REG-JZ Capital Ptnrs Ltd: Annual Report and Financial Statements
08/06/2023 10:30
JZ CAPITAL PARTNERS LIMITED (the “Company” or “JZCP”)
(a closed-end investment company incorporated with limited liability under the
laws of Guernsey with registered number 48761)
ANNUAL REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED 28 FEBRUARY 2023
LEI: 549300TZCK08Q16HHU44
(Classified Regulated Information, under DTR 6 Annex 1 section 1.1)
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF THE MARKET
ABUSE REGULATION (EU) NO. 596/2014 WHICH FORMS PART OF UK LAW BY VIRTUE OF THE
EUROPEAN UNION (WITHDRAWAL) ACT 2018 ("MAR").
8 June 2023
JZ Capital Partners, the London listed fund that has investments in US and
European micro-cap companies and US real estate, announces its preliminary
results for the year ended 28 February 2023.
Financial and Operational Highlights
· NAV per share of $4.06. The prior year NAV per share as at 28
February 2022, has been restated to $4.03 per share ($4.29 per share before
restatement).(1)
· NAV of $314.5 million (FYE 28/02/22: $327.1 million)
· Total realisation and distribution proceeds of $184.1 million
(FYE 28/02/22: $65.8 million), including the sale of JZCP’s investments in
Evriholder (a subsidiary of Deflecto Holdings, LLC), Flow Control and Testing
Services, its co-investment in New Vitality, and the partial sale of
Industrial Services Solutions.
· The US micro-cap portfolio has overall performed well, while the
European portfolio continues to be challenged by the economic effects of the
recession in Europe and war in Ukraine. The Company is working towards
realisations in both portfolios as market conditions allow.
· The Company has two remaining properties with equity value:
Esperante, an office building in West Palm Beach, Florida, and 247 Bedford
Avenue, a retail building with Apple as the primary tenant, in Williamsburg,
Brooklyn. Due to newly received appraisals, the portfolio experienced a net
write-up of 9 cents per share.
( 1 ) The NAV per share at 28 February 2022, as reported in the Annual Report
and Financial Statements dated 14 June 2022 was $4.29. However, due to a prior
period restatement this has been subsequently adjusted to $4.03 (28/02/22).
Further details on this can be found in Note 2 to the Financial Statements.
Investment Policy and Liquidity
· The Company remains focused on the implementation of its New
Investment Policy. This policy focuses on realising the maximum value from the
Company’s investment portfolio and, after repaying its debt obligations,
returning capital to shareholders.
· The Company redeemed in full its £38.8 million of Convertible
Unsecured Loan Stock (CULS) and £57.6 million of Zero Dividend Preference
Shares (ZDPs) on their respective maturity dates.
· The Company also redeemed early and in full the $31.5 million of
Subordinated Notes provided by affiliates of Jay Jordan and David Zalaznick.
· Consequently, the Company’s outstanding debt is limited to its
$45.0 million Senior Credit Facility due 26 January 2027.
David Macfarlane, Chairman of JZCP, said: “Our view of the outlook for the
Company remains substantially unchanged to that reported in the Interim
Report. We have achieved a number of successful realizations during the
period, which has generated substantial liquidity and allowed us to
significantly reduce our debt obligations and achieve financial stability.
The Board’s view is that in the current uncertain economic and financial
market conditions, it may take more time to deliver on the New Investment
Policy than might have been expected a year ago. However, the Company is
well-positioned to weather financial pressures from an economic downturn or
periods of volatility, which should allow the Investment Adviser the time
needed to maximise the value of the portfolio and implement the policy in an
orderly manner. The Board expects that in due course a significant amount of
capital will be returned to shareholders.”
Market Abuse Regulation:
The information contained within this announcement is inside information as
stipulated under MAR. Upon the publication of this announcement, this inside
information is now considered to be in the public domain. The person
responsible for arranging the release of this announcement on behalf of the
Company is David Macfarlane, Chairman.
For further information:
Ed Berry / Kit Dunford +44 (0)7703 330 199 / +44
(0)7717 417 038
FTI Consulting
David Zalaznick
+1 212 485 9410
Jordan/Zalaznick Advisers, Inc.
Matt
Smart
+44 (0) 1481 745 228
Northern Trust International Fund
Administration Services (Guernsey) Limited
About JZ Capital Partners
JZCP has investments in US and European micro-cap companies, as well as real
estate properties in the US.
JZCP’s Investment Adviser is Jordan/Zalaznick Advisers, Inc. (“JZAI”)
which was founded by David Zalaznick and Jay Jordan in 1986. JZAI is supported
by teams of investment professionals in New York, Chicago, London and Madrid.
In August 2020, the Company's shareholders approved changes to the Company’s
investment policy. Under the new policy, the Company will make no further
investments except in respect of which it has existing obligations or to
continue selectively to support the existing portfolio. The intention is to
realise the maximum value of the Company's investments and, after repayment of
all debt, to return capital to shareholders.
JZCP is a Guernsey domiciled closed-ended investment company authorised by the
Guernsey Financial Services Commission. JZCP's shares trade on the Specialist
Fund Segment of the London Stock Exchange.
For more information please visit www.jzcp.com.
Chairman's Statement
The Directors present the results for the Company for the financial year ended
28 February 2023. The NAV per share of the Company has declined from $4.29 as
of 28 February 2022 (as reported in the Annual Report dated 12 June 2023 and
before the subsequent prior year reclassification and remeasurement which
restated the NAV to $4.03) to $4.06 as of 28 February 2023.
This decline results mainly from the write-down of the investment in Toro
Finance as well as the write-down attributable to the part sale of ISS, offset
by substantial write-ups and realisations above NAV in the portfolio of JZHL
Secondary Fund LP (the “Secondary Fund”), in which the Company owns a
Special Limited Partnership interest.
Investment Policy and Liquidity
As a result of substantial realisations over the past eighteen months, the
financial position of the Company has been stabilised. These realisations
included Flow Control and Testing Services (both portfolio companies of the
Secondary Fund), Salter Labs, ISS (a part sale) and Evriholder.
On their respective due dates, the Company redeemed in full its £38.8 million
of Convertible Unsecured Loan Stock as well as £57.6 million of Zero Dividend
Preference Shares; in addition, the Company redeemed early and in full the
$31.5 million of Subordinated Notes provided by affiliates of Jay Jordan and
David Zalaznick. Consequently, the Company’s outstanding debt is limited to
its $45 million senior credit facility (the “Senior Credit Facility”) due
26 January 2027, which may be repaid early without penalty at any time. In
addition, the Senior Credit Facility provides for up to an additional $25
million in first lien delayed draw term loan, none of which has been drawn.
The Company’s ability to access the delayed draw term loan facility expires
on January 26, 2024. As at 31 May 2023, the Company has cash and treasuries of
approximately $99 million.
The Board and the Investment Adviser remain focused on the implementation of
the new investment policy (the “New Investment Policy”) to realise maximum
value from the Company’s investments and, after the repayment of all debt,
to return capital to shareholders. Under the New Investment Policy, the
Company will limit further investment to where it has existing obligations or
selectively to support the existing portfolio.
The Board’s view is that in the current uncertain economic and financial
market conditions, prudence requires a conservative maintenance of maximum
liquidity; nevertheless, the Board will keep under close review the timing of
the redemption of the Senior Credit Facility.
Over the last two years, the Investment Adviser has achieved several
significant realisations in the portfolio; however, the Board believes that in
the current climate, it may be difficult to maintain this pace. As we said in
the Interim Report, the market conditions for achieving realisations have
become more challenging than at this point last year. Furthermore, certain of
our remaining portfolio assets require additional time to develop in order to
maximize their value. We must also highlight that where the Company is a
co-investor, the decision regarding the timing of a realisation does not lie
with the Investment Adviser.
As well as keeping under close review the timing of the repayment of the
Senior Credit Facility, the Board will likewise closely monitor when it can
commence return of capital.
US and European Micro-cap Portfolios
While our US micro-cap portfolio has overall performed well (with material
realisations in the US portfolio including Flow Control and Testing Services
(both portfolio companies of the Secondary Fund), ISS (a part sale) and
Evriholder), our European portfolio continues to be challenged by the economic
effects of the recession in Europe and war in Ukraine. The Company continues
to work towards realisations in both portfolios as market circumstances allow.
Real Estate portfolio
The Company has two remaining properties with equity value: Esperante, an
office building in West Palm Beach, Florida, and 247 Bedford Avenue, a retail
building with Apple as the primary tenant, in Williamsburg, Brooklyn.
Due to newly received appraisals at the calendar year-end, the real estate
portfolio experienced a net write-up of 9 cents per share.
Restatement to Correct Historical Error in Classification and Associated
Measurement of Asset
The Company’s investment in Toro Finance has been reclassified to fair value
through profit or loss from amortised cost as at 1 March 2021 and 28 February
2022, leading to the loan being remeasured on these dates. Further details on
this prior year restatement can be found in Note 2 to the Financial
Statements.
Outlook
Our view of the outlook for the Company remains substantially unchanged to
that reported in the Interim Report. The Company is committed to delivering on
the New Investment Policy. For the reasons mentioned above, it will probably
take more time than might have been expected a year ago. The Company is well-
positioned to weather potential financial pressures from an economic downturn
or period of volatility in the financial markets, which should allow the
Investment Adviser the time needed to maximise the value of the portfolio and
implement the New Investment Policy in an orderly manner. The Board expects
that in due course a significant amount of capital will be returned to
shareholders.
David Macfarlane
Chairman
7 June 2023
Investment Adviser's Report
Dear Fellow Shareholders,
We are pleased to report that our Company has achieved some significant
milestones recently, most notably the redemption of the Zero Dividend
Preference Shares (“ZDPs”) at their stated maturity in early October 2022
and the early redemption of the Subordinated Notes in February 2023. JZCP
heads into the beginning of its new fiscal year (the year ending February 28,
2024) with a strong and stable balance sheet, which will continue to provide
the foundation for completing the build-out of existing assets, realizing
investments, paying down debt and returning capital to shareholders.
With regards to our efforts to fortify JZCP’s balance sheet over the past
two years, we successfully executed the following transactions, among others:
· We agreed to personally provide a $31.5 million liquidity
facility (the "Subordinated Notes") at 6.0% interest to JZCP (i.e., at the
same rate as the CULS), which was approved by shareholders.
· JZCP paid off its CULS (£38.8 million) in full and on their
stated due date while at the same time maintaining a cash cushion.
· The Company repaid its previous senior credit facility (the
“Previous Senior Credit Facility”) with clients and funds managed by
Cohanzick Management, LLC and CrossingBridge Advisors, LLC in an amount of
approximately $52.9 million, prior to such facility’s maturity date of 12
June 2022.
· On 26 January 2022, the Company entered into a new five-year term
senior secured loan facility (the “New Senior Credit Facility”) with
WhiteHorse Capital Management LLC. The New Senior Credit Facility consists of
a $45.0 million first lien term loan (which was drawn at close) and up to an
additional $25.0 million in first lien delayed draw term loan (which remains
undrawn and expires on 26 January 2024). The terms of the New Senior Credit
Facility represent a substantial improvement to those of the Previous Senior
Credit Facility, including a lower interest cost and longer maturity – the
New Senior Credit Facility is due on 26 January 2027.
· In June and August 2022, the JZHL Secondary Fund LP (the
“Secondary Fund”) made two distributions to JZCP, totaling approximately
$97.4 million. Pursuant to the Secondary Fund’s waterfall, in which JZCP has
a Special LP Interest, the Company expects to receive approximately 37.5% of
all further distributions received by the Secondary Fund. As of 28 February
2023, JZCP still has approximately $80.4 million of remaining value in the
Secondary Fund.
· In October 2022, JZCP paid off its ZDPs (£57.6 million) in full
and on their stated maturity.
· In February 2023, JZCP redeemed early its Subordinated Notes
($31.5 million) in full, while maintaining a significant cash cushion.
While our US micro-cap portfolio has overall performed well, our European
portfolio continues to be challenged by economic headwinds in Europe and the
effects of the war in Ukraine. Notwithstanding these challenges, we continue
to pursue several significant realizations in our European portfolio, which
will return capital to JZCP.
The Company’s two remaining real estate assets that have equity value are
247 Bedford Avenue in Brooklyn, New York (where Apple is the principal
tenant), and the Esperante office building in West Palm Beach, Florida. Due to
newly received appraisals at year-end, the real estate portfolio experienced a
net write-up of 9 cents per share.
As of 28 February 2023, our US micro-cap portfolio consisted of 12 businesses,
which includes three ‘verticals’ and five co-investments, across nine
industries. Our European micro-cap portfolio consisted of 17 companies across
six industries and seven countries.
Net Asset Value ("NAV")
JZCP’s NAV per share decreased 23 cents, or approximately 5.4%, during the
twelve-month period.
NAV per Ordinary share as of 1 March 2022 (as reported 12 June 2022) $4.29
Restatement of Prior Year NAV
- European micro-cap (0.26)
Change in NAV due to capital gains and accrued income
+ US micro-cap 0.34
- European micro-cap (0.20)
+ Real estate 0.09
+ Other investments 0.01
+ Interest on cash and treasuries 0.02
+ Foreign exchange effect 0.01
- Finance costs (0.11)
- Expenses (0.13)
NAV per Ordinary share as of 28 February 2023 $4.06
The US micro-cap portfolio continued to perform well during the six-month
period, delivering a net increase of 34 cents per share. This was primarily
due to net accrued income of 3 cents and write-ups at co-investment Deflecto
(30 cents) and the JZHL Secondary Fund portfolio (78 cents). One cent of
escrows was received as well.
Offsetting these increases were decreases at the ISS vertical (62 cents),
co-investments New Vitality and Orizon (5 cents and 4 cents, respectively) and
other US micro-cap portfolio company Avante (7 cents).
Our European portfolio decreased 46 cents during the twelve-month period, due
to net write downs at European portfolio companies in our JZI Fund III, L.P.
portfolio (18 cents) and the write down of the direct loan to Toro Finance (28
cents).
Due to newly received appraisals at year-end, the real estate portfolio
experienced a net write-up of 9 cents per share.
Returns
The chart below summarizes cumulative total shareholder returns and total NAV
returns for the most recent one-year, three-year and five-year periods.
28.2.2023 28.2.2022 (1) 29.2.2020 28.2.2018
Share price (in GBP) £1.58 £1.05 £2.58 £4.51
NAV per share (in USD) $4.06 $4.29 $6.14 $9.98
NAV to market price discount 53.0% 67.2% 46.3% 37.7%
1 year 3 year 5 year
return return return
Total Shareholders' return (GBP) 50.0% (39.0%) (65.1%)
Total NAV return per share (USD) (1) (5.4%) (33.9%) (59.3%)
(1) The restated NAV per share at 28 February 2022, after a prior period
adjustment was $4.03. The restated Total NAV return per share for the year
ended 28 February 2023 is 0.7%.
Portfolio Summary
Our portfolio is well-diversified by asset type and geography, with 29 US and
European micro-cap investments across eleven industries. The European
portfolio itself is well-diversified geographically across Spain, Italy,
Portugal, Luxembourg, Scandinavia and the UK.
Below is a summary of JZCP’s assets and liabilities at 28 February 2023 as
compared to 28 February 2022 (before restatement of prior year numbers). An
explanation of the changes in the portfolio follows:
28.2.2023 28.2.2022
US$'000 US$'000
US micro-cap portfolio 127,811 284,162
European micro-cap portfolio 71,966 100,350
Real estate portfolio 31,156 23,597
Other investments 25,683 23,533
Total Private Investments 256,616 431,642
Treasury bills 90,600 3,394
Cash and cash equivalents 11,059 43,656
Total Treasuries and Cash 101,659 47,050
Other assets 168 70
Total Assets 358,443 478,762
Senior Credit Facility 43,181 42,573
Zero Dividend Preferred Shares - 75,038
Subordinated Notes - 32,293
Other liabilities 764 1,719
Total Liabilities 43,945 151,623
Total Net Assets 314,498 337,139
US Micro-Cap Portfolio
As you know from previous reports, our US portfolio is grouped into industry
‘verticals’ and co-investments. As of December 4, 2020, certain of our
verticals and co-investments are now grouped under JZHL Secondary Fund, LP
(“JZHL” or the “Secondary Fund”). JZCP has a continuing interest in
the Secondary Fund through a Special LP Interest, which entitles JZCP to
certain distributions from the Secondary Fund.
Our ‘verticals’ strategy focuses on consolidating businesses under
industry executives who can add value via organic growth and cross company
synergies. Our co-investments strategy allows for greater diversification of
our portfolio by investing in larger companies alongside well-known private
equity groups.
The US micro-cap portfolio continued to perform well during the six-month
period, delivering a net increase of 34 cents per share. This was primarily
due to net accrued income of 3 cents and write-ups at co-investment Deflecto
(30 cents) and the JZHL Secondary Fund portfolio (78 cents). One cent of
escrows was received as well.
Offsetting these increases were decreases at the ISS vertical (62 cents),
co-investments New Vitality and Orizon (5 cents and 4 cents, respectively) and
other US micro-cap portfolio company Avante (7 cents).
European Micro-Cap Portfolio
As anticipated in the Investment Adviser’s Report as of 31 August 2022, our
European portfolio has experienced further net write-downs at year-end, due in
large part to the ongoing economic challenges in Europe and the effects of the
war in Ukraine. For the twelve-month period, our European portfolio decreased
46 cents, due to net write downs at European portfolio companies in our JZI
Fund III, L.P. portfolio (18 cents) and the write down of our direct loan to
Toro Finance (28 cents).
JZCP invests in the European micro-cap sector through its approximately 18.8%
ownership of JZI Fund III,
L.P. As of 28 February 2023, Fund III held 13 investments: five in Spain, two
in Scandinavia, two in Italy, two in the UK and one each in Portugal and
Luxembourg. JZCP held direct loans to a further two companies in Spain: Docout
and Toro Finance.
Real estate Portfolio
The Company’s two remaining real estate assets that have equity value are
247 Bedford Avenue in Brooklyn, New York (where Apple is the principal
tenant), and the Esperante office building in West Palm Beach, Florida. Due to
newly received appraisals at year-end, the real estate portfolio experienced a
net write-up of 9 cents per share.
We look forward to reporting on our progress at both properties in the coming
months.
Other investments
Our asset management business in the US, Spruceview Capital Partners, has
continued to make encouraging progress since our last report to you.
Spruceview addresses the growing demand from corporate pensions, endowments,
family offices and foundations for fiduciary management services through an
Outsourced Chief Investment Officer (“OCIO”) model as well as customized
products/solutions per asset class.
During the fiscal year, Spruceview’s mandate for a portfolio of private
markets investments for a Mexican trust (or “CERPI”) was increased by $255
million, bringing total assets for this mandate to $1.3 billion. In addition,
Spruceview won a $200 million mandate for a portfolio of private markets
investments for a Colombian public pension fund administrator, as well as an
expanded advisory mandate for a $372 million employee savings plan sponsored
by a Mexican corporate client. Further, the firm received over $46 million in
additional contributions to the corporate pension plans to which it provides
advisory services. Spruceview also received commitments of over $20 million
for a new private markets investments fund targeting growth buyout fund
investments in the US, with the potential to receive additional commitments in
subsequent closings in the coming months.
Spruceview also maintained a pipeline of potential client opportunities and
continued to provide investment management oversight to the pension funds of
the Mexican and Canadian subsidiaries of an international packaged foods
company, as well as portfolios for family office clients, and a growing series
of private market funds.
As previously reported, Richard Sabo, former Chief Investment Officer of
Global Pension and Retirement Plans at JPMorgan and a member of that firm’s
executive committee, is leading a team of 22 investment, business and product
development, legal and operations professionals.
Realisations
New Vitality
In July 2022, JZCP received a distribution from the sale of co-investment New
Vitality totaling approximately $7.4 million.
JZHL Secondary Fund LP
In June and August 2022, the Secondary Fund made two distributions to JZCP,
totaling approximately $97.4 million. Pursuant to the Secondary Fund’s
waterfall, in which JZCP has a Special LP Interest, the Company expects to
receive approximately 37.5% of all further distributions received by the
Secondary Fund.
ISS (Partial Sale)
In December 2022, JZCP received a distribution from the partial sale of ISS,
totaling approximately $22.5 million; in addition, the Company may receive up
to a further approximately $8.3 million, which will be payable post-closing
pursuant to a standard escrow arrangement that is subject to customary final
closing adjustments. JZCP continues to maintain an interest in ISS through a
new investment vehicle, Industrial Service Solutions WC L.P. (“ISS WC”).
The value attributable to JZCP's interest in ISS WC is approximately $21.1
million as of 28 February 2023.
Evriholder
In January 2023, Deflecto Holdings, LLC (“Deflecto”), one of the Company's
US micro-cap co-investments, sold its interest in one of its subsidiaries,
Evriholder. This transaction resulted in JZCP receiving a distribution of
approximately $54.3 million. JZCP’s continuing interest in Deflecto is
valued at $12.3 million as of 28 February 2023.
Outlook
The past two years have been a major turnaround for JZCP, highlighted by
significant realizations in our US portfolio, particularly the Secondary Fund
Portfolio. We have now paid off the CULS and ZDPs in full and at their stated
maturities; additionally, we recently redeemed early in full the Subordinated
Notes. With just $45.0 million outstanding on the New Senior Facility due 26
January 2027 and more than $101 million in cash and cash equivalents, the
Company has the ability to continue to build-out and maximize the value of its
remaining portfolio.
We continue to work diligently on realizations in both our US and European
portfolios and will take advantage of market opportunities as conditions
permit. In the meantime, we will continue to build our existing portfolio
companies which we believe is the most effective way to return significant
capital to our ordinary shareholders.
We remain dedicated to maximizing value for our fellow shareholders.
Thank you for your continued support.
Yours faithfully,
Jordan/Zalaznick Advisers, Inc.
7 June 2023
Investment Portfolio
28 February 2023
Percentage
Cost (1) Value of Portfolio
US$'000 US$'000 %
US Micro-cap portfolio
US Micro-cap Fund
JZHL Secondary Fund L.P. (2) Invested in six companies in the US micro-cap sector:
Total JZHL Secondary Fund L.P. valuation 34,876 80,403 23.2
US Micro-cap (Vertical)
INDUSTRIAL SERVICES SOLUTIONS WC, L.P (“ISS”) (3) Provider of aftermarket maintenance, repair, and field services for critical process equipment throughout the US
Total Industrial Services Solutions valuation 21,139 25,655 7.4
US Micro-cap (Co-investments)
DEFLECTO Deflecto designs, manufactures and sells innovative plastic products to multiple industry segments 12,174 12,269 3.5
ORIZON Manufacturer of high precision machine parts and tools for aerospace and defence industries 3,899 3,840 1.1
Total US Micro-cap (Co-investments) 16,073 16,109 4.6
US Micro-cap (Other)
AVANTE HEALTH SOLUTIONS Provider of new and professionally refurbished healthcare equipment 8,140 4,644 1.3
NATIONWIDE STUDIOS Processor of digital photos for pre-schoolers 26,324 1,000 0.3
Total US Micro-cap (Other) 34,464 5,644 1.6
Total US Micro-cap portfolio 106,552 127,811 36.8
European Micro-cap portfolio
EUROMICROCAP FUND 2010, L.P. Invested in European Micro-cap entities 1 - -
JZI FUND III, L.P. At 28 February 2023, was invested in thirteen companies in the European micro-cap sector: 62,903 66,786 19.2
Total European Micro-cap (measured at Fair Value) 62,904 66,786 19.2
Debt Investments
DOCOUT (4) Provider of digitalisation, document processing and storage services 2,777 3,695 1.1
TORO FINANCE Provides short term receivables finance to the suppliers of major Spanish companies 21,619 1,485 0.4
XACOM (4) Supplier of telecom products and technologies 2,055 - -
Debt Investments (Loans to European Micro-cap companies) 26,451 5,180 1.5
Total European Micro-cap portfolio 89,355 71,966 20.7
Real Estate portfolio
247 BEDFORD AVENUE Prime retail asset in northern Brooklyn, NY 17,717 6,298 1.8
ESPERANTE An iconic building on the downtown, West Palm Beach skyline 14,983 24,858 7.2
JZCP REALTY Other Properties held - no equity value 8,409 - -
Total Real Estate portfolio 41,109 31,156 9.0
Other investments
BSM ENGENHARIA Brazilian-based provider of supply chain logistics, infrastructure services and equipment rental 6,115 459 0.1
JZ INTERNATIONAL Fund of European LBO investments - 750 0.2
SPRUCEVIEW CAPITAL Asset management company focusing primarily on managing endowments and pension funds 33,455 24,474 7.1
Total Other investments 39,570 25,683 7.4
Listed investments
U.S. Treasury Bills - Maturity 2 March 2023 33,161 33,496 9.6
U.S. Treasury Bills - Maturity 16 March 2023 22,277 22,458 6.5
U.S. Treasury Bill - Maturity 18 May 2023 34,594 34,646 10.0
Total Listed investments 90,032 90,600 26.1
Total - portfolio 366,618 347,216 100.0
(1) Original book cost incurred by JZCP adjusted for subsequent transactions.
(2) Notional cost of the Company's interest in JZHL Secondary Fund being
$34.876 million which is calculated in accordance with IFRS, and represents
the fair value of the Company's LP interest on recognition adjusted for
subsequent distributions.
(3) Co-investment with Fund A, a Related Party (Note 25).
(4) Classified as loan at amortised cost.
JZHL Secondary Fund LP
In December 2020, the Company completed the sale of its interests in certain
US microcap portfolio companies (the "Secondary Sale") to a secondary fund led
by Hamilton Lane Advisors, L.L.C. ("Hamilton Lane"), one of the world's
largest allocators and managers of private markets capital. The Secondary Sale
was structured as a sale to a newly formed fund, JZHL Secondary Fund LP (the
"Secondary Fund"), managed by an affiliate of JZAI.
The US microcap assets (detailed below) were sold to the Secondary Fund at
their agreed valuation. In return, the Company received cash consideration and
a special limited partner interest in the Secondary Fund entitling the Company
to certain distributions from the Secondary Fund..
The Company's limited partner interest in the Secondary Fund's year-end
valuation is $80.4 million and is valued by considering the valuation of the
underlying investments and the order of returning capital to investors being:
i) First, 100 per cent. is distributed to Hamilton Lane and various members of
the Fund's management team (the "Secondary Investors") pro rata in accordance
with their respective contributions until each Other Investor has received
distributions equal to its total aggregate contributions to the Secondary Fund
(amounting in total to US$90 million plus any further contributions made
thereafter, expected to be in the aggregate of up to an additional US$20
million);
ii) Second, 100 per cent. to the Secondary Investors pro rata in accordance
with their respective contributions until each other investor has realised the
greater of a 15 per cent. net internal rate of return on its total aggregate
contributions or an amount equal to 140 per cent. of its total aggregate
contributions.
iii) Third, 95 per cent. to the Company (in its capacity as the special
limited partner of the Secondary Fund) and 5 per cent. to the Secondary
Investors until the Company has received distributions equal to US$67.6
million; and
iv) Fourth, 62.5 per cent. to the Secondary Investors (pro rata in accordance
with their respective contributions)
In April 2022, JZHL realised its investment in Flow Control, LLC receiving
proceeds of $77.7 million. The sale of Flow Control resulted in the Secondary
Investors receiving a distribution from the Secondary Fund, together with
other distributions so far made and received, totalling approximately $97.1
million for the benefit of the Secondary Investors.
In June 2022, JZHL realised a portion of its investment in Testing Services
Holdings receiving proceeds of $182.8 million. As a result, the Company
received a distribution from the Secondary Fund of approximately $96.2 million
as a result of its Special LP Interest and in accordance with the distribution
waterfall as described above.
JZCP's valuation of special interest in JZHL Secondary Fund
JZHL Cost (1) As at 28.2.2023 $'000s JZHL Valuation As at 28.2.2023 $'000s
ACW Flex Pack, LLC 13,955 13,905
Flow Control, LLC - 45
Safety Solutions Holdings - 8,477
Felix Storch 24,500 126,000
Peaceable Street Capital 34,321 36,541
Tierpoint 29,632 29,632
102,408 214,600
Less interest of other secondary investments (134,197)
JZCP's interest in JZHL Secondary Fund 80,403
(1)The cost of JZHL's investments represent the agreed transfer value from
JZCP to JZHL plus additional contributions from secondary investors less
distributions made.
