, independence and relevant
experience of the Auditor. The scope of the review included an assessment of
feedback from the key service providers and also the Auditor's Transparency
Report 2022. Following this review, the committee concluded that the audit was
effective.
Re‑appointment of the Auditor
The committee continues to be satisfied with the performance of the Auditor
and has recommended the re‑appointment of PwC as the Company's Auditor at
the 2023 AGM.
The following table summarises the remuneration paid to the Auditor for audit
and non‑audit services during the year ended 31 December 2022:
Year ended 31 December Year ended 31 December
2022 2021
£'000 £'000
Audit fees
Annual audit of the Company 131 95
Non-audit services
Review of half‑yearly report 36 39
Total 167 134
Non-audit services
Review of half‑yearly report
36
39
Total
167
134
Colin Huelin FCA
Chair of the Audit committee
13 April 2023
RISK COMMITTEE REPORT
I am pleased to present the Risk committee report for the year ended 31
December 2022.
Joanna Dentskevich
Chair of the Risk committee
Statement from the chair
The purpose of the Risk committee is to assist the Board in its oversight and
assessment of the risks that the Company is exposed to, its risk appetite, the
effectiveness of the risk management framework and ensuring the external
reporting of the Company gives a fair, balanced and understandable reflection
of risk having due regard to the Company's investment objective and policy.
Composition and meetings
The committee comprises all four Directors of the Company, all of whom are
considered independent and through their relevant financial experience provide
effective challenge. The committee met formally five times during the year.
Details of attendance at meetings held during the year are set out above.
Responsibilities
The committee's key responsibilities, amongst others, are to:
- review the risks, including financial crime and ESG risks, the Company is
exposed to and consider their likelihood and impact if they were to
materialise;
- review, in conjunction with the Audit committee, the effectiveness of the
internal controls;
- review the risk management framework;
- carry out a robust assessment of the principal and emerging risks facing the
Company, including those that would threaten its business model, future
performance, solvency or liquidity and ability to deliver its strategy;
- review the report of the risk officer of the AIFM prior to consideration of
the principal and emerging risks and the principal uncertainties to be
included in the half‑yearly and annual reports and financial statements; and
- include in the annual report of the Company a description of the principal
and emerging risks along with explanations on how they are being managed or
mitigated and any change from previous years.
A copy of the terms of reference within which the committee operates is
available on the Company's website or from the Company Secretary upon request.
Risk management and monitoring
The Company has in place a risk register to manage and track identified risks
and uncertainties and potential emerging risks that the committee has
identified the Company to be exposed to. For each risk, the committee
considers, inter alia, their impact on the Company achieving its investment
objective along with the nature and extent of the risk, their mitigants and
any driving factors which may increase the risk.
The level of residual risk determined as part of this analysis assists the
Board (on the committee's recommendation) to determine
whether it is within the Company's risk appetite and any actions required.
During the year, the committee carried out a review of the Company's Money
Laundering and Terrorism Financing risk assessment to include all aspects of
financial crime.
Both the risk register and the financial crime risk assessment are reviewed
semi‑annually in order to support the committee's assessment of the
principal risks and uncertainties and emerging risks that the Company reports
in the half‑yearly report and annual report.
To support the integration of ESG risks, including that of climate risk, into
the Company's procedures, an ESG analysis was undertaken during the year to
assess the impact of ESG on the Company's existing risk categories and any new
categories that might emerge as a result. This assessment has led to clear
actions to work towards over the next few years. Further details can be found
above.
As a result of the war in Ukraine, the Company was required to report to the
JFSC regarding any potential exposure to Russia, Belarus or Ukraine. The
Company is predominantly invested in the UK and has no investments in Ukraine,
Russia or Belarus. Equally, no borrowers have been subject to sanctions
imposed due to the war.
Details of the Company's risk management framework, including the role of the
AIFM, are set out above.
Principal risks and uncertainties
Post year end, the Risk committee met, with the Investment Manager present, to
review and recommend for approval by the Board the principal risks and
uncertainties of the Company. As a result of this review, the committee
recommended to the Board a new principal risk, 'Reliance on third party
service providers'. In addition, as a result of geopolitical and
macro‑economic pressures on interest rates, inflation and growth, the
committee recommended noted increases to the residual risks at the year end
for the principal risks relating to credit, economic, key resource and
execution.
The committee also recommended that the uncertainties relating to Covid‑19
and Brexit no longer be considered as uncertainties as they are now addressed
as part of the Company's normal course of business and that the principal
uncertainty of the conflict in Ukraine be combined in a new principal
uncertainty of geopolitical uncertainty.
Further details can be found above.
Emerging risks and uncertainties
During the year, the Board identified inflation as an emerging risk due to the
potential impact on its borrowers. However, at the year end, the committee did
not consider it to be an emerging risk as its impact is being addressed within
specific risks already identified and managed.
Joanna Dentskevich
Chair of the Risk committee
13 April 2023
REMUNERATION
DIRECTORS' REMUNERATION REPORT
I am pleased to present the Directors' remuneration report for the year ended
31 December 2022.
Marykay Fuller
Chair of the Remuneration
The Directors' remuneration report provides details on remuneration in the
year. Although it is not a requirement under Jersey Company Law to have the
Directors' remuneration report or the Directors' remuneration policy approved
by shareholders, the Board believes that as a company whose shares are
admitted to trading on the LSE, it is good practice for it to do so.
The Directors' remuneration report will be put to a shareholder vote every
year and the Directors' remuneration policy will be put to a shareholder vote
at least once every three years and in any year if there is to be a change in
the policy.
As a result of the succession plan recommendations arising from the external
Board evaluation, the Company anticipates the Board could have up to six
members during 2024 as new Board members join and existing Board members
rotate off.
As a result, the Directors are recommending an increase to the annual cap on
Directors' remuneration from £300,000 to £335,000 to provide sufficient
headroom during this succession period. Therefore, an ordinary resolution will
be put to shareholders at the forthcoming AGM to approve the updated
Directors' remuneration policy in accordance with the Articles.
This report is not subject to audit.
Voting at AGM
The Directors' remuneration report for the year ended 31 December 2021 and the
Directors' remuneration policy were approved by shareholders at the AGM held
on 17 May 2022. The votes cast by proxy were as follows:
Directors' remuneration report Directors' remuneration policy
Number of % of Number of % of
votes cast votes cast votes cast votes cast
For 237,553,581 99.98 233,441,308 98.25
Against 17,923 0.01 4,130,196 1.74
At the Chairman's discretion 12,000 0.01 12,000 0.01
Total votes cast 237,596,736 100 237,596,736 100
Number of votes withheld 13,232 - 13,232 -
Performance of the Company
The Board is responsible for the Company's investment strategy and
performance. The management of the Group's investment portfolio is delegated
to the Investment Manager through the investment management agreement, as
referred to in note 18 to the financial statements.
The tables below illustrate the total shareholder return(1) for a holding in
the Company's shares as compared to the GBP Corporate Bond Index. The Company
considers this to be an appropriate index against which to measure the
Company's performance, in the absence of a meaningful quoted benchmark index.
Cumulative performance to 31 December 2022
Three Six One Three Five Since
Period months months year years years launch
GCP Asset Backed Income Fund Limited 1.9% (9.1)% (7.3)% (5.3)% 13.9% 27.7%
GBP Corporate Bond Index 6.9% (5.9)% (19.3)% (14.3)% (7.6)% 57.6%
Annual performance to 31 December 2022
Year ended 31 December Year ended 31 December Year ended 31 December Year ended 31 December Year ended 31 December
2022 2021 2020 2019 2018
GCP Asset Backed Income Fund Limited (7.3)% 13.2% (9.8)% 10.2% 9.1%
GBP Corporate Bond Index (19.3)% (3.3)% 9.1% 11.0% (2.2)%
Basis: percentage growth, shareholder total return with net income reinvested.
Past performance is not a guide to future performance.
Directors' remuneration
The fees paid to the Directors in the years ended 31 December 2022 and 31
December 2021 are set out below.
ESG
Directors' Chairman Committee representative
base fee fee chair fee fee Expenses Total
£ £ £ £ £ £
2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021
Alex Ohlsson 45,000 40,000 15,000 15,000 - - - - 552 - 60,552 55,000
Joanna Dentskevich 45,000 40,000 - - 10,000 10,000 5,000 - 126 397 60,126 50,397
Colin Huelin FCA 45,000 40,000 - - 10,000 10,000 - - 643 - 55,643 50,000
Marykay Fuller 45,000 40,000 - - 10,000 5,000 - - 755 - 55,755 45,000
Total 180,000 160,000 15,000 15,000 30,000 25,000 5,000 - 2,076 397 232,076 200,397
The fees paid to the Directors were in relation to non‑executive Director
services. At 31 December 2022, liabilities in respect of these services
amounted to £58,000. No variable remuneration, discretionary payments or
payments for loss of office were made during the year.
To reflect the increased complexity and risk, the reality of time commitments
needed, and the skill set required and expected as a non‑executive Director,
the base fee payable to each Director was increased with effect from 1 January
2022 from £40,000 to £45,000. The fee payable to Marykay Fuller in her
capacity as chair of the Remuneration and Nomination committee and Chair of
the Management Engagement committee was also increased by £5,000 to match the
same level of remuneration paid to the other committee Chairs. Additionally,
the Board approved an ESG representative fee of £5,000 per annum with effect
from 1 January 2022 to reflect the level of commitment and time required for
ESG matters.
Post year end, the Board approved a further increase to the Directors' base
fee. In a period of significantly higher inflation, at the time of writing
currently running at 10.4% in the UK, the increase in the base fee has been
limited to 7.5%, with effect from 1 January 2023. In addition, the fee paid to
the Chairman and the Chair of the Audit committee has been increased by
£5,000 each following a review of market comparables and to take into account
their increased workload. Notably, the Chairman working closely with the
Investment Manager to ensure its continued provision of management services to
the Company following the resignation of the lead fund manager, David Conlon
and the Chair of the Audit committee's commitment of time to challenge the
Investment Manager's assumptions and estimates applied in their determination
of the realisable value of the Co‑living group loan. The Directors are
recommending an increase to the cumulative cap on Directors' fees from
£300,000 to £335,000. This is to provide sufficient headroom during Director
handover periods as part of the succession plan.
1. Alternative performance measure - refer below for definitions and
calculation methodology.
Relative importance of spend on pay
The table below sets out, in respect of the year ended 31 December 2022:
- total income;
- the remuneration paid to the Directors;
- the distributions made to shareholders by way of dividend; and
- share repurchases.
Year ended 31 December Year ended 31 December
2022 2021 Change
£'000 £'000 %
Total income 14,394 21,414 (3.3)
Directors' remuneration(1) 230 200 15.0
Dividends paid to shareholders 27,766 27,715 0.2
Share repurchases 4,647 293 14.9
1. Excluding Directors' expenses.
Directors' interests
At 31 December 2022, the interests of the Directors in the ordinary shares of
the Company are as set out below(1):
31 December 31 December
2022 2021
Number of shares Number of shares
Alex Ohlsson 50,000 50,000
Colin Huelin FCA 34,142 34,142
Joanna Dentskevich 57,379 57,379
Marykay Fuller 19,650 19,650
1. The Directors' shareholdings are either direct and/or indirect holdings of
the ordinary shares in the Company.
There have been no changes to any of the above holdings between 31 December
2022 and the date of this report.
Directors' remuneration policy
In accordance with the AIC Code, no Director is involved in deciding his or
her own remuneration.
The Board considers that Directors' fees should reflect duties,
responsibilities and the value of their time spent and, as such, the Chairman
and the chairs of the Board committees receive additional remuneration for
these roles.
Directors are not eligible for bonuses, pension benefits, share options,
long‑term incentive schemes or other benefits in respect of their services
as non‑executive Directors of the Company. In addition, no payment will be
made to a Director for loss of office, or as consideration for or in
connection with his/her retirement from office.
The Board may, however, allow for additional remuneration to be paid where
Directors, at the request of the Company, are involved in ad hoc duties beyond
those normally expected as part of the appointment.
The remuneration of each of the Directors is subject to fixed fee
arrangements, paid quarterly in arrears. Part of the Directors' fee may be
paid in the form of fully paid shares in the capital of the Company. At 31
December 2022, no shares were issued in lieu of payment of the Directors' fee
(31 December 2021: none).
The aggregate of all the Directors' remuneration is currently subject to an
annual cap of £300,000 in accordance with the Articles and shall be reviewed
annually in relation to the proposed change. As noted above, the Board is
recommending the annual cap be increased to £335,000.
The Company will reimburse the Directors all reasonable travelling, hotel and
other expenses properly incurred by them in or about the proper performance of
their duties and the taking of reasonable independent legal advice concerning
matters relating to their directorship, provided that if and when required by
the Company, they produce to the Company receipts or other evidence of actual
payment of expenses.
The Company is committed to ongoing shareholder dialogue and any views
expressed by shareholders on the fees being paid to Directors would be taken
into consideration by the Board when reviewing the Directors' remuneration
policy and in the annual review of Directors' fees.
Directors' fee levels
The Board has set different fee levels to reflect the workload,
responsibilities and time commitment of the various roles held by Board
members. The fee levels in respect of the year ended 31 December 2022 and the
expected fee levels in respect of the year ending 31 December 2023 are as
follows:
31 December 31 December
2023 2022
£ £
Base fee 48,375 45,000
Chairman's fee 20,000 15,000
Audit committee chair fee 15,000 10,000
Management Engagement committee chair fee 5,000 5,000
Remuneration and Nomination committee chair fee 5,000 5,000
Risk committee chair fee 10,000 10,000
ESG representative fee 5,000 5,000
Approval
The Directors' remuneration report was approved by the Board and signed on its
behalf by:
Marykay Fuller
Chair of the Remuneration and Nomination committee
13 April 2023
DIRECTORS' REPORT
The corporate governance statement set out above forms part of this report.
Principal activity and business review
The strategic report has been prepared by the Directors and should be read in
conjunction with the Chairman's statement and forms part of the annual report
to shareholders.
Directors
The Directors in office during the year and at 31 December 2022 are shown
above.
The terms and conditions of the appointment of the Directors are formalised in
letters of appointment, copies of which are available for inspection at the
Company's registered office. None of the Directors have a contract of service
with the Company nor has there been any other contract or arrangement between
the Company and any Director at any time during the year.
The Company has Directors' and Officers' liability insurance and civil
liability insurance. Under the Company's Articles, the Directors are provided,
subject to the provisions of the Jersey legislation, with an indemnity in
respect of liabilities which they may sustain or incur in connection with
their appointment.
Director conflicts of interest
It is the responsibility of each individual Director to avoid a
conflict‑of‑interest situation arising. The Director must inform the Board
as soon as he or she is aware of the possibility of an interest that might
possibly conflict with the interests of the Company. The Company's articles of
association authorise the Board to approve such situations, where deemed
appropriate. A register of conflicts is maintained by the Company Secretary
and is reviewed at Board meetings, to ensure that any authorised conflicts
remain appropriate. The Directors are required to confirm at these meetings
whether there has been any change to their position.
The Directors must also comply with the statutory rules requiring company
directors to declare any interest in an actual or proposed transaction or
arrangement with the Company.
Further details of the Directors' conflicts of interest can be found in note
18 to the financial statements.
