Schroder Br.Opps.Tst - Final Results
06/07/2023 07:00
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RNS Number : 1168F Schroder British Opportunities Tst. 06 July 2023
Schroder British Opportunities Trust plc
Annual Report & Accounts for the year ended 31 March 2023
Schroder British Opportunities Trust plc ("SBO" or the "Company") hereby
submits its final results for the year ended 31 March 2023.
Financial highlights
· Net asset value ("NAV") per share increased 3.1% to 107.32 pence
(31 March 2022: 104.14 pence)
· Strong aggregate performance of private equity allocation, which
now represents 65% of total investments (31 March 2022: 42%), and resilient
NAV performance since inception against challenging market backdrop
· Available cash for future investments as at 31 March 2023 of
£7.8 million
Portfolio highlights
· Portfolio focus remains on high growth small and mid-sized
companies
· Profitable* companies make up 74% of total investments as at
31 March 2023
· Private equity allocation focused on the 'growth capital' and
'buyout' areas of the market
o Portfolio seeing significant EBITDA development, driven by strong organic
and inorganic growth
o 65% of total investments are now in private companies
o Eight of nine unquoted investments performing well with uplifts to their
original valuations and are already profitable or have a clear pathway to
profitability, that have in aggregate grown sales 40% over the past 12 months
o New investments into Mintec, CFC and Pirum
o First cash distribution (£2.4 million) from private equity holdings
received, following combination of Culligan and Waterlogic
· Public holdings decreased in value slightly as UK small and
mid-cap stocks were affected by the macro factors impacting the market, but
with substantial re-rating potential when markets recover
o Added Bytes Technology and exited holdings in Euromoney, EMIS and Ideagen
- sold after they received takeover bids, illustrating the Portfolio Manager's
ability to identifying undervalued businesses
*Based on EBITDA profitability
Investor Presentation
The Company's Portfolio Managers are hosting an annual results presentation
for investors on Tuesday, 11 July 2023 at 10.00 a.m. Investors can register
for the event at: https://registration.duuzra.com/form/SBOAnnualResults23.
Neil England, Chairman of Schroder British Opportunities Trust plc commented:
"In certain areas of the private equity market there has been significant
downwards revaluation, although this has generally not been the case in the
part of the market that we focus on.
Our differentiated public-private equity strategy enables us to continue to
invest without boundaries, thus providing access to a broader investable
universe. Our current portfolio of growing and innovative British companies
are expected to perform well. The patient investor that can look beyond the
recent and current environment should be well rewarded."
The Company's Report and Accounts for the period ended 31 March 2023 are also
being published in hard copy format and an electronic copy will shortly be
available to download from the Company's website www.schroders.com/sbo. Please
click on the following link to view the document:
http://www.rns-pdf.londonstockexchange.com/rns/1168F_1-2023-7-5.pdf
(http://www.rns-pdf.londonstockexchange.com/rns/1168F_1-2023-7-5.pdf)
Enquiries:
Schroder Investment Management Limited
Augustine Chipungu
(Press)
020 7658 6000
Paula Lockwood (Company
Secretary) 020 7658 6000
John
Spedding
020 7658 6000
Schroder British Opportunities Trust plc
Chairman's Statement
I am pleased to present your Company's third report and accounts since the
launch of the Company in 2020. This report covers the year ended 31 March
2023.
Investment policy
Your Company invests in a diversified mix of public and private companies,
either based in the UK or generating a significant proportion of their revenue
in the UK. We seek to invest in companies with potential for high growth and
with strong ESG credentials, particularly where we believe these to be
undervalued by the market. Our objective is to deliver long term and
sustainable capital growth for shareholders.
Performance
Shareholders will be fully aware of the significant market volatility
throughout the year under review. The war in Ukraine, inflation, rising
interest rates after a prolonged period of close to free money, highly priced
US technology stocks falling in value and the contagion from that, have all
been contributing factors. Fast growing companies that need cash to fuel their
growth have generally been out of favour, but this sentiment has also hit
other growth companies that are profitable already or have cash reserves that
will fund them through to that point.