JZHL Secondary Fund LP includes investments in the following companies:
ACW Flex Pack,
Flex Pack is a provider of a variety of custom flexible packaging solutions to
converters and end-users. Further information can be found at
www.flex-pack.com
Felix Storch
Felix Storch is a leading provider of specialty refrigeration and custom
appliances to residential small kitchen, professional, life sciences, food
service and hospitality markets. Felix Storch is a second generation family
business, founded in 1969 and based in The Bronx, NY. Felix Storch’s
products now include a wide range of major appliances sold both nationally and
internationally.
Further information can be found at www.felixstorchinc.com
Peaceable Street Capital
Peaceable is a specialty finance platform focused on making structured
investments in small and mid-sized income producing commercial real estate.
The company is built on a foundation of know-how, creatively structuring
preferred equity to provide senior equity in complex situations. With
extensive investment experience throughout the United States and Canada,
Peaceable's underwriting and decision making process is designed to deliver
creative, flexible and dependable solutions quickly. Peaceable focuses on a
diverse portfolio of property types including multi-family, office,
self-storage, industrial, retail, RV parks, mobile home parks, parking health
care and hotels.
Further information can be found at www.peaceablestreet.com
Safety Solutions Holdings
Safety Solutions Holdings offers a complete range of safety products,
including gas detection, safety equipment, respiratory, fall protection,
lighting, calibration gas, noise and sound, particle counters, personal
protection equipment, hi-visibility apparel, and compressors and vacuum pumps.
Further information can be found at safetysolutionsholdings.com
Tierpoint
TierPoint is incorporated in Delaware and is a leading provider of information
technology and data centre services, including colocation, cloud computing,
disaster recovery and managed IT services. TierPoint’s hybrid IT solutions
help clients increase business agility, drive performance and manage risk.
TierPoint operates via a network of 43 data centres in 20 markets across the
United States.
Further information can be found at www.tierpoint.com
Summary of JZCP's investment in JZI Fund III''s Investment Portfolio at 28
February 2023
JZCP Cost (EURO) (1) JZCP Value (EURO) (1) JZCP Value (USD)
Country As at As at As at
28.2.2023 28.2.2023 28.2.2023
€'000s €'000s $'000s
ALIANZAS EN ACEROS Steel service center Spain 4,425 3,508 3,720
BLUESITES Build-up in cell tower land leases Portugal 3,643 6,581 6,979
COLLINGWOOD Niche UK motor insurer UK 3,015 2,700 2,863
ERSI Reinforced steel modules Lux 8,448 1,725 1,829
FACTOR ENERGIA Electricity supplier Spain 3,653 9,394 9,962
FINCONTINUO Niche consumer lender Italy 4,810 938 994
GUANCHE Build-up of petrol stations Spain 5,082 5,475 5,806
KARIUM Personal care consumer brands UK 4,321 9,525 10,101
LUXIDA Build-up in electricity distribution Spain 3,315 4,969 5,270
MY LENDER Niche consumer lender Finland 4,870 198 210
S.A.C Operational van leasing Denmark 3,392 9,000 9,545
TREEE e-waste recycling Italy 5,070 4,463 4,733
UFASA Niche consumer lender Spain 5,294 6,952 7,373
Other net Liabilities (2,599)
Total valuation 66,786
(1)Represents JZCP's 18.75% of Fund III's investment portfolio.
JZCP's Top Ten Investments
Portfolio Value US$'000 Percentage of Portfolio
1. Felix Storch (1) U.S. micro-cap 47,250 18.3%
2. Industrial Services Solutions WC, L.P (“ISS”) U.S. micro-cap 25,655 9.9%
3. Esperante Real estate 24,858 9.6%
4. Spruceview Capital Management, LLC Other 24,474 9.5%
5. Peaceable Street Capital (1) U.S. micro-cap 13,703 5.3%
6. Deflecto, LLC U.S. micro-cap 12,269 4.7%
7. Tierpoint (1) U.S. micro-cap 11,112 4.3%
8. Karium (2) Euro micro-cap 10,101 3.9%
9. Factor Energia (2) Euro micro-cap 9,962 3.8%
10. S.A.C (2) Euro micro-cap 9,945 3.8%
(1) JZCP value calculated net of JZHL secondary investors valuation.
(2) Represents JZCP's 18.75% of Fund III's investment portfolio.
Board of Directors
David Macfarlane (Chairman)(1)
Mr Macfarlane was appointed to the Board of JZCP in 2008 as Chairman and a
non-executive Director. Until 2002, he was a Senior Corporate Partner at
Ashurst. He was a non-executive director of the Platinum Investment Trust Plc
from 2002 until January 2007.
James Jordan
Mr Jordan is a private investor who was appointed to the Board of JZCP in
2008. He is a director of the First Eagle family of mutual funds. Until 30
June 2005, he was the managing director of Arnhold and S. Bleichroeder
Advisers, LLC, a privately owned investment bank and asset management firm;
and until 25 July 2013, he was a non-executive director of Leucadia National
Corporation.
Sharon Parr(2)
Mrs Parr was appointed to the Board of JZCP in June 2018. She has over 35
years in the finance industry and spent a significant portion of her
professional career with Deloitte and Touche in a number of different
countries. After a number of years in the audit department, on relocating to
Guernsey in 1999 she transferred into their fiduciary and fund management
business and, after completing a management buyout and subsequently selling to
Barclays Wealth in 2007, she ultimately retired from her role there as Global
Head of Wealth Structuring in 2011. Ms Parr holds a number of Non-Executive
Directorships across the financial services sector including in other listed
funds. Ms Parr is a Fellow of the Institute of Chartered Accountants in
England and Wales and a member of the Society of Trust and Estate
Practitioners, and is a resident of Guernsey.
Ashley Paxton
Mr Paxton was appointed to the Board in August 2020. He has more than 25 years
of funds and financial services industry experience, with a demonstrable track
record in advising closed-ended London listed boards and their audit
committees on IPOs, capital market transactions, audit and other corporate
governance matters. He was previously C.I. Head of Advisory for KPMG in the
Channel Islands, a position he held from 2008 through to his retirement from
the firm in 2019. He is a Fellow of the Institute of Chartered Accountants in
England and Wales and a resident of Guernsey. Amongst other appointments he is
Chairman of the Youth Commission for Guernsey & Alderney, a locally based
charity whose vision is that all children and young people in the Guernsey
Bailiwick are ambitious to reach their full potential.
(1)Chairman of the nominations committee of which all Directors are members.
(2)Chairman of the audit committee of which all Directors are members.
Report of the Directors
The Directors present their annual report together with the audited financial
statements of JZ Capital Partners ("JZCP" or the "Company") for the year ended
28 February 2023.
Principal Activities
JZ Capital Partners Limited is a closed-ended investment company with limited
liability which was incorporated in Guernsey on 14 April 2008 under the
Companies (Guernsey) Law, 1994 and is subject to the Companies (Guernsey) Law,
2008. The Company's Capital consists of Ordinary shares which are traded on
the London Stock Exchange's Specialist Fund Segment.
The Company's second lien loan notes (the "Subordinated Notes"), ZDP shares
and Convertible Unsecured Loan Stock ("CULS") were redeemed on 15 February
2023, 3 October 2022 and 30 July 2021 respectively. The Company's debt now
consists of a Senior Credit Facility.
The Company’s Investment Policy has been to target predominantly private
investments, seeking to back exceptional management teams to deliver on
attractive investment propositions. In executing its strategy, the Company
takes a long term view.
The Company focused on investing in the following areas, and is now focused on
supporting these investments:
(i) small or micro-cap buyouts in the form of debt and equity and preferred
stock in both the US and Europe; and
(ii) US real estate.
The Company's shareholders agreed changes to the Company’s investment policy
on 12 August 2020. In line with the new investment policy, the Company will
make no further investments except in respect of which it has existing
obligations or to the extent that investment is required to support existing
investments. The intention is to realise the maximum value of its investments
and, after repayment of all debt, to return capital to shareholders.
Business Review
The total comprehensive profit attributable to Ordinary shareholders for the
year ended 28 February 2023 was $2,646,000 (year ended 28 February 2022:
$3,113,000). The net asset value ("NAV") of the Company at the year end was
$314,498,000 (28 February 2022: $311,852,000) equal to $4.06 (28 February
2022: $4.03) per Ordinary share.
A review of the Company's activities and performance is detailed in the
Chairman's Statement and the Investment Adviser's Report. The valuations of
the unlisted investments are detailed in the Investment Portfolio.
Restatement to Correct Historical Error in Classification and Associated
Measurement of Asset
An investment in a direct loan to a European micro-cap company has been
revalued to reflect the contractual terms of the loan in place as at 1 March
2021 and 28 February 2022. The investment has been reclassified from a Loan at
Amortised Cost to an Investment at Fair Value Through Profit or Loss. Further
details and the balances changed by the restatement are detailed in Note 2 to
the Financial Statements.
Principal Risks and Uncertainties
The Company's Board believes the principal risks and uncertainties that relate
to an investment in JZCP are as follows:
Portfolio Liquidity
The Company invests predominantly in unquoted companies and real estate.
Therefore, this potential illiquidity means there can be no assurance
investments will be realised at their latest valuation or on the timing of
such realisations. The Board considers this illiquidity when planning to meet
its future obligations, whether committed investments or the repayment of the
Senior Credit Facility. On a quarterly basis, the Board reviews a working
capital model produced by the Investment Adviser which highlights the
Company's projected liquidity and financial commitments.
Investment Performance and Impact on NAV
The Company is reliant on the Investment Adviser to support the Company's
investment portfolio by executing suitable investment decisions. The
Investment Adviser provides the Board with an explanation of all investment
decisions and also provides quarterly investment reports and valuation
proposals of investee companies. The Board reviews investment performance
quarterly and investment decisions are checked to ensure they are consistent
with the agreed investment strategy.
Financing in the Real Estate Portfolio
The cost of servicing debt in the underlying real estate structures may impact
the net valuation of the real estate portfolio and subsequently the Company's
NAV. Gearing in the underlying real estate structures will increase any losses
arising from a downturn in property valuations. The Board assess the risk that
debt facilities may be withdrawn due to default or reasons beyond the
Company's control.
Operational and Personnel
Although the Company has no direct employees, the Company considers what
dependence there is on key individuals within the Investment Adviser and
service providers that are key to the Company meeting its operational and
control requirements.
Macroeconomic Risks and Impact on NAV
The Company's performance, and underlying NAV, is influenced by economic
factors that affect the demand for products or services supplied by investee
companies and the valuation of Real Estate interests held. Economic factors
will also influence the Company's ability to invest and realise investments
and the level of realised returns. Approximately 21% (28 February 2022: 24%)
of the Company's investments are denominated in non-US dollar currencies,
primarily the euro and also sterling. Fluctuations to these exchange rates
will affect the NAV of the Company.
Uncertainties in today's world that influence economic factors include:
(i) COVID-19
Whilst the Company's portfolio has performed robustly throughout the pandemic,
the Board acknowledge world economies face lasting challenges as they continue
to emerge from the pandemic and learn to live with the virus.
(ii) War in Ukraine and resulting energy crisis
The Board strongly condemns the actions of the Russian government and the
devastating events that have unfolded since Russia’s unprovoked invasion of
Ukraine.
JZCP's investments are predominantly focused in the U.S. and Western Europe,
and as such, the portfolio has no direct exposure to the affected regions.
However, certain portfolio companies have exposure to the rising energy costs
resulting from the conflict. The Board continue to receive reports from the
Investment Adviser on the impact of these increased costs. The Board is not
aware that the Company has any Russian investors.
(iii) Climate Change
JZCP does not have a sustainability-driven investment strategy, nor is its
intention to do so, but the Board believes that considering the principle of
being environmentally responsible is important in realising the maximum value
of the Company's investments.
JZCP only invests where it has existing obligations or to continue selectively
to support the existing portfolio. JZAI where possible plans to use its
influence as an investor to ensure investee businesses and funds have a
cautious and responsible approach to environmental management of their
business operations. JZCP invests across a wide range of businesses but has
limited exposure to those that create high levels of emissions.
The Board considers the impact of climate change on the firm’s business
strategy and risk profile and, where appropriate will make timely climate
change related disclosures. Regular updates, given by the Investment Adviser
on portfolio companies and properties will include potential risk factors
pertaining to climate change and how/if these risks are to be mitigated. The
Board receive a report from the Investment Adviser categorising the Company's
investments according to their level of exposure to climate-related risks.
These climate-related risks can be categorised as either physical (impact of
extreme weather, rising sea levels) or transitional (impact of the transition
to a lower-carbon economy).
The Board also has regard to the impact of the Company’s own operations on
the environment and other stakeholders. There are expectations that portfolio
companies operate in a manner that contributes to sustainability by
considering the social, environmental, and economic impacts of doing business.
The Board requests the Investment Adviser report on any circumstances where
expected standards are not met.
The Board has assessed the impact of climate change and has judged that the
Company's immediate exposure to the associated risks are low and therefore
there is no material impact on the fair value of investments and the financial
performance reported in these Financial Statements.
Share Price Trading at Discount to NAV
JZCP's share price is subject to market sentiment and will also reflect any
periods of illiquidity when it may be difficult for shareholders to realise
shares without having a negative impact on share price. The Directors review
the share price in relation to Net Asset Value on a regular basis and
determine whether to take any action to manage the discount. The Directors,
with the support of the Investment Adviser, work with brokers to maintain
interest in the Company’s shares through market contact and research
reports.
The Board considers the principal risks and uncertainties above are broadly
consistent with those reported at the prior year end, but wishes to note the
following:
· The Company's exposure to liquidity risk has decreased during the
year as debt obligations were repaid on their maturity date; and
· The effect of the war in Ukraine on market conditions means that
there are challenges to completing corporate transactions within the European
micro-cap portfolio and planned realisations may be delayed.
· In May 2023, the World Health Organization declared that COVID-19
no longer represented a "global health emergency".
Going Concern
A fundamental principle of the preparation of financial statements in
accordance with IFRS is the judgement that an entity will continue in
existence as a going concern for a period of at least 12 months from signing
of the Annual Report, which contemplates continuity of operations and the
realisation of assets and settlement of liabilities occurring in the ordinary
course of business.
In reaching its conclusion, the Board has considered the risks that could
impact the Company’s liquidity over the period from 7 June 2023 to 30 June
2024 (the "Going Concern period").
Recent events impacting liquidity:
· realisation proceeds during the financial year in excess of $184
million;
· the redemption and cancellation of the Company's ZDP shares; and
· the early redemption of the Company's Subordinated Notes.
The Company’s outstanding debt is now limited to its $45 million Senior
Credit Facility due 26 January 2027, which may be repaid early without penalty
at any time. In addition, the Senior Credit Facility provides for up to an
additional
$25 million in first lien delayed draw term loan, none of which has been
drawn.
The below table shows the Company's net liquidity position at the year end and
the previous three year ends:
28.2.2023 28.2.2022 28.2.2021 29.2.2020
$'000 $'000 $'000 $'000
Senior Credit Facility (1) (45,000) (45,000) (68,694) (150,362)
ZDP Shares - (77,281) (80,527) (73,569)
Subordinated Notes - (32,293) - -
CULS - - (54,332) (49,637)
Total debt (45,000) (154,574) (203,553) (273,568)
Cash and Treasury Bills 101,659 47,050 63,178 56,298
Net liquidity position 56,659 (107,524) (140,375) (217,270)
(1)Principal amount of $45 million, due on 26 January 2027, excludes any
accrued interest due on maturity.
The below table details the proceeds from the Company's realisations during
the last three fiscal years:
Year End 28.2.2023 $ million Year End 28.2.2022 $ million Year End 28.2.2021 $ million
JZHL Secondary Fund U.S. 97.4 Salter Labs U.S. 41.1 Secondary Sale U.S. 87.7
Deflecto U.S. 54.3 George Industries U.S. 9.5 Real estate 13.6
ISS U.S. 22.5 Orangewood Fund U.S. 6.2 ABTA U.S. 9.4
New Vitality U.S. 7.4 Igloo U.S. 3.8 Eliantus Euro 9.4
Other 2.5 Vitalyst U.S. 1.9 K2 Towers II Euro 9.2
EMC 2010 Euro 2.2 Other U.S. 9.0
Fund III Euro 1.1 Cerpi Other 1.2
184.1 65.8 139.5
The Board takes account of the levels of realisation proceeds historically
generated by the Company’s micro-cap portfolios as well as the accuracy of
previous forecasts to assess the predicted accuracy of forecasts presented.
The Company continues to work on the realisation of various investments within
a timeframe that will enable the Company to maximise the value of its
investment portfolio.
The Board is encouraged by the Company's ability to deliver realisations and
the subsequent improved liquidity position, having net liquidity of
approximately $56 million at the year end.
The Board has analysed the projected cash outflows over the going concern
period and concluded they will be paid from the Company's cash reserves
(including maturing treasury bills).
Going Concern Conclusion
After careful consideration and based on the reasons outlined above, the Board
is satisfied, as at the date of the signing of the Annual Report and Financial
Statements, that it is appropriate to adopt the going concern basis in
preparing the financial statements and they have a reasonable expectation that
the Company will continue in existence as a going concern for the period from
7 June 2023 to 30 June 2024.
Viability Statement
In accordance with the UK Corporate Governance Code (the "UK Code"), the Board
has assessed the expectations that the Company will be able to continue in
operation and meet ongoing debt obligations. In order to make the assessment
and as noted above, the Board has carried out a robust review of the principal
risks and uncertainties, to which the Company is exposed and that potentially
threaten future performance and liquidity. It has assessed the Company's
current position and prospects as detailed in the Chairman's Statement and
Investment Adviser's Report. The period covered by the viability statement is
the next three financial years to 28 February 2026.
The Board has continued to use the period of three years that has been used
historically to assess viability. This period is considered appropriate as the
actions will be directed at achieving liquidity from sales of investments at a
level that will reasonably ensure the longer-term viability of the operations
of the Company. The three year period is also considered consistent with the
Company’s investment policy to make no further investments except in respect
of which it has existing obligations and to continue selectively to support
the existing portfolio. The Board will continue to review the period of
assessment on an annual basis and may in future adjust if considered
appropriate.
In reaching its conclusion on the Company’s viability, the Directors have
considered the following:
(i) Stability in Company's Balance Sheet
In order to stabilise the Company's balance sheet, the Board is focused on
repaying debt. Investment is being curtailed to commitments and what is
necessary to maximise the value of the existing portfolio. No repayment of
capital will be made to shareholders until debt obligations have been met.
During the prior year, the Company successfully restructured its senior debt
facility. The terms of the new facility included an extended maturity date to
2027 and allowed for the repayment of the Company's ZDP Shares and
Subordinated Notes assuming the required asset ratio together with other
covenants were maintained.
During the year to 28 February 2023, the Company made the following
significant debt repayments:
Zero Dividend Preference (2022) Shares
On their maturity date of 3 October 2022, the Company redeemed and cancelled
its ZDP shares. The ZDP shares had a redemption value of £57,597,000
($64,296,000 using the exchange rate on the redemption date).
Subordinated Notes
On 14 February 2023, the Company undertook an early voluntary redemption in
full of its $31.5 million Subordinated Notes.
As highlighted in the Company’s going concern assessment the Company has
greatly improved liquidity and is in a position to meet its financial
obligations in both the near and medium term as it looks to maximise and
realise the value of remaining investments.
(ii) Financing obligations
Senior Credit Facility
The new senior credit facility has a maturity date of 27 January 2027, the
principal balance outstanding at 28 February 2023 was $45.0 million. It is
expected the extended credit facility will be repaid from the cash held or
future proceeds from realisations and/or refinancing of investments.
Commitments
At 28 February 2023, JZCP had financial commitments of $7.1 million (28
February 2022: $16.2 million) outstanding in relation to fund investments.
(iii) Investment performance and portfolio liquidity
The Board reviews, on a quarterly basis, the valuation and prospects of all
underlying investee companies. The Board is generally satisfied with the
performance of the micro-cap portfolios and believe the historic realisation
of investments at or above NAV provide support to the level of the current
valuations and the Company will continue to explore suitable realisation
opportunities. JZCP's micro-cap portfolio has averaged annual realisations of
approximately $130 million over the five years ending 28 February 2023.
(iv) Loan covenants
A covenant on the senior debt facility states the fair value of collateral
must be no less than 4x the loan value (which equates to approximately $180
million at the year end) and the Company is also required to hold a minimum
cash balance of $12.5 million. At 28 February 2023, investments and cash
valued at $352.0 million were held as collateral on the senior debt facility.
The collateral value used in the asset coverage ratio of $252.1 million is
after adjustments to the collateral value including a ceiling value on any one
investment. The Board are confident the loan covenants will not be breached.
(v) Mitigation of other risks as outlined in the Principal Risks and
Uncertainties.
Viability Conclusion
In concluding on the viability of the Company, the Board has concluded that
there is a reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the three year period
ending 28 February 2026, being the period of the assessment. The Board
considers the going concern assumptions and conclusion set out above to be
relevant.
Ongoing Charges
Ongoing charges for the years ended 28 February 2023 and 28 February 2022 have
been prepared consistently with the methodology used in the previous year. The
ongoing charges ratio represents annualised recurring operational expenses as
a percentage of the average net asset value. Ongoing charges are based on
costs incurred in the year as being the best estimate of future costs but are
amended if this method is not considered an accurate prediction of future
expenses. The Ongoing charges for the year ended 28 February 2023 were 2.56%
(28 February 2022: 3.31%).
Directors
The Directors listed below, who served on the Board during the year and are
all deemed independent and non-executive, were in office at the end of the
year and subsequent to the date of this report. The biographical details of
the Directors are shown on Director’s Report.
David Macfarlane
(Chairman)
James
Jordan
Sharon
Parr
Ashley
Paxton
Dividends
No dividends were paid or proposed for the years ended 28 February 2023 and 28
February 2022.
Annual General
Meeting
The Company's Annual General Meeting is due to be held on 11 July
2023.
Substantial
Shareholders
As at 7 June 2023, the Company has been notified in accordance with the
Disclosure Guidance and Transparency Rules of the following interests of 5% or
more of the total Ordinary share capital of the Company. The number and
percentage of Ordinary shares relate to the number informed by shareholders on
the relevant notification rather than the current share register. The number
and percentage of Ordinary shares set out below for each substantial
shareholder will therefore not take account of any Ordinary shares bought or
sold by them or the effect of any share buy backs undertaken by the Company on
their shareholdings, in each case, not so notified as required by, or in
accordance with, the Disclosure Guidance and Transparency Rules. For the
avoidance of doubt, the number and percentage of Ordinary shares set out below
should not therefore be used for the purposes determining if the Company is or
is to become a controlled foreign corporation within the meaning of The United
States Internal Revenue Code of 1986, as amended (further information on the
Company's controlled foreign corporation status can be found under the section
Useful Information for Shareholders). Shareholders and prospective
shareholders must consult their own tax advisers concerning US tax
laws.
Ordinary % of Ordinary
shares shares
Edgewater Growth Capital Partners L.P. 18,335,944 23.7%
David W. Zalaznick 10,550,294 13.6%
John W. Jordan II & Affiliates 10,550,294 13.6%
Jefferies Financial Group 8,021,552 10.4%
Arnhold, LLC 4,573,007 5.9%
Almitas Capital LLC 4,504,586 5.8%
Finepoint Capital L.P. 4,413,067 5.7%
The percentage of Ordinary shares shown above represents the ownership of
voting rights at the date of this report, before weighting for votes on
Directors.
It is the responsibility of the shareholders to notify the Company of any
change to their shareholdings when it reaches 5% of shares in issue and any
subsequent change when the shareholding increases or decreases by a further 5%
(up to 30% of shares in issue i.e. 10%, 15%, 20%, 25% and 30%) and thereafter
50% and 75%.
Share Capital, Purchase of Own Shares and Convertible Unsecured Loan Stock
"CULS"
The beneficial interests of the Directors in the Ordinary shares of the
Company are shown below:
Number of Ordinary shares at 1 March 2022 Purchased in year Sold in year Number of Ordinary shares at 28 February 2023
David Macfarlane 71,550 - - 71,550
James Jordan 39,124 - - 39,124
Sharon Parr 10,000 - - 10,000
Ashley Paxton 12,250 - - 12,250
132,924 - - 132,924
The beneficial interests of the Directors in the ZDP shares of the Company are
shown below:
Number of ZDP shares at 1 March 2022 Purchased in year Redeemed in year Number of ZDP shares at 28 February 2023
David Macfarlane - - - -
James Jordan - - - -
Sharon Parr - - - -
Ashley Paxton 4,250 - (4,250) -
4,250 - (4,250) -
There have been no changes in the Directors' interests of Ordinary shares
between 28 February 2023 and the date of this report.
Details of the ZDP shares and the Ordinary shares can be found in Notes 16 and
20.
Engaging with Stakeholders
In line with best practice, the Board is required to ensure effective
engagement with, and participation from, its shareholders and stakeholders.
The Board should also understand the views of the Company’s key stakeholders
and describe in the annual report how their interests and the matters set out
in Section 172 of the Companies Act 2006 have been considered in board
discussions and decision-making.
The Board identifies its key stakeholders as the following:
· Shareholders and prospective investors;
· JZAI, the Investment Adviser of its portfolio investments and
other service providers. The Company has no employees.
Engaging with Shareholders
The Board believes that the maintenance of good relations with both
institutional and retail shareholders is important for the prospects of the
Company. It therefore seeks active engagement with investors, bearing in mind
the duties regarding equal treatment of shareholders and the dissemination of
inside information. The Board receives feedback on shareholder views from its
Corporate Broker and Investment Adviser, and is circulated with Broker reports
on the Company.
The Board considers that the Annual General Meeting, a meeting for all
shareholders, is the key point in the year when the Board of Directors
accounts to all shareholders for the performance of the Company. The Board
encourages shareholders to attend the Annual General Meeting where Directors
will be present and available to engage with shareholders.
The Board believes that the Company policy of reporting to shareholders as
soon as possible after the Company's year end and the holding of the Annual
General Meeting at the earliest opportunity is valuable.
The Company, provides an Interim Report and Accounts in accordance with IAS 34
and will aim to issue monthly NAV announcements within 21 day of the month
end, these announcements will be posted on JZCP's website at the same time, or
soon thereafter. A monthly factsheet is also posted on the Company's website.
Engaging with Service Providers
The Board is in regular communication with the Investment Adviser to discuss
the Company’s strategy as well as being kept up to date with portfolio
matters.
A Management Engagement Committee, was established in 2018, to review the
performance and contractual arrangements of the Company’s service providers.
The Board looks to engage with service providers and encourage communication
of any concerns of matters arising and deal with them appropriately.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and Financial
Statements in accordance with applicable laws and regulations. Guernsey
Company Law requires the Directors to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
Company as at the end of the financial year and of the profit or loss for that
year.
In preparing Financial Statements the Directors are required to:
· select suitable accounting policies and apply them consistently;
· make judgements and estimates that are reasonable and prudent;
· state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the Financial
Statements;
· prepare the Financial Statements on the going concern basis
unless it is inappropriate to presume that the Company will continue in
business;
· confirm that there is no relevant audit information of which the
Company’s Auditor is unaware; and
· confirm that they have taken all reasonable steps which they
ought to have taken as Directors to make themselves aware of any relevant
audit information and to establish that the Company’s Auditor is aware of
that information.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and to enable them to ensure that the Financial Statements have been
properly prepared in accordance with the Companies (Guernsey) Law, 2008 and
International Financial Reporting Standards as adopted by the European Union
(“IFRS”). 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 confirm that they have complied with these requirements in
preparing the Financial Statements.
Responsibility Statement of the Directors in respect of the Financial
Statements
The Directors confirm that to the best of their knowledge:
· the Financial Statements have been prepared in accordance with
IFRS and give a true and fair view of the assets, liabilities and financial
position, and profit or loss of the Company;
· the Annual Report includes a fair review of the development and
performance of the business and position of the Company together with the
description of the principal risks and uncertainties that the Company faces,
as required by the Disclosure Guidance and Transparency Rules of the UK
Listing Authority; and
· the Directors confirm that the Annual Report and Financial
Statements, taken as a whole, is fair, balanced and understandable and
provides the information necessary for Shareholders to assess the Company’s
performance and strategy.