Share capital
At the Annual General Meeting held on 17 May 2022, the Company was granted the
authority to allot ordinary shares up to 10% of its total issued share capital
at that date on a non‑pre‑emptive basis, amounting to 44,203,351 ordinary
shares. No ordinary shares have been allotted under this authority during the
year. Details of the movements in share capital during the period are set out
in the statement of changes in equity below and in note 16 to the financial
statements.
The Company will be seeking shareholder approval at the Company's AGM
scheduled to be held on 15 May 2023 to renew its authority in respect of the
disapplication of pre‑emption rights over 10% of its ordinary shares in
issue which it may then be able to issue by way of placings. This will provide
the Company with the ability to take advantage of investment opportunities as
they arise and further broaden its investor base over time.
Furthermore at the 2022 AGM, the Company was granted the authority to purchase
up to 14.99% of the Company's ordinary share capital in issue at the date on
which the notice of the AGM was published, on 6 April 2022, amounting to
65,931,044 ordinary shares. This authority will expire at the conclusion of,
and renewal will be sought at, the AGM to be held on 15 May 2023.
During the year, the Company repurchased under this authority a total of
5,682,459 shares at a weighted average price of 81.39 pence per share, a
discount to the prevailing NAV.
The Company may hold any ordinary shares that it purchases in treasury or
cancel them, in accordance with the Articles and the Companies Law. The
Directors believe that it is desirable for the Company to have this choice.
Holding the shares purchased in treasury gives the Company the ability to
re‑sell or transfer them quickly and cost effectively and provides the
Company with additional flexibility in the management of its capital base.
The decision whether to cancel any shares purchased by the Company or hold
such shares in treasury will be made by the Directors at the time of purchase,
on the basis of the Company's and shareholders' best interests.
At 31 December 2022, the Company's issued share capital comprised 442,033,518
ordinary shares of no par value, 7,882,459 of which are held in treasury. The
total voting rights of the Company at 31 December 2022 were 434,151,059, being
the issued share capital minus the shares held in treasury.
Post year end to the date of this report, the Company has repurchased an
additional 6,325,000 ordinary shares. Therefore, the total voting rights of
the Company at the date of this report are 427,826,059. All shares repurchased
are held in treasury.
At general meetings of the Company, every ordinary shareholder shall have one
vote in respect of every ordinary share and every C shareholder, if any, shall
have one vote in respect of every C share. At 31 December 2022, there were no
C shares in issue (31 December 2021: none).
Dividends
Details of the dividends paid and declared during the period are set out in
note 9 to the financial statements. As the last dividend in respect of any
financial period is payable prior to the relevant AGM, it is declared as an
interim dividend and, accordingly, there is no final dividend payable.
The Board is conscious that this means that shareholders will not be given the
opportunity to vote on the payment of a final dividend. Accordingly, it has
been decided that shareholders will be asked to confirm their approval of the
Company's dividend policy at the forthcoming AGM.
The Company has authority to offer a scrip dividend alternative under which
shareholders elect to receive new ordinary shares in lieu of the cash
dividend.
The price of a new ordinary share to be issued under the scrip dividend
alternative is calculated by taking the average of the Company's closing
middle market quotations of an ordinary share for the ex‑dividend date and
the four subsequent dealing days.
As a result of the Company's ordinary shares trading at a discount to the
prevailing NAV, the Board exercised its discretion to suspend the scrip
dividend alternative.
The Board will keep under consideration the offer of a scrip dividend
alternative in respect of future quarterly dividends if the Company's ordinary
shares trade at a premium to the prevailing published NAV at the relevant
time.
Greenhouse gas emissions
Refer to the sustainability section above for information.
Significant voting rights
At the date of the report, the Company had been informed of the following
holdings representing more than 3% of the voting rights of the Company:
Percentage
Name Shares held of total voting rights
Valu‑Trac Investment Management 41,511,041 9.70%
CCLA Investment Management 33,419,060 7.81%
Close Asset Management 30,860,513 7.21%
Waverton Investment Management 24,756,248 5.79%
West Yorkshire Pension Fund 17,421,098 4.07%
Foresight Group 16,402,728 3.83%
Raymond James Investment Services 15,782,883 3.69%
Canopius 13,544,656 3.17%
The table of significant shareholders disclosed forms part of note 2.2 to the
financial statements.
The Company has not been informed of any changes to the interests between 31
December 2022 and the date of this report.
Auditor
PwC has expressed its willingness to continue as Auditor of the Company and
resolutions for its re‑appointment and to authorise the Audit committee to
determine its remuneration will be proposed at the forthcoming AGM.
The Directors holding office at the date of this annual report confirm that,
so far as they are each aware, there is no relevant audit information of which
the Company's Auditor is unaware.
Each Director has taken all the steps that they ought to have taken as a
Director to make themselves aware of any relevant audit information and to
establish that the Company's Auditor is aware of that information.
Financial risk management
Information about the Company's financial risk management objectives and
policies is set out in note 17 to the financial statements.
Requirements of the Listing Rules
Listing Rule 9.8.4 requires the Company to include specified information in a
single identifiable section of the annual report or a cross reference table
indicating where the information is set out.
The information required under Listing Rule 9.8.4(7) in relation to allotments
of shares is set out under the heading 'Share capital' above. The Directors
confirm that there are no other disclosures required in relation to Listing
Rule 9.8.4.
On behalf of the Board
Alex Ohlsson
Chairman
13 April 2023
STATEMENT OF DIRECTORS' RESPONSIBILITIES
In respect of the annual report and financial statements
Under the terms of the DTRs of the FCA, the Directors are responsible for
preparing the annual report and financial statements in accordance with
applicable law and IFRS.
Companies Law requires the Directors to prepare financial statements for each
year, which give a true and fair view of the state of affairs of the Company
and the profit and loss for that year.
The Directors are required to:
- properly select suitable accounting policies and apply them consistently;
- present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
- provide additional disclosures when compliance with the specific
requirements of IFRS are insufficient to enable users
- to understand the impact of particular transactions, other events and
conditions on the Company's financial position and financial performance;
- make judgements and estimates that are reasonable and prudent; and
- make an assessment of the Company's ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that
disclose with reasonable accuracy at any time the financial position of the
Company. They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
The Directors have overall responsibility for the maintenance and integrity of
the corporate and financial information included on the Company's website.
Legislation in Jersey governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Directors' responsibility statement
In accordance with the FCA's DTRs, each of the Directors, whose names are set
out above, confirms that to the best of his or her knowledge:
- the annual report and financial statements have been prepared in accordance
with IFRS, give a true and fair view of the assets, liabilities, financial
position and profit or loss of the Company; and
- the strategic report, including the Directors' report, includes a fair and
balanced review of the development and performance of the business, and the
financial position of the Company, together with a description of the
principal risks and uncertainties that the Company faces.
The annual report and financial statements, taken as a whole, are considered
by the Board to be fair, balanced and understandable, and provide the
information necessary for shareholders to assess the Company's position,
performance, business model and strategy.
On behalf of the Board
Alex Ohlsson
Chairman
13 April 2023
INDEPENDENT AUDITOR'S REPORT
To the members of GCP Asset Backed Income Fund Limited
Report on the audit of the financial statements
Our opinion
In our opinion, the financial statements give a true and fair view of the
financial position of GCP Asset Backed Income Fund Limited (the "Company") as
at 31 December 2022, and of its financial performance and its cash flows for
the year then ended in accordance with International Financial Reporting
Standards and have been properly prepared in accordance with the requirements
of the Companies (Jersey) Law 1991.
What we have audited
The Company's financial statements comprise:
- the statement of financial position as at 31 December 2022;
- the statement of comprehensive income for the year then ended;
- the statement of changes in equity for the year then ended;
- the statement of cash flows for the year then ended; and
- the notes to the financial statements, which include significant accounting
policies and other explanatory information.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
("ISAs"). Our responsibilities under those standards are further described in
the Auditor's responsibilities for the audit of the financial statements
section of our report.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Emphasis of Matter - extension of the Revolving Credit Facility ("RCF")
We draw attention to Note 2 of the financial statements, which describes the
potential liquidity risk associated with the extension
of the Company's RCF of £31.9 million (full facility £50.0 million) which is
due to expire on 21 August 2023 and the options available to the Directors to
mitigate the potential liquidity risk which may be faced by the Company. Our
opinion is not modified in respect of this matter.
Independence
We are independent of the Company in accordance with the ethical requirements
that are relevant to our audit of the financial
statements of the Company, as required by the Crown Dependencies' Audit Rules
and Guidance. We have fulfilled our other ethical responsibilities in
accordance with these requirements.
Our audit approach
Overview
Audit scope
- The Company is based in Jersey and the financial statements include its
investments in the Subsidiary and other investments as financial assets
through profit or loss.
- Our audit work was performed solely in Jersey for the audit of the financial
statements of the Company.
- We tailored the scope of our audit taking into account the types of
investments within the Company, the accounting processes and controls, and the
industry in which the Company operates.
- We conducted our audit of the financial statements based on information
provided by the appointed service providers to the Company to whom the Board
of Directors has delegated the provision of certain functions, including
Gravis Capital Management Limited (the "Investment Manager" or "AIFM") and
Apex Financial Services (Alternative Funds) Limited (the "Administrator").
Key audit matters
- Valuation of financial assets at fair value through profit or loss:
investment in Subsidiary - Fair value of Secured Loan Notes.
- Potential Liquidity risk - Directors' conclusions regarding the extension of
the revolving credit facility ("RCF").
Materiality
- Overall materiality: £10.3 million (31 December 2021: £10.9 million) based
on 2.5% of net assets.
- Performance materiality: £7.7 million.
The scope of our audit
As part of designing our audit, we determined materiality and assessed the
risks of material misstatement in the financial statements. In particular, we
considered where the Directors made subjective judgements; for example, in
respect of significant accounting estimates that involved making assumptions
and considering future events that are inherently uncertain. As in all of our
audits, we also addressed the risk of management override of internal
controls, including among other matters, consideration of whether there was
evidence of bias that represented a risk of material misstatement due to
fraud.
Key audit matters
Key audit matters are those matters that, in the auditor's professional
judgement, were of most significance in the audit of the financial statements
of the current period and include the most significant assessed risks of
material misstatement (whether or not due to fraud) identified by the auditor,
including those which had the greatest effect on: the overall audit strategy;
the allocation of resources in the audit; and directing the efforts of the
engagement team. These matters, and any comments we make on the results of our
procedures thereon, were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion thereon, and we do
not provide a separate opinion on these matters.
This is not a complete list of all risks identified by our audit.
Key audit matter How our audit addressed the key audit matter
Valuation of financial assets at fair value through profit or loss: investment We have performed the following procedures:
in Subsidiary - Fair value of Secured Loan Notes
- Discussions were held with the Directors of the Company and the Investment
Refer to note 11 and note 17 of the financial statements Manager to enable us to understand and evaluate the controls in place over the
valuation process.
The valuation of financial assets at fair value through profit or loss:
investment in Subsidiary ("investment in Subsidiary") drives a number of key - We assessed the Company's external Valuation Agent's independence,
performance indicators, such as net asset value, which is of significant qualifications and expertise and read their terms of engagement with the
interest to investors and the market. Company to determine whether there were any matters that might have affected
their objectivity or may have imposed scope limitations upon their work.
- We read the valuation report issued by the external Valuation Agent and
The fair value of the investment in Subsidiary is substantially derived from understood the valuation approach used.
the fair value of Secured Loan Notes to the end borrower.
- We engaged valuation experts from PwC UK London to assess the reasonableness
of the methodology applied by the external Valuation Agent with regard to a
sample of investments and the reasonableness of key assumptions used.
The valuations of Secured Loan Notes are performed using contractual cash
flows generated by each loan facility over a medium to long-term period and by - We held discussions with the Investment Manager to understand the monitoring
selecting key assumptions such as the discount rate adjusted as appropriate process of the borrowers' payments and financial performance, in identifying
for market, credit and liquidity risk factors. circumstances that can materially impact the recoverability of the contractual
cash flows.
- We agreed a sample of the contractual cash flows used in the DCF calculation
The nature of discounted cash flow ("DCF") is inherently subjective due to key to the contractual payment schedule of the loan facility agreements and tested
assumptions used for the discount rate and the amount or timing of cash flows the mathematical accuracy of the DCF calculation. As part of these procedures,
supporting the interest and capital repayments on debt positions held. we performed these:
- for a sample of new secured loan notes, we tested the drawdowns to signed
facility agreements, note certificates and bank payments;
The existence of significant estimation uncertainty, coupled with the fact
that small percentage differences in assumptions to the valuations when - for a sample of Secured Loan Notes repaid during the year, we tested the
aggregated could result in material misstatement, are the reasons for our movement to signed facility agreements and cash payments;
specific audit focus and attention to this area.
- for a sample of interest received during the year, we agreed the amounts to
bank payments; and
As a result of the inherent nature of the key assumptions used in the DCF - for a sample of interest accrued during the year, we recomputed the amounts
model, the Directors appointed an external Valuation Agent to support them in using the interest rates as per the facility agreements and the outstanding
ascertaining the fair value of Secured Loan Notes. balances of the loan amounts at the relevant period.
- We challenged the assumptions used in the valuation models.
- We considered the adequacy of the Company's disclosures in respect of the
fair value of the investment in Subsidiary.
- We also considered the disclosure of the degree of sensitivity when a
reasonably possible change in a key assumption could give rise to a change in
the fair value of the investment in Subsidiary.
Based on the above procedures, we have not identified any material matters to
report to those charged with governance.
Potential Liquidity risk - Directors' conclusions In assessing the Directors' consideration of the liquidity risk for the
Company surrounding the extension of the RCF, we have performed the following
regarding the extension of the revolving credit procedures:
facility ("RCF") - We obtained the Directors approved cash flow forecasts prepared by the
Investment Manager;
Refer to note 2 to the financial statements.
- We held meetings with the Investment Manager and the Directors to discuss
The RCF is due to expire on 21 August 2023 which includes an optional their cash flow forecasts and the stressed cash flow downside scenario and
extension for an additional term of one year with lender approval. challenged the Directors estimates and judgements contained therein. This
included consideration of the reasonableness of the other available finance
options including alternative finance facilities and the potential sale of
specific assets identified by the Investment Manager of the Company should the
The Directors acknowledge that the extension of the RCF is at the discretion RCF not be extended; and
of the lender and therefore have considered if the potential liquidity risk
associated with the extension of the RCF creates a material uncertainty that - We considered the appropriateness of the disclosures made by the Directors
raises significant doubt about the Company's ability to continue as a going in the financial statements in respect of their conclusions on going concern
concern. and liquidity risk.
The Investment Manager has prepared cash flow forecasts which were challenged As a result of our audit work, we have concluded that a material uncertainty
and approved by the Directors including a stressed downside scenario to does not exist which casts significant doubt around the Company's ability to
determine if the Company could repay the RCF should it not be extended beyond continue as a going concern due to mitigating factors contained within the
its expiry on 21 August 2023. The cash flows included an assessment of the Directors' future plans.
reasonableness of other available finance options including alternative
finance facilities and the sale of specific assets which could mitigate the
liquidity risk for the Company should the RCF extension not be approved.
We have however concluded that it is necessary to include an emphasis of
matter paragraph within our audit report to draw to the users' attention to
the disclosures contained within note 2 to the financial statements regarding
Due to the importance of the conclusions reached by the Directors on their the potential liquidity risk surrounding the extension of the RCF.
assessment of the potential liquidity risk, we have determined this area to be
a key audit matter.