In certain areas of the private equity market there has been significant
downwards revaluation, although this has generally not been the case in the
part of the market that we focus on. We are not venture investors. We focus
on the growth and the buyout sector. Of the Company's portfolio of nine
private businesses, diversified across sectors, eight are either profitable or
on a clear path to profitability. These companies have an average of c.40%
revenue growth and good margins. Our decision to focus on this area of the
private equity market has proved to be the right one in this environment. Our
private portfolio contributed 10% to the Company's NAV during the period under
review.
The Company's public holdings fell slightly in value as UK small and mid-cap
stocks were badly affected by the macro factors affecting the market.
Despite this difficult environment, it is pleasing to report that your
Company's NAV increased by 3.1% during the period (from 104.14p to 107.32p).
This positive overall result highlights the benefit of blending public and
private companies together in one portfolio.
Unfortunately, this robust NAV performance did not produce a commensurate
improvement in our share price, which suffered a decline of -18.5%. The
discount to NAV widened during the period under review from ‑19.3% to -36.2%
as at 31 March 2023. The share price falling to this higher discount
correlates with market sentiment towards growth stocks and private equity
investment companies in particular. It is frustrating when our share price
does not reflect the performance or the potential of the Company's portfolio.
Further comment on performance and portfolio activity can be found in the
Portfolio Managers' review.
Valuations
The portfolio has a mix of public and private equities. Public investments are
obviously valued at the prevailing market price. Shareholders in investment
companies with a private portfolio are often sceptical of valuations when they
don't see them change as much or as rapidly as they do in many public
companies. Your Board considers its governance role in the private equities
valuations process to be of utmost importance. We are fortunate to have a
specialist valuations team within Schroders, who are independent of the
Portfolio Managers, and who report their findings directly to the Board. The
results we are reporting reflect their in-depth analysis and a discursive and
challenging valuations process. In all cases, we use public market
comparables.
In December 2022, revised international private equity and venture valuations
(IPEV) guidelines were issued, built on industry best practice. Shareholders
will be comforted to learn that the Company's valuation process was already
fully compliant with these guidelines.
Discount management
The Board monitors the Company's discount levels and regularly reviews its
share buyback policy. The Board instigated a highly accretive buyback, seeking
to convey to the market our confidence in the value of the portfolio.
1,100,000 shares were purchased by the Company and are being held in treasury.
These shares can be reissued when the share price recovers to a premium to
NAV.
Dividend
No dividend has been declared or recommended for the year. Your Company is
focused on providing capital growth and has a policy to only pay dividends to
the extent that it is necessary to maintain the Company's investment trust
status.
Portfolio Managers
The Company's portfolio has been co-managed by Rory Bateman (Schroders'
Co-Head of Investment and Head of Equities), and Tim Creed (Schroders
Capital's Head of Private Equity Investments). In view of recognising talent
within the team, Uzo Ekwue and Peraveenan ('Pav') Sriharan will additionally
join them as Co-Managers of the portfolio. Uzo is a Fund Manager within
Schroders' UK Equity team, where she manages assets across the market cap
spectrum. She joined Schroders in November 2020 and has been working closely
alongside Rory since the Company's inception. Pav covers Schroders Capital's
private equity investment activities in Europe and forms part of the
technology and consumer sector groups. He started at Schroders in September
2012 and joined the private equity team in January 2022, and has been working
closely with Tim on the Company's private investments since then.
Board
Chris Keljik, a non-executive Director since our IPO, resigned in February for
personal reasons. We thank him and wish him well. The Board decided not to
replace Chris immediately, conscious of our relatively small size and expense
ratio. Chris's role as Chair of the Management Engagement Committee has been
taken by current non-executive Director, Professor Tim Jenkinson. We believe
the Board has adequate resources to manage workloads at this time but expects
to recruit a replacement in due course. We will seek to add diversity to the
Board when doing so.