Directors’ Statement
So far as each of the Directors is aware, there is no relevant audit
information of which the Company's auditor is unaware, and each Director has
taken all the steps 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.
Approved by the Board of Directors and signed on behalf of the Board on 7 June
2023.
David
Macfarlane
Sharon Parr
Chairman
Director
Corporate Governance
Introduction
As a Guernsey incorporated company with a UK listing, JZCP’s governance
policies and procedures are based on the principles of the UK Corporate
Governance Code (the "UK Code") as required under the Disclosure Guidance and
Transparency Rules. The UK Code is available on the Financial Reporting
Council’s website, www.frc.org.uk. The Company is subject to the GFSC Code,
which applies to all companies registered as collective investment schemes in
Guernsey. The GFSC has also confirmed that companies that report against the
UK Code are deemed to meet the GFSC Code. Up to 29 February 2020, the Company
reported against the AIC Code of Corporate Governance (the "AIC Code"), which
addresses all the principles set out in the UK Code, as well as setting out
additional principles and recommendations on issues that are of specific
relevance to investment companies. The Company resigned its membership from
the AIC in 2020.
Throughout the accounting period the Company has complied with the
recommendations of the UK Code and thus the relevant provisions of the UK
Corporate Governance Code, except as set out below.
- the tenure of the Chairman.
- the Chairman serving as a member of the Audit Committee.
The Board considers the following UK Code provisions are not relevant to the
position of JZ Capital Partners Limited, being an externally managed
investment company. The Company has therefore not reported further in respect
of these provisions.
- the role of the chief executive;
- executive directors remuneration; and
- appointment of a senior independent director.
There have been no other instances of non-compliance, other than those noted
above.
Guernsey Code of Corporate Governance
The Guernsey Financial Services Commission’s (the "GFSC") “Finance Sector
Code of Corporate Governance” (the "Guernsey Code") came into effect on 1
January 2012 and was subsequently amended on 18 February 2016. The
introduction to the Guernsey Code states that companies which report against
the UK Corporate Governance Code or the AIC’s Code of Corporate Governance
are deemed to meet the Guernsey Code.
The Board
Corporate Governance of JZCP is monitored by the Board which at the end of the
year comprised four Directors, all of whom are non-executive. Biographical
details of the Board members at the date of signing these Financial Statements
are shown on Board of Directors section and their interests in the shares of
JZCP are shown in the Report of the Directors. The Directors' biographies
highlight their wide range of relevant financial and sector experience.
Directors' Independence
The Board continually considers the independence of the Directors, including
in light of the circumstances which are set out in the UK Code as likely to
impair a director's independence.
There are no circumstances that exist, including those under the UK Code,
which the Board considers likely to impair the independence of any of the
Directors.
Two Board members (David Macfarlane and James Jordan) have, however, served on
the Board for a period of longer than nine years which is one of those
circumstances set out in the UK Code. The conclusion the Board has reached is
that despite having served on the Board for more than nine years, this has not
impacted the independence of such Directors. However, the Board will continue
to assess on an annual basis how length of service could impair judgement and
decision making both on the basis of an individual Director and the Board as a
whole.
Previously, each Director having served longer than nine years was subject to
annual re-election and each Director having served less than nine years was
subject to re-election at the third annual general meeting after appointment
or (as the case may be) the general meeting at which he or she was last
appointed. In line with best practice, all Directors are now subject to annual
re-election.
Further details on the Board’s processes and criteria for the appointment of
directors can be found under the section of this Annual Report detailing the
work of the Nomination Committee.
Succession Planning
The Board acknowledges that the Board and its Committees should have a
combination of skills, experience and knowledge and that membership should be
regularly refreshed. The Board annually evaluates its composition, diversity
and how effectively each member contributes and how they work together to
achieve objectives. Further details on the evaluation of the Board and its
Committees can be found below in this section of the Annual Report.
Chairman Tenure
The UK Code, states the Chairman should not remain in post beyond nine years
from the date of their first appointment to the Board. However, to facilitate
effective succession planning and the development of a diverse board, this
period can be extended for a limited time.
The Board’s policy on the Chairman’s tenure is that continuity and
experience are considered to add significantly to the strength of the Board
and as such these attributes need to be weighed against any advantages that a
new appointment may bring. Therefore, no limit on the overall length of
service of the Chairman is imposed.
The Chairman has served on the Board since the Company’s inception (April
2008) and the Board therefore acknowledges that succession to the role needs
to be anticipated in line with effective succession planning. A substantial
refreshment of the board was planned to take place in 2021, including the
appointment of a new Chairman. However, in the light of the events which saw a
material decline in the Company's Net Asset Value, it was decided the Chairman
would continue to oversee the stabilisation of the Company and implementation
of the investment policy introduced in 2020. The Chairman will therefore
continue to seek re-election to the Board annually.
Proceedings of the Board
The Board has overall responsibility for the Company's activities and the
determination of its investment policy and strategy. The Company has entered
into an investment advisory and management agreement with its Investment
Adviser, JZAI, pursuant to which, subject to the overall supervision of the
Directors, the Investment Adviser acts as the investment manager to the
Company and manages the investment and reinvestment of the assets of the
Company in pursuit of the investment objective of the Company and in
accordance with the investment policies and investment guidelines from time to
time of the Company and any investment limits and restrictions notified by the
Directors (following consultation with the Investment Adviser). Within its
strategic responsibilities, the Board regularly considers corporate strategy
as well as dividend policy, the policy on share buy backs and corporate
governance issues.
The Directors meet at least quarterly to direct and supervise the Company’s
affairs. This includes reviewing the investment strategy, risk profile,
gearing strategy and performance of the Company and the performance of the
Company’s functionaries, and monitoring compliance with the Company's
objectives.
In usual circumstances, the Directors visit the Investment Adviser at least
annually for a comprehensive review of the portfolio, its valuation
methodology and general strategy. The Directors deem it appropriate to review
the valuations of the investment portfolio on a quarterly basis. The schedule
of Board and Committee meetings is shown on Corporate Governance section.
Continuing terms of Investment Adviser agreement
In the opinion of the Directors, the continuing appointment of the Investment
Adviser on the terms agreed continues to be in the interests of Shareholders.
In reaching its conclusion the Board considers the Investment Adviser's
performance, expertise and ability in effectively assisting the management of
portfolio companies.
Supply of information
The Chairman ensures that all Directors are properly briefed on issues arising
at, and when necessary in advance of, Board meetings. The Company's advisers
provide the Board with appropriate and timely information in order that the
Board may reach proper decisions. Directors can, if necessary, obtain
independent professional advice at the Company's expense.
Directors' training
The Board is provided with information concerning changes to the regulatory or
statutory regimes as they may affect the Company, and the Directors are
offered the opportunity to attend courses or seminars on such changes, or
other relevant matters. An induction programme is available for any new
Director appointments. The induction programme offers training about the
Company, its managers, their legal responsibilities and investment company
industry matters.
Chairman and Senior Independent Director
The Chairman is a non-executive Director, together with the rest of the Board.
There is no executive Director position within the Company. Day-to-day
management of the Company's affairs has been delegated to third party service
providers. Currently there is no appointment of a Senior Independent Director.
Board diversity
The Board has also given careful consideration to the recommendations of the
Davies Review and the findings of the Hampton-Alexander Review on the evolving
gender diversity debate. The Board continues to review its composition in
terms of diversity, appropriate range of skills and experience and the Board
is committed to ensuring that diversity is considered when appointments to the
Board are under consideration – as indeed has always been its practice.
The Board's evaluation
The Board, Audit Committee, and Nomination Committee undertake an evaluation
of their own performance and that of individual Directors on an annual basis.
In order to review their effectiveness, the Board and its Committees carry out
a process of formal self-appraisal. The Board and Committees consider how they
function as a whole and also review the individual performance of its members.
This process is conducted by the Chairman reviewing each member’s
performance, contribution and their commitment to the Company. The Board, as a
whole, reviews the performance of the Chairman. Each Board member is also
required to submit details of training they have undertaken on an annual
basis. Currently, no third party evaluation of the Directors effectiveness is
undertaken. The results of the evaluation process concluded the Board was
functioning effectively and the Board and its committees provided a suitable
mix of skills and experience.
Board Committees
In accordance with the UK Code, the Board has established a number of
Committees (see below), in each case with formally delegated duties and
responsibilities within written terms of reference. The identity of each of
the Chairmen of the committees referred to below is reviewed on an annual
basis. The Board, consisting of all non-executive Directors, has decided that
the entire Board should fulfil the role of the Audit and Nomination
Committees. The terms of reference of the committees are kept under review and
can be viewed on the Company's website www.jzcp.com.
Nomination Committee
In accordance with the Code, the Company has established a Nomination
Committee. The Nomination Committee leads the process for all board
appointments, oversees the development of and reports on, amongst other
things, its approach to a diverse pipeline for succession.
The Nomination Committee takes into consideration the Code’s rules on
independence of the Board in relation to the Company, its senior management
and major shareholders. The Nomination Committee is chaired by David
Macfarlane, and each of the other Directors is also a member. The members of
the committee are independent of the Investment Adviser. The Nomination
Committee has responsibility for considering the size, structure and
composition of the Board, retirements and appointments of additional and
replacement Directors and making appropriate recommendations to the Board.
Due to the nature of the Company being a listed investment company investing
in private equity with an international shareholder base, the Company needs
Directors with a broad range of financial experience. For this reason,
Directors use external consultants as well as using their own contacts to
identify suitable candidates.
The final decision with regard to appointments always rests with the Board and
all such appointments are subject to confirmation by shareholders.
Audit Committee
The Audit Committee is chaired by Sharon Parr and all other Directors are
members. Contrary to the recommendations of the UK Code, the Board considers
it is appropriate for the Company's Chairman to serve as a member of the Audit
Committee due to his considered independence and the skills/experience
contributed. The Board also notes the AIC Code, previously followed by the
Company, permits a chairman to be a member of an audit committee if
independent on appointment. Members of the Committee are independent of the
Company’s external auditors and the Investment Adviser. All members have the
necessary financial and sector experience to contribute effectively to the
Committee. The Audit Committee meets at least twice a year and meets the
external auditors at least twice a year. The Audit Committee is responsible
for overseeing the Company’s relationship with the external auditors,
including making recommendations to the Board on the appointment of the
external auditors and their remuneration. The Committee also considers the
nature, scope and results of the auditors’ work and reviews, and develops
and implements policies on the supply of any non- audit services that are to
be provided by the external auditors.
Post year end, the Audit Committee has re-considered whether the Company is
able to continue as a going concern for the period ending 31 May 2024 and
whether it considers it appropriate to adopt the going concern basis of
accounting in preparing them, and identify any material uncertainties to the
company’s ability to continue to do so. Also, the Audit Committee, has
considered the Company’s current position and principal risks, and assessed
the prospects of the Company, over the viability period of three years to 28
February 2026.
The activities and responsibilities of the Audit Committee are further
described on the Audit Committee Report and the recommendations to the Board
made by the Audit Committee, regarding the going concern and viability of the
Company are detailed in the Report of the Directors.
Management Engagement Committee
The Management Engagement Committee is chaired by David Macfarlane and
comprises the entire Board. Responsibilities include reviewing the performance
and contractual arrangements of the Company’s service providers.
Remuneration Committee
The Disclosure Committee is constituted of two Directors and two
representatives of the Investment Adviser. Its purpose is to monitor and
review the Company’s obligation to inform the market in respect of matters
and events, to ensure compliance with the Market Abuse Regulations.
Disclosure Committee
The Disclosure Committee is constituted of two Directors and two
representatives of the Investment Adviser to monitor and review the
Company’s obligation to inform the market in respect of matters and events,
to ensure compliance with the Market Abuse Regulations.
Board and Committee meeting attendance
The number of formal meetings of the Board and its committees held during the
fiscal year and the attendance of individual Directors at these meetings was
as follows:
Number of meetings
Management
Board Main AGM AdHoc Meetings Audit Committee Disclosure Committee Engagement Committee
Total number of meetings 4 1 5 5 2 1
David Macfarlane 4 1 5 5 2 1
James Jordan 3 1 4 3 N/A 1
Sharon Parr 4 1 5 5 2 1
Ashley Paxton 4 1 5 5 N/A 1
The main Board meetings are held to agree the Company's valuation of its
investments, agree the Company's financial statements and discuss and agree
other strategic issues. Other meetings are held when required to agree board
decisions on ad-hoc issues.
Internal Controls
The Board is ultimately responsible for establishing and maintaining the
Company’s system of internal financial and operating control and for
maintaining and reviewing its effectiveness on an annual basis. The Company's
risk matrix continues to be the core element of the Company's risk management
process in establishing the Company's system of internal financial and
reporting control. The risk matrix is prepared and maintained by the Board
which initially identifies the risks facing the Company and then collectively
assesses the likelihood of each risk, the impact of those risks and the
strength of the controls operating over each risk. The system of internal
financial and operating control is designed to manage rather than to eliminate
the risk of failure to achieve business objectives and by their nature can
only provide reasonable and not absolute assurance against misstatement and
loss.
These controls aim to ensure that assets of the Company are safeguarded,
proper accounting records are maintained and the financial information for
publication is reliable. The Board confirms that there is an ongoing process
for identifying, evaluating and managing the principal risks faced by the
Company. This process has been in place for the year under review and up to
the date of approval of this Annual Report and Financial Statements and is
reviewed by the Board and is in accordance with the FRC’s Guidance on Risk
Management, Internal Control and Related Financial and Business Reporting.
The Board has evaluated the systems of internal controls of the Company. In
particular, it has prepared a process for identifying and evaluating the
principal risks affecting the Company and the policies by which these risks
are managed.
The Board has delegated the day to day responsibilities for the management of
the Company’s investment portfolio, the provision of depositary services and
administration, registrar and corporate secretarial functions including the
independent calculation of the Company's NAV and the production of the Annual
Report and Financial Statements which are independently audited.
Formal contractual agreements have been put in place between the Company and
providers of these services
Even though the Board has delegated responsibility, it retains accountability
for these functions and is responsible for the systems of internal control. At
each quarterly board meeting, compliance reports are provided by the
Administrator, Company Secretary and Investment Adviser. The Board also
receives confirmation from the Administrator of its accreditation under its
Service Organisation Controls 1 report.
The Company’s risk exposure and the effectiveness of its risk management and
internal control systems are reviewed by the Audit Committee at its quarterly
meetings and annually by the Board.
The Board believes that the Company has adequate and effective systems in
place to identify, mitigate and manage the risks to which it is exposed.
Whistle Blowing Policy
The Directors are non-executive and the Company does not have employees, hence
no whistle blowing policy is required. However, the Directors have satisfied
themselves that the Company's service providers have appropriate whistle
blowing policies and procedures and have received confirmation from the
service providers that nothing has arisen under those policies and procedures
which should be brought to the attention of the Board.
UK Criminal Finances Act 2017
In respect of the UK Criminal Finances Act 2017 which has introduced a new
Corporate Criminal Offence of 'failing to take reasonable steps to prevent the
facilitation of tax evasion', the Board confirms that it is committed to zero
tolerance towards the criminal facilitation of tax evasion.
The Board also keeps under review developments involving other social and
environmental issues, such as Modern Slavery and General Data Protection
Regulation, and will report on those to the extent they are considered
relevant to the Company's operations.
International Tax Reporting
For purposes of the US Foreign Account Tax Compliance Act (“FATCA”), the
Company registered with the US Internal Revenue Services (“IRS”) as a
Guernsey reporting Foreign Financial Institution (“FFI”), received a
Global Intermediary Identification Number CAVBUD.999999.SL.831, and can be
found on the IRS FFI list.
The Common Reporting Standard (“CRS”) is a global standard for the
automatic exchange of financial account information developed by the
Organisation for Economic Co-operation and Development (“OECD”), which has
been adopted by Guernsey and which came into effect on 1 January 2016. The CRS
replaced the intergovernmental agreement between the UK and Guernsey to
improve international tax compliance that had previously applied.
The Board will take necessary actions to ensure that the Company is compliant
with Guernsey regulations and guidance in this regard.
Directors' Remuneration Report
The Company's policy in regard to Directors' remuneration is to ensure that
the Company maintains a competitive fee structure in order to recruit, retain
and motivate non-executive Directors of excellent quality in the overall
interests of
shareholders.
Remuneration
Policy
The Directors do not consider it necessary for the Company to establish a
separate Remuneration Committee. All of the matters recommended by the Code
that would be delegated to such a committee are considered by the Board as a
whole.
It is the responsibility of the Board to determine and approve the Directors'
fees, following a recommendation from the Chairman who will have given the
matter proper consideration, having regard to the level of fees payable to
non-executive Directors in the industry generally, the role that individual
Directors fulfil in respect of Board and Committee responsibilities and the
time committed to the Company's affairs. The Chairman's remuneration is
decided separately and is approved by the
Board.
The Company's Articles state that Directors' remuneration payable in any
accounting year shall not exceed in the aggregate an annual sum of $650,000.
Each Director is also entitled to reimbursement of their reasonable expenses.
There are no commission or profit sharing arrangements between the Company and
the Directors. Similarly, none of the Directors is entitled to pension,
retirement or similar benefits. No element of the Directors' remuneration is
performance
related.
The remuneration policy set out above is the one applied for the year ended 28
February 2023 and is not expected to change in the foreseeable
future.
Directors' and Officers' liability insurance cover is maintained by the
Company on behalf of the Directors.
Remuneration for Services to the Company as Non-Executive Directors Year Ended Year Ended
28 February 2023 US$ 28 February 2022 US$
David Macfarlane (Chairman) 120,000 120,000
James Jordan 50,000 50,000
Sharon Parr 70,000 70,000
Ashley Paxton 50,000 50,000
290,000 290,000
Fees payable to the Chairman and Directors are $120,000 per annum and $50,000
per annum respectively. The Chairman of the Audit Committee will receive an
additional amount of $20,000 per annum.
No Director has a service contract with the Company, nor are any such
contracts proposed.
Directors' Term of
Appointment
In line with the UK Code of Corporate Governance, all Directors seeking
re-election to the Board will do so on an annual basis regardless of their
tenure not yet exceeding nine years.
The Directors were appointed as non-executive Directors by letters issued in
April 2008, June 2018 and August 2020 which state that their appointment and
any subsequent termination or retirement shall be subject to three-months’
notice from either party in accordance with the Articles. Each Director’s
appointment letter provides that, upon the termination of his/her appointment,
that he/she must resign in writing and all records remain the property of the
Company. The Directors’ appointments can be terminated in accordance with
the Articles and without compensation. There is no notice period specified in
the Articles for the removal of Directors. The Articles provide that the
office of director shall be terminated by, among other things: (a)
written resignation; (b) unauthorised absences from board meetings for six
months or more; (c) unanimous written request of the other directors; and
(d) an ordinary resolution of the
Company.
Signed on behalf of the Board of Directors on 7 June 2023 by:
David Macfarlane Sharon Parr
Chairman Director
Audit Committee Report
Dear Shareholder,
Below, we present the Audit Committee's Report, setting out the
responsibilities of the Audit Committee and its key activities during the year
ended 28 February 2023. The Audit Committee has reviewed the Company's
financial reporting, the independence and effectiveness of the external
auditor and the internal control and risk management systems of the Company's
service providers. In order to assist the Audit Committee in discharging these
responsibilities, regular reports are received and reviewed from the
Investment Manager, Administrator and external auditor.
A member of the Audit Committee will continue to be available at each Annual
General Meeting to respond to any shareholder questions on the activities of
the Audit Committee.
Responsibilities
The terms of reference of the Audit Committee include the requirement to:
• monitor the integrity of the published Financial Statements of the
Company;
• review and report to the Board on the significant issues and judgements
made in the preparation of the Company's published Financial Statements,
(having regard to matters communicated by the external Auditors) and other
financial information;
• monitor and review the quality and effectiveness of the external Auditors
and their independence;
• consider and make recommendations to the Board on the appointment,
reappointment, replacement and remuneration of the Company's external Auditor;
• advise the Board that the annual report and accounts, taken as a whole, is
fair, balanced and understandable;
• review and consider the Company's Principal risks and uncertainties;
• consider the long-term viability of the Company;
• review the Company's procedures for prevention, detection and reporting of
fraud, bribery and corruption; and
• monitor and review the internal control and risk management systems of the
service providers.
The Audit Committee's full terms of reference can be viewed on the Company's
website www.jzcp.com.
Key Activities of the Audit Committee
The following sections discuss the assessments made by the Audit Committee
during the year:
Financial
Reporting:
The Audit Committee's review of the Annual Financial Statements focused on the
following significant
areas:
• Assessment of Going Concern and Viability
The Audit Committee has considered the ability of the Company to continue as a
going concern over the period ending 30 June 2024. After careful consideration
the Committee have recommended to the Board that it is satisfied that it is
appropriate to adopt the going concern basis in preparing these Financial
Statements and they have a reasonable expectation that the Company will
continue in existence as a going concern for the period. The reasons for
reaching this judgement are detailed in the Report of the Directors.
For the viability assessment, the Audit Committee has assessed the
expectations that the Company will be able to continue in operation and meet
ongoing debt obligations over the period ending 28 February 2026. In making
its recommendation to the Board the Committee has carried out a robust review
of the Company's principal risks and uncertainties to which the Company is
exposed and that potentially threaten future performance and liquidity and has
assessed the Company's current position and prospects as detailed in the
Chairman's Statement and Investment Adviser's Report.
The key factors considered by the Committee are detailed in the Report of the
Director.
The Committee has concluded it has 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 the assessment. The committee consider the going
concern assumptions and conclusion set out above to be relevant.
The Audit Committee was also satisfied that the disclosures in the basis of
preparation note and the viability statement, relating to the going concern
assessment of the Company, were appropriately clear and
transparent.
• Valuation of Unquoted Investment Fair Values
including the impact on management fees
The fair value of the Company’s unquoted securities at 28 February 2023,
which are valued using techniques detailed in Note 5 of the financial
statements, was $252,921,000 accounting for 72.8% of the Company's investment
portfolio. The Committee has concentrated on ensuring the Investment Adviser
has applied appropriate valuation methodologies to these investments in
producing the net asset value of the Company.
Members of the Audit Committee discuss the valuation process with the
Investment Adviser on a quarterly basis. The Audit Committee gains comfort in
the valuations produced by reviewing the methodologies used and challenging
the recommendations of the Investment Adviser. The Audit Committee are thus
satisfied that the valuation techniques are appropriate and represent fair
value.
The valuation of the unquoted investments is the key driver of the Company’s
gross asset value and the basis of the management fees payable to the
Investment Adviser and therefore the management fees payable could potentially
be misstated if there were to be an error in the calculation of the gross
assets. The Audit Committee is satisfied that there is a robust procedure
around the production and authorisation of the Company's NAV calculations and
therefore management fees have been correctly calculated as stated in the
Annual Report and Financial Statements.
• Impairment of Direct Loans Measured at Amortised
Cost
Risk that the carrying value of the direct loans might be misstated due to
application of inappropriate methodologies, inputs and/or judgemental factors
determining the expected credit loss in accordance with IFRS 9 - "Financial
Instruments".
• Restatement to Correct Historical Error in
Classification and Associated Measurement of Asset
The Audit Committee has considered the impact of Toro Finance being
reclassified from amortised cost to fair value through profit and loss and
revalued at 1 March 2021 and 28 February 2022 and is satisfied that the
disclosures given in Note 2 to the financial statements are appropriate.
Risk Management:
The Audit Committee continued to consider the process for managing the risk of
the Company and its service providers. Risk management procedures for the
Company, as detailed in the Company's risk assessment matrix, were reviewed
and approved by the Audit Committee. New risks are added to the matrix when
deemed appropriate.
Fraud, Bribery and Corruption:
The Audit Committee continues to monitor the fraud, bribery and corruption
policies of the Company. The Board receives a confirmation from all service
providers of any instances of fraud, bribery or corruption.
In a press release dated 21 March 2022, the Company announced that it had come
to the Board's attention that allegations of fraudulent conduct had been made
against two individuals who were members of the management team that manages
JZCP's investments in European micro-cap companies. A claim, which is still
ongoing, has been made in respect thereof in the New York State Supreme Court.
The claimants are a fund in which JZCP has only an approximate 1% interest
(carried at approximately $0.75 million) as well as a fund in which JZCP has
no interest. Following the announcement, the Company undertook a subsequent
review and concluded the alleged fraudulent conduct did not impact the
Company's investments held through JZI Fund III.
In a press release dated 3 January 2023, the Company announced that it had
come to the Board’s attention that two separate claims alleging criminal
complaints had been filed on behalf of certain private entities in the Spanish
courts against a number of entities, including the Company, the Company’s
Investment Adviser and a number of their respective related entities.
Subsequently, the company has been able to confirm that (i) the investigation
was never formally opened against the Company, which remained outside the
perimeter of the procedure by decision of the Judge since its very beginning,
and (ii) in any case, said procedure was provisionally closed by the Judge in
charge of the investigation upon not finding through the initial evidence
taken any indication of a crime.
The External
Auditor
Ernst & Young LLP have acted as external auditor since the Company's inception
in April 2008. This is the fifth year of Andrew Dann’s anticipated five year
tenure as audit partner. A full tender process was undertaken during December
2018 and January 2019 resulting in Ernst & Young LLP being
reappointed.
Independence, objectivity and
fees
The independence and objectivity of the external auditor is reviewed by the
Audit Committee which also reviews the terms under which the external auditor
is appointed to perform non-audit services.
In line with the historic policies, the Audit Committee does not consider that
the provision of non-audit services, to have been a threat to the objectivity
and independence of the external auditor. However, following the introduction
of the UK FRC Revised Ethical Standard (effective on 15 March 2020), the Audit
Committee has introduced a general prohibition on the external auditor
providing non-audit services to the Company. This general prohibition will not
extend to an interim review report providing the fee for such interim review
is subject to a 70% fee cap when compared to the audit fee. PFIC services
which had previously been provided by affiliates of Ernst & Young LLP up to
the year ended 29 February 2020, are now provided by PricewaterhouseCoopers
LLP.
The following table summarises the remuneration paid and payable by the
Company to Ernst & Young LLP and to other Ernst & Young LLP member firms for
audit and other services during the years ended 28 February 2023 and 28
February 2022.
$ Equivalent $ Equivalent
Year ended Year ended Year ended Year ended
28.2.2023 28.2.2023 28.2.2022 28.2.2022
Ernst & Young LLP
- Annual audit £222,000 $268,000 £256,000 $343,000
- Auditor's interim review £55,000 $68,000 £53,000 $71,000
Performance and
effectiveness:
During the year, when considering the effectiveness of the external auditor,
the Audit Committee has taken into account the following
factors:
? the audit plan presented to them before each
audit;
? the post audit report including variations from the original plan;
? changes in audit
personnel;
? the external auditor's own internal procedures to identify threats to
independence; and
? feedback received from both the Investment Adviser and
Administrator.
The Audit Committee reviewed and challenged the audit plan and the post audit
report of the external auditor and concluded that audit risks had been
sufficiently identified and were sufficiently addressed. The Audit Committee
considered reports from the external auditor on their procedures to identify
threats to independence and concluded that the procedures were sufficient to
identify potential threats to independence.
There were no significant adverse findings from this evaluation.
The Audit Committee has examined the scope and results of the audit, its cost
effectiveness and the independence and objectivity of the external auditor and
considers Ernst & Young LLP, as external auditor, to be independent of the
Company.
Audit Quality
Review
Post year end, the Financial Reporting Council (FRC)’s Audit Quality Review
(AQR) team concluded and reported to the Audit Committee the results of their
inspection and assessment of the quality of the audit work performed by the
Company’s Auditors on the prior year’s financial statements ended 28
February
2022.
The Audit Committee has discussed the findings and the actions to be taken
with both the FRC and Ernst & Young LLP.
Further information and scope of the work performed by the FRC’S AQR team
can be found at Audit Quality Review | Financial Reporting Council
(frc.org.uk)
Internal control and risk management systems:
Additional work performed by the Audit Committee in the areas of internal
control and risk management are disclosed in the ‘Internal Controls’
section under ‘Corporate Governance’.