Based on our procedures performed we have no further matters to report to
those charged with governance.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to
be able to give an opinion on the financial statements as a whole, taking into
account the structure of the Company, the accounting processes and controls,
and the industry in which the Company operates.
Materiality
The scope of our audit was influenced by our application of materiality. We
set certain quantitative thresholds for materiality. These, together with
qualitative considerations, helped us to determine the scope of our audit and
the nature, timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating the effect of
misstatements, both individually and in aggregate, on the financial statements
as a whole.
Based on our professional judgement, we determined materiality for the
financial statements as a whole as follows:
Overall materiality £10.3 million (31 December 2021: £10.9 million)
How we determined it 2.5% of net assets
Rationale for benchmark applied We believe that net assets is the most appropriate benchmark because this is
the key metric of interest to investors. It is also a generally accepted
measure used for companies in this industry.
We use performance materiality to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected misstatements
exceeds overall materiality. Specifically, we use performance materiality in
determining the scope of our audit and the nature and extent of our testing of
account balances, classes of transactions and disclosures, for example in
determining sample sizes. Our performance materiality was 75% (31 December
2021: 75%) of overall materiality, amounting to £7.7 million (31 December
2021: £8.1 million) for the Company financial statements.
In determining the performance materiality, we considered a number of factors
- the history of misstatements, risk assessment and aggregation risk and the
effectiveness of controls - and concluded that an amount at the upper end of
our normal range was appropriate.
We agreed with the Audit committee that we would report to them misstatements
identified during our audit above £515,000 (31 December 2021: £545,000) as
well as misstatements below that amount that, in our view, warranted reporting
for qualitative reasons.
Reporting on other information
The other information comprises all the information included in the annual
report and financial statements (the "annual report") but does not include the
financial statements and our auditor's report thereon. The Directors are
responsible for the other information.
Our opinion on the financial statements does not cover the other information
and we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility
is to read the other information and, in doing so, consider whether the other
information is materially inconsistent with the financial statements or our
knowledge obtained in the audit, or otherwise appears to be materially
misstated. If, based on the work we have performed, we conclude that there is
a material misstatement of this other information, we are required to report
that fact. We have nothing to report based on these responsibilities.
Responsibilities for the financial statements and the audit
Responsibilities of the Directors for the financial statements
As explained more fully in the Statement of Directors' responsibilities, the
Directors are responsible for the preparation of the financial statements that
give a true and fair view in accordance with International Financial Reporting
Standards, the requirements of Jersey law
and for such internal control as the Directors determine is necessary to
enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for
assessing the Company's ability to continue as a going concern, disclosing, as
applicable, matters related to going concern and using the going concern basis
of accounting unless the Directors either intend to liquidate the Company or
to cease operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in aggregate, they could
reasonably be expected to influence the economic decisions of users taken on
the basis of these financial statements.
Our audit testing might include testing complete populations of certain
transactions and balances, possibly using data auditing techniques. However,
it typically involves selecting a limited number of items for testing, rather
than testing complete populations. We will often seek to target particular
items for testing based on their size or risk characteristics. In other cases,
we will use audit sampling to enable us to draw a conclusion about the
population from which the sample is selected.
As part of an audit in accordance with ISAs, we exercise professional
judgement and maintain professional scepticism throughout the audit. We also:
- Identify and assess the risks of material misstatement of the financial
statements, whether due to fraud or error, design and perform audit procedures
responsive to those risks, and obtain audit evidence that is sufficient and
appropriate to provide a basis for our opinion. The risk of not detecting a
material misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
- Obtain an understanding of internal control relevant to the audit in order
to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control.
- Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by the
Directors.
- Conclude on the appropriateness of the Directors' use of the going concern
basis of accounting and, based on the audit evidence obtained, whether a
material uncertainty exists related to events or conditions that may cast
significant doubt on the Company's ability to continue as a going concern over
a period of at least twelve months from the date of approval of the financial
statements. If we conclude that a material uncertainty exists, we are required
to draw attention in our auditor's report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained up to the
date of our auditor's report.
- Evaluate the overall presentation, structure and content of the financial
statements, including the disclosures, and whether the financial statements
represent the underlying transactions and events in a manner that achieves
fair presentation.
We communicate with those charged with governance regarding, among other
matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in internal
control that we identify during our audit.
We also provide those charged with governance with a statement that we have
complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably
be thought to bear on our independence, and where applicable, related
safeguards.
From the matters communicated with those charged with governance, we determine
those matters that were of most significance in the audit of the financial
statements of the current period and are therefore the key audit matters. We
describe these matters in our auditor's report unless law or regulation
precludes public disclosure about the matter or when, in extremely rare
circumstances, we determine that a matter should not be communicated in our
report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
Use of this report
This report, including the opinions, has been prepared for and only for the
members as a body in accordance with Article 113A of the Companies (Jersey)
Law 1991 and for no other purpose. We do not, in giving these opinions, accept
or assume responsibility for any other purpose or to any other person to whom
this report is shown or into whose hands it may come save where expressly
agreed by our prior consent in writing.
Report on other legal and regulatory requirements
Company Law exception reporting
Under the Companies (Jersey) Law 1991 we are required to report to you if, in
our opinion:
- we have not received all the information and explanations we require for our
audit;
- proper accounting records have not been kept; or
- the financial statements are not in agreement with the accounting records.
We have no exceptions to report arising from this responsibility.
Corporate governance statement
The Listing Rules require us to review the Directors' statements in relation
to going concern, longer-term viability and that part of the corporate
governance statement relating to the Company's compliance with the provisions
of the UK Corporate Governance Code specified for our review. Our additional
responsibilities with respect to the corporate governance statement as other
information are described in the Reporting on other information section of
this report.
The Company has reported compliance against the 2019 AIC Code of Corporate
Governance (the "Code") which has been endorsed by the UK Financial Reporting
Council as being consistent with the UK Corporate Governance Code for the
purposes of meeting the Company's obligations, as an investment company, under
the Listing Rules of the FCA.
Based on the work undertaken as part of our audit, we have concluded that each
of the following elements of the corporate governance statement included
within the governance section is materially consistent with the financial
statements and our knowledge obtained during the audit, and we have nothing
material to add or draw attention to in relation to:
- the Directors' confirmation that they have carried out a robust assessment
of the emerging and principal risks;
- the disclosures in the annual report that describe those principal risks,
what procedures are in place to identify emerging risks and an explanation of
how these are being managed or mitigated;
- the Directors' statement in the financial statements about whether they
considered it appropriate to adopt the going concern basis of accounting in
preparing them, and their identification of any material uncertainties to the
Company's ability to continue to do so over a period of at least twelve months
from the date of approval of the financial statements;
- the Directors' explanation as to their assessment of the Company's
prospects, the period this assessment covers and why the period is
appropriate; and
- the Directors' statement as to whether they have a reasonable expectation
that the Company will be able to continue in operation and meet its
liabilities as they fall due over the period of its assessment, including any
related disclosures drawing attention to any necessary qualifications or
assumptions.
Our review of the Directors' statement regarding the longer-term viability of
the Company was substantially less in scope than an audit and only consisted
of making inquiries and considering the Directors' process supporting their
statements; checking that the statements are in alignment with the relevant
provisions of the Code; and considering whether the statement is consistent
with the financial statements and our knowledge and understanding of the
Company and its environment obtained in the course of the audit.
In addition, based on the work undertaken as part of our audit, we have
concluded that each of the following elements of the corporate governance
statement is materially consistent with the financial statements and our
knowledge obtained during the audit:
- the Directors' statement that they consider the annual report, taken as a
whole, is fair, balanced and understandable, and provides the information
necessary for the members to assess the Company's position, performance,
business model and strategy;
- the section of the annual report that describes the review of effectiveness
of risk management and internal control systems; and
- the section of the annual report describing the work of the Audit committee.
We have nothing to report in respect of our responsibility to report when the
Directors' statement relating to the Company's compliance with the Code does
not properly disclose a departure from a relevant provision of the Code
specified under the Listing Rules for review by the auditors.
Lisa McClure
For and on behalf of PricewaterhouseCoopers CI LLP
Chartered Accountants and Recognized Auditor Jersey, Channel Islands
13 April 2023
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2022
Year ended Year ended
31 December 31 December
2022 2021
Notes £'000 £'000
Income
Loan note interest realised 3 31,945 32,931
Net loss on financial assets at fair value through profit or loss 3 (18,281) (15,742)
Net (loss)/gain on derivative financial instruments 3 (781) 1,328
Net changes in fair value of financial assets and financial liabilities at 12,883 18,517
fair value through profit or loss
Other income 3 1,498 2,897
Deposit interest income 13 -
Total income 14,394 21,414
Expenses
Investment management fees 18 (3,724) (3,916)
Operating expenses 4 (1,759) (1,439)
Directors' remuneration 6 (232) (200)
Total expenses (5,715) (5,555)
Total operating profit before finance costs 8,679 15,859
Finance costs
Finance expenses 7 (992) (887)
Total profit and comprehensive income 7,687 14,972
Basic and diluted earnings per share (pence) 10 1.75 3.40
All items in the above statement are derived from continuing operations.
The accompanying notes below form an integral part of these financial
statements.
STATEMENT OF FINANCIAL POSITION
As at 31 December 2022
As at As at
31 December 31 December
2022 2021
Notes £'000 £'000
Assets
Cash and cash equivalents 13 10,311 10,108
Derivative financial instruments 17.1 243 492
Other receivables and prepayments 12 66 128
Financial assets at fair value through profit or loss 11 435,071 446,989
Total assets 445,691 457,717
Liabilities
Derivative financial instruments 17.1 (257) -
Other payables and accrued expenses 15 (1,527) (1,445)
Revolving credit facilities 14 (31,907) (19,546)
Total liabilities (33,691) (20,991)
Net assets 412,000 436,726
Equity
Share capital 16 437,960 442,607
Retained losses (25,960) (5,881)
Total equity 412,000 436,726
Ordinary shares in issue (excluding treasury shares) 16 434,151,059 439,833,518
NAV per ordinary share (pence per share) 94.90 99.29
The financial statements were approved and authorised for issue by the Board
of Directors on 13 April 2023 and signed on its behalf by:
Alex Ohlsson Colin Huelin FCA
Chairman Director
The accompanying notes below form an integral part of these financial
statements.
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2022
Share Retained Total
capital losses equity
Notes £'000 £'000 £'000
Balance as at 1 January 2022 442,607 (5,881) 436,726
Total profit and comprehensive income for the year - 7,687 7,687
Share repurchases 16 (4,647) - (4,647)
Dividends 9 - (27,766) (27,766)
Balance as at 31 December 2022 437,960 (25,960) 412,000
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2021
Share Retained Total
capital losses equity
Notes £'000 £'000 £'000
Balance as at 1 January 2021 442,900 6,862 449,762
Total profit and comprehensive income for the year - 14,972 14,972
Share repurchases 16 (293) - (293)
Dividends 9 - (27,715) (27,715)
Balance as at 31 December 2021 442,607 (5,881) 436,726
The accompanying notes below form an integral part of these financial
statements.
STATEMENT OF CASH FLOWS
For the year ended 31 December 2022
Year ended Year ended
31 December 31 December
2022 2021
Notes £'000 £'000
Cash flows from operating activities
Total operating profit before finance costs 8,679 15,859
Adjustments for:
Net changes in fair value of financial assets and financial liabilities at 3 (12,883) (18,517)
fair value through profit or loss
Increase/(decrease) in other payables and accrued expenses 112 (174)
Decrease/(increase) in other receivables and prepayments 62 (21)
Total (4,030) (2,853)
Loan note interest realised 3 31,945 32,931
Net settlement of derivative financial instruments 3 (275) 994
Investment in Subsidiary 11 (101,985) (134,504)
Capital repayments from Subsidiary 11 95,622 117,735
Net cash flow generated from operating activities 21,277 14,303
Cash flows from financing activities
Proceeds from revolving credit facilities 14 51,550 40,250
Repayment of revolving credit facilities 14 (39,399) (25,351)
Share repurchases 16 (4,647) (293)
Finance costs paid (812) (1,080)
Dividends paid 9 (27,766) (27,715)
Net cash flow used in financing activities (21,074) (14,189)
Net increase in cash and cash equivalents 203 114
Cash and cash equivalents at beginning of the year 10,108 9,994
Cash and cash equivalents at end of the year 13 10,311 10,108
The accompanying notes below form an integral part of these financial
statements.
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2022
1. General information
The Company is a public closed-ended investment company incorporated on
7 September 2015 and domiciled in Jersey, with registration number 119412.
The Company is governed by the provisions of the Jersey Company Law and the
CIF Law.
The ordinary shares and C shares (when in issue) of the Company are admitted
to the Official List of the FCA and are traded on the Premium Segment of the
Main Market of the LSE.
The Company makes its investments through its wholly owned Subsidiary, by
subscribing for the Secured Loan Notes issued by the Subsidiary. The
Subsidiary subsequently on-lends the funds to borrowers.
At 31 December 2022, the Company had one wholly owned Subsidiary, GABI UK (31
December 2021: one), incorporated in England and Wales on 23 October 2015
(registration number 9838893). GABI UK has three subsidiaries (31 December
2021: two): GABI Housing (registration number 10497254) incorporated in
England and Wales on 25 November 2016, GABI GS (registration number 10546087)
incorporated in England and Wales on 4 January 2017 and GABI Housing 2
(registration number 14372988) incorporated in England and Wales on 23
September 2022. The Company, GABI UK, GABI Housing (including its subsidiary,
GABI Blyth (dissolved on 7 June 2022)), GABI GS and GABI Housing 2 comprises
the Group. The registered office address for GABI UK, GABI Housing, GABI
Housing 2, GABI Blyth (prior to its dissolution) and GABI GS is 24 Savile Row,
London W1S 2ES.
GABI GS was set up to hold shares as security for loans issued to underlying
borrowers, where required. Its purpose is to isolate any potential liabilities
that may arise from holding shares as security, from the Company.
GABI Housing was set up for the sole purpose of investing in five underlying
properties, one of which was held by its subsidiary, GABI Blyth (prior to its
dissolution), and the social income stream derived from these properties
through letting them to specialist housing associations.
GABI Housing 2 was set up as a subsidiary during the year, to invest in a
single, unlevered, operational rental property and benefit from the income
stream derived from this asset.
The Company, through its Subsidiary, seeks to meet its investment objective
through a diversified portfolio of investments which are secured against, or
comprise, contracted, predictable medium to long‑term cash flows and/or
physical assets.
The Group's investments will predominantly be in the form of medium to
long‑term fixed or floating rate loans which are secured against cash flows
and/or physical assets which are predominantly UK based.
The Group's investments will typically be unquoted and will include, but not
be limited to, senior loans, subordinated loans, mezzanine loans, bridge loans
and other debt instruments. The Group may also make limited investments in
equities, equity‑related derivative instruments such as warrants,
controlling equity positions (directly or indirectly) and/or directly in
physical assets.
The Group will at all times invest and manage its assets in a manner which is
consistent with the objective of spreading investment risk.
Where possible, investments are structured to benefit from partial inflation
and/or interest rate protection.
2. Significant accounting policies
The principal accounting policies applied in the preparation of these
financial statements are set out below and in the subsequent notes. These
policies, except for those changes discussed in this note, have been
consistently applied throughout the years presented.
2.1 Basis of preparation
The annual report and financial statements for the year ended 31 December 2022
have been prepared on a going concern basis and in accordance with IFRS, which
includes standards and interpretations approved by the IASB, and as applied
in accordance with the Jersey Company Law.