The Board completed an evaluation of its performance during the year, taking
input from Directors and related parties. It was concluded that Board
performance was either at or above the standard in all areas measured.
Presentation from the Portfolio Managers
Our Portfolio Managers will be presenting at a webinar on Tuesday, 11 July
2023 from 10-11 am to provide some insight into their decision making and the
current portfolio. Shareholders are encouraged to register for the event at:
https://registration.duuzra.com/form/SBOAnnualResults23.
Regular news about the Company can be found on the Company's website:
https://www.schroders.com/en/uk/private-investor/fundcentre/funds-in-focus/investment-trusts/schrodersinvestment-trusts/never-miss-an-update
AGM
Our AGM will be held on Wednesday, 27 September 2023 at 1.00 pm at 1 London
Wall Place, London EC2Y 5AU.
Your Board welcomes shareholders' comments and questions for them or for the
Portfolio Managers. A short presentation will be given by the investment
management team at the meeting. Please contact us via our Company Secretary's
email: amcompanysecretary@schroders.com or, if you prefer to write in, to: The
Company Secretary, Schroder British Opportunities Trust plc, at the above
address. We will endeavour to get your questions answered at or prior to the
AGM and will be providing answers to commonly asked questions on our webpage.
Shareholders are encouraged to cast their votes by proxy to ensure that they
are counted. The Directors consider that all of the resolutions listed are in
the best interests of the Company and its shareholders and therefore recommend
a vote in favour of each, as the Directors intend to do in respect of their
own holdings.
Why invest in SBO today?
I am often asked by private investors and wealth managers why they should
invest in SBO at this time. If asked that question today, my response would
be:
· 65% of our investments are in private companies.
· Eight of these nine investments are already profitable or have a
clear pathway to profitability, that have in aggregate grown sales 40% over
the past 12 months.
· We have had nine successive quarters of an increase in the
valuation of the private portfolio.
· We also have some interesting positions in UK small to mid-cap
public companies, which we expect to benefit from a re-rating when markets
recover.
Outlook
The current economic environment is challenging and many company valuations
are trading close to historic lows. In a number of cases there is disconnect
between an investment company's share price and the value of its portfolio
holdings, and that is certainly the case here. Your Board and the Portfolio
Managers view our current discount as unjustly high and expect to see this
start to close in the coming months.
Having avoided a recession, the UK's economy is showing some positive signs
with inflation seemingly peaked, which in turn should limit further interest
rate rises. Small and mid-cap stocks are expected to be early beneficiaries
from any recovery.
The Company had £7.8 million in cash as at 31 March 2023, and therefore is
well positioned to take advantage of new attractive investment opportunities.
Our differentiated public-private equity strategy enables us to continue to
invest without boundaries, thus providing access to a broader investable
universe. Our current portfolio of growing and innovative British companies
are expected to perform well. The patient investor that can look beyond the
recent and current environment should be well rewarded.
Neil England
Chairman
5 July 2023
Portfolio Managers' Review
Introduction
Summary
The investment case
At present, there are many instances where there is a disconnect between an
investment company's share price and the value of its portfolio holdings, and
we believe this is certainly the case with the Company. We believe the
investment case is currently enhanced by two forms of discount.
Firstly, the UK is among the lowest valued of any regional stock markets at
present, with a notable valuation discount to global peers. This provides
investors with the opportunity to invest in UK assets at a discount to what
they would be worth if they were listed, in say, the US.
Furthermore, listed UK small and mid- cap companies (the focus of the
portfolio's public equity allocation) have notably underperformed UK large
caps over the past year, as fast-growing small and mid-cap businesses in new
and emerging industries were shunned for most of the period in preference for
large companies able to return cash today. We are confident that UK small and
mid-caps are poised to do well from here, which we discuss in the outlook
section.