The Audit Committee has also reviewed the need for an internal audit function.
The Audit Committee has decided that the systems and procedures employed by
the Investment Adviser and the Administrator, including the Administrator's
internal audit function, provide sufficient assurance that a sound system of
internal control, which safeguards the Company’s assets, is maintained. An
internal audit function specific to the Company is therefore considered
unnecessary.
In finalising the Annual Report and Accounts for recommendation to the Board
for approval, the Audit Committee has also recommended to the Board that the
Annual Report and Accounts should be considered fair, balanced and
understandable.
Sharon
Parr
Chairman, Audit
Committee
7 June 2023
Independent Auditor's Report
To The Members of JZ Capital Partners Limited
Opinion
We have audited the financial statements of JZ Capital Partners Limited (the
“Company”) for the year ended 28 February 2023 which comprise the
Statement of Financial Position, the Statement of Comprehensive Income, the
Statement of Changes in Equity, the Statement of Cash Flows and the related
Notes 1 to 33, including a summary of significant accounting policies. The
financial reporting framework that has been applied in their preparation is
applicable law and International Financial Reporting Standards as adopted by
the European Union (“IFRS”).
In our opinion, the financial statements:
? give a true and fair view of the state of the
Company’s affairs as at 28 February 2023 and of its profit for the year then
ended;
? have been properly prepared in accordance with IFRS; and
? have been properly prepared in accordance with the
requirements of The Companies (Guernsey) Law, 2008.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
(UK) (ISAs (UK)) and applicable law. 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 are required to be
independent of the Company and to meet our other ethical responsibilities in
accordance with the relevant ethical requirements relating to our audit. We
believe that the audit evidence we have obtained is sufficient and appropriate
to provide a basis for our audit opinion.
Independence
We are independent of the Company in accordance with the ethical requirements
that are relevant to our audit of the financial statements, including the UK
FRC’s Ethical Standard as applied to listed public interest entities, and we
have fulfilled our other ethical responsibilities in accordance with these
requirements.
The non-audit services prohibited by the FRC’s Ethical Standard were not
provided to the Company and we remain independent of the Company in conducting
the audit.
Going Concern
In auditing the financial statements, we have concluded that the directors’
use of the going concern basis of accounting in the preparation of the
financial statements is appropriate. Our evaluation of the directors’
assessment of the Company’s ability to continue to adopt the going concern
basis of accounting included:
- The audit engagement partner directed and
supervised the audit procedures on going concern;
- In conjunction with our walkthrough of the
Company’s financial close process, we confirmed our understanding of
management’s Going Concern assessment process and also engaged with
management early to ensure all key factors were considered in their
assessment;
- We obtained management’s going concern
assessment, including cash flow forecasts and covenant calculation prepared by
the Investment Adviser, Jordan/Zalaznick Advisers, Inc (“JZAI”) for the
going concern period which covers a year from the date of the signing of the
audit opinion;
- We have tested the factors and assumptions used to
model the cashflow forecast and covenant calculation and tested the
arithmetical accuracy of the models including reperforming the covenant tests;
- We obtained the agreements and enquired of
management to understand the Senior Credit Facility and associated agreement
amendments, including the nature of facilities, repayment terms and covenants;
- We performed a reverse-stress test for covenant
compliance to assess the likelihood of a reduction in fair value and/ or cash
balance, triggering a covenant breach;
- We challenged the appropriateness of
management’s forecasts by assessing historical forecasting accuracy,
challenging management’s consideration of downside sensitivity analysis and
applied further stress testing to understand the sensitivity of the assessment
to the timing and quantum of asset realisations;
- We assessed whether available funds are sufficient
to cover unfunded commitments made to underlying investments and other ongoing
commitments including Investment Adviser and other expenses;
- We held discussions with the Investment Adviser
and the Audit Committee in relation to the status of the asset
realisations; and
- We assessed the disclosures in the Annual Report and Financial
Statements relating to going concern, including the material uncertainties, to
ensure they were fair, balanced and understandable and in compliance with IAS
1.
Based on the work we have performed, we have not identified any material
uncertainties relating to events or conditions that, individually or
collectively, may cast significant doubt on the Company's ability to continue
as a going concern for a period to 30 June 2024.
Our responsibilities and the responsibilities of the directors with respect to
going concern are described in the relevant sections of this report. However,
because not all future events or conditions can be predicted, this statement
is not a guarantee as to the Company's ability to continue as a going concern.
Overview of our audit approach
Key audit matters Misstatement of unquoted investment fair values, including the impact on management fees: The risk that the fair value of investments might be misstated due to application of inappropriate methodologies or inputs to the valuations and/or inappropriate judgemental factors. This will include the possible impact on the management fees.
Impairment of direct loans measured at amortised cost: The risk that the carrying value of the direct loans might be misstated due to application of inappropriate methodologies or inputs determining the amortised cost and/or inappropriate judgemental factors Expected Credit Loss (“ECL”) in accordance with IFRS 9.
Materiality Overall materiality of $3.16m (2022: $3.41m) which represents 1% of total equity.
An overview of the scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation
of performance materiality determine our audit scope for the Company. This
enables us to form an opinion on the financial statements. We take into
account size, risk profile, the organisation of the Company and effectiveness
of controls, including controls and changes in the business environment when
assessing the level of work to be performed.
All audit work was performed directly by the audit engagement team. The audit
was led from Guernsey. In addition, we engaged our Valuation, Modelling, and
Economics (“VME”) industry valuation specialists from the Brooklyn and
Miami offices, who assisted us in auditing the valuation of the real estate
investments, and the Kyiv and London offices, who assisted us in auditing the
valuation of unquoted private equity investments. The scope of their work was
consistent with the prior year.
Climate change
Stakeholders are increasingly interested in how climate change will impact the
Company. The Company determined that the most significant future impacts from
climate change on its operations will be from transition and physical risk.
These are explained in the required Task Force for Climate related Financial
Disclosures and on page 19 in the principal risks and uncertainties. They have
also explained their climate commitments on page 19. All of these disclosures
form part of the “Other information,” rather than the audited financial
statements. Our procedures on these unaudited disclosures therefore consisted
solely of considering whether they are materially inconsistent with the
financial statements, or our knowledge obtained in the course of the audit or
otherwise appear to be materially misstated, in line with our responsibilities
on “Other information”.
In planning and performing our audit we assessed the potential impacts of
climate change on the Company’s business and any consequential material
impact on its financial statements.
Based on our work we have not identified the impact of climate change on the
financial statements to be a key audit matter or to impact a key audit matter.
The Company has explained in Note 2 its articulation of how climate change has
been reflected in the financial statements and how they have reflected the
impact of climate change in their financial statements. Significant judgements
and estimates relating to climate change are included in Note 3.
Our audit effort in considering the impact of climate change on the financial
statements was focused on evaluating management’s assessment of the impact
of climate risk, physical and transition, their climate commitments, the
effects of material climate risks disclosed in Note 3 and the significant
judgements and estimates disclosed in Note 3 and whether these have been
appropriately reflected following the requirements of IFRS. As part of this
evaluation, we performed our own risk assessment to determine the risks of
material misstatement in the financial statements from climate change which
needed to be considered in our audit.
We also challenged the Directors’ considerations of climate change risks in
their assessment of going concern and viability and associated disclosures.
Where considerations of climate change were relevant to our assessment of
going concern, these are described above.
Based on our work we have not identified the impact of climate change on the
financial statements to be a key audit matter or to impact a key audit
matter.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were
of most significance in our 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) that we identified. These matters
included 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 were addressed in the context of our audit of
the financial statements as a whole, and in our opinion thereon, and we do not
provide a separate opinion on these matters.
Risk Our response to the risk Key observations communicated to the Audit Committee
Misstatement of unquoted investment fair values, including the impact on management fees (2023: $253 million; 2022 (Restated): $412 million) Refer to the Audit Committee Report; Accounting policies; and Note 5 of the financial statements 74% (2022: 99%) of the carrying value of investments relates to the Company’s holdings in unquoted investments, which are valued using different valuation techniques, as described in Note 5 to the financial statements. The valuation of the unquoted investments is the key driver of the Company’s net asset value and total return. Incorrect valuation could have a significant impact on the net asset value of the Company and therefore the return generated for shareholders. The valuation is subjective, with a high level of judgement and estimation linked to the determination of the values with limited market information available, as a result of the low level of liquidity in the private equity and real estate markets at the year-end. The Investment Advisory fees are calculated based on NAV, which is driven by investment valuation and is therefore related to this key audit matter. As a result, there is a risk of an inappropriate valuation model being applied, together with the risk of inappropriate inputs to the model/calculation being selected including the possible impact on the management fees. Our audit procedures consisted of: Private Equities Updating and confirming our understanding of the Company’s processes and methodologies, including the use of We have no matters to report to the Audit Committee in this regard.
industry specific measures, and policies for valuing private equity investments held by the Company; Attending fair value discussions in relation to 28 February 2023
valuations. These included the Investment Adviser, EY core audit team and EY valuation specialists; Obtaining and inspecting the valuation decks and supporting data for
the private equity investments, to assess whether the data used is appropriate and relevant, and discussing these with the Investment Adviser to evaluate whether the fair
value of the Company’s private equity investments are reasonably stated, challenging the assumptions made by the Investment Adviser and Board of Directors of the Company;
For a sample of significant private equity investments selected based on their size/value and complexity, we engaged EY Kyiv and EY London. It was considered appropriate
for EY Kyiv to review both US and European assets as the estimation process is common across both geographies and EY London to review the debt investments. We engaged the
above as valuation specialist to: use their knowledge of the market to assess and corroborate the Investment Adviser's and the Company’s specialist’s market related
judgements and valuation inputs (in relation to the US and European private equity investments discount rates and EBITDA multiples while in relation to debt investments
the probability weighted scenario approach) by reference to comparable transactions, and independently compiled databases/indices; assist us to determine whether the
methodologies used to value private equity investments assets were consistent with methods usually used by market participants; perform procedures to assess whether, in
light of market data, the fair values of certain recently acquired private equity investments continue to approximate to their consideration paid. Vouching valuation
inputs that do not require specialist knowledge to independent sources and testing the arithmetical accuracy of the Company’s calculations for a sample of significant
private equity investments selected based on their size/value and complexity; Agreeing the valuation per the financial statements back to the models per the valuation
decks, relating to private equity investments, prepared by the Investment Adviser and agreeing the proposed values per the valuation decks to the investment portfolio
report prepared by the Administrator; Reviewing the waterfall calculations on the flow of valuation through the SPV structures to the Company and reviewing the inputs to,
and arithmetic accuracy of, the valuation calculations/waterfall; Performing back testing on the Level 3 investment sensitivity disclosures to understand the drivers of
movements in fair value; Performing back testing to compare realisation proceeds during the period to the previously reported fair values for those disposed assets;
Identifying the significant unobservable inputs to valuations and reviewing and assessing the reasonableness of the sensitivity workings and disclosures, comparing the
Investment Adviser’s position with EY’s range of acceptable inputs; Challenging management on the appropriateness of their chosen comparable public companies used to
compute multiples as well as corroborating those multiples with independent data; Reporting to the Audit Committee on the investment valuations against EY’s ranges and
commenting on any specific movements of valuation marks in those ranges vs prior periods; Real Estate Investments Obtaining and inspecting the independent appraisals
and supporting data regarding the real estate assets, to assess whether the data used is appropriate and relevant, and discussing these with the Investment Adviser to
evaluate whether the fair value of the Company’s real estate investments are reasonably stated, challenging the assumptions made by the Investment Adviser and Board of
Directors of the Company; We engaged with EY New York and Miami to: use their knowledge of the market to assess and corroborate the Investment Adviser's and the Company’s
specialist’s market related judgements and valuation inputs in relation to real estate assets discount rates, rental per square foot, selling price per square foot by
reference to comparable transactions, and independently compiled databases/indices; assist us to determine whether the methodologies used to value real estate assets were
consistent with methods usually used by market participants; perform procedures to assess whether, in light of market data, the fair values of certain recently acquired
real estate assets continue to approximate to their consideration paid; and assist us in determining whether the Company’s specialist, for the real estate assets, was
appropriately qualified and independent; Agreeing the valuation per the financial statements back to the models per the independent appraisal reports, prepared by the
Company’s specialist; For all unquoted investments, we re-perform the management fee calculations for arithmetical accuracy and consistency with the terms of the
investment advisory agreement.
Impairment of direct loans measured at amortised cost (2023: $3.7 million; 2022 (Restated) $3.9 million) Refer to the Audit Committee Report; Accounting policies; and Note 7 of the financial statements There is a risk that the carrying value of the direct loans might be misstated due to methodologies, inputs, and/or judgmental factors determining the expected credit loss in accordance with IFRS 9. Our audit procedures consisted of: Obtaining copies of the signed loan agreements including any changes to the terms and conditions of the loans; Re-performing the From our audit procedures, we noted one direct loan was incorrectly classified at amortised cost. This has been reclassified to fair value through profit or loss and correctly presented in the restated financial statements by management. We believe the disclosure in Note 2 of the financial statements appropriately describes the error. We have no other matters to report to the Audit Committee in this regard.
amortised cost calculations for mathematical accuracy and consistency with the terms of the loan agreements; Obtaining the expected credit loss calculation from the
Investment Advisor for each material loan and determining that the estimate and judgements applied by management specific to each loan were in accordance with IFRS 9;
Inquiring and challenging management’s valuations of the investments held by the holding companies, which are the counterparties to the direct loans; Reviewing the
possible default scenarios and credit risk of each loan separately and applying probabilities of default to assess the expected credit loss over the next 12 months;
Assessing the reasonableness of the effective interest rate calculations used to recognise lifetime expected losses, with interest revenue based on the net amount;
Assessing the impact the potential material uncertainties in respect of going concern might have on the valuation of the expected credit loss; and Reviewing to ensure
that the presentation and disclosure requirements of IFRS 9 are adequate in the financial statements.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in
evaluating the effect of identified misstatements on the audit and in forming
our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the
aggregate, could reasonably be expected to influence the economic decisions of
the users of the financial statements. Materiality provides a basis for
determining the nature and extent of our audit procedures.
We determined materiality for the Company to be $3.16 million (2022: $3.41
million), which is 1% (2022: 1%) of Total Equity. We believe that Total Equity
provides a basis for determining the nature, timing and extent of risk
assessment procedures, identifying and assessing the risk of material
misstatement and determining the nature, timing and extent of further audit
procedures. We believe that Total Equity provides us with the best measure of
planning materiality as the Company’s primary performance measures for
internal and external reporting are based on Total Equity.
During the course of our audit, we reassessed initial materiality and updated
its calculation to align with the year-end Total Equity figure.
Performance materiality
The application of materiality at the individual account or balance level. It
is set at an amount to reduce to an appropriately low level the probability
that the aggregate of uncorrected and undetected misstatements exceeds
materiality.
On the basis of our risk assessments, together with our assessment of the
Company’s overall control environment, our judgement was that performance
materiality was 50% (2022: 50%) of our planning materiality, namely $1.58m
(2022:$1.70m). We have set performance materiality at this percentage to
ensure that the total uncorrected and undetected audit differences in the
financial statements did not exceed our materiality level.
Reporting threshold
An amount below which identified misstatements are considered as being clearly
trivial.
We agreed with the Audit Committee that we would report to them all
uncorrected audit differences in excess of $0.15m (2022: $0.17m), which is set
at 5% of planning materiality, as well as differences below that threshold
that, in our view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative
measures of materiality discussed above and in light of other relevant
qualitative considerations in forming our opinion.
Other information
The other information comprises the information included in the Annual Report
other than the financial statements and our auditor’s report thereon. The
directors are responsible for the other information contained within the
Annual Report.
Our opinion on the financial statements does not cover the other information
and, except to the extent otherwise explicitly stated in this report, we do
not express any form of assurance conclusion thereon.
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 course of the audit or otherwise
appears to be materially misstated. If we identify such material
inconsistencies or apparent material misstatements, we are required to
determine whether there is a material misstatement in the financial statements
themselves. If, based on the work we have performed, we conclude that there is
a material misstatement of the other information, we are required to report
that fact. We have nothing to report in this regard.
We have nothing to report in this regard.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters in relation to
which The Companies (Guernsey) Law, 2008 requires us to report to you if, in
our opinion:
?proper accounting records have not been kept by the Company; or
?the financial statements are not in agreement with the Company’s accounting
records and returns; or
?we have not received all the information and explanations we require for our
audit.
Corporate Governance Statement
The Listing Rules require us to review the directors’ statement 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.
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 or our knowledge obtained during the
audit:
?Directors’ statement with regards to the appropriateness of adopting the
going concern basis of accounting and any material uncertainties identified;
?Directors’ explanation as to its assessment of the Company’s prospects,
the period this assessment covers and why the period is appropriate;
?Directors’ statement on fair, balanced and understandable;
?Board’s confirmation that it has carried out a robust assessment of the
emerging and principal risks;
?The section of the Annual Report that describes the review of effectiveness
of risk management and internal control systems; and
?The section describing the work of the audit committee.
Responsibilities of Directors
As explained more fully in the directors’ responsibilities statement set out
on page 24, the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view, 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 (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on
the basis of these financial statements.
Explanation as to what extent the audit was considered capable of detecting
irregularities, including fraud Irregularities, including fraud, are instances
of non-compliance with laws and regulations. We design procedures in line with
our responsibilities, outlined above, to detect irregularities, including
fraud. The risk of not detecting a material misstatement due to fraud is
higher than the risk of not detecting one resulting from error, as fraud may
involve deliberate concealment by, for example, forgery or intentional
misrepresentations, or through collusion. The extent to which our procedures
are capable of detecting irregularities, including fraud is detailed below.
However, the primary responsibility for the prevention and detection of fraud
rests with both those charged with governance of the Company and the
Investment Adviser. Our approach was as follows:
?We obtained an understanding of the legal and regulatory frameworks that are
applicable to the Company and determined that the most significant are the
Companies (Guernsey) Law, 2008, as amended, the 2018 UK Corporate Governance
Code and the listing requirements of London Stock Exchange and the Disclosure
Guidance and Transparency Rules of the UK Listing Authority;
?We understood how the Company is complying with those frameworks by making
enquiries of the Investment Adviser and those charged with governance
regarding:
- their knowledge of any non-compliance or potential
non-compliance with laws and regulations that could affect the financial
statements;
- the Company’s methods of enforcing and
monitoring non-compliance with such policies;
- management’s process for identifying and
responding to fraud risks, including programs and controls the Company has
established to address risks identified by the entity, or that otherwise
prevent, deter and detect fraud; and
- how management monitors those programs and
controls;
?Administration and maintenance of the Company’s books and records is
performed by Northern Trust International Fund Administration Services
(Guernsey) Limited which is a regulated firm, independent of the Investment
Adviser. We corroborated our enquiries through our review of Board minutes and
any correspondence received from regulatory bodies. We also obtained their
SOC1 controls report and reviewed it for findings relevant to the Company. We
noted no contradictory evidence during these procedures;
?We assessed the susceptibility of the Company’s financial statements to
material misstatement, including how fraud might occur by:
- obtaining an understanding of entity-level
controls and considering the influence of the control environment;
- obtaining management’s assessment of fraud risks
including an understanding of the nature, extent and frequency of such
assessment documented in the Board’s risk matrix;
- making inquiries with those charged with
governance as to how they exercise oversight of management’s processes for
identifying and responding to fraud risks and the controls established by
management to mitigate specifically those risks the entity has identified, or
that otherwise help to prevent, deter and detect fraud;
- making inquiries with management and those charged
with governance regarding how they identify related parties including
circumstances related to the existence of a related party with dominant
influence; and
- making inquiries with management and those charged
with governance regarding their knowledge of any actual or suspected fraud or
allegations of fraudulent financial reporting affecting the Company.
?Based on this understanding we designed our audit procedures to identify
non-compliance with such laws and regulations identified above. Our procedures
involved a review of Board minutes and inquiries of the Investment Adviser and
those charged with governance including:
- Through discussion, gaining an understanding of
how those charged with governance, the Investment Adviser and Administrator
identify instances of non-compliance by the Company with relevant laws and
regulations;
- Inspecting the relevant policies, processes and
procedures to further our understanding;
- Reviewing Board minutes and internal compliance
reporting;
- Inspecting correspondence with regulators; and
- Obtaining relevant written representations from
the Board of Directors.
A further description of our responsibilities for the audit of the financial
statements is located on the Financial Reporting Council’s website at
https://www.frc.org.uk/auditorsresponsibilities. This description forms part
of our auditor’s report.
Other matters we are required to address
?Following the recommendation from the audit committee, we were appointed by
the Company to audit the financial statements for the year ending 28 February
2009 and subsequent financial periods. We signed an engagement letter on 27
April 2008..
?The period of total uninterrupted engagement including previous renewals and
reappointments is 15 years, covering the years ended 28 February 2009 to 28
February 2023.
?The audit opinion is consistent with the additional report to the audit
committee.
Use of our report
This report is made solely to the Company’s members, as a body, in
accordance with Section 262 of The Companies (Guernsey) Law 2008. Our audit
work has been undertaken so that we might state to the Company’s members
those matters we are required to state to them in an auditor’s report and
for no other purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the Company and the Company’s
members as a body, for our audit work, for this report, or for the opinions we
have formed.
Andrew Jonathan Dann, FCA
for and on behalf of Ernst & Young LLP
Guernsey, Channel Islands
7 June 2023
1. The maintenance and integrity of the JZ Capital Partners Limited website is
the responsibility of the Directors; the work carried out by the auditors does
not involve consideration of these matters and, accordingly, the auditors
accept no responsibility for any changes that may have occurred to the
Financial Statements since they were initially presented on the website.
2. Legislation in Guernsey governing the preparation and dissemination of
Financial Statements may differ from legislation in other jurisdictions.
Independent Auditor’s Report To The Directors of JZ Capital Partners For
Audit Conducted In Accordance With Auditing Standards Generally Accepted In
The United States(1)
Opinion
We have audited the financial statements of JZ Capital Partners Limited (the
“Company”), which comprise the Statements of Financial Position as of
February 28, 2023 and 2022, and the related Statements of Comprehensive
Income, Changes in Equity and Cash Flows for the years then ended, and the
related notes (collectively referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of the Company as of February 28,
2023 and 2022, and the results of its operations and its cash flows for the
years then ended in accordance with International Financial Reporting
Standards as adopted by the European Union (“IFRS”).
Basis for Opinion
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America (GAAS). 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 are required
to be independent of the Company and to meet our other ethical
responsibilities in accordance with the relevant ethical requirements relating
to our audits. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit opinion.
Restatement of 2022 and 2021 Financial Statements
As discussed in Note 2 to the financial statements, the financial statements
as of February 28, 2022 and March 1, 2021 and for the year ended February 28,
2022 have been restated to correct misstatements in an investment which has
been reclassified to fair value through profit or loss from amortised cost and
subsequently remeasured. Our opinion is not modified with respect to this
matter.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of the
financial statements in accordance with IFRS, and for the design,
implementation, and maintenance of internal control relevant to the
preparation and fair presentation of financial statements that are free of
material misstatement, whether due to fraud or error.
In preparing the financial statements, management is 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 management either intends to liquidate the Company or to
cease operations, or has 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 of 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 absolute
assurance and therefore is not a guarantee that an audit conducted in
accordance with GAAS will always detect a material misstatement when it
exists. 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. Misstatements are considered material if there is a
substantial likelihood that, individually or in the aggregate, they would
influence the judgment made by a reasonable user based on the financial
statements.
In performing an audit in accordance with GAAS, we:
• Exercise professional judgment and maintain
professional skepticism throughout the audit.
• Identify and assess the risks of material
misstatement of the financial statements, whether due to fraud or error, and
design and perform audit procedures responsive to those risks. Such procedures
include examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements.
• 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. Accordingly, no such
opinion is expressed.
• Evaluate the appropriateness of accounting
policies used and the reasonableness of significant accounting estimates made
by management, as well as evaluate the overall presentation of the financial
statements.
• Conclude whether, in our judgment, there are
conditions or events, considered in the aggregate, that raise substantial
doubt about the Company’s ability to continue as a going concern for a
reasonable period of time.
We are required to communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit, significant
audit findings, and certain internal control-related matters that we
identified during the audit.
Other Information
Management is responsible for the other information. The other information
comprises the information included in the Annual Report but does not include
the financial statements and our auditor’s report thereon. Our opinion on
the financial statements does not cover the other information, and we do not
express an opinion or any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility
is to read the other information and consider whether a material inconsistency
exists between the other information and the financial statements, or the
other information otherwise appears to be materially misstated. If, based on
the work performed, we conclude that an uncorrected material misstatement of
the other information exists, we are required to describe it in our report.
Ernst & Young LLP
Guernsey, Channel Islands
7 June 2023
(1)In order to comply with the U.S. Securities and Exchange Commission's
custody rule, an audit opinion was requested, by the Company's Investment
Adviser, which satisfies the requirements of auditing standards generally
accepted in the United States.
Statement of Comprehensive Income
For the Year Ended 28 February 2023
Year Ended Year Ended
28 February 2023 28 February 2022 (Restated)
US$'000 US$'000
Notes
Income and investment and other gains
Investment income 2,8 12,542 15,333
Bank and deposit interest 275 174
Realisations from investments held in escrow accounts 29 1,189 597
Net foreign currency exchange gains 2,9 9,845 2,075
Net gain on investments at fair value through profit or loss 2,6 - 15,972
23,851 34,151
Expenses and losses
Net loss on investments at fair value through profit or loss 6 (2,045) -
Expected credit losses 2,7 (462) (3,840)
Investment Adviser's base fee 11 (7,033) (7,414)
Administrative expenses 11 (2,583) (3,457)
Directors' remuneration 11 (290) (290)
Loss on financial liabilities at fair value through profit or loss 18 - (1,869)
(12,413) (16,870)
Operating profit 11,438 17,281
Other income 12 398 -
Finance costs 10 (9,030) (13,094)
Profit before taxation 2,806 4,187
Withholding taxes 12 (160) -
Profit for the year 2,646 4,187
Other comprehensive loss that will not be reclassified to the Income Statement
Other comprehensive loss that will not be reclassified to the Income Statement
Loss on financial liabilities due to change in credit risk 18 - (1,074)
Total comprehensive profit for the year 2,646 3,113
Weighted average number of Ordinary shares in issue during the year 26 77,477,214 77,475,932
Basic and diluted (loss)/earnings per Ordinary share 26 3.42c 5.40c
All of the profits and losses presented in this statement are from continuing
operations. The accompanying notes form an integral part of these Financial
Statements.
The accompanying notes form an integral part of these Financial Statements.
Prior year balances have been restated to present an investment which has been
reclassified to fair value through profit or loss from amortised cost as at 28
February 2022 and 1 March 2021, leading to the loan being remeasured on these
dates (see Note 2 to the Financial Statements).
Statement of Financial Position
As at 28 February 2023
28 February 2023 28 February 2022 1 March 2021
(Restated) (Restated)
Notes US$'000 US$'000 US$'000
Assets
Investments at fair value through profit or loss 2,13 343,521 415,836 439,050
Loans at amortised cost 2,13 3,695 3,913 7,142
Other receivables 14 168 70 22
Cash at bank 11,059 43,656 59,784
Total Assets 358,443 463,475 505,998
Liabilities
Senior Credit Facility 15 43,181 42,573 68,694
Zero Dividend Preference (2022) Shares 16 - 75,038 74,303
Subordinated Notes 17 - 32,293 -
Investment Adviser's base fee 11 - 276 573
Other payables 19 764 1,443 1,284
Converted Unsecured Loan Stock - - 52,430
Total Liabilities 43,945 151,623 197,284
Equity
Share capital 20 216,650 216,650 216,625
Other reserve 22 353,528 353,528 354,602
Retained deficit 2,22 (255,680) (258,326) (262,513)
Total Equity 314,498 311,852 308,714
Total Liabilities and Equity 358,443 463,475 505,998
Number of Ordinary shares in issue at year end 20 77,477,214 77,477,214 77,477,214
Basic and Diluted NAV per Ordinary share 2,28 $4.06 $4.03 $3.98
These Audited Financial Statements were approved by the Board of Directors and
authorised for issuance on 7 June 2023. They were signed on its behalf by:
David Macfarlane
Sharon Parr
Chairman
Director
The accompanying notes form an integral part of these Financial Statements.