In accordance with the investment entities exemption contained in IFRS 10
Consolidated Financial Statements, the Directors have determined that the
Company continues to meet the definition of an investment entity and as a
result the Company is not required to prepare consolidated financial
statements. The Company's investment in its Subsidiary is measured at fair
value and treated as a financial asset through profit or loss in the statement
of financial position (refer to note 2.2(b)).
The Company raises capital through the issue of ordinary shares and C shares.
The net assets attributable to the C share class, when in issue, are accounted
for and managed by the Company as a distinct pool of assets, with the Company
ensuring that separate cash accounts are created and maintained. Expenses are
either specifically allocated to an individual share class or split
proportionately by the NAV of each share class. When in issue, C shares are
classified as a financial liability. At 31 December 2022, there were no C
shares in issue (31 December 2021: none).
New standards, amendments and interpretations adopted in the year
In the year under review, the Company has applied amendments to IFRS issued by
the IASB. These include annual improvements to IFRS, changes in standards,
legislative and regulatory amendments, changes in disclosure and presentation
requirements. This incorporated:
- onerous contracts - cost of fulfilling a contract (amendments to IAS 37);
and
- annual improvements to IFRS standards.
The adoption of the changes to accounting standards has had no material impact
on these or prior years' financial statements. There are amendments to IFRS
that will apply from 1 January 2023 as follows:
- disclosure of accounting policies (amendments to IAS 1 and IFRS Practice
Statement 2);
- definition of accounting estimates (amendments to IAS 8); and
- deferred tax related to assets and liabilities arising from a single
transaction - amendments to IAS 12 Income Taxes.
Amendments to IFRS applicable from 1 January 2024 are:
- classification of liabilities as current or non‑current (amendments to IAS
1); and
- non-current liabilities with covenants (amendments to IAS 1).
The Directors do not anticipate that the adoption of these will have a
material impact on the financial statements.
Other than those detailed above, there are no new IFRS or IFRIC
interpretations that are issued but not effective that would be expected to
have a material impact on the Company's financial statements.
Functional and presentation currency
The primary objective of the Company is to generate returns in Pound Sterling,
its capital‑raising currency. The Company's performance is evaluated in
Pound Sterling. Therefore, the Directors consider Pound Sterling as the
currency that most faithfully represents the economic effects of the
underlying transactions, events and conditions.
The financial statements are presented in Pound Sterling and all values have
been rounded to the nearest thousand pounds (£'000), except where otherwise
indicated.
Going concern
At 31 December 2022, the Company held "cash and cash equivalents" of £10.3
million. Within the statement of financial position the Company had current
liabilities consisting of "other payables and accrued expenses" of £1.5
million and RCF due to RBSI of £31.9 million (full facility £50.0 million)
which is due to expire on 21 August 2023 ("termination date"). The Company's
net current liability position as at 31 December 2022 was £23.1 million.
The RCF agreement includes an optional extension for an additional term of one
year which is subject to lender approval. In
accordance with the terms of the RCF, the Company is required to give written
notice of extension no earlier than 60 days prior (June
2023) and no later than 30 days prior (July 2023) to the termination date.
The Directors acknowledge that the extension of the RCF is at the discretion
of RBSI and therefore have considered if the potential liquidity risk with the
expiry of the RCF raises a material uncertainty that causes significant doubt
about the Company's ability to continue as a going concern.
The Directors consider that the RCF, representing leverage of 7.2% of total
assets at the year end, does not constitute a significant
level of gearing and that the Company has met, and continues to be able to
meet, all financial commitments and covenants of the RCF. Based on preliminary
discussions held with RBSI, the Directors and the Investment Manager are
satisfied that the one year extension will be approved.
The Investment Manager has prepared cash flow forecasts which were challenged
and approved by the Directors, including a stressed cash flow downside
scenario whereby the Company has to repay the RCF should it not be extended
beyond the termination date, and the reasonableness of other available finance
options including alternative finance facilities and the sale of specific
assets. On this basis, the Directors are satisfied that the Company can
continue to meet its liabilities as they fall due within a period of at least
the next twelve months from the date of approval of the financial statements.
Whilst there is some uncertainty with regards to the extension of the RCF, the
Directors believe that the above options are sufficient to mitigate the
potential liquidity risk which may be faced by the
Company.
Furthermore, the Directors have concluded that the potential liquidity risk
associated with the expiry of the RCF does not create a
material uncertainty which casts significant doubt around the Company's
ability to continue as a going concern due to mitigating factors
identified during the review of the Company's financing arrangements as
detailed above. The financial statements have therefore been prepared on a
going concern basis.
2.2 Significant accounting estimates and judgements
The preparation of financial statements, in accordance with IFRS, requires the
Directors to make estimates and judgements that affect the reported amounts
recognised in the financial statements. However, uncertainty about these
assumptions and judgements could result in outcomes that require a material
adjustment to the carrying amount of the asset or liability in the future.
There are no changes in estimates reported in prior financial statements that
require disclosure in these financial statements.
(a) Critical accounting estimates and assumptions
Fair value of instruments not quoted in an active market
The Company's investments are made by subscribing for the Secured Loan Notes
issued by the Subsidiary. The Subsidiary's assets consist of investments held
by the Subsidiary, which represent secured loan facilities issued to the
Project Companies. The Subsidiary's assets are not quoted in an active market;
therefore, the fair value is determined using a discounted cash flow
methodology where applicable (excluding the Co-living group loan) adjusted as
appropriate for market, credit and liquidity risk factors (refer to note 17.9
for further information). This requires assumptions to be made regarding
future cash flows and the discount rate applied to these cash flows. The
Subsidiary's investments are valued by a third party Valuation Agent on a
semi-annual basis. Investments which may be subject to discount rate changes
are valued on a quarterly basis.
The models used by the Valuation Agent use observable data to the extent
practicable. However, areas such as credit risk (both own and counterparty),
volatilities and correlations require estimates to be made. Changes in
assumptions about these factors could affect the reported fair value of the
financial instruments.
The determination of what constitutes 'observable' requires significant
judgement by the Company. The Company considers observable data to be market
data that is readily available, regularly distributed or updated, reliable and
verifiable, not proprietary, and provided by independent sources that are
actively involved in the relevant market.
The investment in the Subsidiary is held at fair value through profit or loss,
with income distributions and interest payments from the Subsidiary included
as part of the fair value movement calculation together with any unrealised
movement in the fair value of the holding in the Subsidiary.
The value of the investment in the Subsidiary is based on the aggregate of the
NAV of the Subsidiary and the value of the Secured Loan Notes issued by the
Subsidiary. Refer to note 11 for further details.
The valuation of the Co-living group loan
The Group's Co-living group loan was valued at the year end by combining
recovery values on realised assets with an estimate of recoverability of
amounts on the three key remaining properties. The estimates are based on
negotiations with prospective buyers and independent valuation reports.
Further, adjustments to reflect specific known transaction risks were applied
and additional assumptions were applied for professional fees required to
complete the sale of the remaining assets. Further information is given in
note 17.9.
(b) Critical judgements
Assessment as an investment entity
The Directors have concluded that the Company continues to meet the definition
of an investment entity.
Entities that meet the definition of an investment entity within IFRS 10
Consolidated Financial Statements are required to measure their subsidiaries
at fair value through profit or loss rather than consolidate.
The criteria which define an investment entity are as follows:
- an entity that obtains funds from one or more investors for the purpose of
providing those investors with investment services;
- an entity that commits to its investors that its business purpose is to
invest funds solely for returns from capital appreciation, investment income
or both; and
- an entity that measures and evaluates the performance of substantially all
of its investments on a fair value basis.
The Directors have concluded that the Company continues to meet the
characteristics of an investment entity in that it:
- raises funds from investors through the issue of equity, has more than one
investor and its investors are not related parties other than those disclosed
in note 18;
- invests in a portfolio of investments held by the Subsidiary for the purpose
of generating risk‑adjusted returns through regular distributions and
capital appreciation; and
- the Company's investments are held at fair value through profit or loss with
the performance of its portfolio evaluated on a fair value basis.
Accordingly, the Company's Subsidiary is not consolidated, but rather the
investment in the Subsidiary is accounted for at fair value through profit or
loss. The value of the investment in the Subsidiary is based on the aggregate
of the NAV of the Subsidiary and the value of the Secured Loan Notes issued by
the Subsidiary.
(c) Segmental information
The Directors view the operations of the Company as one operating segment,
being the investment portfolio of asset backed loans held through the
Subsidiary, which is a registered UK company. All significant operating
decisions made by the Board, as the chief operating decision maker, are based
upon analysis of the Subsidiary's investments as one segment. The financial
results from this segment are equivalent to the financial results of the
Company as a whole, which are evaluated regularly by the Directors.
Significant shareholders are disclosed in the Directors' report above.
3. Operating income
The table below analyses the operating income derived from the Company's
financial assets at fair value through profit or loss:
Year ended Year ended
31 December 31 December
2022 2021
£'000 £'000
Loan note interest realised 31,945 32,931
Unrealised (loss)/gain on financial assets at fair value through profit or
loss(1):
Debt - Secured Loan Notes up to £1,000,000,000(2) (17,700) (16,977)
Equity - representing one ordinary share in the Subsidiary 745 1,235
Realised loss on financial assets at fair value through profit or loss:
Debt - Secured Loan Notes up to £1,000,000,000(3) (1,326) -
Net loss on financial assets at fair value through profit or loss (18,281) (15,742)
(Loss)/gain on derivative financial instruments:
Unrealised (loss)/gain on forward foreign exchange contracts (506) 334
Realised gain on forward foreign exchange contracts 795 1,397
Realised loss on forward foreign exchange contracts (1,070) (403)
Net (loss)/gain on derivative financial instruments (781) 1,328
Net changes in fair value of financial assets and financial liabilities at 12,883 18,517
fair value through profit or loss
1. Refer to note 11 for further information.
2. Includes write-down in respect of the Co-living group loan and other
unrealised gains and losses in respect of discount rate adjustments, offset by
principal indexation of £1.4 million applied to certain loans.
3. Includes £1.0 million of foreign exchange losses upon repayment of certain
loans which are partially offset by gains of £0.8 million on forward foreign
exchange contracts.
The table below analyses the other income earned by the Company by type:
Year ended Year ended
31 December 31 December
2022 2021
£'000 £'000
Arrangement fee income 258 293
Commitment fee income 480 129
Early repayment fee income 760 2,475
Total 1,498 2,897
Accounting policy
Interest income and interest expense other than interest received on financial
assets held at fair value through profit or loss are recognised on an accruals
basis in the statement of comprehensive income.
Net movements in fair value of financial assets and financial liabilities at
fair value through profit or loss includes changes in the fair value of the
investment in the Subsidiary held at fair value through profit or loss, loan
note interest realised, principal indexation applied to certain loans and net
gain or loss on forward foreign exchange contracts.
Principal indexation is applied to certain loan notes where applicable. The
indexation is a contractually allowable inflationary adjustment to loan
principal calculated where permitted by a predefined mechanism in a loan
agreement. The effect of the adjustment is to increase or decrease the
fair value of those loan notes in line with the indexation factor which takes
account of the rate of inflation against a stipulated inflation threshold of
each relevant loan. The fair value of those loan notes are subsequently
adjusted accordingly.
Arrangement fee income comprises fees relating to the issue and set up of
Secured Loan Notes. The Investment Manager, at its discretion, is entitled to
an arrangement fee of up to 1% of the value of each investment made by the
Group. The Investment Manager generally expects the costs of any such fee to
be covered by the borrowers, and not the Company. To the extent any
arrangement fee negotiated by the Investment Manager with a borrower exceeds
1%, the benefit of any such excess is paid to the Company. The arrangement fee
income is recognised in the financial statements when contractual provisions
are met and the amounts become due.
Commitment fees are accounted for on an accruals basis and are paid by the
borrowers.
Early repayment fee income is income in relation to the redemption of loans
before maturity and is recognised in the financial statements when contractual
provisions are met and the amounts become due.
The Company holds derivative financial instruments comprising forward foreign
exchange contracts to hedge its exposure to movements in foreign currency
exchange rates on loans denominated in currency other than Pound Sterling. It
is not the Company's policy to trade in derivative financial instruments.
Forward foreign exchange contracts are stated at fair value, being the
difference between the agreed price of selling or buying the financial
instrument on a future date and the price quoted for selling or buying the
same or similar instrument on the statement of financial position date. The
Company does not apply hedge accounting and consequently all gains or losses
in fair value are recognised in the statement of comprehensive income.
4. Operating expenses
Year ended Year ended
31 December 31 December
2022 2021
£'000 £'000
Corporate administration and Depositary fees 590 613
Registrar fees 39 40
Audit fees 131 95
Legal and professional fees 67 38
Valuation Agent fees 186 178
Other 746 475
Total 1,759 1,439
Key service providers other than the Investment Manager (refer to note 18 for
disclosures of transactions with the Investment Manager):
Administrator and Company Secretary
The Company has appointed Apex Financial Services (Alternative Funds) Limited
as Administrator and Company Secretary. Fund accounting, administration and
company secretarial services are provided to the Company pursuant to an
agreement dated 28 September 2015. All Directors have access to the Company
Secretary, who provides guidance to the Board, through the Chairman, on
governance and administrative matters. The fee for the provision of
administration and company secretarial services during the year was £462,000
(31 December 2021: £479,000) of which £112,000 remains payable at year end
(31 December 2021: £119,000).
Depositary
Depositary services are provided to the Company by Apex Financial Services
(Corporate) Limited pursuant to an agreement dated 28 September 2015. The fee
for the provision of these services during the year was £128,000 (31 December
2021: £134,000) of which £31,000 remains payable at year end (31 December
2021: £66,000).
Accounting policy
Operating expenses and investment management fees in the statement of
comprehensive income are recognised on an accruals basis.
5. Auditor's remuneration
The following table summarises the remuneration paid to the Auditor for audit
and non-audit related services:
Year ended Year ended
31 December 31 December
2022 2021
£'000 £'000
Audit fees
Annual audit of the Company 131 95
Non-audit services
Review of the half-yearly report 36 39
Total 167 134
6. Directors' remuneration
The Directors of the Company were remunerated as follows:
Year ended Year ended
31 December 31 December
2022 2021
£'000 £'000
Alex Ohlsson 60 55
Colin Huelin FCA 55 50
Joanna Dentskevich 60 50
Marykay Fuller 55 45
Total 230 200
Directors' expenses 2 -
Total 232 200
Full details of the Directors' remuneration policy can be found in the
Directors' remuneration report above.
7. Finance expenses
Year ended Year ended
31 December 31 December
2022 2021
£'000 £'000
Arrangement fees relating to the RCF 224 236
Commitment fees relating to the RCF 297 250
Interest expense relating to the RCF 471 401
Total 992 887
Accounting policy
Finance expenses in the statement of comprehensive income comprise loan
arrangement and commitment fees which are accounted for on an accruals basis,
along with interest accrued on the RCF (refer to note 14) incurred in
connection with the borrowing of funds. Arrangement fees are amortised over
the life of the RCF.
8. Taxation
Profits arising in the Company for the year ended 31 December 2022 are subject
to tax at the standard rate of 0% (31 December 2021: 0%) in accordance with
the Income Tax (Jersey) Law 1961, as amended.