Secondly, the Company's shares are priced at a discount to NAV, which we
believe is driven by exogenous factors. To demonstrate this, in early 2022 the
shares reached a modest premium to NAV until unexpected geopolitical factors
and negative sentiment around the private equity asset class drove the
Company's shares to trade at a discount. While the discount grew throughout
the course of the year, it has recently stabilised for several months at the
low-to-mid 30% region. While other private equity-exposed investment trusts
have also slipped to a discount, the operational performance of the Company's
unlisted holdings has, in aggregate, been very positive since inception and
momentum remains generally strong.
EBITDA = earnings before interest, taxes, depreciation and amortization.
EBITDA margin is a measure of a company's operating profit as a percentage of
its revenue. Weighted averages using latest last 12 month figures available.
We believe this operational performance reflects the resilient characteristics
we are seeking to invest in and the maturity of our portfolio companies, which
are already at profitability (74% as at 31 March 2023(1)) or approaching it,
while growing revenues quickly. In short, we believe the combination of these
two discounts provides a window of opportunity for investors to buy a quality,
fast-growing portfolio of predominantly UK businesses at a wide discount.
Additionally, the winding-up resolution, a feature of the Company since its
inception, should act as a catalyst to the closing of the discount(2). While
only an illustration, assuming a recent discount of 33% to net asset value
remains, this may imply that investors could see an approximate 8.5%
annualised return on their investment from now until 31 May 2028 (assuming a
hypothetical crystallisation of all investments on 31 May 2028). While only
illustrative, we believe this is a notable return profile. If the discount
exacerbates, the return increases further. While it may be argued that this
annualised return is only achievable if we realise par, we are confident this
is achievable as cash is tradeable at cash, the public equity portfolio is
valued at market and the private equity portfolio is valued above cost despite
turbulent markets.
Market
Over the 12 months to end March 2023, UK small and mid-cap stocks performed
poorly as their valuations were negatively impacted by rising interest rates,
as Russia's invasion of Ukraine looked set to prolong the inflation problem
facing developed economies. UK mid-caps and UK small caps (represented by the
FTSE 250 and FTSE Small Cap indices) saw total returns of -7.9% and -9.0%
respectively, while UK large caps (represented by the FTSE 100) returned
+5.4%.(3) The UK small and mid-cap area of the market has a larger contingent
of fast-growing businesses in new and emerging industries, which were shunned
for most of 2022 in preference for large companies able to return cash today.
At the same time, higher interest rates threatened to further squeeze
consumers also struggling to cope with soaring energy and food costs, weighing
heavily on quoted retailers, as well as the travel and leisure and home
construction sectors. These and other domestically focused companies are well
represented in UK small and mid-cap indices. Valuations reached very depressed
levels in the autumn when some ill-advised policies from the Liz Truss
government spooked markets. A collapse in sterling and soaring market interest
rates threatened to heap further pressure on consumers and businesses,
although a new government was able to restore confidence and stability to
asset prices relatively quickly. More broadly, hopes built towards the back
end of 2022 that central banks might 'pivot' to cutting interest rates in late
2023 also contributed to a recovery in UK small and mid-caps. Domestically
focused companies recovered particularly well during this phase as the UK
economy performed much more resiliently than feared as European wholesale
energy prices fell back very sharply.
While private equity valuations have held up better than those of public
markets, the asset class has not been immune to global economic headwinds,
inflation and increased interest rates. Our focus is on the small to
mid-market area of the UK private equity landscape, but we believe the
following provides useful insight into recent activity to contextualise the
period under review. Following a stellar year in 2021, deal volumes in the UK
mid-market private equity segment fell by 19% year-on-year in 2022 (from 843
deals to 680 deals), while the total deal value fell 6% (from £49.1bn to
£46.0bn). Despite these year-on-year decreases, this was still a relatively
strong year for private equity deals in the context of the last five years.
Additionally, exit volumes fell by nearly 23% year-on-year in 2022 (from 189
exits to 146 exits), while the total exit value fell 55% (from £19.1bn to
£8.6bn).(4) Conspicuously there were no IPO exits over the year, which is
most likely explained by uncertainty in markets.