Prior year balances have been restated to present an investment which has been
reclassified to fair value through profit or loss from amortised cost as at 28
February 2022 and 1 March 2021, leading to the loan being remeasured on these
dates (see Note 2 to the Financial Statements).
Statement of Changes in Equity
For the Year Ended 28 February 2023
Share Other
Capital Reserve Retained Deficit Total
Notes US$'000 US$'000 US$'000 US$'000
Balance as at 1 March 2022 216,650 353,528 (258,326) 311,852
Loss for the year - - 2,646 2,646
Balance at 28 February 2023 216,650 353,528 (255,680) 314,498
Restated comparative for the Year ended 28 February 2022
Share Other Retained
Capital Reserve Deficit Total
US$'000 US$'000 US$'000 US$'000
Balance as at 1 March 2021 216,625 354,602 (241,668) 329,559
Restatement to Correct Historical Error 2 - - (20,845) (20,845)
Profit for the year (restated) 2 - - 4,187 4,187
Loss on financial liabilities due to change in credit risk 18 - (1,074) - (1,074)
Issue of Ordinary shares 20 25 - - 25
Balance at 28 February 2022 (Restated) 216,650 353,528 (258,326) 311,852
The accompanying notes form an integral part of these Financial Statements.
Prior year balances have been restated to present an investment which has been
reclassified to fair value through profit or loss from amortised cost as at 28
February 2022 and 1 March 2021, leading to the loan being remeasured on these
dates (see Note 2 to the Financial Statements).
Statement of Cash Flows
For the Year Ended 28 February 2023
28 February 28 February
2023 2022
US$'000 US$'000
Cash flows from operating activities
Cash inflows
Realisation of investments 182,540 65,799
Maturity of treasuries 123,357 3,395
Escrow receipts received 1,189 597
Income distributions received from investments 372 520
Bank Interest received 275 174
Cash outflows
Direct investments and capital calls (10,870) (13,008)
Purchase of treasuries (213,164) (3,395)
Investment Adviser's base fee paid (7,374) (7,711)
Other operating expenses paid (3,187) (3,637)
Net cash inflow from operating activities 73,138 42,734
Cash flows from financing activities
Repayment of ZDP shares (64,296) -
(Repayment)/Advance of Subordinated Notes (31,500) 31,500
Advance of Senior Credit Facility - 16,000
Repayment of Senior Credit Facility - (40,585)
Repayment of Convertible Unsecured Loan Stock - (54,401)
Finance costs paid:
• Senior Credit Facility (4,555) (8,379)
• Subordinated Notes (2,593) (315)
• Convertible Unsecured Loan Stock - (2,677)
Net cash outflow from financing activities (102,944) (58,857)
Decrease in cash and cash equivalents (29,806) (16,123)
Reconciliation of Net Cash Flow to Movements in Cash and Cash Equivalents
Cash at bank at beginning of year 43,656 59,784
Decrease in cash and cash equivalents as above (29,806) (16,123)
Foreign exchange movements on cash at bank (2,791) (5)
Cash at bank at year end 11,059 43,656
There is no impact on the prior year cash flow balances due to the restatement
as detailed in Note 2 to the Financial Statements.
The accompanying notes form an integral part of these Financial Statements.
Notes to the Financial Statements
1. General Information
JZ Capital Partners Limited ("JZCP" or the "Company") is a Guernsey domiciled
closed-ended investment company which was incorporated in Guernsey on 14 April
2008 under the Companies (Guernsey) Law, 1994. The Company is now subject to
the Companies (Guernsey) Law, 2008. The Company is classified as an authorised
fund under the Protection of Investors (Bailiwick of Guernsey) Law 2020. As at
28 February 2023, the Company's capital consisted of Ordinary shares. In
October 2022, the Company redeemed and cancelled its Zero Dividend Preference
("ZDP") shares. The Company's shares trade on the London Stock Exchange's
Specialist Fund Segment ("SFS").
The Company's debt structure consists of a Senior Credit Facility. In February
2023, the Company redeemed its subordinated, second lien loan notes (the
"Subordinated Notes").
The Company's new investment policy, adopted in August 2020, is for the
Company to make no further investments outside of its existing obligations or
to the extent that investment may be made to support selected existing
portfolio investments. The intention is to realise the maximum value of the
Company’s investments and, after repayment of all debt, to return capital to
shareholders. The Company’s previous Investment Policy was to target
predominantly private investments and back management teams to deliver on
attractive investment propositions. In executing this strategy, the Company
took a long term view. The Company looked to invest directly in its target
investments and was able to invest globally but with a particular focus on
opportunities in the United States and Europe.
The Company is currently mainly focused on supporting its investments in the
following areas:
small or micro-cap buyouts in the form of debt and equity and preferred stock
in both the US and Europe; and
US real estate.
The Company has no direct employees. For its services, the Investment Adviser
receives a management fee as described in Note 11. The Company has no
ownership interest in the Investment Adviser. During the period under review,
the Company was administered by Northern Trust International Fund
Administration Services (Guernsey) Limited.
2. Basis of Accounting and Significant Accounting Policies
Basis of preparation
The Financial Statements have been prepared in accordance with the
International Financial Reporting Standards as adopted by the European Union
("IFRS"), which comprise standards and interpretations approved by the
International Accounting Standards Board ("IASB") together with applicable
legal and regulatory requirements of Guernsey Law, and the SFS.
The Financial Statements have been prepared on a historical-cost basis, except
for financial assets and financial liabilities held at fair value through
profit or loss ("FVTPL").
The Financial Statements are presented in US Dollars and all values are
presented to the nearest thousand dollars ($000), except where otherwise
indicated. The functional currency of the Company as determined in accordance
with IFRS is the US Dollar because this is the currency that best reflects the
economic substance of the underlying events and circumstances of the Company.
The Company presents its Statement of Cash Flows statement on a direct-basis.
The Company's Statement of Financial Position's is presented in order of
liquidity, which provides information in a format that is deemed relevant to
the Company.
New and amended standards and interpretations
There were no new standards or amendments to existing standard and
interpretations, effective for annual periods beginning on or after 1 January
2022, that had significant effect on the Company's Financial Statements. The
new standards or amendments to existing standards and interpretations,
effective from 1 March 2022, did not have a material impact of the Company’s
Financial Statements. The Company has assessed the impact of standards issued
but not yet applicable, and has concluded that they will not have a material
impact on the Financial Statements.
Changes in accounting policy and disclosure
The accounting policies adopted in the preparation of these Audited Annual
Financial Statements have been consistently applied during the year and are
consistent with those of the previous year, unless otherwise stated.
Climate Change
The Board has assessed the impact of climate change on the financial
performance of the Company reported within these Financial Statements.
Restatement to Correct Historical Error in Classification and Associated
Measurement of Asset
An investment in a direct loan to a European micro-cap company has been
reclassified to fair value through profit or loss from amortised cost as at 28
February 2022 and 1 March 2021 to reflect its contractual terms, leading to
the loan being remeasured on these dates. The reclassification is required as
the contractual terms of the loan do not give rise, on specified dates, to
cash flows that are solely payments of principal and interest on the principal
amount of the loan outstanding and are therefore not consistent with an
amortised cost classification. The affected financial statement line items for
the prior periods have been restated, as follows:
Impact on the statement of financial position
28.2.2022 (1) Reclass- ification (2) Remeasure- ment (2) 28.2.2022 (restated) 1.3.2021 (1) Reclass- ification Remeasure- ment 1.3.2021 (restated)
Assets US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Investments at FVTPL 411,568 24,680 (20,412) 415,836 433,224 26,671 (20,845) 439,050
Loans at amortised cost 28,593 (24,680) - 3,913 33,813 (26,671) - 7,142
(1)The value of the assets as recorded in the prior year financial statements
before restatement.
(2)Assumes the reclassification and remeasurement occurred on 28 February 2022
rather than 1 March 2021.
NAV per share as at 28.2.2022 of $4.29 per share has been restated to $4.03
(28.2.2021: $4.25 per share restated to $3.98)
Impact on statement of comprehensive income
28.2.2022
US$ '000
Investment income (1,437)
Net foreign currency exchange gains 1,991
Net gain on investments at fair value through profit or loss (1,558)
Expected credit losses 1,437
Net impact on profit for the year 433
28.2.2022
0.56c
Impact on basic and diluted earnings per share ("EPS") (Increase/(decrease) in
EPS)
Basic and diluted earnings per Ordinary share (cents per share)
Significant Accounting Policies
Financial instruments
In accordance with IFRS 9 - "Financial Instruments", the Company classifies
its financial assets and financial liabilities at initial recognition into the
categories of financial assets and financial liabilities discussed below.
Financial assets
The Company classifies its financial assets as subsequently measured at
amortised cost or measured at FVTPL on the basis of both:
? The entity’s business
model for managing the financial assets; and
? The contractual cash
flow characteristics of the financial asset.
i) Financial assets measured at amortised cost
A debt instrument is measured at amortised cost if it is held within a
business model whose objective is to hold financial assets in order to collect
contractual cash flows and its contractual terms give rise on specified dates
to cash flows that are solely payments of principal and interest on the
principal amount outstanding. The Company includes in this category loans at
amortised cost, short-term non-financing receivables and other receivables.
ii) Financial assets measured at FVTPL
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
ii a) Classification
Financial assets classified at FVTPL are those that are managed and their
performance evaluated on a fair value basis in accordance with the Company’s
investment strategy as documented in its prospectus.
The Company includes in this category:
· Investments in the equity and preferred stock of micro cap, real
estate and other investments;
· Investment in subsidiaries: In accordance with the exception
under IFRS 10 - "Consolidated Financial Statements", the Company does not
consolidate subsidiaries in the financial statements unless the subsidiary is
not itself an investment entity and its main purpose and activities are
providing services that relate to the Company’s investment activities. The
Company has no consolidated subsidiaries;
· Investment in associates: In accordance with the exemption in IAS
28 - "Investments in Associates and Joint Ventures", the Company meets the
criteria of an investment entity and does not account for its investments in
associates using the equity method but measures its investments in associates
at FVTPL; and
· Investments in debt instruments which include investments that
are held under a business model to manage them on a fair value basis for
investment income and fair value gains.
ii b) Measurement
Investments made by the Company are measured initially and subsequently at
fair value, with changes in fair value taken to the Statement of Comprehensive
Income. Transaction costs are expensed in the year in which they arise for
those financial instruments classified at FVTPL.
ii c) Fair value estimate
The fair value of financial assets traded in active markets (such as publicly
traded securities) is based on quoted market prices at the Statement of
Financial Position date. The quoted market price used for financial assets
held by the Company is the bid price.
Unquoted preferred shares, micro cap loans, unquoted equities and equity
related securities investments are typically valued by reference to their
enterprise value, which is generally calculated by applying an appropriate
multiple to the last twelve months’ earnings before interest, tax,
depreciation and amortisation (“EBITDA”). In determining the multiple, the
Directors consider inter alia, where practical, the multiples used in recent
transactions in comparable unquoted companies, previous valuation multiples
used and where appropriate, multiples of comparable publicly traded companies.
In accordance with the International Private Equity and Venture Capital
Association (“IPEVCA”) valuation guidelines, a marketability discount is
applied which reflects the discount that in the opinion of the Directors,
market participants would apply in a transaction in the investment in
question.
The valuation techniques to derive the fair value of real estate interests and
other investments are detailed in Note 5.
iii) Other receivables
Other receivables do not carry any interest and are short-term in nature and
are accordingly stated at their carrying value as reduced by appropriate
allowances for expected credit losses.
iv) Cash and cash equivalents
Cash and cash equivalents comprise bank balances and cash held by the Company,
including short-term bank deposits with a maturity of three months or less.
Cash also includes amounts held in interest-bearing overnight accounts.
Financial liabilities
For financial liabilities designated as FVTPL using the fair value option
("FVO"), the amount of change in the fair value of such financial liabilities
that is attributable to changes in the Company's credit risk must be presented
in Other Comprehensive Income ("OCI"). The remainder of the change in fair
value is presented in profit or loss, unless presentation in OCI of the fair
value change in respect of the liability’s credit risk would create or
enlarge an accounting mismatch in profit or loss.
Financial liabilities are classified according to the substance of the
contractual arrangements entered into. Financial liabilities are recorded at
the amount of proceeds received, net of issue costs.
Financial liabilities may be designated at fair value through profit or loss
rather than stated at amortised cost, when the Board have considered the
appropriate accounting treatment for the specific liability. As at 28 February
2023, the Company had no financial liabilities designated as FVTPL.
Financial liabilities measured at amortised cost
This category includes all financial liabilities, other than those measured at
fair value through profit or loss. The Company includes in this category the
Senior Credit Facility and other short-term payables. Zero Dividend Preference
(“ZDP”) shares and Subordinated Notes which were repaid during the year
were also included in this category.
a) Senior Credit Facility
The loan is recorded at amortised cost using the effective interest rate
method.
b) Other payables
Other payables (include the accrual of Investment Adviser’s fees) are
classified as financial liabilities at amortised cost. Other payables are not
interest-bearing and are stated at their nominal value.
c) Zero Dividend Preference (“ZDP”) Shares
ZDP shares met the definition of a financial liability in accordance with IAS
32 - "Financial Instruments: Presentation", as the shares were redeemable at a
fixed date and holders were entitled to a fixed return. ZDP shares were
recorded at amortised cost using the effective interest rate method.
d) Subordinated Notes
Subordinated Notes were recorded at amortised cost using the effective
interest rate method.
Equity
Equity is classified according to the substance of the contractual
arrangements entered into. An equity instrument is any contract that evidences
a residual interest in the assets of the Company after deducting all of its
liabilities. Equity is recorded at the amount of proceeds received, net of
issue costs. Ordinary Shares are classified as equity in accordance with IAS
32 – “Financial Instruments: Presentation” as these instruments include
no contractual obligation to deliver cash.
Interest revenue
Interest revenues are recognised in the Statement of Comprehensive Income for
all interest-bearing financial instruments using the effective interest
method.
Dividend income
Dividend income is recognised when the Company's right to receive payment is
established. When there is reasonable doubt that income due to be received
will actually be received, such income is not accrued until it is clear that
its receipt is probable. Where, following an accrual of income, receipt
becomes doubtful, the accrual is either fully or partly written off until the
reasonable doubt is removed.
Expenses
All expenses are recognised in the Statement of Comprehensive Income on an
accruals basis.
Finance costs
Finance costs are interest expenses in respect of the ZDP shares, Senior
credit facility and Subordinated Notes, and are recognised in the Statement of
Comprehensive Income using the effective interest rate method.
Escrow accounts
Where investments are disposed of, the consideration given may include
contractual terms requiring that a percentage of the consideration is held in
an escrow account pending resolution of any indemnifiable claims that may
arise and as such the value of these escrow amounts is not immediately known.
The Company has historically and will continue to record gains realised on
investments held in escrow in the Statement of Comprehensive Income following
confirmation that any such indemnifiable claims have been resolved and none is
expected in the future. However, following the partial sale of the Company's
interest in Industrial Services Solutions (ISS), the Board determined due to
the high likelihood that a portion of the total escrow would be released
imminently, it would be included within the year end valuation of Industrial
Service Solutions WC, L.P. rather than as an contingent asset (see Note 29).
Taxation
The Company has been granted Guernsey tax exempt status in accordance with The
Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 (as amended). However, in
some jurisdictions, investment income and capital gains are subject to
withholding tax deducted at the source of the income. The Company presents the
withholding tax separately from the gross investment income in the Statement
of Comprehensive Income.
3. Estimates and Judgements
The preparation of the Company’s financial statements requires management to
make estimates, judgements, and assumptions that affect the reported amounts
recognised in the financial statements. However, uncertainty about these
assumptions and estimates could result in outcomes that could require a
material adjustment to the carrying amount of the asset or liability affected
in future periods.
The following are the key judgements and other key sources of estimation
uncertainty at the end of the reporting year, that have a significant risk of
causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year:
Estimates
Fair Value of Investments at Fair Value Through Profit or Loss
Certain investments are classified as FVTPL, and valued accordingly, as
disclosed in Note 2. The key source of estimation uncertainty is on the
valuation of unquoted equities, equity-related securities and real estate
investments.
In reaching its valuation of the unquoted equities, equity-related securities
and real estate investments, the key estimates management has to make are
those relating to the multiples, discount factors and real estate valuation
factors (Note 5) used in the valuation models.
Expected Credit Losses ("ECL")
Certain financial assets are classified as Loans at Amortised cost, and valued
accordingly as disclosed in Note 2. The key source of estimation uncertainty
is on the various default scenarios for prescribed future periods and the
probability of each scenario occurring which are considered when estimating
the ECLs.
Judgements
Assessment as an Investment Entity
Entities that meet the definition of an investment entity within IFRS 10 are
required to measure their subsidiaries at FVTPL rather than consolidate them.
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.
Having considered the Company's investor profile, investment policy and
methodology of valuing investments, management have judged the Company meets
the criteria of an investment entity. The Company has clearly defined exit
strategies for each of its investment classes, these strategies are again
consistent with an investment entity.
The Board has also concluded that the Company meets the additional
characteristics of an investment entity stated under IFRS 10, in that it has
more than one investment, the investments are predominantly in the form of
equities and similar securities, it has more than one investor and it has
investors that are not related parties of the Company.
Investment in Associates
An associate is an entity over which the Company has significant influence. An
entity is regarded as a subsidiary only if the Company has control over its
strategic, operating and financial policies and intends to hold the investment
on a long-term basis for the purpose of securing a contribution to the
Company’s activities. The Directors have determined that although the
Company has over 50% economic interest in EuroMicrocap Fund 2010, L.P. and JZI
Fund III GP, L.P. (JZCP holds indirectly a 18.75% partnership interest in JZI
Fund III, L.P. through its interest in JZI Fund III GP, L.P.), it does not
have the power to govern the financial and operating policies of the entities,
but does have significant influence over the strategic, operating and
financial policies. The Company also has significant influence over the
strategic, operating and financial policies of Spruceview Capital Partners,
LLC and JZHL Secondary Fund.
As the Company is an investment company, it measures its investments in
associates at fair value.
Climate Change
The Board has assessed the impact of climate change and has judged that the
Company's immediate exposure to the associated risks are low and therefore
there is no material impact on the fair value of investments and the financial
performance reported in these Financial Statements.
Going Concern
A fundamental principle of the preparation of financial statements in
accordance with IFRS is the judgement that an entity will continue in
existence as a going concern for a period of at least 12 months from signing
of the Annual Report, which contemplates continuity of operations and the
realisation of assets and settlement of liabilities occurring in the ordinary
course of business.
In reaching its conclusion, the Board has considered the risks that could
impact the Company’s liquidity over the period from 7 June 2023 to 30 June
2024 (the "Going Concern Period").
Recent events impacting liquidity
· realisation proceeds during the financial year in excess of $180
million;
· the redemption and cancellation of the Company's ZDP shares; and
· the early redemption of the Company's Subordinated Notes.
The Company’s outstanding debt is now limited to its $45 million Senior
Credit Facility due 26 January 2027, which may be repaid early without penalty
at any time. In addition, the Senior Credit Facility provides for up to an
additional $25 million in first lien delayed draw term loan, none of which has
been drawn.
The below table shows the Company's net liquidity position at the year end and
the previous three year ends:
28.2.2023 28.2.2022 28.2.2021 29.2.2020
$'000 $'000 $'000 $'000
Senior Credit Facility (1) (45,000) (45,000) (68,694) (150,362)
ZDP Shares - (77,281) (80,527) (73,569)
Subordinated Notes - (32,293) - -
CULS - - (54,332) (49,637)
Total debt (45,000) (154,574) (203,553) (273,568)
Cash and Treasury Bills 101,659 47,050 63,178 56,298
Net liquidity position 56,659 (107,524) (140,375) (217,270)
The below table details the proceeds from the Company's realisations during
the last three fiscal years.
Year End 28.2.2023 $ million Year End 28.2.2022 $ million Year End 28.2.2021 $ million
JZHL Secondary Fund U.S. 97.4 Salter Labs U.S. 41.1 Secondary Sale U.S. 87.7
Deflecto U.S. 54.3 George Industries U.S. 9.5 Real estate 13.6
ISS U.S. 22.5 Orangewood Fund U.S. 6.2 ABTA U.S. 9.4
New Vitality U.S. 7.4 Igloo U.S. 3.8 Eliantus Euro 9.4
Other 2.5 Vitalyst U.S. 1.9 K2 Towers II Euro 9.2
EMC 2010 Euro 2.2 Other U.S. 9.0
Fund III Euro 1.1 Cerpi Other 1.2
184.1 65.8 139.5
The Board takes account of the levels of realisation proceeds historically
generated by the Company’s micro-cap portfolios as well as the accuracy of
previous forecasts to assess the predicted accuracy of forecasts presented.
The Company continues to work on the realisation of various investments within
a timeframe that will enable the Company to maximise the value of its
investment portfolio.
The Board is encouraged by the Company's ability to deliver realisations and
the subsequent improved liquidity position, having net liquidity of
approximately $56 million at the year end.
The Board has analysed the projected cash outflows over the going concern
period and concluded they will be paid from the Company's cash reserves
(including treasury bills).
Going Concern Conclusion
After careful consideration and based on the reasons outlined above, the Board
is satisfied, as at the date of the signing of the Annual Report and Financial
Statements, that it is appropriate to adopt the going concern basis in
preparing the financial statements and they have a reasonable expectation that
the Company will continue in existence as a going concern for the period from
7 June 2023 to 30 June 2024.
4. Segment Information
The Investment Manager is responsible for allocating resources available to
the Company in accordance with the overall business strategies as set out in
the Investment Guidelines of the Company. The Company is organised into the
following segments:
· Portfolio of US micro-cap investments
· Portfolio of European micro-cap investments
· Portfolio of Real estate investments
· Portfolio of Other investments - (not falling into above
categories)
The investment objective of each segment is to achieve consistent medium-term
returns from the investments in each segment while safeguarding capital by
investing in a diversified portfolio. Investments in treasury bills are not
considered as part of the investment strategy and are therefore excluded from
this segmental analysis.
Segmental Profit/(Loss)
For the year ended 28 February 2023 US European Real Other
Micro- Cap Micro- Cap Estate In vestments Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Interest revenue 10,336 462 - - 10,798
Other portfolio income 532 - - - 532
Total segmental income 10,868 462 - - 11,330
Net gain/(loss) on investments at FVTPL 14,626 (20,596) 6,734 1,050 1,814
Expected credit losses - (462) - - (462)
Realisations from investments held in Escrow 1,189 - - - 1,189
Other income 398 - - - 398
Withholding tax (160) - - - (160)
Investment Adviser's base fee (3,582) (1,466) (366) (356) (5,770)
Total segmental operating profit/(loss) 23,339 (22,062) 6,368 694 8,339
For the year ended 28 February 2022 (restated (1)) US European Real Other
Micro- Cap Micro- Cap Estate Investments Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Interest revenue 13,667 1,146 - - 14,813
Other portfolio income 520 - - - 520
Total segmental income 14,187 1,146 - - 15,333
Net gain/(loss) on investments at FVTPL 28,723 (12,958) 221 (14) 15,972
Expected credit losses - (3,840) - - (3,840)
Realisations from investments held in Escrow 597 - - - 597
Investment Adviser's base fee (4,106) (1,742) (317) (348) (6,513)
Total segmental operating profit/(loss) 39,401 (17,394) (96) (362) 21,549
Certain income and expenditure is not considered part of the performance of an
individual segment. This includes net foreign exchange gain/(loss),
gain/(loss) on financial liabilities at fair value through profit or loss,
interest on cash, finance costs, and expenses other than the Investment
Adviser fees which can be allocated to an individual segment.
The following table provides a reconciliation between total segmental
operating profit and profit for the year.
28.2.2023 28.2.2022 (1)
(restated)
US$ '000 US$ '000
Total Segmental Operating Profit 8,339 21,549
Net foreign exchange gain 9,845 2,075
Fees payable to Investment Adviser based on non-segmental assets (1,263) (901)
Expenses not attributable to segments (2,873) (3,747)
Interest on cash 275 174
Realised currency loss on UK gilts (3,859) -
Interest on Treasury bills and UK gilts 1,212 -
Loss on financial liabilities at fair value through profit or loss - (1,869)
Finance costs (9,030) (13,094)
Profit for the year 2,646 4,187
(1) See Note 2
The following table provides a reconciliation between total segmental income and total income which comprises the Company's income from investments and bank deposits.
28.2.2023 28.2.2022 (restated (1))
US$ '000 US$ '000
Total segmental income 11,330 15,333
Non-segmental income
Interest on treasury bills and UK gilts 1,212 -
Bank and deposit interest 275 174
Total income 12,817 15,507
Segmental Net Assets
The Company's segmental net assets at the year end are as follows:
At 28 February 2023 US Micro-Cap European Micro-Cap Real Estate Other Investments Total
Segmental assets US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Investments at FVTPL 127,811 68,271 31,156 25,683 252,921
Loans at amortised cost - 3,695 - - 3,695
Prepaid expenses 29 12 3 3 47
Total segmental assets 127,840 71,978 31,159 25,686 256,663
Segmental liabilities - - - - -
Total segmental net assets 127,840 71,978 31,159 25,686 256,663
At 28 February 2022 (restated (1)) US European Real Other
Segmental assets Micro-Cap US$ '000 Micro-Cap US$ '000 Estate US$ '000 Investments US$ '000 Total US$ '000
Investments at FVTPL 284,162 81,150 23,597 23,533 412,442
Loans at amortised cost - 3,913 - - 3,913
Total segmental assets 284,162 85,063 23,597 23,533 416,355
Segmental liabilities
Payables and accrued expenses (551) (72) (11) (14) (648)
Total segmental liabilities (551) (72) (11) (14) (648)
Total segmental net assets 283,611 84,991 23,586 23,519 415,707
Treasury Bills, Cash at bank and cash equivalents and prepayments are not
considered to be part of individual segment assets. Certain liabilities are
not considered to be part of the net assets of an individual segment. These
include custodian and administration fees payable, directors’ fees payable
and other payables and accrued expenses.
The following table provides a reconciliation between total segmental
assets/liabilities and total assets/liabilities.
28.2.2023 28.2.2022 (restated (1))
US$ '000 US$ '000
Total Segmental Assets 256,663 416,355
Non Segmental Assets
Cash at bank 11,059 43,656
Treasury bills 90,600 3,394
Other receivables 121 70
Total Assets 358,443 463,475
Total Segmental Liabilities - (648)
Non Segmental Liabilities
Senior Credit Facility (43,181) (42,573)
Subordinated Notes - (32,293)
Zero Dividend Preference (2022) Shares - (75,038)
Other payables (764) (1,071)
Total Liabilities (43,945) (151,623)
Total Net Assets 314,498 311,852
(1) See Note 2
5. Fair Value of Financial Instruments
The Company classifies fair value measurements of its financial instruments at
FVTPL using a fair value hierarchy that reflects the significance of the
inputs used in making the measurements. The financial assets valued at FVTPL
are analysed in a fair value hierarchy based on the following levels:
Level 1
Quoted prices (unadjusted) in active markets for identical assets or
liabilities.
Level 2
Those involving inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly (that is, as
prices) or indirectly (that is, derived from prices). For example, investments
which are valued based on quotes from brokers (intermediary market
participants) are generally indicative of Level 2 when the quotes are
executable and do not contain any waiver notices indicating that they are not
necessarily tradeable. Another example would be when assets/liabilities with
quoted prices, that would normally meet the criteria of Level 1, do not meet
the definition of being traded on an active market.
Level 3
Those involving inputs for the asset or liability that are not based on
observable market data (that is, unobservable inputs). Investments in JZCP's
portfolio valued using unobservable inputs such as multiples, capitalisation
rates, discount rates fall within Level 3.
Differentiating between Level 2 and Level 3 fair value measurements i.e.,
assessing whether inputs are observable and whether the unobservable inputs
are significant, may require judgement and a careful analysis of the inputs
used to measure fair value including consideration of factors specific to the
asset or liability.