9. Dividends
Year ended Year ended
31 December 31 December
Pence 2022 2021
Quarter ended Dividend Per share £'000 £'000
Current year dividends
31 December 2022 2022 fourth interim dividend 1.58125 -(1) -
30 September 2022 2022 third interim dividend 1.58125 6,929 -
30 June 2022 2022 second interim dividend 1.58125 6,955 -
31 March 2022 2022 first interim dividend 1.58125 6,955 -
Total 6.32500 20,839 -
Prior year dividends
31 December 2021 2021 fourth interim dividend 1.57500 6,927 -(1)
30 September 2021 2021 third interim dividend 1.57500 - 6,927
30 June 2021 2021 second interim dividend 1.57500 - 6,927
31 March 2021 2021 first interim dividend 1.57500 - 6,927
Total 6.30000 6,927 20,781
31 December 2020 2020 fourth interim dividend 1.57500 - 6,934
Dividends in statement of changes in equity and cash flows 27,766 27,715
1. The fourth interim dividend was declared after the year end and is
therefore not accrued for as a provision in the financial statements.
On 26 January 2023, the Company announced a fourth interim dividend of 1.58125
pence per share amounting to £6.8 million which was paid on 3 March 2023 to
ordinary shareholders on the register at 3 February 2023.
Accounting policy
In accordance with the Company's Articles, in respect of the ordinary shares,
the Company will distribute the income it receives to the fullest extent that
is deemed appropriate by the Directors. Dividends due to the Company's
shareholders are recognised as a liability in the period in which they are
paid or approved by the Directors and are reflected in the statement of
changes in equity. Dividends declared and approved by the Company after the
statement of financial position date have not been recognised as a liability
of the Company at the statement of financial position date.
The Company pays dividends on a quarterly basis with dividends typically
declared in January, April, July and October and paid in or around February,
May, August and November in each financial year.
10. Earnings per share
Basic earnings per ordinary share are calculated by dividing profit for the
year attributable to ordinary shareholders of the Company by the weighted
average number of ordinary shares in issue during the year. Diluted earnings
per ordinary share are calculated by dividing the profit attributable to
ordinary shareholders by the diluted weighted average number of ordinary
shares.
Weighted
average
Earnings number of Pence
£'000 ordinary shares per share
Year ended 31 December 2022
Basic earnings per ordinary share 7,687 439,291,385 1.75
Diluted earnings per ordinary share 7,687 439,291,385 1.75
Adjusted earnings¹ per share 28,900 439,291,385 6.58
Year ended 31 December 2021
Basic earnings per ordinary share 14,972 439,895,094 3.40
Diluted earnings per ordinary share 14,972 439,895,094 3.40
Adjusted earnings¹ per share 31,784 439,895,094 7.22
11. Financial assets at fair value through profit or loss: investment in
Subsidiary
The Company's financial assets at fair value through profit or loss comprise
its investment in the Subsidiary, which represents amounts advanced to finance
the Group's investment portfolio in the form of Secured Loan Notes issued by
the Subsidiary to the Company and equity. The Company's investment in the
Subsidiary at 31 December 2022 comprised:
Year ended Year ended
31 December 31 December
2022 2021
Debt - Secured Loan Notes up to £1,000,000,000 £'000 £'000
Opening balance 443,647 443,855
Investment in Subsidiary 101,985 134,504
Capital repayments from Subsidiary (95,622) (117,735)
Realised loss on financial assets at fair value through profit or loss(2) (1,326) -
Unrealised (loss)/gain on financial assets and liabilities at fair value
through profit or loss:
Unrealised valuation loss(3) (20,370) (17,029)
Unrealised foreign exchange gain/(loss) 1,503 (983)
Other unrealised movements on investments(4) 1,167 1,035
Total unrealised loss on investments at fair value through profit or loss (17,700) (16,977)
Total 430,984 443,647
1. Alternative performance measure - refer below for definitions and
calculation methodology.
2. Includes £1.0 million of foreign exchange losses upon repayment of certain
loans which are partially offset by gains of £0.8 million on forward foreign
exchange contracts.
3. Comprises write-down of the Co-living group loan and other unrealised gains
and losses in respect of discount rate adjustments.
4. Attributable to the timing of the debt service payments and principal
indexation of £1,400,000 (31 December 2021: £24,000) applied to certain
loans.
The difference between the valuation of the Secured Loan Notes issued by the
Subsidiary to the Company and the underlying investments held by the
Subsidiary is as a result of payment timings, differing application of the
effective interest rate in respect of the underlying investments and
indexation, as set out in the table below:
31 December 31 December
2022 2021
Debt - Secured Loan Notes up to £1,000,000,000 £'000 £'000
Valuation of the underlying investments held by the Subsidiary 430,979 443,640
Interest rate differential 8 7
Unrealised gain on investments at fair value through profit or loss (3) -
Fair value of Secured Loan Notes 430,984 443,647
31 December 31 December
2022 2021
Equity - representing one ordinary share in the Subsidiary £'000 £'000
Opening balance 3,342 2,107
Unrealised gain on investment at fair value through profit or loss 745 1,235
Total 4,087 3,342
Financial assets at fair value through profit or loss 435,071 446,989
The above represents a 100% interest in the Subsidiary at year end 31 December
2022 (31 December 2021: 100%).
Secured Loan Notes
The Subsidiary has issued a loan note instrument to the Company for a
programme of up to £1 billion variable funding notes limited to the cash
available by the Company. Each series of loan notes issued has a maximum
nominal amount, fixed at the date of issue; a base amount and a subscribed
amount.
Accounting policy
The Company classifies its investment in the Subsidiary as financial assets at
fair value through profit or loss in accordance with IFRS 9 Financial
Instruments as set out below.
Financial assets at fair value through profit or loss
The category which includes financial assets at fair value through profit or
loss consists of financial instruments that have been designated at fair value
through profit or loss upon initial recognition. These financial assets are
designated on the basis that they are part of a group of financial assets
which are managed and have their performance evaluated on a fair value basis,
in accordance with the risk management and investment strategies of the
Company.
Upon initial recognition, the Company designates the investment in the
Subsidiary as part of 'financial assets at fair value through profit or loss'.
The investment in the Subsidiary is included initially at fair value, which
is taken to be its cost (excluding expenses incidental to the acquisition
which are written off in the statement of comprehensive income).
All financial assets for which fair value is measured or disclosed in the
financial statements are categorised within the fair value hierarchy.
Financial information about the financial assets of the Company is provided by
the Investment Manager to the Directors with the valuation of the portfolio
being carried out by the Valuation Agent.
The Company recognises a financial asset when, and only when, it becomes a
party to the contractual provisions of the instrument. Purchases or sales
of financial assets that require delivery of assets within the timeframe
generally established by regulation or convention in the marketplace are
recognised on the trade date, i.e. the date that the Company commits to
purchase or sell the asset.
A financial asset (or, where applicable, a part of a financial asset or part
of a group of similar financial assets) is derecognised when:
- the rights to receive cash flows from the asset have expired; or
- the Company has transferred its rights to receive cash flows from the asset
or has assumed an obligation to pay the received cash flows in full without
material delay to a third party under a pass-through arrangement; and
- either (a) the Company has transferred substantially all the risks and
rewards of the asset, or (b) the Company has neither transferred nor retained
substantially all the risks and rewards of the asset but has transferred
control of the asset.
When the Company transfers its rights to receive cash flows from an asset or
has entered into a pass-through arrangement, and has neither transferred nor
retained substantially all the risks and rewards of the asset nor transferred
control of the asset, the asset is recognised to the extent of the Company's
continuing involvement in the asset.
After initial measurement, the Company measures financial instruments
classified at fair value through profit or loss at fair value. Subsequent
changes in the fair value of financial instruments are recorded in the
statement of comprehensive income.
Fair value is the price that would be received to sell an asset in an orderly
transaction between market participants at the measurement date. For all other
financial instruments not traded in an active market, the fair value is
determined by using appropriate valuation techniques. Valuation techniques
used by the Valuation Agent include using recent arm's length market
transactions, referenced to appropriate current market data, and discounted
cash flow analysis, at all times making as much use of available and
supportable market data as possible.
An analysis of fair values of financial instruments and further details as to
how they are measured are provided in note 17.9.
12. Other receivables and prepayments
31 December 31 December
2022 2021
£'000 £'000
Arrangement fees - 64
Other income debtors 6 6
Prepayments 60 58
Total 66 128
Accounting policy
Other receivables and prepayments are recognised and carried at the lower of
their original invoiced value and recoverable amount or, where the time value
of money is material, at amortised cost. The Company recognises a loss
allowance for expected credit loss on other receivables where necessary.
13. Cash and cash equivalents
31 December 31 December
2022 2021
£'000 £'000
Cash and cash equivalents 10,311 10,108
Total 10,311 10,108
Accounting policy
Cash comprises cash in hand and demand deposits. Cash equivalents are
short-term with original maturities of three months or less and highly liquid
investments, that are readily convertible to known amounts of cash and which
are subject to an insignificant risk of changes in value.
14. Revolving credit facilities
31 December 31 December
2022 2021
£'000 £'000
Opening balance 19,899 5,000
Proceeds from amounts drawn on the RCF 51,550 40,250
Repayment of amounts drawn on the RCF (39,399) (25,351)
RCF drawn at the year end 32,050 19,899
Loan arrangement fees unamortised (143) (353)
Total 31,907 19,546
Any amounts drawn under the RCF are to be used in, or towards, the making of
investments (including a reduction of available commitment as an alternative
to cash cover for entering into forward foreign exchange contracts) in
accordance with the Company's investment policy.
On 19 August 2021, the Company entered into an agreement with RBSI to extend
the existing £50 million RCF by 24 months to August 2023, with an additional
one year extension option subject to lender approval. All terms of the RCF
remain unchanged except for the interest rate benchmark. Interest on amounts
drawn under the RCF was charged at LIBOR plus 2.10% per annum from 16 April
2019 until the facility was extended on 19 August 2021, when it was amended
and restated and the interest benchmark rate changed from LIBOR to SONIA (plus
a credit adjustment spread) plus a 2.10% margin. A commitment fee is payable
on undrawn amounts at a rate of 0.84% per annum.
The total costs incurred to extend the facility to August 2023 were £450,000,
of which £425,000 related to the arrangement fees and £25,000 in associated
legal fees. The legal fees are included as arrangement fees for reporting
purposes.
A total of £224,000 (31 December 2021: £236,000) of costs were amortised as
loan arrangement fees during the year and charged through the statement of
comprehensive income, refer to note 7.
The RCF with RBSI is secured against the investment in the Subsidiary.
Total drawdowns of £32.1 million were repayable at 31 December 2022 (31
December 2021: £19.9 million).
At year end, the sum of £2.3 million (31 December 2021: £2.0 million) had
been drawn down on the RCF as an alternative to cash cover for the seven open
forward foreign exchange contracts. This has restricted the amount available
for drawdown on the RCF, excluding existing drawdowns, to £15.7 million at
31 December 2022.
The RCF includes covenants which are measured in accordance with the facility
agreement. The covenants are as follows: loan to NAV value of less than 15%,
loan-to-value of eligible assets of less than 25% and an interest cover ratio
of six times. At 31 December 2022, the Company was in compliance with
all loan covenants in the RCF agreement.
The Company, through the Investment Manager, has commenced a review of its
financing arrangements with the intention of extending the RCF in advance of
the date of expiry in August 2023. Further information is included in note
2.1.
Leverage
For the purposes of the UK AIFM Regime, leverage is any method which increases
the Company's exposure, including the borrowing of cash and the use of
derivatives. It is expressed as a ratio between the Company's exposure and its
NAV and is calculated under the gross and commitment methods, in accordance
with the UK AIFM Regime.
The Company is required to state its maximum and actual leverage levels,
calculated as prescribed by the UK AIFM Regime, at 31 December 2022; figures
are as follows:
31 December 31 December
2022 2021
Maximum Actual Actual
Leverage exposure limit exposure exposure
Gross method 1.25 1.11 1.09
Commitment method 1.25 1.08 1.05
The leverage figures above represent leverage calculated under the UK AIFM
Regime methodology as follows:
31 December 31 December 31 December 31 December
2022 2022 2021 2021
Gross Commitment Gross Commitment
Leverage exposure £'000 £'000 £'000 £'000
Investments at fair value through profit or loss 435,071 435,071 446,989 446,989
Cash and cash equivalents - 10,311 - 10,108
Derivative financial instruments(1) 20,656 - 26,890 -
Total exposure under the UK AIFM Regime 455,727 445,382 473,879 457,097
Net assets 412,000 412,000 436,736 436,736
Leverage ratio 1.11 1.08 1.09 1.05
1. Equivalent position in the underlying assets of derivative financial
instruments using the conversion methodologies set out in the UK AIFM regime.
The Company's leverage limit under the UK AIFM Regime is 1.25, which equates
to a gearing limit of 25% of NAV. The Company has maintained significant
headroom against the limit throughout the year.
Accounting policy
All loans and borrowings are initially recognised at fair value less directly
attributable transaction costs. After initial recognition, interest bearing
loans and borrowings are subsequently measured at amortised cost using the
effective interest method. Borrowing costs are amortised over the lifetime of
the facility through the statement of comprehensive income.
15. Other payables and accrued expenses
31 December 31 December
2022 2021
£'000 £'000
Accruals 540 372
Loan commitment fee accrued 58 64
Loan interest accrued 15 39
Investment management fees 914 970
Total 1,527 1,445
Accounting policy
Other payables and accrued expenses are recognised initially at fair value and
subsequently stated at amortised cost using the effective interest method
where appropriate.
16. Authorised and issued share capital
31 December 2022 31 December 2021
Number Number
Share capital of shares £'000 of shares £'000
Ordinary shares issued at no par value and fully paid
Shares in issue at beginning of the year 442,033,518 444,414 442,033,518 444,414
Shares issued in the year - - - -
Total shares in issue 442,033,518 444,414 442,033,518 444,414
Treasury shares
Shares repurchased and held in treasury at beginning of the year (2,200,000) (1,807) (1,875,000) (1,514)
Shares repurchased in the year (5,682,459) (4,647) (325,000) (293)
Total shares repurchased and held in treasury (7,882,459) (6,454) (2,200,000) (1,807)
Total ordinary share capital excluding treasury shares 434,151,059 437,960 439,833,518 442,607
The Company's authorised share capital is represented by an unlimited number
of no par value ordinary shares. At 31 December 2022, the Company's issued
share capital comprised 442,033,518 ordinary shares (31 December 2021:
442,033,518), 7,882,459 of which are held in treasury (31 December 2021:
2,200,000).
The ordinary shares carry the right to dividends out of the profits available
for distribution as determined by the Board. Each holder of an ordinary share
is entitled to attend meetings of shareholders and, on a poll, to one vote
for each share held.
The Company may issue C shares which, when in issue, are classified as a
financial liability (refer to note 2.1). There were no C shares in issue at
31 December 2022 (31 December 2021: none).
Accounting policy
Upon issuance of equity shares, the consideration received is included in
equity.
Transaction costs incurred by the Company in issuing, acquiring or reselling
its own equity instruments are accounted for as a deduction from equity to the
extent that they are incremental costs directly attributable to the equity
transaction that otherwise would have been avoided.
No gain or loss is recognised in the statement of comprehensive income in
respect of the purchase, sale, issuance or cancellation of the Company's own
equity instruments.
17. Financial instruments
The table below sets out the carrying amounts of the Company's financial
assets and financial liabilities into categories of financial instruments.
31 December 31 December
2022 2021
£'000 £'000
Financial assets
Cash and cash equivalents 10,311 10,108
Other receivables 6 70
Total financial assets at amortised cost(1) 10,317 10,178
Derivative financial instruments 243 492
Financial assets at fair value through profit or loss 435,071 446,989
Total financial assets at fair value through profit or loss 435,314 447,481
Total financial assets 445,631 457,659
Financial liabilities
Derivative financial instruments (257) -
Other payables and accrued expenses (1,527) (1,445)
Revolving credit facilities (31,907) (19,546)
Financial liabilities at amortised cost(1) (33,691) (20,991)
Total financial liabilities (33,691) (20,991)
1. The carrying value of the financial assets and liabilities stated at
amortised cost approximates their fair value.
17.1 Derivative financial instruments
Derivative financial assets and liabilities comprise forward foreign exchange
contracts for the purpose of hedging foreign currency exposure of the Company
to Euro and US Dollar denominated loan investments made by the Subsidiary. The
investments represent 2.4% of the portfolio by value at the year end. The
Company intends to utilise the forward foreign exchange contracts on a rolling
basis, for the term of the investments.
The table below sets out the forward foreign exchange contracts held by the
Company at year end:
Fair value £'000
Principal Hedged Financial Financial
31 December 2022 Maturity amount amount assets liabilities
Contract EUR/GBP 4 January 2023 (£2,192,406) €2,500,000 - (26)
Contract EUR/GBP 4 January 2023 (£2,290,922) €2,610,506 - (25)
Contract EUR/GBP 8 March 2023 (£4,892,017) €5,717,300 - (193)
Contract GBP/EUR 8 March 2023 £5,027,081 (€5,717,300) 59 -
Contract EUR/GBP 22 March 2023 (£1,236,309) €1,400,614 - (10)
Contract EUR/GBP 3 October 2023 (£2,234,894) €2,495,706 - (3)
Total EUR/GBP (£7,819,467) €9,006,826 59 (257)
Contract USD/GBP 4 January 2023 (£2,724,746) $3,058,800 184 -
Total USD/GBP (£2,724,746) $3,058,800 184 -
Total (£10,544,213) 243 (257)
Fair value £'000
Principal Hedged Financial Financial
31 December 2021 Maturity amount amount assets liabilities
Contract EUR/GBP 5 January 2022 (£3,548,328) €4,102,222 102 -
Contract EUR/GBP 13 January 2022 (£11,772,735) €13,800,000 176 -
Contract EUR/GBP 2 March 2022 (£8,094,808) €9,401,310 185 -
Contract EUR/GBP 22 March 2022 (£1,773,917) €2,080,449 22 -
Total EUR/GBP (£25,189,788) €29,383,981 485 -
Contract USD/GBP 5 January 2022 (£2,218,241) $2,981,760 7 -
Total USD/GBP (£2,218,241) $2,981,760 7 -
Total (£27,408,029) 492 -
Information on the forward foreign exchange contracts executed post year end
can be found in note 20.
Accounting policy
Recognition of derivative financial assets and liabilities takes place when
the hedging contracts are entered into. They are initially recognised and
subsequently measured at fair value; transaction costs, where applicable, are
included directly in finance costs. The Company does not apply hedge
accounting and consequently all gains or losses are recognised in the
statement of comprehensive income in net change in fair value of financial
assets and financial liabilities through profit or loss.
17.2 Capital management
The Company's capital is represented by share capital comprising issued
ordinary share capital and its credit facilities, as detailed in notes 16 and
14 respectively.
The Company may seek to raise additional capital from time to time to the
extent that the Directors and the Investment Manager believe the Company will
be able to make suitable investments. The Company raises capital only when it
has a clear view of a robust pipeline of advanced investment opportunities to
ensure the rapid deployment of capital.
The Company may borrow up to 25% of its NAV at such time any such borrowings
are drawn down. Refer to note 14 for further information.
17.3 Financial risk management objectives
The Company has an investment policy and strategy that sets out the Company's
overall investment strategy and general risk management philosophy and has
established processes to monitor and control these in a timely and accurate
manner. These guidelines are subject to regular operational reviews undertaken
by the Investment Manager to ensure that the Company's policies are adhered to
as it is the Investment Manager's duty to identify and assist in the
management of risk. The Investment Manager reports regularly to the Directors
who have ultimate responsibility for the overall risk management approach.
The Directors and the Investment Manager ensure that all investment activity
is performed in accordance with investment guidelines. The Company's
investment activities expose it to various types of risks that are associated
with the financial instruments and markets in which it invests. Risk is
inherent in the Company's activities and it is managed through a process of
ongoing identification, measurement and monitoring. The financial risks to
which the Company is exposed include market risk (which includes interest rate
risk), credit risk, currency risk and liquidity risk.
As explained in notes 11 and 17, the Company's financial assets and
liabilities at fair value through profit or loss comprise the investment in
the Subsidiary and derivatives used for the purpose of hedging foreign
currency exposure. The Subsidiary is a holding vehicle existing solely to hold
the Company's investments and, therefore, exposure to market risk, interest
rate risk, credit risk, liquidity risk and credit and counterparty risk are
highly dependent on the performance of the Subsidiary's investments.
Geopolitical and market uncertainties
The Board and the Investment Manager note the significant increase in
political and economic uncertainty driven by the war in Ukraine, high
inflation, interest rates and a cost-of-living crisis, and the rapid change of
personnel in Government. The war in Ukraine continues to be monitored by the
Board and the Investment Manager for its wide-ranging impact on geopolitical
relationships and volatility in the energy market. The Company is
predominantly invested in the UK and has no investments in Ukraine, Russia or
Belarus. Equally, no borrowers have been subject to sanctions imposed due to
the war. Energy price increases have impacted across all sectors and have
become a focus of monitoring for the Investment Manager. To date, no material
adverse impact has been noted and increases have been absorbed by borrowers
within their operational budgets.
Climate risk
The Investment Manager has carried out a climate risk assessment for each
underlying portfolio asset to assess the actual and potential impacts of
climate-related risks and opportunities across the portfolio. The analysis
considered both physical and transition risks for each asset. The data
collated was based upon publicly available data on flood risk and EPC ratings,
supplemented by inputs from the Investment Manager's portfolio management team
and its investment management team. Further information is given in the
sustainability section above. Based on the climate risk analysis undertaken,
the Investment Manager does not currently propose to make any changes to
financial forecasts due to climate risk.
17.4 Market risk
The value of the investment in the Subsidiary is based on the aggregate of the
NAV of the Subsidiary and the value of the Secured Loan Notes issued by the
Subsidiary to the Company. The key driver of the Subsidiary's NAV is the
valuation of its portfolio of secured loan facilities issued to the Project
Companies.
There is a risk that market movements in interest rates, credit markets,
exchange rates and observable yields may decrease or increase the value of the
Subsidiary's assets without regard to the assets' underlying performance. The
Subsidiary's portfolio of assets is held at fair value, and valued on a
semi-annual basis by the Valuation Agent. Investments subject to discount rate
changes are valued on a quarterly basis. The Company's assets are stable with
predictable cash flows and are not exchange traded.
In assessing the expected future cash flows from each of the investments, the
Valuation Agent considers the movements in comparable credit markets and
publicly available information around each project.
The valuation principles used are based on a discounted cash flow methodology
where applicable (excluding the Co-living group loan); refer to note 17.9 for
further information. A fair value for each asset acquired by the Group is
calculated by applying a relevant market discount rate to the contractual cash
flow expected to arise from each asset.
The Valuation Agent determines the discount rate that it believes the market
would reasonably apply to each underlying investment taking, inter alia, into
account the following significant inputs:
- Pound Sterling interest rates;
- movements of comparable credit markets; and
- observable yield on other comparable instruments.
In addition, the following are also considered as part of the overall
valuation process:
- market activity and investor sentiment; and
- changes to the economic, legal, taxation or regulatory environment.
The Valuation Agent exercises its judgement in assessing the expected future
cash flows from each investment. Given that the investments are generally
fixed income debt instruments (in some cases with elements of inflation and/or
interest rate protection) or other investments with a similar economic effect,
the focus of the Valuation Agent is on assessing the likelihood of any
interruptions to the debt service payments, in light of the operational
performance of the underlying asset.
The valuations are reviewed by the Investment Manager and the Directors and
the subsequent NAV is reviewed by the Investment Manager and the Directors on
a quarterly basis.
The table below shows how changes in discount rates affect the changes in the
valuation of financial assets through profit or loss. The range of discount
rate changes has been determined with reference to historic discount rate
changes made by the Valuation Agent.
31 December 2022
Change in discount rates (1.00%) (0.50%) 0.00% 0.50% 1.00%
Valuation of financial assets at fair value through profit or loss (£'000) 449,822 442,280 435,071(1,2) 428,171 421,559
Change in value of financial assets at fair value (£'000) 14,751 7,209 - (6,900) (13,512)
31 December 2021
Change in discount rates (1.00%) (0.50%) 0.00% 0.50% 1.00%
Valuation of financial assets at fair value through profit or loss (£'000) 459,795 453,246 446,989(1,2) 441,004 435,270
Change in value of financial assets at fair value (£'000) 12,806 6,257 - (5,985) (11,719)
1. Includes the fair value of the Co-living group loan which is not valued on
a discounted cash flow basis; see note 17.9 for further details.
2. Including the NAV of the Subsidiary.
17.5 Interest rate risk
Interest rate risk arises from the effects of fluctuations in the prevailing
level of market interest rates on the fair value of financial assets, future
cash flows and borrowings.
Interest rate risk has the following effect:
Fair value of financial assets
Interest rates are one of the factors which the Valuation Agent takes into
account when valuing the financial assets.
Future cash flows
The Company primarily invests, via its Subsidiary, in a diversified portfolio
of investments which are secured against, or comprise, contracted, predictable
medium to long‑term cash flows and/or physical assets. The Group's
investments will predominantly be in the form of medium to long-term fixed or
floating rate loans which are secured against cash flows and/or physical
assets which are predominantly UK based.
Interest rate hedging may be carried out to seek to provide protection against
falling interest rates in relation to assets that do not have a minimum fixed
rate of return acceptable to the Company in line with its investment policy
and strategy. The Company has not entered into an interest rate hedging
agreement during the year, or in the prior year.
Borrowings
During the year, the Company made use of its RCF, which was used towards the
making of investments in accordance with the Company's investment policy.
Details of the RCF are given in note 14.
Any potential financial impact of movements in interest rates on the cost of
borrowings to the Company is mitigated by the short-term nature of such
borrowings.
The drawn amount under the RCF at 31 December 2022 was £32.1 million (31
December 2021: £19.9 million).
The following tables show an estimate of the sensitivity of the drawn amounts
under the RCF to interest rate changes of 100 and 200 basis points in a twelve
month period, with all other variables being held constant.
31 December 2022
Change in interest rates 2.0% 1.0% 0% (1.0%) (2.0%)
Value of interest expense (£'000) 2,445 2,092 1,772 1,451 1,099
Changes in interest expense (£'000) 673 321 - (321) (673)
31 December 2021
Change in interest rates 2.0% 1.0% 0% (1.0%) (2.0%)
Value of interest expense (£'000) 874 655 456 257 38
Changes in interest expense (£'000) 418 199 - (199) (418)
Other financial assets and liabilities
Bank deposits, payables and accrued expenses are exposed to and affected by
fluctuations in interest rates. However, the impact of interest rate risk on
these assets and liabilities is not considered material.
17.6 Credit risk
Credit risk refers to the risk that the counterparty to a financial instrument
will fail to discharge an obligation or commitment that it has entered into
with the Company. Credit risk is generally higher when a non-exchange traded
financial instrument is involved because the counterparty is not an exchange
clearing house. The assets classified at fair value through profit or loss do
not have a published credit rating, however the Investment Manager monitors
the financial position and performance of the Project Companies on a regular
basis to ensure that credit risk is appropriately managed.
The Company is exposed to differing levels of credit risk on all its assets.
Per the statement of financial position, the Company's total exposure to
credit risk is £445.7 million (31 December 2021: £457.7 million) represented
by its investments, receivables, financial derivatives and cash.
At the year end, the Company had exposure to five key relationship
counterparties which together represent 56% of the loans in the portfolio by
value. This exposure is across 26 loans, multiple assets, sectors and
strategies. The loans are also with different borrower entities (in some cases
with different ownership structures) within these relationships for different
projects and assets. The Directors therefore believe that there is no
concentration of credit risk.
Cash is held at a number of financial institutions to spread credit risk. Cash
awaiting investment is currently held on behalf of the Company at banks
carrying a minimum rating of A-2, P-2 or F2 from Standard and Poor's, Moody's
and Fitch respectively.
The Company's investments comprise debt and equity securities in the
Subsidiary and, therefore, the credit risk of the Company's investments is
highly dependent on the performance of the Subsidiary's investment portfolio,
which is valued on a semi-annual basis by the Valuation Agent. Investments
which may be subject to discount rate changes are valued on a quarterly basis.
The Valuation Agent takes into account the credit risk associated with these
investments in their valuation.
The Investment Manager continues to focus on the work-out process in respect
of the Co-living group loan and stabilisation of the multi-use community
facilities. These assets were most negatively impacted by the Covid-19
pandemic and associated restrictions. Further information on these loans is
provided above. The Company has exposure to a portfolio of supported living
properties, of which three of the properties have seen a period of reduced
rent due to challenges at the registered provider, causing cash flow issues
for the borrower. The Investment Manager continues to work closely with the
borrower and the registered provider to seek a resolution to this issue. The
remaining loans in the portfolio continue to report good performance.
Credit risk is considered by the Valuation Agent both during the origination
process and at valuation updates. The Company's investments are stable with
predictable cash flows and are not exchange traded. Depending on the nature of
the underlying projects, residual credit risk is considered by reference to a
number of factors including, but not limited to: relative benchmark analysis,
comparable bond pricing, market analysis such as the capital asset pricing
model, and fundamental credit analysis of a borrower's underlying performance
by reference to any applicable loan covenants.
After an investment is made, the forecasts are regularly updated with
information provided by the borrowers in order to monitor ongoing financial
performance. In addition, the credit risk associated with each borrower is
mitigated by way of the assets of the Project Company, being secured against
the loan on either a senior or subordinated basis. At year end, the
concentration of credit risk to any one counterparty did not exceed 20%
(31 December 2021: <20%) of the Company's total assets, in line with its
investment restrictions.
The Directors currently consider the fair value of the financial instruments
at par plus accumulated interest to be reasonable. The impact on fair value
attributable to any change in credit risk will continue to be reviewed at each
quarter end and specifically when investments mature and their ongoing
performance can be assessed. Credit risk is incorporated by the Valuation
Agent into the discount rate applied to the financial assets at fair value
through profit or loss. Discount rate sensitivity analysis is disclosed in
note 17.4.
17.7 Currency risk
The Group's investments at 31 December 2022 were denominated in Pound
Sterling, except for four investments which are denominated in Euros and one
investment which is denominated in USD (31 December 2021: five
Euro-denominated investments and one USD-denominated investment). The
investments are secured against Euro-valued and USD-valued contracted cash
flows. The Company's only currency exposure is through the trading activities
of its investee companies. The Company engages in currency hedging, in the
form of five forward foreign exchange contracts, to reduce the risk of adverse
movements in currency exchange rates in relation to its non-Pound Sterling
denominated investments. Realised and unrealised gains or losses on forward
foreign exchange contracts are disclosed in note 3.