The following table shows the financial instruments at FVTPL by fair value
hierarchy category:
Financial assets at 28 February 2023 Level 1 Level 2 Level 3 Total
US$ '000 US$ '000 US$ '000 US$ '000
US micro-cap - - 127,811 127,811
European micro-cap - - 68,271 68,271
Real estate - - 31,156 31,156
Other investments - - 25,683 25,683
Listed investments 90,600 - - 90,600
90,600 - 252,921 343,521
Financial assets at 28 February 2022 (restated see Note 2) Level 1 Level 2 Level 3 Total
US$ '000 US$ '000 US$ '000 US$ '000
US micro-cap - - 284,162 284,162
European micro-cap - - 81,150 81,150
Real estate - - 23,597 23,597
Other investments - - 23,533 23,533
Listed investments 3,394 - - 3,394
3,394 - 412,442 415,836
Valuation techniques
In valuing investments in accordance with IFRS, the Board follows the
principles as detailed in the IPEVCA guidelines.
When fair values of listed equity and debt securities at the reporting date
are based on quoted market prices or binding dealer price quotations (bid
prices for long positions), without any deduction for transaction costs, the
instruments are included within Level 1 of the hierarchy.
Investments for which there are no active markets are valued according to one
of the following methods:
Real estate
JZCP makes its real estate investments through a wholly-owned subsidiary,
which in turn owns interests in various residential, commercial, and
development real estate properties. The net asset value of the subsidiary is
used for the measurement of fair value. The underlying fair value of JZCP’s
Real Estate holdings, however, is represented by the properties themselves.
The Company's Investment Adviser and Board review the fair value methods and
measurement of the underlying properties on a quarterly basis. Where
available, the Company will use third party appraisals on the subject
property, to assist the fair value measurement of the underlying property.
Third-party appraisals are prepared in accordance with the Appraisal and
Valuation Standards (6th edition) issued by the Royal Institution of Chartered
Surveyors. Fair value techniques used in the underlying valuations are:
- Use of comparable market values per square foot of properties in recent
transactions in the vicinity in which the property is located, and in similar
condition, of the relevant property, multiplied by the property’s square
footage.
- Discounted Cash Flow ("DCF") analysis, using the relevant rental stream,
less expenses, for future periods, discounted at a Market Capitalisation
("MC") rate, or interest rate.
- Relevant rental stream less expenses divided by the market capitalization
rate; this method approximates the enterprise value construct used for
non-real estate assets.
- Income capital approach using the relevant sell out analysis, less expenses
and costs.
For each of the above techniques third party debt is deducted to arrive at
fair value.
The valuations obtained in relation to the real estate portfolio are dated 31
December 2022. Subsequent discussions with appraisers indicate there would be
no significant change in property values between 31 December 2022 and 28
February 2023. Due to the inherent uncertainties of real estate valuation, the
values reflected in the financial statements may differ significantly from the
values that would be determined by negotiation between parties in a sales
transaction and those differences could be material.
Unquoted preferred shares, unquoted equities and equity related securities
Unquoted equities and equity related securities investments are classified in
the Statement of Financial Position as Investments at fair value through
profit or loss. These investments are typically valued by reference to their
enterprise value, which is generally calculated by applying an appropriate
multiple to the last twelve months' earnings before interest, tax,
depreciation and amortisation ("EBITDA"). In determining the multiple, the
Board consider inter alia, where practical, the multiples used in recent
transactions in comparable unquoted companies, previous valuation multiples
used and where appropriate, multiples of comparable publicly traded companies.
In accordance with IPEVCA guidelines, a marketability discount is applied
which reflects the discount that in the opinion of the Board, market
participants would apply in a transaction in the investment in question. The
increase of the fair value of the aggregate investment is reflected through
the unquoted equity component of the investment and a decrease in the fair
value is reflected across all financial instruments invested in an underlying
company.
In respect of unquoted preferred shares the Company values these investments
at fair value by reference to the attributable enterprise value as the exit
strategy in respect to these investments would be a one tranche disposal
together with the equity component. The fair value of the investment is
determined by reference to the attributable enterprise value reduced by senior
debt and marketability discount.
Micro-cap loans
Investments in micro-cap debt are valued at fair value by reference to the
attributable enterprise value when the Company also holds an equity position
in the investee company.
When the Company invests in micro-cap loans and does not hold an equity
position in the underlying investee company these loans are valued at
amortised cost in accordance with IFRS 9 (Note 2). The carrying value at
amortised cost is considered to approximate to fair value.
Other Investments
Other investments at year end, comprise of mainly the Company's investment in
the asset management business-Spruceview Capital Partners ("Spruceview").
Spruceview is valued using a valuation model which considers a forward looking
revenue approach which the Board considers to be consistent with the valuation
methods used by peer companies.
Quantitative information of significant unobservable inputs and sensitivity
analysis to significant changes in
unobservable inputs within Level 3 hierarchy
The significant unobservable inputs used in fair value measurement categorised
within Level 3 of the fair value hierarchy together with a quantitative
sensitivity as at 28 February 2023 and 28 February 2022 are shown below:
Value 28.2.2023 US$'000 Valuation Technique Unobservable input Range (weighted average) Sensitivity used Effect on Fair Value US$'000
US micro-cap Average EBITDA
investments 127,811 EBITDA Multiple Multiple of Peers 7.0x - 13.5x (8.3x) -0.5x /+0.5x (10,326) 10,092
Discount to Average
Multiple 5% - 35% (14.3%) +5% /-5% (12,303) 11,955
European micro- Average EBITDA
cap investments (1) 66,786 EBITDA Multiple Multiple of Peers 5.0x - 15.7x (8.6x) -0.5x /+0.5x (4,693) 4,705
Discount to Average
Multiple 4% - 61% (26%) +5% /-5% (3,542) 3,554
Real estate (2,3) 31,156 Cap Rate/ Income Approach Capitalisation Rate 5.25%-5.75% (5.65%) +50bps/ -50bps (6,918) 8,061
Other investments (4) 24,474 Forward looking Revenue $9.5 million -10%/+10% (1,722) 2,613
Revenue Approach Multiple 5.3x -10%/+10% (1,722) 2,613
Value 28.2.2022 US$'000 Valuation Technique Unobservable input Range (weighted average) Sensitivity used Effect on Fair Value US$'000
US micro-cap 284,162 EBITDA Multiple Average EBITDA Multiple of Peers 7.0x - 13.5x (9.0x) -0.5x /+0.5x (23,876) 23,998
investments Discount to Average
Multiple 5% - 30% (14.7%) +5% /-5% (32,217) 31,887
Average EBITDA
European micro- 76,286 EBITDA Multiple Multiple of Peers 5.5x - 14.2x (9.4x) -0.5x /+0.5x (5,293) 5,293
cap investments (1) Discount to Average
Multiple 2% - 50% (23%) +5% /-5% (4,533) 4,533
Real estate (2,3) 23,597 Cap Rate/ Income Approach Capitalisation Rate 5.25%-5.75% (5.56%) +50bps/ -50bps (5,338) 6,552
Other investments (4) 22,324 Forward looking Revenue $8.3 million -10%/+10% (2,187) 1,824
Revenue Approach Multiple 5.3x -10%/+10% (2,206) 1,809
(1) Excludes the Company's investment in Toro Finance.
(2) The Fair Value of JZCP's investment in financial interests in Real Estate
is measured as JZCP's percentage interest in the value of the underlying
properties.
(3) Sensitivity is applied to the property value and then the debt associated
to the property is deducted before the impact to JZCP's equity value is
calculated. Due to gearing levels in the property structures an increase in
the sensitivity of measurement metrics at property level will result in a
relatively greater impact at JZCP's equity level.
(4) JZCP's investment in Spruceview.
The following table shows a reconciliation of all movements in the fair value
of financial instruments categorised within Level 3 between the beginning and
the end of the reporting year.
Year ended 28 February 2023 US European Real Other
Micro-Cap Micro-Cap Estate Investments Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
At 1 March 2022 284,162 81,150 23,597 23,533 412,442
Investments in year including capital calls 317 8,628 825 1,100 10,870
Payment In Kind ("PIK") 11,810 - - - 11,810
Proceeds from investments realised (181,629) (911) - - (182,540)
Net gains/(losses) on investments 14,626 (20,596) 6,734 1,050 1,814
Movement in accrued interest (1,475) - - - (1,475)
At 28 February 2023 127,811 68,271 31,156 25,683 252,921
Year ended 28 February 2022 (restated (1)) US European Real Other
Micro-Cap Micro-Cap Estate Investments Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
At 1 March 2021 299,339 89,794 23,376 23,147 435,656
Investments in year including capital calls 4,898 7,647 - 400 12,945
Payment In Kind ("PIK") 14,190 - - - 14,190
Proceeds from investments realised (62,466) (3,333) - - (65,799)
Net gains/(losses) on investments 28,723 (12,958) 221 (14) 15,972
Movement in accrued interest (522) - - - (522)
At 28 February 2022 284,162 81,150 23,597 23,533 412,442
6. Net (Loss)/Gain on Investments at Fair Value Through
Profit or Loss
Year Ended Year Ended
28.2.2023 28.2.2022 (restated (1))
US$ '000 US$ '000
Net (loss)/gain on investments held in investment portfolio at year end
Net movement in unrealised gain/(loss) positions during the year 34,171 69,684
Reversal of net unrealised loss in prior years on investments now realised (75,905) (54,048)
Net unrealised (loss)/gain on investments held at the year end (41,734) 15,636
Gains/(loss) on investments realised in the year
Proceeds from investments realised 327,036 65,799
Cost of investments realised (363,252) (119,511)
Net realised loss (36,216) (53,712)
Reversal of net unrealised loss in prior years on investments now realised 75,905 54,048
Total gain on investments realised during the year 39,689 336
Net (loss)/gain on investments during the year (2,045) 15,972
(1) See Note 2
7. Expected Credit Losses
Year Ended Year Ended
28.2.2023 28.2.2022 (restated (1))
US$ '000 US$ '000
Impairments on loans during the year 462 3,840
ECLs are recognised in three stages. Stage one being for credit exposures for
which there has not been a significant increase in credit risk since initial
recognition, ECLs are provided for credit losses that result from default
events that are possible within the next 12-months (a 12-month ECL). Stage two
being for those credit exposures for which there has been a significant
increase in credit risk since initial recognition, a loss allowance is
required for credit losses expected over the remaining life of the exposure,
irrespective of the timing of the default (a lifetime ECL). Stage three being
credit exposures which are considered credit-impaired, interest revenue is
calculated based on the amortised cost (i.e. the gross carrying amount less
the loss allowance). Financial assets in this stage will generally be assessed
individually. Lifetime expected credit losses are recognised on these
financial assets. Please refer to Note 23 Financial Risk Management Objectives
and Policies/Credit Risk for further information on the Company's
ECLs.
Year Ended Year Ended
28.2.2023 28.2.2022
US$ '000 US$ '000
Impairment on loans classified as Stage 1 462 455
Impairment on loans classified as Stage 3 - 3,385
Total impairment on loans during the year 462 3,840
8. Investment Income
Year Ended Year Ended
28.2.2023 28.2.2022 (restated (1))
US$ '000 US$ '000
Interest revenue calculated using the effective interest method 462 1,146
Other interest and similar income 12,080 14,187
12,542 15,333
Income for the year ended 28 February 2023
Preferred Loan note Other
Dividends Dividends PIK Income Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
US micro-cap portfolio 532 10,336 - - 10,868
European micro-cap portfolio - - 462 - 462
Treasury bills and UK gilts - - - 1,212 1,212
532 10,336 462 1,212 12,542
Income for the year ended 28 February 2022 (restated)
Preferred Loan note Other
Dividends Dividends PIK Income Total
US micro-cap portfolio 520 13,667 - - 14,187
European micro-cap portfolio - - 1,146 - 1,146
520 13,667 1,146 - 15,333
9. Net Foreign Currency Exchange Gains
Year Ended Year Ended
28.2.2023 28.2.2022 (restated (1))
US$ '000 US$ '000
Foreign exchange gain on translation of ZDP Shares 12,809 3,072
Foreign exchange loss on translation of cash held for redemption of ZDP Shares (2,755) -
Foreign exchange loss on translation of loans at amortised cost (219) (535)
Other net foreign exchange gains/(losses) 10 (462)
9,845 2,075
(1)See Note 2
10. Finance Costs
Year Ended Year Ended
28.2.2023 28.2.2022
US$ '000 US$ '000
Interest expense calculated using the effective interest method
Senior Credit Facility (Note 15) 5,163 6,843
ZDP Shares (Note 16) 2,067 3,807
Subordinated Notes (Note 17) 1,800 1,108
9,030 11,758
Other interest and similar expense
CULS finance costs paid (Note 18) - 1,336
9,030 13,094
11. Expenses
Year Ended Year Ended
28.2.2023 28.2.2022
US$ '000 US$ '000
Investment Adviser's base fee 7,033 7,414
Directors' remuneration 290 290
7,323 7,704
Administrative expenses:
Legal fees 1,091 1,675
Other professional fees 289 432
Accounting, secretarial and administration fees 350 350
Auditors' remuneration 269 350
Auditors' remuneration - non-audit fees 68 71
Directors' insurance 403 226
Custodian fees 32 24
Other expenses 81 329
2,583 3,457
Total expenses 9,906 11,161
Directors' Remuneration
For the year ended 28 February 2023 total Directors' fees included in the
Statement of Comprehensive Income were
$290,000 (year ended 28 February 2022: $290,000), of this amount $47,000 was
outstanding at the year end (28 February 2022: $47,000). The Directors'
remuneration report in the annual report provides further details of the
remuneration paid.
Investment Advisory and Performance
fees
The Company entered into the amended and restated investment advisory and
management agreement with Jordan/Zalaznick Advisers, Inc. (the "Investment
Adviser") on 23 December 2010 (the "Advisory Agreement").
Pursuant to the Advisory Agreement, the Investment Adviser is entitled to a
base management fee and to an incentive fee. The base management fee is an
amount equal to 1.5 per cent. per annum of the average total assets under
management of the Company less excluded assets as defined under the terms of
the Advisory Agreement.
The base management fee is payable quarterly in arrears; the agreement
provides that payments in advance on account of the base management fee will
be made.
For the year ended 28 February 2023, total investment advisory and management
expenses, based on the average total assets of the Company, were included in
the Statement of Comprehensive Income of $7,033,000 (year ended 28 February
2022: $7,414,000). At 28 February 2023, an amount $65,000 was prepaid to the
Investment Adviser (28
February 2022: $276,000 was due and payable at the year end).
The incentive fee has two parts. The first part is calculated by reference to
the net investment income of the Company ("Income Incentive fee") and the
second part of the incentive fee is calculated by reference to the net
realised capital gains ("Capital Gains Incentive Fee", or "CGIF").
In December 2019 following significant losses reported in the Company's real
estate portfolio, the Investment Adviser agreed to waive fees payable by the
Company of $14.5 million relating to realised gains in the year ended 28
February 2019. Further fees payable for realised gains in the year ended 29
February 2020 of $10.1 million were also waived. No further incentive fees
will be paid to the Investment Adviser until the Company and Investment
Adviser have mutually agreed to reinstate such payments.
The Advisory Agreement may be terminated by the Company or the Investment
Adviser upon not less than two and one- half years’ (i.e. 913 days’) prior
notice (or such lesser period as may be agreed by the Company and Investment
Adviser).
Administration Fees
Northern Trust International Fund Administration Services (Guernsey) Limited
was appointed as Administrator to the Company on 1 September 2012. The
Administrator is entitled to an annual fee of $350,000 (28 February 2022:
$350,000) payable quarterly in arrears. Fees payable to the Administrator are
subject to an annual fee review. As from 1 March 2023, the Administrator's
fees have been increased to $370,000 per annum.
Custodian Fees
HSBC Bank (USA) N.A, (the "Custodian") was appointed on 12 May 2008 under a
custodian agreement. The Custodian is entitled to receive an annual fee of
$2,000 and a transaction fee of $50 per transaction. For the year ended 28
February 2023, total Custodian expenses of $32,000 (28 February 2022: $24,000)
were included in the Statement of Comprehensive Income of which $10,000 (28
February 2022: $10,000) was outstanding at the year end.
Auditors' Remuneration
During the year ended 28 February 2023, the Company incurred fees for audit
services of $269,000 (28 February 2022: $350,000).
28.2.2023 28.2.2022
Non-audit Fees Paid to Ernst & Young US$ '000 US$ '000
Interim Review - £53,000 (2022: £53,000) 68 71
Total non-audit fees 68 71
12. Taxation
As at 31 December 2022, the Company had been granted Guernsey tax exempt
status in accordance with The Income Tax (Exempt Bodies) (Guernsey) Ordinance
1989 (as amended). Regarding the Company's tax exempt status for 2023, an
application has been made and the company is awaiting confirmation.
During the year ended 28 February 2023, the Company reversed a provision for
potential withholding tax of $398,000. The provision related to dividend
income from an investment realised in 2015 and is shown as Other income in the
Statement of Comprehensive Income. The Company had tax withheld of $160,000 on
a dividend received during the year.
13. Investments Including Loans at Amortised Cost
Category of financial instruments
Listed Unlisted Unlisted Carrying Value
FVTPL FVTPL Loans Total
28.2.2023 28.2.2023 28.2.2023 28.2.2023
US$ '000 US$ '000 US$ '000 US$ '000
Book cost at 1 March 2022 3,395 472,983 12,828 489,206
Investments in year including capital calls 213,164 32,009 - 245,173
Payment in kind ("PIK") (1) - 11,810 455 12,265
Proceeds from investments matured/realised (123,357) (203,679) - (327,036)
Interest received on maturity 689 - - 689
Realised currency loss (3,859) - - (3,859)
Net realised loss - (32,357) - (32,357)
Book cost at 28 February 2023 90,032 280,766 13,283 384,081
Unrealised net investment and foreign exchange loss - (28,372) (895) (29,267)
Impairment on loans at amortised cost - - (8,775) (8,775)
Accrued interest 568 527 82 1,177
Carrying value at 28 February 2023 90,600 252,921 3,695 347,216
(1)The cost of PIK investments is deemed to be interest not received in cash but settled by the issue of further securities when that interest has been recognised in the Statement of Comprehensive Income.
Comparative reconciliation for the year ended 28 February 2022 (restated (1))
Category of financial instruments
Listed Unlisted Unlisted Carrying Value
FVTPL FVTPL Loans Total
28.2.2022 28.2.2022 28.2.2022 28.2.2022
US$ '000 US$ '000 US$ '000 US$ '000
Book cost at 1 March 2021 3,393 565,359 45,837 614,589
Investments in year including capital calls 3,395 12,945 - 16,340
Payment in kind ("PIK") (1) - 14,190 1,422 15,612
Proceeds from realisation and repayment of investments (3,395) (65,799) - (69,194)
Interest received on maturity 2 - - 2
Net realised loss - (53,712) - (53,712)
Realised impairment loss - - (31,757) (31,757)
Realised currency loss - - (2,674) (2,674)
Book cost at 28 February 2022 3,395 472,983 12,828 489,206
Unrealised net investment and foreign exchange loss - (62,543) (678) (63,221)
Impairment on loans at amortised cost - - (8,313) (8,313)
Accrued interest (1) 2,002 76 2,077
Carrying value at 28 February 2022 3,394 412,442 3,913 419,749
(1)The cost of PIK investments is deemed to be interest not received in cash but settled by the issue of further securities when that interest has been recognised in the Statement of Comprehensive Income.
Loans at amortised cost
Loans to European micro-cap companies are classified and measured as Loans at
amortised cost under IFRS 9.
The repayment of the loans will occur when the underlying investee company
issuing the debt redeems on ownership change or due date.
Interest on the loans accrues at the following rates:
As At 28 February 2023 As At 28 February 2022 (restated (2))
8% 10% Total 8% 10% Total
$'000 $'000 $'000 $'000 $'000 $'000
Loans at amortised cost 1,447 2,248 3,695 1,677 2,236 3,913
The Company has not recognised interest on the loans classified as being
credit impaired (Stage 3 see Note 7). Maturity dates are as follows:
As At 28 February 2023 As At 28 February 2022
(restated(2))
$'000 $'000 $'000 $'000
3,695 3,695 3,913 3,913
0-6 months Total7-12 months Total
Loans at amortised cost
During the year, a loan with a carrying value of $1.485 million (28 February
2022: $24.680 million) became past due and the maturity date of a loan with a
carrying value of $3.695 million (28 February 2022: $3.913 million) was
extended from 31 December 2022 to 30 June 2023.
(2) See Note 2
Investment in Associates An associate is an entity over which the Company has significant influence. An entity is regarded as a subsidiary only if the Company has control over its strategic, operating and financial policies and intends to hold the investment on a long-term basis for the purpose of securing a contribution to the Company’s activities. The Company meets the definition of an investment entity and therefore measures its associates at fair value through profit or loss in accordance with IFRS 10.
Carrying Value of Investments in Associates
Entity % Interest 28.2.2023 US$'000 28.2.2022 US$'000
JZI Fund III GP, L.P. (has 25% partnership interest in JZI Fund III, L.P.) (1) Cayman 75% 66,786 76,286
JZHL Secondary Fund L.P. Delaware n/a 80,403 117,339
Spruceview Capital Partners, LLC Delaware 33.75% 24,474 22,324
EuroMicrocap Fund 2010, L.P. Cayman 75% - 596
171,663 216,545
(1)JZCP holds indirectly a 18.75% partnership interest in JZI Fund III, L.P.
The principal activity of all the JZI Fund III, JZHL Secondary Fund and
EuroMicrocap Fund 2010, L.P. is the acquisition of micro-cap companies. The
principal activity of Spruceview Capital Partners, LLC is that of an asset
management company. There are no significant restrictions on the ability of
associates to transfer funds to the Company in the form of dividends or
repayment of loans or advances.
The Company's maximum exposure to losses from the associates (shown below)
equates to the carrying value plus outstanding commitments:
Entity 28.2.2023 US$'000 28.2.2022 US$'000
JZI Fund III GP, L.P. 73,850 91,974
JZHL Secondary Fund L.P. 80,403 117,339
Spruceview Capital Partners, LLC 24,474 22,824
EuroMicrocap Fund 2010, L.P. - 596
178,727 232,733
Investment in Subsidiaries
The principal place of business for subsidiaries is the USA. The Company meets the definition of an Investment Entity in accordance with IFRS 10. Therefore, it does not consolidate its subsidiaries but rather recognises them as investments at fair value through profit or loss.
Entity Place of incorporation % Interest 28.2.2023 US$'000 28.2.2022 US$'000
JZCP Realty, Ltd Cayman 100% 31,156 23,597
Investments in subsidiaries at fair value 31,156 23,597
There are no significant restrictions on the ability of subsidiaries to
transfer funds to the Company. The Company has no contractual commitments to
provide any financial or other support to its unconsolidated subsidiaries.
JZCP Realty Ltd has a 100% interest in JZ REIT Esperante Corp (Maryland
incorporated) and JZ RS Onshore Blocker, LLC (Delaware incorporated).
14. Other Receivables
28.2.2023 28.2.2022
US$ '000 US$ '000
Prepayments 168 70
168 70
15. Senior Credit
Facility
On 26 January 2022, JZCP entered into an agreement with WhiteHorse Capital
Management, LLC (the "New Senior Lender") providing for a new five year term
senior secured loan facility (the "Senior Credit Facility"). The Senior Credit
Facility matures on 26 January 2027 and replaced the Company's Previous Senior
Secured Loan Facility with clients and funds advised and sub-advised by
Cohanzick Management, LLC and CrossingBridge Advisors, LLC (the "Previous
Senior Lenders").
The Senior Credit Facility consists of a $45.0 million first lien term loan
(the "Closing Date Term Loan"), fully funded as of the closing date (being 26
January 2022), and up to $25.0 million in first lien delayed draw term loans
(the "DDT Loans"), which remain undrawn as of the closing date and the year
end. The Company can draw down the DDT Loans from time to time in its
discretion in the 24 month period following the closing date. Use of proceeds
from the DDT Loans are limited to finance (i) Permitted Investments or (ii)
for any other purpose consented to in writing by the Administrative Agent.
Customary fees and expenses were payable upon the drawing of the Closing Date
Term Loan. The proceeds of the Closing Date Term Loan, together with cash at
hand, were used by the Company to repay the Previous Senior Credit Facility of
approximately $52.9 million due 12 June 2022 and for the payment of fees and
expenses related to the Senior Credit Facility.
The interest rate charged under the Senior Credit Facility at the year end is
the LIBOR/SOFR(1) Rate plus 7.002 per cent., or if the Company elects for a
portion of the interest to be paid in kind, the LIBOR/SOFR Rate plus 9.00 per
cent., of which 4.00 per cent. would be charged as payment-in kind (PIK)
interest. The Closing Date Term Loan was subject to a prepayment penalty if
repaid before yielding an aggregate 15 per cent. Post year end, the aggregate
yield exceeded 15 per cent and therefore the Closing Date Term is no longer
subject to a prepayment penalty.
During the year, no election was made for a portion of the interest to be paid
in kind. The average interest rate paid by the Company was 9.73% being the
applicable LIBOR/SOFR rate plus 7.0 per cent. The rate payable at the year end
was 11.82 per cent (28 February 2022: 8.00 per cent).
The Senior Credit Facility Agreement includes covenants from the Company
customary for an agreement of this nature, including (a) maintaining a minimum
asset coverage ratio (calculated by reference to eligible assets, subject to
customary ineligibility criteria and concentration limits, plus unrestricted
cash) of not less than 4.00 to 1.00, and (b) ensuring the Company retains an
aggregate amount of unrestricted cash and cash equivalents of not less than
$12.5 million. At 28 February 2023, investments and cash valued at $352.0
million were held as collateral on the senior debt facility. The collateral
value used in the asset coverage ratio of $252.1 million is after adjustments
to the collateral value including a ceiling value on any one investment. The
Senior Credit Facility allowed for the repayment of the Company's other debt
obligations assuming the above covenants were not breached as a result of
repayment.
(1)Post year end, the Secured Overnight Financing Rate (SOFR) replaced LIBOR
as the benchmark interest rate for the Senior Credit
Facility.
(2)There is an interest rate floor that stipulates LIBOR/SOFR will not be
lower than 1%. In this agreement, the presence of the floor does not
significantly alter the amortised cost of the instrument and is considered to
be clearly and closely related to the facility, therefore separation is not
required and the loan is valued at amortised cost using the effective interest
rate
method.
Senior Credit Facility
28.2.2023 28.2.2022
US$ '000 US$ '000
Principal - drawdown 26 January 2022 - 45,000
Issue costs - (2,787)
Amortised cost - 26 January 2022 - 42,213
Amortised cost - 1 March 2022 42,573 -
Finance costs charged to Statement of Comprehensive Income 5,163 360
Interest and finance costs paid (4,555) -
Amortised cost at year end 43,181 42,573
Previous Senior Credit Facility
28.2.2023 28.2.2022
US$ '000 US$ '000
Amortised cost (Dollar drawdown) - 1 March - 68,694
Loan advance - 16,000
Loan repayments - (85,585)
Finance costs charged to Statement of Comprehensive Income - 6,483
Interest and finance costs paid - (5,592)
Amortised cost at year end - -
The carrying value of the Senior Credit Facility and Previous Senior Credit
Facility at the prior year end approximated fair value.
16. Zero Dividend Preference ("ZDP") Shares
On 3 October 2022, the Company redeemed and cancelled its ZDP shares on their
maturity date. The ZDP shares had a gross redemption yield of 4.75% and a
total redemption value of £57,597,000 ($64,296,000 using the exchange rate on
the redemption date).