As an alternative to cash cover/margin required on these forward foreign
exchange contracts, the Company has made use of its RCF, as disclosed in
note 14.
17.8 Liquidity risk
Liquidity risk is the risk that the Company may not be able to generate
sufficient cash resources to settle its obligations in full as they fall due
or can only do so on terms that are materially disadvantageous. The Company is
a closed-ended investment company and therefore assets do not need to be
liquidated to meet redemptions, and sufficient liquidity is maintained to meet
obligations as they fall due. The Company ensures it maintains adequate
reserves by continuously monitoring forecast and actual cash flows and
matching the maturity profiles of financial assets and liabilities. During the
year ended 31 December 2022, investments made by the Group were funded by
Company cash reserves, amounts received from repayments and the utilisation of
the RCF.
The table below analyses all of the Company's assets and liabilities into
relevant maturity groupings based on the remaining period from 31 December
2022 to the contractual maturity date. The Directors have elected to present
both assets and liabilities in the liquidity disclosure below to illustrate
the net liquidity exposure of the Company.
All cash flows in the table below are presented on an undiscounted basis.
Less than One to Three to Greater than
one month three months twelve months twelve months Total
31 December 2022 £'000 £'000 £'000 £'000 £'000
Financial assets
Cash and cash equivalents 10,311 - - - 10,311
Derivative financial instruments - 5,027 - - 5,027
Other receivables and prepayments 6 7 53 - 66
Financial assets at fair value through profit or loss 28,581 15,563 75,743 477,388 597,275
Total financial assets 38,898 20,597 75,796 477,388 612,679
Financial liabilities
Derivative financial instruments (7,208) (6,128) (2,235) - (15,571)
Other payables and accrued expenses (51) (203) (3) - (257)
Revolving credit facilities - - (32,050) - (32,050)
Total financial liabilities (7,259) (6,331) (34,288) - (47,878)
Net exposure 31,639 14,266 41,508 477,388 564,801
Less than One to Three to Greater than
one month three months twelve months twelve months Total
31 December 2021 £'000 £'000 £'000 £'000 £'000
Financial assets
Cash and cash equivalents 10,108 - - - 10,108
Other receivables and prepayments 70 7 51 - 128
Financial assets at fair value through profit or loss 1,508 37,760 111,492 428,341 579,101
Total financial assets 11,686 37,767 111,543 428,341 589,337
Financial liabilities
Derivative financial instruments (17,539) (9,869) - - (27,408)
Other payables and accrued expenses (39) (1,317) (89) - (1,445)
Revolving credit facilities - - - (19,546) (19,546)
Total financial liabilities (17,578) (11,186) (89) (19,546) (48,399)
Net exposure (5,892) 26,581 111,454 408,795 540,938
The Directors' assessment of the Company's ability to continue as a going
concern, in note 2.1, includes an assessment of liquidity risk. The Board has
concluded that the Company will be able to generate sufficient cash resources
to settle its obligations in full as they fall due.
17.9 Fair values of financial assets
Valuation of financial instruments
The Company measures fair values using the following fair value hierarchy that
reflects the significance of inputs used in making the measurements.
Categorisation within the hierarchy has been determined on the basis of the
lowest level input that is significant to their fair value measurement of the
relevant assets as follows:
- Level 1 - valued using quoted prices unadjusted in active markets for
identical assets or liabilities;
- Level 2 - valued by reference to valuation techniques using observable
inputs for the asset or liability other than quoted prices included in Level
1; and
- Level 3 - valued by reference to valuation techniques using inputs that are
not based on observable market data for the asset or liability.
An investment is always categorised as Level 1, 2 or 3 in its entirety. In
certain cases the fair value measurement for an investment may use a number of
different inputs that fall into different levels of the fair value hierarchy.
In such cases, an investment level within the fair value hierarchy is based on
the lowest level of input that is significant to the fair value measurement.
The assessment of the significance of a particular input to the fair value
measurement requires judgement and is specific to the investment.
The Valuation Agent has carried out semi-annual fair valuations of the
financial assets of the Subsidiary (quarterly for investments which may be
subject to discount rate changes). The same discount rates, determined by the
Valuation Agent, are applied to the future cash flows of the Secured Loan
Notes issued by the Subsidiary to the Company to determine the fair value of
the assets of the Company.
The Company recognises transfers between levels of the fair value hierarchy at
the end of the reporting period during which the change has occurred.
The tables below set out fair value measurements of financial instruments at
the year end, by the level in the fair value hierarchy into which the fair
value measurement is categorised. The amounts are based on the value
recognised in the statement of financial position. All fair value measurements
are recurring.
Level 1 Level 2 Level 3 Total
31 December 2022 £'000 £'000 £'000 £'000
Financial assets at fair value through profit or loss - - 435,071 435,071
Derivative financial instruments (assets) - 243 - 243
Total - 243 435,071 435,314
Level 1 Level 2 Level 3 Total
31 December 2022 £'000 £'000 £'000 £'000
Derivative financial instruments (liabilities) - (257) - (257)
Total - (257) - (257)
Level 1 Level 2 Level 3 Total
31 December 2021 £'000 £'000 £'000 £'000
Financial assets at fair value through profit or loss - - 446,989 446,989
Derivative financial instruments (assets) - 492 - 492
Total - 492 446,989 447,481
The derivative financial instruments are classified as Level 2 as observable
market data is used for valuation and pricing.
The Directors have classified the financial instruments relating to
'Investments in Subsidiary' as Level 3 due to the limited number of comparable
and observable market transactions in this sector. The primary input for Level
3 at year end is the discount rates for these investments (excluding the
Co-living group loan; refer below for further information); discount rates are
considered to be primarily modelled rather than market observed. The secured
loan facilities that the Subsidiary has invested in are also classified as
Level 3.
The following table shows a reconciliation of all movements in the fair value
of financial instruments categorised within Level 3 between the beginning
and end of the year:
31 December 31 December
2022 2021
£'000 £'000
Opening fair value of financial instruments at fair value through profit or 446,989 445,962
loss
Investment in Subsidiary 101,985 134,504
Capital repayments from Subsidiary (95,622) (117,735)
Realised (loss)/gain on financial assets at fair value through profit or loss:
Debt - Secured Loan Notes up to £1,000,000,000(1) (1,326) -
Unrealised (loss)/gain on financial assets at fair value through profit or
loss(2):
Debt - Secured Loan Notes up to £1,000,000,000 (17,700) (16,977)
Equity - representing one ordinary share in the Subsidiary 745 1,235
Closing fair value of financial instruments at fair value through profit or 435,071 446,989
loss
1. Includes £1.0 million of foreign exchange losses upon repayment of certain
loans which are partially offset by gains of £0.8 million on forward foreign
exchange contracts.
2. Refer to note 11 for further information.
For the Company's financial instruments categorised as Level 3, changing the
discount rate used to value the underlying instruments alters the fair value.
In determining the discount rate for calculating the fair value of financial
assets at fair value through profit or loss, reference is made to Pound
Sterling interest rates, movements of comparable credit markets and observable
yield on comparable instruments. Hence, movements in these factors could give
rise to changes in the discount rate. A change in the discount rate used to
value the Level 3 investments would have the effect on the valuation as shown
in the table in note 17.4.
The fair value of the investment in the Subsidiary is based on the aggregate
of the NAV of the Subsidiary and the value of the Secured Loan Notes issued by
the Subsidiary. At 31 December 2022, the NAV of the Subsidiary was as follows:
31 December 31 December
2022 2021
£'000 £'000
GABI UK(1) 4,087 3,342
1. Refer to note 11 for further information.
The key driver of the NAV of the Subsidiary is the valuation of its portfolio
of secured loan facilities issued to the Project Companies.
The Secured Loan Notes issued by the Subsidiary that the Company has
subscribed for, are valued on a discounted cash flow basis in line with the
model used by the Valuation Agent, applying the following discount rates:
Fair Key
value(1) Valuation unobservable Discount
£'000 technique inputs rate
Financial assets at fair value through profit or loss - 31 December 2022 430,671(2) Discounted cash flow Discount rate 8.4%(3)
Financial assets at fair value through profit or loss - 31 December 2022 4,400(4) Net realisable value Discount rate -
Financial assets at fair value through profit or loss - 31 December 2021 428,189(2) Discounted cash flow Discount rate 7.5%(3)
Financial assets at fair value through profit or loss - 31 December 2021 18,800(4) Net realisable value Discount rate -
1. Including the NAV of the Subsidiary.
2. Balance excludes the fair value of the Co-living group loan which is not
valued on a discounted cash flow basis.
3. Weighted average discount rate(5).
4. Fair value of the Co-living group loan which is not valued on a discounted
cash flow basis, see below for further information.
5. Alternative performance measure - refer below for definitions and
calculation methodology.
The investments in Project Companies held by the Subsidiary (excluding the
Co-living group loan) are valued on a discounted cash flow basis, in line with
the methodology used by the Valuation Agent. At the year end, discount rates
ranged from 6-13%% (31 December 2021: 5-13%).
At 31 December 2022, the Group's Co-living group loan was valued at £4.4
million (31 December 2021: £18.8 million), which represents an estimate of
recoverability of amounts secured against three key underlying properties and
seven other underlying properties (31 December 2021: six key underlying
properties and four other underlying properties). The value is based on (i)
realised sales values of three assets (31 December 2021: three assets), (ii)
negotiated purchase prices with buyers in ongoing sales processes and (iii)
valuation reports from independent valuers. Adjustments to reflect known
transaction risks, increased debt costs and professional fees were also made
to the valuation of the loan.
The Directors review the valuation report provided by the Valuation Agent
which includes reference to the inputs used in the valuation of investments
and the appropriateness of their classification in the fair value hierarchy.
In particular, the Directors are satisfied that the significant inputs into
the determination of the discount rate adopted by the Valuation Agent are
pursuant to the Valuation Agent engagement letter. Should the valuation
approach change, causing an investment to meet the characteristics of a
different level of the fair value hierarchy, it will be reclassified
accordingly.
During the year, there were no transfers of investments between levels.
18. Related party disclosures
As defined by IAS 24 Related Party Disclosures, parties are considered to be
related if one party has the ability to control the other party or exercise
significant influence over the other party in making financial or operational
decisions. Subsidiary companies are also deemed to be related parties as
they are members of the same group of companies.
Directors
The Directors of the Company are considered to be the key management personnel
of the Company. Directors' remuneration for the year (including reimbursement
of Company-related expenses) totalled £232,000 (31 December 2021: £200,000).
At 31 December 2022, liabilities in respect of these services amounted to
£58,000 (31 December 2021: £64,000).
At 31 December 2022, the Directors of the Company held directly or indirectly,
and together with their family members, 161,171 ordinary shares
(31 December 2021: 161,171).
Alex Ohlsson is the managing partner of Carey Olsen, the Company's Jersey
legal advisers. Carey Olsen has provided legal services to the Company during
the year. Carey Olsen maintains procedures to ensure that the Chairman has no
involvement in the provision of legal services to the Company. The Company
maintains procedures to ensure that the Chairman takes no part in any decision
to engage the services of Carey Olsen. During the year, the aggregate sum of
£2,000 (31 December 2021: £4,000) was paid to Carey Olsen in respect of
legal work undertaken, of which £nil (31 December 2021: £nil) is outstanding
at year end.
Investment Manager
The Company is party to an investment management agreement with the Investment
Manager, which was most recently amended and restated in December 2020,
pursuant to which the Company has appointed the Investment Manager to provide
discretionary portfolio and risk management services relating to the assets
on a day‑to‑day basis in accordance with its investment objective and
policies, subject to the overall control and supervision of the Directors.
As a result of the responsibilities delegated under this investment management
agreement, the Company considers it to be a related party by virtue of being
'key management personnel'. Under the terms of the investment management
agreement, the notice period of the termination of the Investment Manager by
the Company is twelve months.
For its services to the Company, the Investment Manager receives an investment
management fee which is calculated and paid quarterly in arrears at an annual
rate of 0.9% per annum of the prevailing NAV of the Company less the value of
the cash holdings of the Company pro rata for the period for which such cash
holdings have been held. The Investment Manager receives an annual fee of
£25,000 in relation to its role as the Company's AIFM plus annual increases
in accordance with the rate of the RPI.
During the year, the Company incurred £3,752,000 (31 December 2021:
£3,942,000) in respect of the services outlined above; £3,724,000 (31
December 2021: £3,916,000) in respect of investment management services and
£28,000 (31 December 2021: £26,000) in respect of AIFM services provided by
the Investment Manager. At 31 December 2022, liabilities in respect of these
services amounted to £921,000 (31 December 2021: £977,000).
The Investment Manager, at its discretion, is entitled to an arrangement fee
of up to 1% of the value of each investment made by the Company.
The Investment Manager typically expects the cost of any such fee to be
covered by the borrowers, and not the Company. To date, such fees in respect
of 39 of the Group's investments have been met and paid by borrowers. During
the year, the Investment Manager received £730,000 (31 December 2021:
£506,000) from arrangement fees which had been met by the borrowers and
£328,000 (31 December 2021: £171,000) from arrangement fees which had been
met by the Company. To the extent any arrangement fee negotiated by the
Investment Manager with a borrower exceeds 1%, the benefit of any such excess
is paid to the Company.
A number of the directors and employees of the Investment Manager also sit on
the board of the Subsidiary.
At 31 December 2022, the key management personnel of the Investment Manager
held directly or indirectly, and together with their family members, 1,113,097
ordinary shares in the Company (31 December 2021: 1,209,651 ordinary shares).
At 31 December 2022, the directors and/or shareholders of the Investment
Manager, and their family members, directly or indirectly own an equity
interest in the Subsidiary's student accommodation investments. These
investments are valued by the Valuation Agent in line with the rest of the
portfolio and were approved by the Board at the time of acquisition.
Subsidiary
At 31 December 2022, the Company owns a 100% (31 December 2021: 100%)
controlling stake in the Subsidiary. The Subsidiary is considered to be a
related party by virtue of being part of the same group. The Company
indirectly owns 100% of GABI Housing Limited, GABI GS Limited, GABI Blyth
(prior its dissolution on 7 June 2022) and GABI Housing 2 Limited; for
further information, refer to note 1.
The following tables disclose the transactions and balances between the
Company and the Subsidiary:
31 December 31 December
2022 2021
Transactions £'000 £'000
Intercompany income received
Other income 1,240 2,604
Arrangement fee income 258 293
Loan note interest realised 31,945 32,931
Total 33,443 35,828
31 December 31 December
2022 2021
Balances £'000 £'000
Intercompany balances receivable - 64
Principal value of intercompany holdings within financial assets at fair value 469,463 464,425
through profit or loss
19. Reconciliation of NAV
This note reconciles the NAV reported in the financial statements to the
published NAV.
Total Per share
£'000 pence
NAV at 31 December 2022 as published on 26 January 2023 (unaudited) 412,000 94.90
NAV at 31 December 2022 as per the financial statements 412,000 94.90
Total Per share
£'000 pence
NAV at 31 December 2021 as published on 25 January 2022 (unaudited) 436,726 99.29
NAV at 31 December 2021 as per the financial statements 436,726 99.29
20. Subsequent events after the report date
On 26 January 2023, the Company announced a fourth interim dividend of 1.58125
pence per share amounting to £6.8 million which was paid on 3 March 2023 to
ordinary shareholders on the register at 3 February 2023.