ZDP (2022) Shares 28.2.2023 28.2.2022
US$ '000 US$ '000
Amortised cost at 1 March 75,038 74,303
Finance costs allocated to Statement of Comprehensive Income 2,067 3,807
Unrealised currency gain to the Company on translation during the year (12,809) (3,072)
Redemption (64,296) -
Amortised cost at year end - 75,038
Total number of ZDP (2022) shares in issue
-
11,907,720
17. Subordinated Notes
During the prior year, the Company entered into a note purchase agreement with
David Zalaznick and John (Jay) Jordan, the founders and principals of the
Company's investment adviser, Jordan/Zalaznick Advisers, Inc. ("JZAI"),
pursuant to which they purchased on 31 July 2021, directly or through their
affiliates, subordinated, second lien loan notes totalling $31.5 million, with
a maturity date of 11 September 2022 (the “Subordinated notes”). In August
2022, the Company announced the extension of the maturity date of the
Subordinated Notes through to 30 September 2023. On 14 February 2023, the
Company undertook an early voluntary redemption in full of the Subordinated
Notes.
The interest rate on the Loan notes was 6 per cent. per annum payable
semi-annually, in arrears, on each of 31 March and 30 September of each year
and on redemption.
28.2.2023 28.2.2022
US$ '000 US$ '000
Subordinated Notes issued - 31,500
Amortised cost at 1 March 32,293 -
Finance costs charged to Statement of Comprehensive Income 1,800 1,108
Interest and finance costs paid (2,593) (315)
Redemption (31,500) -
Amortised cost at year end - 32,293
18. Convertible Unsecured Loan Stock ("CULS")
On 30 July 2021, JZCP redeemed 3,884,279 £10 CULS and converted on request 1,835 £10 CULS into 3,039 Ordinary Shares, at the agreed conversion price. CULS bore interest on their nominal amount at the rate of 6.00 per cent. per annum, payable semi-annually in arrears.
28.2.2023 28.2.2022
US$ '000 US$ '000
Fair Value of CULS at 1 March - 52,430
Interest expense - 1,336
Coupon paid - (2,679)
Unrealised movement in value of CULS due to change in Company's Credit Risk - 1,074
Unrealised movement in fair value of CULS - 2,170
Unrealised currency gain on translation during the year - (301)
Loss on financial liabilities at fair value through profit or loss - 1,869
Redemption of CULS - (54,005)
Conversion of CULS into Ordinary Shares - (25)
Fair Value of CULS based on offer price - -
19. Other Payables
28.2.2023 28.2.2022
US$ '000 US$ '000
Legal fee provision 200 505
Audit fees 268 325
Other expenses 249 168
Directors' remuneration 47 47
Provision for tax on dividends received not withheld at source - 398
764 1,443
20. Share Capital
Authorised Capital
Unlimited number of ordinary shares of no par value.
Ordinary shares - Issued Capital
28.2.2023 28.2.2022
Number of shares Number of shares
Balance at 1 March 77,477,214 77,474,175
Ordinary shares issued during the year - 3,039
Total Ordinary shares in issue 77,477,214 77,477,214
On 2 August 2021, the Company issued 3,039 Ordinary shares resulting from the
conversion of 1,835 CULS. The conversion price was £6.0373 per Ordinary
Share, resulting in a credit to the Share capital account of £18,000
($25,000).
The Company's shares trade on the London Stock Exchange's Specialist Fund
Segment.
The Ordinary shares carry a right to receive the profits of the Company
available for distribution by dividend and resolved to be distributed by way
of dividend to be made at such time as determined by the Directors.
In addition to receiving the income distributed, the Ordinary shares are
entitled to the net assets of the Company on a winding up, after all
liabilities have been settled. In addition, holders of Ordinary shares will be
entitled on a winding up to receive any accumulated but unpaid revenue
reserves of the Company, subject to all creditors having been paid out in
full. Any distribution of revenue reserves on a winding up is currently
expected to be made by way of a final special dividend prior to the Company's
eventual liquidation.
Holders of Ordinary shares have the rights to receive notice of, to attend and
to vote at all general meetings of the Company.
Capital raised on issue of new shares and capital repaid on buy back of shares
Subsequent amounts raised by the issue of new shares (net of issue costs) and
amounts paid to buy back Ordinary shares, are credited/debited to the share
capital account.
Share Capital
28.2.2023 28.2.2022
US$ ‘000 US$ ‘000
At beginning of year 216,650 216,625
Issue of Ordinary shares - 25
At year end 216,650 216,650
21. Capital Management
The Company’s capital is represented by the Ordinary shares following the
redemption of ZDP shares and CULS.
As a result of the ability to issue, repurchase and resell shares, the capital
of the Company can vary. Other than a minimum asset coverage ratio specified
under the New Senior Credit Facility and certain typical restrictions in the
New Senior Credit Facility with respect to the payments of dividends and
issuance of disqualified capital stock (e.g., convertible or redeemable
capital stock), the Company is not subject to externally imposed capital
requirements and has no restrictions on the issue, repurchase or resale of its
shares.
The Company’s objectives for managing capital are:
To invest the capital in investments meeting the description, risk exposure
and expected return indicated in its prospectus;
· To achieve consistent returns while safeguarding capital by
investing in a diversified portfolio;
· To maintain sufficient liquidity to meet the expenses of the
Company; and
· To maintain sufficient size to make the operation of the Company
cost-efficient.
The Company’s current focus is on realising the maximum value of the
Company’s investments and repaying debt. Once this has been achieved, and
after the repayment of all debt, the Company intends to return capital to
shareholders and will at this point keep under review opportunities to buy
back Ordinary shares. The Company will be seeking shareholder approval for the
return of capital to shareholders, should the Company be in a position to do
so.
The Company monitors capital by analysing the NAV per share over time and
tracking the discount to the Company’s share price.
22. Reserves
Summary of reserves attributable to Ordinary
shareholders
28.2.2023 28.2.2022 (restated (1))
US$ '000 US$ '000
Share capital 216,650 216,650
Other reserve 353,528 353,528
Retained deficit (255,680) (258,326)
314,498 311,852
Other reserve
On formation of the Company, the Royal Court of Guernsey granted that on the admission of the Company's shares to the Official List and to trading on the London Stock Exchange's market, the amount credited to the share premium account of the Company immediately following the admission of such shares be cancelled and any surplus thereby created accrue to the Company's distributable reserves to be used for all purposes permitted by The Companies (Guernsey) Law, 2008, including the purchase of shares and the
payment of dividends. This distributable reserve was subsequently renamed 'Other reserve'. Subject to satisfaction of the solvency test, all of the Company's capital and reserves are distributable in accordance with The Companies (Guernsey) Law, 2008. Retained deficit
28.2.2023 28.2.2022
(restated (1))
US$ '000 US$ '000
At beginning of year (243,118) (241,668)
Restatement to Correct Historical Error - (5,637)
Profit for the year 2,646 4,187
At year end (240,472) (243,118)
(1)See Note 2
23. Financial Risk Management Objectives and Policies
Introduction
The Company’s objective in managing risk is the creation and protection of
shareholder value. Risk is inherent in the Company’s activities, but it is
managed through a process of ongoing identification, measurement and
monitoring, subject to risk limits and other controls. The process of risk
management is critical to the Company’s continuing profitability. The
Company is exposed to market risk (including currency risk, fair value
interest rate risk, cash flow interest rate risk and price risk), credit risk
and liquidity risk arising from the financial instruments it holds.
Risk management structure and Risk mitigation
The Company’s Investment Adviser is responsible for identifying and
controlling risks. The Directors supervise the Investment Adviser and are
ultimately responsible for the overall risk management approach within the
Company. The Company's prospectus sets out its overall business strategies,
its tolerance for risk and its general risk management philosophy. The Company
may use derivatives and other instruments for trading purposes and in
connection with its risk management activities.
Restatement to Correct Historical Error in Classification and Associated
Measurement of Asset
Comparative numbers included in Note 23, have been amended to reflect the
prior year reclassification and remeasurement detailed in Note 2.
Market risk
Market risk is defined as "the risk that the fair value or future cash flows
of a financial instrument will fluctuate because of changes in variables such
as equity price, interest rate and foreign currency rate".
The Company's investments are subject to normal market fluctuations and there
can be no assurance that no depreciation in the value of those investments
will occur. There can be no guarantee that any realisation of an investment
will be on a basis which necessarily reflects the Company's valuation of that
investment for the purposes of calculating the NAV of the Company.
Changes in industry conditions, competition, political and diplomatic events,
tax, environmental and other laws and other factors, whether affecting the
United States alone or other countries and regions more widely, can
substantially and either adversely or favourably affect the value of the
securities in which the Company invests and, therefore, the Company's
performance and prospects.
The Company's market price risk is managed through diversification of the
investment portfolio across various sectors. The Investment Adviser considers
each investment purchase to ensure that an acquisition will enable the Company
to continue to have an appropriate spread of market risk and that an
appropriate risk/reward profile is maintained.
Equity price risk
Equity price risk is the risk of unfavourable changes in the fair values of equity investments as a result of changes in the value of individual shares. The equity price risk exposure arose from the Company’s investments in equity securities.
The Company does not generally invest in liquid equity investments and the previous portfolio of listed equity investments resulted from the successful flotation of unlisted investments.
For unlisted equity and non-equity shares the market risk is deemed to be inherent in the appropriate valuation methodology (earnings, multiples, capitalisation rates etc). The impact on fair value and subsequent profit or loss, due to movements in these variables, is set out in Note 5.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates
will affect future cash flows or the fair values of financial instruments. It
has not been the Company's policy to use derivative instruments to mitigate
interest rate risk, as the Investment Adviser believes that the effectiveness
of such instruments does not justify the costs involved.
The table below summarises the Company's exposure to interest rate risks
(restated):
Interest Fixed rate bearing Floating rate Non interest bearing Total
28.2.2023 28.2.2023 28.2.2023 28.2.2023
US$ '000 US$ '000 US$ '000 US$ '000
Investments at FVTPL 139,493 - 204,028 343,521
Loans at amortised cost 3,695 - - 3,695
Cash and cash equivalents - 11,059 - 11,059
Other receivables and prepayments - - 168 168
Senior Credit Facility - (43,181) - (43,181)
Other payables - - (764) (764)
143,188 (32,122) 203,432 314,498
The table below summarises the Company's exposure to interest rate risks:
Interest bearing Non interest
Fixed rate Floating rate bearing Total
28.2.2022 28.2.2022 28.2.2022 28.2.2022
US$ '000 US$ '000 US$ '000 US$ '000
Investments at FVTPL 143,811 - 272,025 415,836
Loans at amortised cost 3,913 - - 3,913
Cash and cash equivalents - 43,656 - 43,656
Other receivables and prepayments - - 70 70
Senior Credit Facility - (42,573) - (42,573)
ZDP Shares (2022) (75,038) - - (75,038)
Subordinated Notes (32,293) - - (32,293)
Other payables - - (1,719) (1,719)
40,393 1,083 270,376 311,852
The following table analyses the Company's exposure in terms of the interest
bearing assets and liabilities maturity dates. The Company's assets and
liabilities are included at their carrying value.
As at 28 February 2023
0-3 months 4-12 months 1 - <3 years 3 - <5 years Past due No maturity date Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Investments at FVTPL 90,600 - - - 2,485 46,408 139,493
Loans at amortised cost - - - - 3,695 - 3,695
Cash and cash equivalents 11,059 - - - - - 11,059
Senior Credit Facility - - - (43,181) - - (43,181)
101,659 - - (43,181) 6,180 46,408 111,066
As at 28 February 2022 (restated)
0-3 months 4-12 months 1 - <3 years 3 - <5 years <5 years No maturity date Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Investments at FVTPL 3,394 4,268 - - 1,000 141,258 149,920
Loans at amortised cost - 3,913 - - - - 3,913
Cash and cash equivalents 43,656 - - - - - 43,656
Senior Credit Facility - - - (42,573) - - (42,573)
ZDP Shares (2022) - (78,038) - - - - (75,038)
Subordinated Notes - (32,293) - - - - (32,293)
47,050 (99,150) - (42,573) 1,000 141,258 47,585
The income receivable by the Company is not subject to significant amounts of
risk due to fluctuations in the prevailing levels of market interest rates.
However, whilst the income received from fixed rate securities is unaffected
by changes in interest rates, the investments are subject to risk in the
movement of fair value. The Investment Adviser considers the risk in the
movement of fair value as a result of changes in the market interest rate for
fixed rate securities to be insignificant, hence no sensitivity analysis is
provided.
Of the cash and cash equivalents held, $11,059,000 (28 February 2022:
$43,656,000) earns interest at variable rates and the income may rise and fall
depending on changes to interest rates.
The Investment Adviser monitors the Company's overall interest sensitivity on
a regular basis by reference to the current market rate and the level of the
Company's cash balances. The Company has not used derivatives to mitigate the
impact of changes in interest rates.
The table below demonstrates the sensitivity of the Company's profit/(loss)
for the year to a reasonably possible movement in interest rates. The Company
has cash at bank and loans payable for which interest receivable and payable
are sensitive to a fluctuation to rates. The below sensitivity analysis
assumes year end balances and interest rates are constant through the
year.
Interest Receivable (1) Interest Payable (2)
28.2.2023 28.2.2022 28.2.2023 28.2.2022
Change in basis points increase/decrease US$ '000 US$ '000 US$ '000 US$ '000
+100/-100 25/(25) 350/(175) (450)/450 (230)/ nil
+300/-300 76/(76) 1,051/(175) (1,350)/1,350 (1,130)/ nil
(1)Sensitivity applied to money market account balance and applying the year end rate of 4.1%
(2)Sensitivity applied to year end balances at relevant rates being $45 million at 11.8%
Currency risk
Currency risk is the risk that the value of a financial instrument will
fluctuate due to changes in foreign exchange rates.
Changes in exchange rates are considered to impact the fair value of the
Company's investments denominated in Euros and Sterling. However, under IFRS
the foreign currency risk on these investments is deemed to be part of the
market price risk associated with holding such non-monetary investments. As
the information relating to the non-monetary investments is significant, the
Company also provides the total exposure and sensitivity changes on
non-monetary investments. The following tables set out the Company's exposure
by currency to foreign currency risk.
Exposure to Non-Monetary Assets (held in foreign currencies)
Euro Sterling Total Euro Sterling Total
28.2.2023 28.2.2023 28.2.2023 28.2.2022 28.2.2022 28.2.2022
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Loans at amortised cost 3,695 - 3,695 3,913 - 3,913
Cash at bank 216 159 375 507 38 545
Other receivables - 157 157 - 70 70
Liabilities
ZDP Shares - - - - (75,038) (75,038)
Other payables - (392) (392) - (415) (415)
Net Currency Exposure 3,911 (76) 3,835 4,420 (75,345) (70,925)
The sensitivity analysis for monetary and non-monetary net assets calculates
the effect of a reasonably possible movement of the currency rate against the
US dollar on an increase or decrease in net assets attributable to
shareholders with all other variables held constant. An equivalent decrease in
each of the aforementioned currencies against the US dollar would have
resulted in an equivalent but opposite impact.
Currency Change in Currency Rate Effect on net assets attributable to shareholders (relates to monetary financial assets and liabilities)
28.2.2023 28.2.2022
US$ '000 US$ '000
Euro +10% 391 2,910
GBP +10% (8) (7,535)
Exposure to Non-Monetary Assets (held in foreign currencies)
Euro Sterling Total Euro Sterling Total
28.2.2023 28.2.2023 28.2.2023 28.2.2022 28.2.2022 28.2.2022
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Financial assets at FVTPL 53,822 12,964 66,786 62,287 14,595 76,882
Net Currency Exposure 53,822 12,964 66,786 62,287 14,595 76,882
Currency Change in Currency Rate Effect on net assets attributable to shareholders (relates to non-monetary financial assets)
28.2.2023 28.2.2022
US$ '000 US$ '000
Euro +10% 5,382 6,229
GBP +10% 1,296 1,460
Credit risk
The Company takes on exposures to credit risk, which is the risk that a
counterparty to a financial instrument will cause a financial loss to the
Company by failing to discharge an obligation. These credit exposures exist
within debt instruments and cash & cash equivalents. They may arise, for
example, from a decline in the financial condition of a counterparty or from
entering into derivative contracts under which counterparties have obligations
to make payments to the Company. As the Company’s credit exposure increases,
it could have an adverse effect on the Company’s business and profitability
if material unexpected credit losses were to occur. In the event of any
default on the Company's loan investments by a counterparty, the Company will
bear a risk of loss of principal and accrued interest of the investment, which
could have a material adverse effect on the Company's income and ability to
meet financial obligations.
In accordance with the Company’s policy, the Investment Adviser regularly
monitors the Company's exposure to credit risk in its investment portfolio, by
reviewing the financial statements, budgets and forecasts of underlying
investee companies. Agency credit ratings do not apply to the Company's
investment in investee company debt. The 'credit quality' of the debt is
deemed to be reflected in the fair value valuation of the investee company.
The Company's investment in accumulated preferred stock is excluded from the
below analysis as the instruments are deemed to be more closely associated
with the investment in the portfolio companies' equity than its debt.
The table below analyses the Company's maximum exposure to credit risk.
Total Total
28.2.2023 28.2.2022
US$ '000 US$ '000
US micro-cap debt 1,000 1,000
European micro-cap debt 5,180 8,181
US Treasury Bills 90,600 3,394
Cash and cash equivalents 11,059 43,656
107,839 56,231
The following table analyses the concentration of credit risk in the Company's
debt portfolio by industrial distribution.
28.2.2023 28.2.2022
US$ '000 US$ '000
Financial General 24% 46%
Document Processing 60% 43%
House, Leisure & Personal Goods 16% 11%
100% 100%
Loans at Amortised Cost and Expected Credit Losses ("ECL")
The Company's loans to European micro-cap companies are classified as loans at
amortised cost. The credit risk in these investments is deemed to be reflected
in the performance and valuation of the investee company. Using IFRS 9's
“expected credit loss” model, the Company calculates the allowance for
credit losses by considering the cash shortfalls it would incur in various
default scenarios for prescribed future periods and multiplying the shortfalls
by the probability of each scenario occurring. The allowance is the sum of
these probability weighted outcomes. The IFRS ECL model assumes all loans and
receivables carries with it some risk of default, every such asset has an
expected loss attached to it from the moment of its origination or
acquisition. On assessment of the recoverability of the Xacom loan in the
prior year, it was concluded there would not be proceeds from Xacom, to pay
any portion of JZCP's loan hence a provision has been made to bring the
carrying value to $nil. The loans to Xacom is recognised at stage three loans
and is considered credit-impaired, lifetime expected credit losses are
recognised on this loan. Information on the three stages on which ECLs are
recognised is provided within Note 7.
Year ended 28 February
2023 Year ended 28 February 2022 (restated)
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
ECL at 1 March 1,329 - 6,318 7,647 954 3,177 32,559 36,690
Provision during the year 462 - - 462 455 3,385 - 3,840
Level transfer - - - - - (6,318) 6,318 -
ECL realised - - - - - - (31,664) (31,664)
Foreign exchange movement (70) - (353) (423) (80) (244) (895) (1,249)
1,721 - 5,965 7,686 1,329 - 6,318 7,647
The table below analyses the Company’s cash and cash equivalents by rating
agency category.
Credit ratings
Outlook LT Issuer Default Rating 28.2.2023 $'000
HSBC Bank USA NA S&P Stable (2022: Stable) S&P A+ (2022: A+) 8,320
City National Bank S&P Stable (2022: Stable) S&P AA- (2022: AA-) 2,497
Northern Trust (Guernsey) Limited S&P Stable (2022: Stable) S&P AA- (2022: AA-) 242
11,059
Bankruptcy or insolvency of the Banks may cause the Company's rights with
respect to these assets to be delayed or limited. The Investment Adviser
monitors risk by reviewing the credit rating of the Bank. If credit quality
deteriorates, the Investment Adviser may move the holdings to another bank.
Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter
difficulty in meeting obligations associated with financial liabilities.
Liquidity risk arises because of the possibility that the Company could be
required to pay its liabilities earlier than expected. There has been no
change during the year in the Company's processes and arrangements for
managing liquidity.
The Company's private investments are predominately private equity, real
estate and other unlisted investments. By their nature, these investments will
generally be of a long term and illiquid nature and there may be no readily
available market for sale of these investments. None of the Company's
assets/liabilities are subject to special arrangement due to their illiquid
nature.
The Company has capital requirements to repay it Senior Credit Facility in
January 2027. At the year end the Company has outstanding investment
commitments of $7,064,000 (28 February 2022: $16,188,000) see Note 24.
The Company manages liquidity risk and the ability to meet its obligations by
monitoring current and expected cash balances from forecasted investment
activity.
The table below analyses JZCP’s financial liabilities into relevant maturity
groups based on the remaining period at the reporting date to the contractual
maturity date. Amounts attributed to the Senior Credit Facility, ZDP Shares
and Subordinated Notes include future contractual interest payments. Financial
commitments are contractual outflows of cash and are included within the
liquidity statement.
At 28 February 2023 Less than 1 year >1 year – 3 years >3 years – 5 years >5 years No stated maturity
US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000
Senior Credit Facility 5,364 10,728 50,364 - -
Other payables 764 - - - -
Financial commitments (see note 24) 2,355 4,709 - - -
8,483 15,437 50,364 - -
At 28 February 2022 Less than 1 year >1 year – 3 years >3 years – 5 years >5 years No stated maturity
US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000
Senior Credit Facility 3,600 7,200 52,200 - -
ZDP (2022) Shares 77,281 - - - -
Subordinated Notes 33,075 - - - -
Other payables 1,299 - - - 398
Financial commitments (see Note 24) 5,729 10,459 - - -
120,984 17,659 52,200 - 398
24. Commitments
At 28 February 2023 and 28 February 2022, JZCP had the following financial
commitments outstanding in relation to fund investments:
Expected date 28.2.2023 28.2.2022
of Call US$ ‘000 US$ ‘000
JZI Fund III GP, L.P. €6,661,066 (28.2.2022: €13,967,295) over 3 years 7,064 15,688
Spruceview Capital Partners, LLC (1) over 1 year - 500
7,064 16,188
(1)Following a capital call of $0.6 million in November 2022, JZCP has the option to increase further commitments to Spruceview up to approximately $3.5 million.
25. Related Party Transactions JZAI is a US based company founded by David Zalaznick and John (“Jay”) Jordan II, that provides advisory services to the Company in exchange for management fees, paid quarterly. Fees paid by the Company to the Investment Adviser are detailed in Note 10. JZAI and various affiliates provide services to certain JZCP portfolio companies and may receive fees for providing these services pursuant to the Advisory Agreement. JZCP invests in European micro-cap companies through JZI Fund III, L.P. (“Fund III”). Previously investments were made via the EuroMicrocap Fund 2010, L.P. ("EMC 2010"). Fund III and EMC 2010 are managed by an affiliate of JZAI. At 28 February 2023, JZCP's investment in Fund III was valued at $67.6 million (28 February 2022: $76.3 million). JZCP's investment in EMC 2010 was valued at $nil (28 February 2022: $0.6 million). JZCP has invested in Spruceview Capital Partners, LLC on a 50:50 basis with Jay Jordan and David Zalaznick (or their respective affiliates). The total amount committed and funded by JZCP to this investment at 28 February 2023, was $34.1 million. As approved by a shareholder vote on 12 August 2020, JZCP has the ability to make up to approximately $4.1 million in further commitments to Spruceview, above the original $33.5 million committed. Further commitments made would be on the same 50:50 basis with Jay Jordan and David Zalaznick (or their respective affiliates). Following a capital call of $0.6 million in November 2022, JZCP has the option to increase further commitments to Spruceview up to approximately $3.5 million. During the year ended 28 February 2021, the Company sold its interests in certain US microcap portfolio companies (the "Secondary Sale") to a secondary fund led by Hamilton Lane Advisors, L.L.C. The Secondary Sale was structured as a sale and contribution to a newly formed fund, JZHL Secondary Fund LP, managed by an affiliate of JZAI. At 28 February 2023, JZCP's investment in JZHL Secondary Fund LP was valued at $80.4 million (28 February 2022: $99.2 million). JZCP has co-invested with Fund A, Fund A Parallel I, II and III Limited Partnerships in a number of US micro-cap buyouts. These Limited Partnerships are managed by an affiliate of JZAI. JZCP invested in a ratio of 82%/18% with the Fund A entities. At 28 February 2023, these co-investments, with the Fund A entities, were in the following portfolio companies: Industrial Service Solutions WC, L.P., Safety Solutions Holdings, BSM Engenharia and Tierpoint. Pursuant to a merger agreement, dated December 14, 2022, JZCP and all of the Fund A Entities transferred their prior investments in ISS #2, LLC ratably in exchange for cash, a rollover investment (Industrial Service Solutions WC, L.P.) and contingent escrow amounts. JZCP's investments in Safety Solutions Holdings and Tierpoint have subsequently been transferred to JZHL Secondary Fund LP (mentioned above). During the prior year, the Company entered into a note purchase agreement with David Zalaznick and Jay Jordan, pursuant to which they have purchased directly or through their affiliates, subordinated, second lien Subordinated Notes in the amount of $31.5 million, with an interest rate of 6 per cent. per annum and maturing on 11 September 2022 (the “Subordinated Notes”). The issuance of the Subordinated Notes was subject to a number of conditions, including shareholder approval. On 26 August 2022, the maturity date of the Subordinated Notes was extended to 30 September 2022 and subsequently after certain criteria were met extended for a further 12 months to 30 September 2023. On 14 February 2023, the Company completed an early voluntary redemption in full of the Subordinated Notes. Total Directors' remuneration for the year ended 28 February 2023 was $290,000 (28 February 2022: $290,000). 26. Controlling Party The issued shares of the Company are owned by a number of parties, and therefore, in the opinion of the Directors, there is no ultimate controlling party of the Company, as defined by IAS 24 - Related Party Disclosures. 27. Basic and Diluted (Loss)/Earnings Per Share Basic earnings per share is calculated by dividing the profit for the year by the weighted average number of Ordinary shares outstanding during the year. For the year ended 28 February 2023, the weighted average number of Ordinary shares outstanding during the year was 77,477,214 (Year ended 28 February 2022: 77,475,932). The diluted earnings per share is calculated by considering adjustments required to the profit and weighted average number of shares for the effects of potential dilutive Ordinary shares. Following the redemption of the Company's CULS during the prior year, there are no longer any potential dilutive events to the Ordinary shares. 28. Net Asset Value Per Share The net asset value per Ordinary share of $4.06 (28 February 2022: $4.03, restated from $4.29 in accordance with information disclosed in Note 2) is based on the net assets at the year end of $314,498,000 (28 February 2022:$311,852,000) and on 77,477,214 (28 February 2022: 77,477,214) Ordinary shares, being the number of Ordinary shares in issue at the year end. 29. Contingent Assets Amounts held in escrow accounts When investments have been disposed of by the Company, proceeds may reflect contractual terms requiring that a percentage is held in an escrow account pending resolution of any indemnifiable claims that may arise. With the exception of Industrial Services Solutions (ISS) discussed below, the Company has assessed that the likelihood of the recovery of other escrow accounts at 28 February 2023 and 28 February 2022 cannot be determined and has therefore classified these escrow accounts as a contingent asset. In December 2022, following the partial sale of the Company's interest in Industrial Services Solutions (ISS), approximately $8.3 million was placed in an escrow account payable to the Company post-closing pursuant to an escrow arrangement that is subject to customary final closing adjustments. Included in this escrow amount was approximately $5.3 million held back for the scenario of the estimated net working capital on closing exceeding the final agreed amount. The Board determined due to the high likelihood that this portion of
the total escrow would be released imminently, it would be included within the year end valuation of Industrial Service Solutions WC, L.P. rather than as an contingent asset. The Company still has the potential to receive further proceeds from the closing of the ISS partial sale once the final working capital of ISS on the closing date has been agreed, as well as the other standard escrows highlighted in below table. As at 28 February 2023 and 28 February 2022, the Company had the following contingent assets held in escrow accounts which had not been recognised as assets of the Company:
28.2.2023
US$
Unaudited NAV per share - announced 20 March 2023 4.08
Valuation change (0.02)
Audited NAV per share 4.06
Company Amount in Escrow
28.2.2023 28.2.2022
US$'000 US$'000
Industrial Services Solutions (ISS) 3,044 -
Igloo 49 49
Salter Labs ($528,000 received) - 536
Southern Petroleum Laboratories ($525,000 received) - 509
JZHL Secondary Fund (being 37.5% of the total amount held in escrow) - 202
3,093 1,296
During the year ended 28 February 2023 net proceeds including a minor refund
of an escrow receipt, totalled $1,189,000 (28 February 2022: $597,000) were
realised during the year and recorded in the Statement of Comprehensive
Income.