In addition to the above, the following events occurred post year end:
- the Group made four advances totalling £13.9 million and received 27
repayments totalling £12.5 million;
- the Company drew down an aggregate amount of £10.0 million on the RCF with
RBSI, resulting in a total drawn amount of £42.1 million (not including the
amount drawn down as alternative to cash cover for the forward exchange
contracts);
- the Company's forward foreign exchange contracts shown in note 17.1 matured
and were replaced on the same terms as the existing contracts;
- the Company has bought back 6,325,000 ordinary shares at a total cost of
£5.0 million, which are held in treasury;
- the Lender group has sold its interests in the last development asset. This
transaction does not have a material impact on the fair value of the Co-Living
group loan at 31 December 2022.
- a payment comprising interest and principal amounts was missed by one of the
football finance positions. The total position represents 0.5% of the
portfolio. Further updates are included above; and
- All other expected cash receipts were received by the Group for the three
month period to 31 March 2023.
21. Ultimate controlling party
It is the view of the Board that there is no ultimate controlling party.
SHAREHOLDER INFORMATION
Key dates
March
Payment of fourth interim dividend
April
Annual results announced
May
Annual General Meeting
June
Payment of first interim dividend
Company's half year end
August
Payment of second interim dividend
September
Interim results announced
December
Payment of third interim dividend
December
Company's year end
NAV publication
The Company's NAV is released to the LSE on a quarterly basis and is
published on the Company's website.
Further information
Copies of the Company's annual and half‑yearly reports, quarterly investor
reports, stock exchange announcements and further information on the Company
can be obtained from the Company's website.
Warning to users of this report
This report is intended solely for the information of the person to whom it is
provided by the Company, the Investment Manager or the Administrator. This
report is not intended as an offer or solicitation for the purchase of shares
in the Company and should not be relied on by any person for the purpose of
accounting, legal or tax advice or for making an investment decision. The
payment of dividends and the repayment of capital are not guaranteed by the
Company. Any forecast, projection or target is indicative only and not
guaranteed in any way, and any opinions expressed in this report are not
statements of fact and are subject to change, and neither the Company nor the
Investment Manager is under any obligation to update such opinions.
Past performance is not a reliable indicator of future performance, and
investors may not get back the original amount invested. Unless otherwise
stated, the sources for all information contained in this report are the
Investment Manager and the Administrator. Information contained in this report
is believed to be accurate at the date of publication, but none of the
Company, the Investment Manager and the Administrator gives any representation
or warranty as to the report's accuracy or completeness. This report does not
contain and is not to be taken as containing any financial product advice or
financial product recommendation. None of the Company, the Investment Manager
and the Administrator accepts any liability whatsoever for any loss (whether
direct or indirect) arising from any use of this report or its contents.
ALTERNATIVE PERFORMANCE MEASURES
The Board and the Investment Manager assess the Company's performance using a
variety of measures that are not defined under IFRS and are therefore classed
as APMs. Where possible, reconciliations to IFRS are presented from the APMs
to the most appropriate measure prepared in accordance with IFRS.
All items listed below are IFRS financial statement line items unless
otherwise stated. APMs should be read in conjunction with the statement of
comprehensive income, statement of financial position, statement of changes in
equity and statement of cash flows, which are presented in the financial
statements section of this report. The APMs below may not be directly
comparable with measures used by other companies.
Adjusted earnings/EPS
In respect of a period, the EPS adjusted to remove the impact of fair
valuation movements of investments in such period arising from: (i) discount
rate adjustments; and (ii) upward or downward revaluations associated with the
performance of investments.
For the For the
For the year ended For the year ended
year ended 31 December year ended 31 December
31 December 2022 31 December 2021
2022 (Pence per 2021 (Pence per
Adjusted EPS £'000 share) £'000 share)
Basic and diluted earnings 7,687 1.75 14,972 3.40
Increase/(decrease) to weighted average discount rates(1) 6,775 1.54 (2,798) (0.64)
Write-down of the Co-living group loan(2) 14,438 3.29 19,610(3) 4.46
Adjusted earnings/EPS 28,900 6.58 31,784 7.22
1. Refer to relevant APM below for further information.
2. Refer to Investment Manager's report above for further information.
3. The comparative for the year ended 31 December 2021 was calculated on the
basis of a comparison of bookcost to fair valuation. The effect of applying a
fair valuation to fair valuation comparison basis, in line with the current
year, would reduce the figure to £13.3 million or 3.02 pence per share.
Annualised total shareholder return since IPO
Total shareholder return(1) expressed as a time weighted annual percentage.
Source: Bloomberg
Average LTV
The ratio of a loan or mortgage to a property valuation, averaged across the
Company's property investments, expressed as a percentage. This ratio
demonstrates the headroom in the underlying asset values to absorb negative
movements in property valuations.
Average NAV
The average net asset value of the Company over the reporting year.
For the For the
NAV per share NAV per share year ended year ended
31 December 31 December 31 December 31 December
2022 2021 2022 2021
Quarter ended (pence) (pence) £'000 £'000
31 March 2022/2021 99.36 102.49 437,005 450,804
30 June 2022/2021 98.45 102.71 433,031 451,737
30 September 2022/2021 96.18 98.94 423,016 435,165
31 December 2022/2021 94.90 99.29 412,000 436,726
Average NAV 97.22 100.86 426,263 443,608
Discount/average discount
The amount, expressed as a percentage, that the Company's shares trade below
the prevailing NAV per share. This metric is shown at a point in time or as an
average over the stated period.
Dividend cover ratio
Ratio of earnings to dividends calculated as dividends per share divided by
EPS.
For the For the
year ended year ended
31 December 31 December
2022 2021
Total profit and comprehensive income (£'000) 7,687 14,972
Weighted average number of shares 439,291,385 439,895,094
Basic EPS (p) 1.75 3.40
Adjusted EPS(1) (p) 6.58 7.22
Dividends (p) 6.325(2) 6.30
Dividend cover ratio (basic) 0.28 0.54
Dividend cover ratio (adjusted) 1.04 1.15
Dividend yield
Total dividend per share declared for the period annualised, relative to the
closing share price at the period end, expressed as a percentage.
IRR
IRR is the interest rate at which the net present value of all the cash flows
(both positive and negative) from a project or investment equal zero.
The internal rate of return is used to evaluate the attractiveness of a
project or investment.
Ongoing charges ratio
Ongoing charges ratio (previously "total expense ratios" or "TERs") is a
measure of the annual percentage reduction in shareholder returns as a result
of recurring operational expenses assuming markets remain static and the
portfolio is not traded.
This is a standard performance metric across the investment industry and
allows comparability across the sector and it is calculated in accordance with
the AIC's recommended methodology.
For the For the
year ended year ended
31 December 31 December
2022 2021
Ongoing charges £'000 £'000
Investment management fees 3,724 3,916
Directors' remuneration 232 200
Operating expenses 1,759 1,439
Total expenses 5,715 5,555
Non-recurring expenses (492) (209)
Total 5,223 5,346
Average NAV(1) 426,263 443,608
Ongoing charges ratio 1.2 1.2
1. Refer to relevant APM above for further information.
2. Total dividend of 6.325 pence includes a quarterly dividend of 1.58125
pence per share for the quarter to 31 December 2022, which was declared post
year end.
Premium/average premium
The amount, expressed as a percentage, that the Company's shares trade above
the prevailing NAV per share. This metric is shown at a point in time or
as an average over the stated period.
Total shareholder return
A measure of the performance of a company's shares over the stated period. It
combines share price movements and dividends to show the total return to the
shareholder expressed as a percentage.
It assumes that dividends are reinvested in the shares at the time the shares
are quoted ex dividend.
This is a standard performance metric across the investment industry and
allows comparability across the sector.
Source: Bloomberg.
Total NAV return
A measure of the performance of a company's NAV over the stated period. It
combines NAV movements and dividends to show the total return to the
shareholder expressed as a percentage.
It assumes that dividends are reinvested in the shares at the time the shares
are quoted ex dividend.
This is a standard performance metric across the investment industry and
allows comparability across the sector.
Source: Bloomberg.
Weighted average annualised yield
The weighted average yield on the investment portfolio calculated based on the
yield of each investment weighted by the principal balance outstanding
on such investment, expressed as a percentage. The weighted average yield
does not include principal indexation.
The yield forms a component of investment cash flows used for the valuation of
financial assets at fair value through profit or loss under IFRS 9.
Weighted average discount rate
A rate of return used in valuation to convert a series of future anticipated
cash flows to present value under a discounted cash flow approach.
This approach is used for the valuation of financial assets at fair value
through profit or loss under IFRS 9.
The average rate is calculated with reference to the relative size of each
investment.
Weighted average number of shares
The weighted average number of shares is calculated by multiplying the number
of shares in issue during the year after buybacks of shares, by the
percentage of the reporting period for which that number applies for each
period. The total weighted average number of shares at the year end was
439,291,385 shares.
GLOSSARY
Adjusted EPS
Refer to APMs section above
AGM
The Annual General Meeting of the Company
AIC
Association of Investment Companies
AIC Code
AIC Code of Corporate Governance
AIF
Alternative Investment Fund
AIFM
Alternative Investment Fund Manager
Annualised total shareholder return since IPO
Refer to APMs section above
APM
Alternative performance measure
Articles
The articles of association of the Company
Average LTV
Refer to APMs section above
BCP
Business continuity plan
Benefits to end users in society
The Company defines benefits to end users in society as those aligning with
the UN SDGs
Bidco
The special purpose company established to hold assets for sale as part of the
Co-living group restructure
Borrower
Owner of a Project Company to which the Group advances loans
BPA-free
Bisphenol A free
BREEAM
Science-based suite of validation and certification systems for sustainable
built environment
Carey Olsen
Carey Olsen Jersey LLP
CHP loan
A loan secured against combined heat and power engines
CIF Law
Collective Investment Funds (Jersey) Law 1988
CIL
Community Infrastructure Levy
CNG
Compressed natural gas stations supplying 100% renewable waste‑derived
biomethan
Company
GCP Asset Backed Income Fund Limited
CPI
Consumer price index
Detrimental to the environment
Depletion of resources such as quality of air, water and soil; the destruction
of ecosystems; habitat destruction; the extinction of wildlife; and pollution
Discount
Refer to APMs section above
Dividend cover ratio
Refer to APMs section above
DTRs
Disclosure Guidance and Transparency Rules of the FCA
EDCI
ESG Data Convergence Initiative
EPC
Energy Performance Certificate
EPS
Earnings per share
ESG
Environmental, social and governance
FCA
Financial Conduct Authority
FRC
Financial Reporting Council
FTE
Full-time equivalent
GABI Blyth
GABI (Blyth) Limited
GABI GS
GABI GS Limited
GABI Housing
GABI Housing Limited
GABI Housing 2
GABI Housing 2 Limited
GABI UK
GCP Asset Backed Income (UK) Limited
GCP Infra
GCP Infrastructure Investments Limited, a third party company advised by the
Investment Manager
GHG
Greenhouse gas
GRESB
Global Real Estate Sustainability Benchmark
Gross assets
Total assets less other receivables and prepayments
Group
The Company, GABI UK, GABI GS, GABI Housing, GABI Housing 2 and GABI Blyth
H&S
Health and safety
HMO
Houses of multiple occupancy
IAS
International Accounting Standards
IASB
International Accounting Standards Board
IFRIC
International Financial Reporting Interpretations Committee
IFRS
International Financial Reporting Standards
IPO
Initial public offering
IRR
Internal rate of return
Refer to APMs section above
ISAE 3402
International Standard on Assurance Engagements
ISO
International Organisation for Standardisation
ISSB
International Sustainability Standards Board
Jersey Company Law
The Companies (Jersey) Law 1991, as amended
JFSC
Jersey Financial Services Commission
KPI
Key performance indicator
LIBOR
London inter-bank offered rate
Listing Rules
FCA Listing Rules
LSE
London Stock Exchange
LTV
Loan-to-value
MAR
EU Market Abuse Regulation
Market capitalisation
Value of a company traded on the LSE, calculated as total number of shares
multiplied by closing share price
Mezzanine
Mezzanine loans are those which rank behind senior loans in the event that a
company fails to fulfil its repayment obligations
MiFID II
The UK version of MiFID II which is part of UK law by virtue of the European
Union (Withdrawal) Act 2018
NAV
Net asset value
NAV total return
Refer to APMs section above
O&M
Operations and maintenance
Ongoing charges ratio
Refer to APMs section above
Premium
Refer to APMs section above
PRI
Principles for Responsible Investment
Project Company
A special purpose company which owns and operates an asset
RAG
Red, Amber, Green
RBSI
The Royal Bank of Scotland International Limited
RCF
Revolving credit facility
RHI
Renewable Heat Incentive
RPI
Retail price index
Secured Loan Notes
Loan notes issued to the Company
Senior
Senior loans are those that take priority over unsecured or otherwise more
"junior" debt such as mezzanine loans in the event that a company fails to
fulfil its repayment obligations
SMEs
Small and medium-sized enterprises
SONIA
Sterling Overnight Index Average
Subsidiary and/or GABI UK
GCP Asset Backed Income Fund (UK) Limited
TCFD
Task Force on Climate-related Financial Disclosures
Total shareholder return
Refer to APMs section above
UK AIFM Regime
Together, The Alternative Investment Fund Managers Regulations 2013 (as
amended by The Alternative Investments Fund Managers (Amendment etc.) (EU
Exit) Regulations 2019) and the Investment Funds sourcebook forming part of
the FCA Handbook, as amended from time to time
UK Code
UK Corporate Governance Code
UN SDGs
United Nations Sustainable Development Goals
Weighted average annualised yield
Refer to APMs section above
Weighted average discount rate
Refer to APMs section above
CORPORATE INFORMATION
The Company
GCP Asset Backed Income Fund Limited
12 Castle Street
St Helier
Jersey JE2 3RT
Directors and/or the Board
Alex Ohlsson (Chairman)
Colin Huelin FCA
Joanna Dentskevich
Marykay Fuller
Administrator, secretary and registered office of the Company
Apex Financial Services (Alternative Funds) Limited
12 Castle Street
St Helier
Jersey JE2 3RT
Tel: +44 (0)20 4549 0700
Advisers on English law
Gowling WLG (UK) LLP
4 More London Riverside
London SE1 2AU
Stephenson Harwood LLP
1 Finsbury Circus
London EC2M 7SH
Advisers on Jersey law
Carey Olsen Jersey LLP
47 Esplanade
St Helier
Jersey JE1 0BD
Broker
Investec Bank plc
30 Gresham Street
London EC2V 7QP
Depositary
Apex Financial Services (Corporate) Limited
12 Castle Street
St Helier
Jersey JE2 3RT
Independent Auditor
PricewaterhouseCoopers CI LLP
37 Esplanade
St Helier
Jersey JE1 4XA
Investment Manager and AIFM
Gravis Capital Management Limited
24 Savile Row
London W1S 2ES
Principal banker and lender
Royal Bank of Scotland International Limited
71 Bath Street
St Helier
Jersey JE4 8PJ
Public relations
Quill Communications
107 Cheapside
London EC2V 6DN
Registrar
Link Market Services (Jersey) Limited
12 Castle Street
St Helier
Jersey JE2 3RT
Security Trustee
Gravis Capital Management Limited
24 Savile Row
London W1S 2ES
Share Register Analyst
Orient Capital Limited
65 Gresham Street
London EC2V 7NQ
Valuation Agent
Mazars LLP
Tower Bridge House
St Katharine's Way
London E1W 1DD
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