Year Ended Year Ended
28.2.2023 28.2.2022
US$'000 US$'000
Escrows at beginning of year 1,296 328
Escrows added on realisation of investments 4,336 1,321
Escrow receipts during the year (1,189) (597)
Escrow received by JZHL Secondary Fund and distributed in accordance with Limited Partner agreement. (1,320) -
Additional escrows recognised in year not reflected in opening position (30) 509
Potential escrows at prior year end no longer recorded - (265)
Escrows at year end 3,093 1,296
30. Notes to the Statement of Cash Flows
Investment income and interest received during the year Year Ended Year Ended
28.2.2023 28.2.2022
US$ '000 US$ '000
Dividends on unlisted investments - 520
Bank interest 275 174
Treasury interest 726 -
1,001 694
Purchases and sales of investments are considered to be operating activities of the Company, given its purpose, rather than investing activities. The cash flows arising from these activities are shown in the Statement of Cash Flows.
Changes in financing liabilities arising from both cash flow and non-cash flow
items
Non-cash changes
1.3.2022 Cash flows Fair Value Finance Costs Foreign Exchange 28.2.2023
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Senior credit facility 42,573 (4,555) - 5,163 - 43,181
Subordinated Notes 32,293 (34,093) - 1,800 - -
Zero Dividend Preference (2022) shares 75,038 (64,296) - 2,067 (12,809) -
149,904 (102,944) - 9,030 (12,809) 43,181
Non-cash changes
1.3.2021 Cash flows Fair Value Finance Costs Foreign Exchange 28.2.2022
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Senior credit facility 68,694 (32,964) - 6,843 - 42,573
Zero Dividend Preference (2022) shares 74,303 - - 3,807 (3,072) 75,038
Subordinated Notes - 31,185 - 1,108 - 32,293
Convertible Unsecured Loan Stock 52,430 (54,030) 565 1,336 (301) -
195,427 (55,809) 565 13,094 (3,373) 149,904
31. Dividends Paid and Proposed
No dividends were paid or proposed for the years ended 28 February 2023 and 28
February 2022.
32. IFRS to US GAAP Reconciliation
The Company's Financial Statements are prepared in accordance with IFRS, which
in certain respects differ from US GAAP. These differences are not material
and therefore no reconciliation between IFRS and US GAAP has been presented.
For reference, please see below for a summary of the key judgments and
estimates taken into account with regards to the Company as of 28 February
2023, as well as the Shareholders' financial highlights required under US
GAAP.
Assessment as an Investment Entity
As stated in Note 2, the Company meets the definition of an investment entity
under IFRS 10 and is therefore required to measure its subsidiaries at fair
value through profit or loss rather ("FVTPL") than consolidate them. Per US
GAAP (Financial Services - Investment Companies (Topic 946): Amendments to the
Scope, Measurement, and Disclosure Requirements or "ASC 946"), the Company
meets the definition of an investment company, and as required by ASC 946,
JZCP measures its investment in Subsidiaries at FVTPL.
Fair Value Measurement of Investments
The fair value of the underlying investments held by the Company are
determined in accordance with US GAAP and IFRS based on valuation techniques
and inputs that are observable in the market which market participants have
access to and will use to determine the exit price or selling price of the
investments.
Consideration of going concern
As described in Note 3, the Board is satisfied, as at the date of the signing
of the Annual Report and Financial Statements, that it is appropriate to adopt
the going concern basis in preparing the financial statements and they have a
reasonable expectation that the Company will continue in existence as a going
concern for the period ending 30 June 2024.
Measurement of Liabilities
The Company's Senior Credit Facility and previously the Company's Subordinated
Notes and ZDP shares are/were recorded at amortised cost using the effective
interest rate method in accordance with US GAAP and IFRS.
The following table presents performance information derived from the
Financial Statements.
The Company's Senior Credit Facility and previously the Company's Subordinated
Notes and ZDP shares are/were recorded at amortised cost using the effective
interest rate method in accordance with US GAAP and IFRS.
The following table presents performance information derived from the
Financial Statements.
28.2.2022
28.2.2023 restated (1)
US$ US$
Net asset value per share at the beginning of the year 4.03 3.98
Performance during the year (per share):
Net investment income 0.17 0.22
Net realised and unrealised gain 0.11 0.14
Operating expenses (0.13) (0.14)
Finance costs (0.12) (0.17)
Total return 0.03 0.05
Net asset value per share at the end of the year 4.06 4.03
Total Return 0.66% 0.95%
Net investment income to average net assets excluding incentive fee 3.72% 4.76%
Operating expenses to average net assets (2.91%) (3.41%)
Finance costs to average net assets (2.65%) (4.00%)
(1) See Note 2
33. Subsequent Events
These financial statements were approved by the Board on 7 June 2023.
Subsequent events have been evaluated until this date.
There are no subsequent events to report.
Company Advisers
Investment Adviser Independent Auditor
The Investment Adviser to JZ Capital Partners Limited (“JZCP”) is Jordan/Zalaznick Advisers, Inc., (“JZAI”) a company beneficially owned by John (Jay) W Jordan II and David W Zalaznick. The company offers investment advice to the Board of JZCP. JZAI has offices in New York and Chicago. Ernst & Young LLP
PO Box 9
Royal Chambers
St Julian's Avenue
St Peter Port
Guernsey GY1 4AF
Jordan/Zalaznick Advisers, Inc. UK Solicitor
9 West 57th Street Ashurst LLP
New York NY 10019 London Fruit & Wool Exchange
1 Duval Square
Registered Office London E1 6PW
PO Box 255
Trafalgar Court US Lawyers
Les Banques Monge Law Firm, PLLC
St Peter Port 435 South Tryon Street
Guernsey GY1 3QL Charlotte, NC 28202
JZ Capital Partners Limited is registered in Guernsey Mayer Brown LLP
Number 48761 300 South Tryon Street
Suite 1800
Administrator, Registrar and Secretary Charlotte NC 28202
Northern Trust International Fund Administration
Services (Guernsey) Limited Winston & Strawn LLP
PO Box 255 35 West Wacker Drive
Trafalgar Court Chicago IL 60601-9703
Les Banques
St Peter Port Guernsey Lawyer
Guernsey GY1 3QL Mourant Ozannes (Guernsey) LLP
Royal Chambers
UK Transfer and Paying Agent St Julian's Avenue
Equiniti Limited St Peter Port
Aspect House Guernsey GY1 4HP
Spencer Road
Lancing Financial Adviser and Broker
West Sussex BN99 6DA J.P. Morgan Securities plc
25 Bank Street
US Bankers London E14 5JP
HSBC Bank USA NA
452 Fifth Avenue
New York NY 10018
(Also provides custodian services to JZ Capital Partners
Limited under the terms of a Custody Agreement).
City National Bank
100 SE 2nd Street, 13th Floor
Miami, FL 33131
Guernsey Banker
Northern Trust (Guernsey) Limited
PO Box 71
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3DA
Useful Information for Shareholders
Listing
JZCP Ordinary shares are listed on the Official List of the Financial Services
Authority of the UK, and are admitted to trading on the London Stock Exchange
Specialist Fund Segment for listed securities.
On 3 October 2022, the Company redeemed and cancelled its Zero Dividend
Preference ("ZDP") shares on their maturity date.
The price of the Ordinary shares are shown in the Financial Times under
"Conventional Private Equity" and can also be found at https://markets.ft.com.
ISIN/SEDOL numbers
Ticker Symbol ISIN
Code SEDOL Number
Ordinary
shares
JZCP
GG00B403HK58
B403HK5
ZDP (2022)
shares
JZCZ
GG00BZ0RY036
BZ0RY03
Key Information Documents
JZCP (http://www.jzcp.com/investor-relations/key-information-documents)
produces (http://www.jzcp.com/investor-relations/key-information-documents)
Key (http://www.jzcp.com/investor-relations/key-information-documents)
Information (http://www.jzcp.com/investor-relations/key-information-documents)
Document (http://www.jzcp.com/investor-relations/key-information-documents)s
to assist investors' understanding of the Company's securities and to
(http://www.jzcp.com/investor-relations/key-information-documents) enable
comparison (http://www.jzcp.com/investor-relations/key-information-documents)
with (http://www.jzcp.com/investor-relations/key-information-documents) other
(http://www.jzcp.com/investor-relations/key-information-documents) investment
(http://www.jzcp.com/investor-relations/key-information-documents) pr
(http://www.jzcp.com/investor-relations/key-information-documents)oducts.
These documents are found on the Company's website
(http://www.jzcp.com/investor-relations/key-information-documents) -
www.jzcp.com/investor-relations/key-informati
(http://www.jzcp.com/investor-relations/key-information-documents)on-documents.
Alternative Performance Measures
In accordance with ESMA Guidelines on Alternative Performance Measures
("APMs") the Board has considered what APMs are included in the annual report
and financial statements which require further clarification. An APM is
defined as a financial measure of historical or future financial performance,
financial position, or cash flows, other than a financial measure defined or
specified in the applicable financial reporting framework. APMs included in
the Annual Report and Financial Statements, which are unaudited and outside
the scope of IFRS, are deemed to be as follows:
Total NAV Return
The Total NAV Return measures how the net asset value ("NAV") per share has
performed over a period of time, taking into account both capital returns and
dividends paid to shareholders. JZCP quotes NAV total return as a percentage
change from the start of the period (one year) and also three-month,
three-year, five-year and seven year periods. It assumes that dividends paid
to shareholders are reinvested back into the Company therefore future NAV
gains are not diminished by the paying of dividends. The Total NAV Return for
the year ended 28 February 2023 was 0.7% (2022: 1.1% (restated)), which only
reflects the change in NAV ($) as no dividends were paid during the year.
Total Shareholder Return (Ordinary shares)
A measure showing how the share price has performed over a period of time,
taking into account both capital returns and dividends paid to shareholders.
JZCP quotes shareholder price total return as a percentage change from the
start of the period (one year) and also six-month, three-year, five-year and
seven-year periods. It assumes that dividends paid to shareholders are
reinvested in the shares at the time the shares are quoted ex dividend. The
Shareholder Return for the year ended 28 February 2023 was 50.0%, which only
reflects the change in share price (£) as no dividends were paid during the
year. The Shareholder Return for the year ended 28 February 2022 was 34.6%.
NAV to market price discount
The NAV per share is the value of all the company’s assets, less any
liabilities it has, divided by the number of shares. However, because JZCP
shares are traded on the London Stock Exchange's Specialist Fund Segment, the
share price may be higher or lower than the NAV. The difference is known as a
discount or premium. JZCP's discount is calculated by expressing the
difference between the period end dollar equivalent share price and the period
end NAV per share as a percentage of the NAV per share.
At 28 February 2023, JZCP's Ordinary shares traded at £1.58 (28 February
2022: £1.05) or $1.91 (28 February 2022: $1.41) being the dollar equivalent
using the year end exchange rate of £1: $1.21 (28 February 2022 £1: $1.34).
The shares traded at a 53.0% (28 February 2022: 65.0% (restated)) discount to
the NAV per share of $4.06 (2022: $4.03).
Ongoing Charges calculation
A measure expressing the Ongoing annualised expenses as a percentage of the
Company's average annualised net assets over the year 2.56% (2022: 3.31%).
Ongoing charges, or annualised recurring operating expenses, are those
expenses of a type which are likely to recur in the foreseeable future, and
which relate to the operation of the company, excluding financing charges and
gains/losses arising on investments.
Ongoing charges are based on costs incurred in the year as being the best
estimate of future costs but are amended if this method is not considered an
accurate prediction of future expenses. Ongoing expenses for the year are
$8,306,000 (2022: $10,785,000) comprising of the IA base fee $5,406,000 (2022:
$7,414,000), Directors' fees $290,000 (2022: $290,000) and other fees
$2,610,000 (2022: $3,081,000) . Average net assets for the year are calculated
using quarterly NAVs $344,532,000 (2022: $323,045,000).
Criminal Facilitation of Tax Evasion
The Board has approved a policy of zero tolerance towards the criminal
facilitation of tax evasion, in compliance with the Criminal Finances Act
2017.
Non-Mainstream Pooled Investments
From 1 January 2014, the FCA rules relating to the restrictions on the retail
distribution of unregulated collective investment schemes and close
substitutes came into effect. JZCP's Ordinary shares qualify as an ‘excluded
security’ under these rules and will therefore be excluded from the FCA’s
restrictions which apply to non-mainstream investment products. Therefore
Ordinary shares issued by JZ Capital Partners can continue to be recommended
by financial advisers as an investment for UK retail investors.
Internet Address
The Company: www.jzcp.com
Financial Diary
Annual General Meeting 25 July 2023
Interim report for the six months ended 31 August 2023 November 2023 (date to be confirmed)
Results for the year ended 28 February 2024 May 2024 (date to be confirmed)
JZCP, will aim to issue monthly NAV announcements within 21 day of the month
end, these announcements will be posted on JZCP's website at the same time, or
soon thereafter.
Payment of Dividends
In the event of a cash dividend being paid, the dividend will be sent by
cheque to the first-named shareholder on the register of members at their
registered address, together with a tax voucher. At shareholders' request,
where they have elected to receive dividend proceeds in Sterling, the dividend
may instead be paid direct into the shareholder's bank account through the
Bankers' Automated Clearing System. Payments will be paid in US dollars unless
the shareholder elects to receive the dividend in Sterling. Existing elections
can be changed by contacting the Company's Transfer and Paying Agent, Equiniti
Limited on +44 (0) 121 415 7047.
Share Dealing
Investors wishing to buy or sell shares in the Company may do so through a
stockbroker. Most banks also offer this service.
Foreign Account Tax Compliance Act
The Company is registered (with a Global Intermediary Identification Number
CAVBUD.999999.SL.831) under The Foreign Account Tax Compliance Act ("FATCA").
Share Register Enquiries
The Company's UK Transfer and Paying Agent, Equiniti Limited, maintains the
share registers. In event of queries regarding your holding, please contact
the Registrar on 0871 384 2265, calls to this number cost 8p per minute from a
BT landline, other providers' costs may vary. Lines are open 8.30 a.m. to 5.30
p.m., Monday to Friday, If calling from overseas
+44 (0) 121 415 7047 or access their website at www.equiniti.com. Changes of
name or address must be notified in writing to the Transfer and Paying Agent.
Nominee Share Code
Where notification has been provided in advance, the Company will arrange for copies of shareholder communications to be provided to the operators of nominee accounts. Nominee investors may attend general meetings and speak at meetings when invited to do so by the Chairman.
Documents Available for Inspection
The following documents will be available at the registered office of the Company during usual business hours on any weekday until the date of the Annual General Meeting and at the place of the meeting for a period of fifteen minutes prior to and during the meeting:
(a) the Register of Directors' Interests in the stated capital of the Company;
(b) the Articles of Incorporation of the Company; and
(c) the terms of appointment of the Directors.
Warning to Shareholders – Boiler Room Scams
In recent years, many companies have become aware that their shareholders have been targeted by unauthorised overseas-based brokers selling what turn out to be non-existent or high risk shares, or expressing a wish to buy their shares. If you are offered, for example, unsolicited investment advice, discounted JZCP shares or a premium price for the JZCP shares you own, you should take these steps before handing over any money:
· Make sure you get the correct name of the person or organisation
· Check that they are properly authorised by the FCA before getting involved by visiting https://www.fca.org.uk/firms/financial-services-register
· Report the matter to the FCA by calling 0800 111 6768
· If the calls persist, hang up
· More detailed information on this can be found on the Money Advice Service website www.moneyadviceservice.org.uk
US Investors
General
The Company's Articles contain provisions allowing the Directors to decline to register a person as a holder of any class of ordinary shares or other securities of the Company or to require the transfer of those securities (including by way of a disposal effected by the Company itself) if they believe that the person:
(a) is a "US person" (as defined in Regulation S under the US Securities Act of 1933, as amended) and not a "qualified purchaser" (as defined in the US Investment Company Act of 1940, as amended, and the related rules thereunder);
(b) is a "Benefit Plan Investor" (as described under "Prohibition on Benefit Plan Investors and Restrictions on Non-ERISA Plans" below); or
(c) is, or is related to, a citizen or resident of the United States, a US partnership, a US corporation or a certain type of estate or trust and that ownership of any class of ordinary shares or any other equity securities of the Company by the person would materially increase the risk that the Company could be or become a "controlled foreign corporation" (as described under "US Tax Matters").
In addition, the Directors may require any holder of any class of ordinary shares or other securities of the Company to show to their satisfaction whether or not the holder is a person described in paragraphs (A), (B) or (C) above.
US Securities Laws
The Company (a) is not subject to the reporting requirements of the US Securities Exchange Act of 1934, as amended (the "Exchange Act"), and does not intend to become subject to such reporting requirements and (b) is not registered as an investment company under the US Investment Company Act of 1940, as amended (the "1940 Act"), and investors in the Company are not entitled to the protections provided by the 1940 Act.
Prohibition on Benefit Plan Investors and Restrictions on Non-ERISA Plans
Investment in the Company by "Benefit Plan Investors" is prohibited so that the assets of the Company will not be deemed to constitute "plan assets" of a "Benefit Plan Investor". The term "Benefit Plan Investor" shall have the meaning contained in 29 C.F.R. Section 2510.3-101, as modified by Section 3(42) of the US Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and includes (a) an "employee benefit plan" as defined in Section 3(3) of ERISA that is subject to Part 4 of Title I of
ERISA; (b) a "plan" described in Section 4975(e)(1) of the US Internal Revenue Code of 1986, as amended (the "Code"), that is subject to Section 4975 of the Code; and (c) an entity whose underlying assets include "plan assets" by reason of an employee benefit plan's or a plan's investment in such entity. For purposes of the foregoing, a "Benefit Plan Investor" does not include a governmental plan (as defined in Section 3(32) of ERISA), a non- US plan (as defined in Section 4(b)(4) of ERISA) or a church plan
(as defined in Section 3(33) of ERISA) that has not elected to be subject to ERISA.
Each purchaser and subsequent transferee of any class of ordinary shares (or any other class of equity interest in the Company) will be required to represent, warrant and covenant, or will be deemed to have represented, warranted and covenanted, that it is not, and is not acting on behalf of or with the assets of, a Benefit Plan Investor to acquire such ordinary shares (or any other class of equity interest in the Company).
Under the Articles, the directors have the power to require the sale or transfer of the Company's securities in order to avoid the assets of the Company being treated as "plan assets" for the purposes of ERISA.
The fiduciary provisions of laws applicable to governmental plans, non-US plans or other employee benefit plans or retirement arrangements that are not subject to ERISA (collectively, "Non-ERISA Plans") may impose limitations on investment in the Company. Fiduciaries of Non-ERISA Plans, in consultation with their advisers, should consider, to the extent applicable, the impact of such fiduciary rules and regulations on an investment in the Company.
Among other considerations, the fiduciary of a Non-ERISA Plan should take into account the composition of the Non- ERISA Plan's portfolio with respect to diversification; the cash flow needs of the Non-ERISA Plan and the effects thereon of the illiquidity of the investment; the economic terms of the Non- ERISA Plan's investment in the Company; the Non- ERISA Plan’s funding objectives; the tax effects of the investment and the tax and other risks associated with the investment; the fact that the investors in
the Company are expected to consist of a diverse group of investors (including taxable, tax-exempt, domestic and foreign entities) and the fact that the management of the Company will not take the particular objectives of any investors or class of investors into account.
Non-ERISA Plan fiduciaries should also take into account the fact that, while the Company's board of directors and its investment adviser will have certain general fiduciary duties to the Company, the board and the investment adviser will not have any direct fiduciary relationship with or duty to any investor, either with respect to its investment in Shares or with respect to the management and investment of the assets of the Company. Similarly, it is intended that the assets of the Company will not be
considered plan assets of any Non-ERISA Plan or be subject to any fiduciary or investment restrictions that may exist under laws specifically applicable to such Non-ERISA Plans. Each Non-ERISA Plan will be required to acknowledge and agree in connection with its investment in any securities to the foregoing status of the Company, the board and the investment adviser that there is no rule, regulation or requirement applicable to such investor that is inconsistent with the foregoing description of the
Company, the Board and the Investment Adviser.
Each purchaser or transferee that is a Non-ERISA Plan will be deemed to have represented, warranted and covenanted as follows:
(a) The Non-ERISA Plan is not a Benefit Plan Investor;
(b) The decision to commit assets of the Non-ERISA Plan for investment in the Company was made by fiduciaries independent of the Company, the Board, the Investment adviser and any of their respective agents, representatives or affiliates, which fiduciaries (i) are duly authorized to make such investment decision and have not relied on any advice or recommendations of the Company, the Board, the Investment adviser or any of their respective agents, representatives or affiliates and (ii) in consultation with
their advisers, have carefully considered the impact of any applicable federal, state or local law on an investment in the Company;
(c) The Non-ERISA Plan’s investment in the Company will not result in a non-exempt violation of any applicable federal, state or local law;
(d) None of the Company, the Board, the Investment adviser or any of their respective agents, representatives or affiliates has exercised any discretionary authority or control with respect to the Non-ERISA Plan’s investment in the Company, nor has the Company, the Board, the Investment adviser or any of their respective agents, representatives or affiliates rendered individualized investment advice to the Non-ERISA Plan based upon the Non-ERISA Plan’s investment policies or strategies, overall portfolio
composition or diversification with respect to its commitment to invest in the Company and the investment program thereunder; and
(e) It acknowledges and agrees that it is intended that the Company will not hold plan assets of the Non-ERISA Plan and that none of the Company, the Board, the Investment adviser or any of their respective agents, representatives or affiliates will be acting as a fiduciary to the Non-ERISA Plan under any applicable federal, state or local law governing the Non-ERISA Plan, with respect to either (i) the Non-ERISA Plan’s purchase or retention of its investment in the Company or (ii) the management or
operation of the business or assets of the Company. It also confirms that there is no rule, regulation, or requirement applicable to such purchaser or transferee that is inconsistent with the foregoing description of the Company, the Board and the Investment Adviser.
US Tax Matters
This discussion does not constitute tax advice and is not intended to be a substitute for tax advice and planning. Prospective holders of the Company's securities must consult their own tax advisers concerning the US federal, state and local income tax and estate tax consequences in their particular situations of the acquisition, ownership and disposition of any of the Company's securities, as well as any consequences under the laws of any other taxing jurisdiction.
The Board may decline to register a person as, or may require such person to
cease to be, a holder of any class of ordinary shares or other equity
securities of the Company because of, among other reasons, certain US
ownership and transfer restrictions that relate to “controlled foreign
corporations” contained in the Articles of the Company. A shareholder of the
Company may be subject to forced sale provisions contained in the Articles in
which case such shareholder could be forced to dispose of its securities if
the Company’s directors believe that such shareholder is, or is related to,
a citizen or resident of the United States, a US partnership, a US corporation
or a certain type of estate or trust and that ownership of any class of
ordinary shares or any other equity securities of the Company by such
shareholder would materially increase the risk that the Company could be or
become a "controlled foreign corporation" within the meaning of the Code (a
"CFC"). Shareholders of the Company may also be restricted by such provisions
with respect to the persons to whom they are permitted to transfer their
securities.
In general, a foreign corporation is treated as a CFC if, on any date of its
taxable year, its "10% US Shareholders" collectively own (directly, indirectly
or constructively within the meaning of Section 958 of the Code) more than 50%
of the total combined voting power or total value of the corporation's stock.
For this purpose, a "10% US Shareholder" means any US person who owns
(directly, indirectly or constructively within the meaning of Section 958 of
the Code) 10% or more of the total combined voting power of all classes of
stock of a foreign corporation or 10% or more of the total value of shares of
all classes of stock of a foreign corporation. Pursuant to current tax laws
regarding constructive ownership of CFC stock, the Company’s US subsidiary
will be deemed to own all of the stock of the non-US subsidiaries held by the
Company for purposes of determining such non-US subsidiaries’ CFC status.
The Company's treatment as a CFC as well as its non-US subsidiaries’
treatment as CFCs could have adverse tax consequences for 10% US Shareholders.
A 10% US Shareholder must generally include in its gross income its pro rata
share of certain earnings and profits of a CFC. If such 10% US Shareholder
sells or exchanges stock of an entity which, during the five-year period
ending upon the date of such sale or disposition, was a CFC, then such 10% US
Shareholder will be required to treat a portion of the gain recognized upon
such sale or exchange as a dividend to the extent of the earnings and profits
of the CFC attributable to such stock. In addition, a 10% US Shareholder is
subject to an additional taxable income inclusion for its pro-rata amount of
“global intangible low-taxed income” (“GILTI”). The includable amount
of income is the 10% US Shareholder’s share of the excess of the CFC’s
“net CFC tested income” above a notional 10% annual return on the CFC’s
aggregate adjusted tax basis in certain tangible depreciable business assets.
Corporate 10% US Shareholders are entitled to a deduction equal to 50% of the
GILTI amount until December 31, 2025 (and a deduction equal to 37.5% of the
GILTI amount thereafter) and may be able to offset a share of such income
inclusions with deemed paid foreign tax credits. Any non-corporate 10% US
Shareholder may elect to be treated as a corporation for purposes of the
subpart F and GILTI rules.
The Company has been advised that it qualified as a "passive foreign
investment company" ("PFIC") for the fiscal year ended February 2022. The
Company's treatment as a PFIC is likely to have adverse tax consequences for
US taxpayers. Previously, for the fiscal year ended February 2021 the Company
was advised that it qualified as a PFIC, however, for fiscal year 2020 the
Company was determined not to qualify as a PFIC. An analysis for the financial
year ended 28 February 2023 will be undertaken this year. An investment in a
PFIC will cause US taxpayer to be subject to special tax rules. In general, an
entity formed under the laws of a non-US jurisdiction that is classified as a
corporation for US federal income tax purposes will be classified as a PFIC if
seventy-five percent (75%) or more of its gross income for the taxable year is
from passive sources (generally defined to include interest, dividends, rents,
royalties and gains from the disposition of passive assets) or fifty percent
(50%) or more of the average value of the entity’s assets on the last day of
each fiscal quarter during a year consist of assets that generate passive
income. There are no minimum stock ownership requirements for application of
the PFIC rules. Once a corporation is a PFIC with respect to a shareholder, it
is generally always treated as a PFIC unless a purging election is made,
irrespective of whether the entity ceases to meet the definitional
requirements for PFIC classification. Under the PFIC rules, gain attributable
to a disposition of the stock of a PFIC, as well as income attributable to
certain “excess distributions” with respect to that PFIC stock, is
allocated ratably over the shareholder’s holding period for the stock. The
portion of such gain and excess distribution allocated under such rules to
such prior years are subject to tax as ordinary income at the highest rate
applicable to such income during each such year during such holding period,
and is subject to an interest-like charge on the tax liability attributable to
income that is treated as allocated to prior years as if such liability had
actually been due in each such prior year.
An investor in a PFIC may generally elect to treat that entity as a qualified
electing fund (“QEF”) by filing IRS Form 8621. If a QEF election is made
with respect to the Company, U.S. holders would generally be required to take
into account currently their pro rata share of certain earnings and net
capital gain from the Company, in general, without regard to whether the
Company makes an actual cash distribution, but would generally not be subject
to the tax regime discussed above. The Company shall provide each investor
with a PFIC Annual Information Statement with its other tax reporting
information for the taxable year upon request. Such statement shall include
sufficient information to enable the shareholder to calculate its pro rata
share of the PFIC’s ordinary earnings and net capital gain for the tax year.
The taxation of a US taxpayer's investment in the Company's securities is
highly complex. Prospective holders of the Company's securities must consult
their own tax advisers concerning the US federal, state and local income tax
and estate tax consequences in their particular situations of the acquisition,
ownership and disposition of any of the Company's securities, as well as any
consequences under the laws of any other taxing jurisdiction.
U.S. investors can request a PFIC statement from Northern Trust, the
Administrator and Secretary of JZCP (contact details above).
Investment Adviser's ADV Form
Shareholders and state securities authorities wishing to view the Investment
Adviser's ADV form can do so by following
the link below:
https://adviserinfo.sec.gov/firm/summary/160932
(https://adviserinfo.sec.gov/firm/summary/160932)
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