Portfolio performance
Since the Company's IPO in December 2020, the net asset value has been
resilient despite a volatile market backdrop. The portfolio's combined
exposure to both public and private equity markets has provided NAV stability
since inception, with the portfolio's listed holdings driving returns in the
Company's first reporting period to 30 June 2021, while strong performance of
the unquoted portfolio allocation provided a substantial cushion to falls in
asset prices over the 9 month reporting period to the end of March 2022,
before also driving the Company's positive NAV development over the past
12 months to the end of March 2023. Indeed, eight out of the nine unquoted
holdings are performing well with uplifts to their original valuations.
Below, we focus on the past 12 months and discuss what has driven the increase
in the Company's net asset value.
Attribution analysis (£m) for 12 months to 31 March 2023
Quoted Unquoted Net cash Other NAV
Value as at 31 March 2022 37.3 27.4 15.5 (2.1) 78.1
+ Investments 4.7 15.1 (19.8) - -
- Realisations at value (11.2) (2.4) 13.6 - -
+/- Fair value gains/(losses) (4.6) 7.8 - - 3.2
+/- Costs and other movements - - (1.5) (0.5) (2.0)
Value as at 31 March 2023 26.2 47.9 7.8 (2.6) 79.3
Key positive and negative performers over the 12 months to 31 March 2023
Top 5 contributors Contribution %
Mintec 2.9
Cera 2.6
EasyPark 2.1
CFC 1.9
Culligan (formerly Waterlogic) 1.7
Bottom 5 contributors Contribution %
Graphcore -1.8
National Express -1.0
GB Group -1.0
Ascential -0.9
Genuit -0.7
Source: HSBC, as at 31 March 2023. Numbers have been rounded
The net asset value increased 1.5% over the period,(5) which comprised:
• Quoted holdings: -5.9%
• Unquoted holdings: +10.0%
• Buybacks: -1.0%
• Costs and other movements: -1.6%
In a challenging environment, the portfolio's private equity (unquoted)
holdings have continued to perform well in aggregate and the overall
resilience of the private equity holdings has been particularly pleasing. We
believe that the Company's private equity focus on the 'growth capital' and
'buyout' areas of the private equity landscape, in contrast to venture capital
and pre-IPO areas, which have been more negatively impacted by rising
inflation and interest rates, has contributed to the resilience of the NAV.
Looking closer at the past 12 months, transactional activity (e.g. add-on
transactions and financing rounds) and trading gains of the unquoted holdings
in aggregate have driven strong performance, despite multiple contraction
which demonstrates the prudent valuation approach applied.
The Company's private equity allocation has seen significant EBITDA(6)
development, driven by strong organic and inorganic growth. Transformational
add-on acquisitions executed by Waterlogic (combination with Culligan) and
Mintec (with its acquisition of Agribriefing for example) have enhanced total
EBITDA.
We like companies that employ market consolidation strategies (often referred
to as "Buy and Build") as these often allow companies to consolidate
fragmented markets and smaller competitors, and complementary business can be
bought, typically at lower multiples, leading to immediate multiple accretion.
Our companies have been very active in employing this strategy.
Furthermore, organic growth delivered through market expansion, new product
development, cross and upselling and curating strategic partnerships were some
of the levers employed to deliver strong EBITDA accretion.
The growth seen by our profitable(7) private equity portfolio companies, in
both revenue and profit-based KPIs, is almost double that of publicly listed
comparables. Nonetheless, we are marking these profitable companies at a c.25%
discount(8) to public comparables. This reiterates our valuation prudence.
Turning to individual private equity portfolio companies, a key contributor
over the year was Mintec, the world's leading independent provider of global
commodity price data & market intelligence, which was added to the
portfolio in the first half of 2022 and has seen its fair value almost double
since. Over the period, the company acquired French business CommoPrices, an
independent provider of commodity price data and analysis, and more recently
Agribriefing, which comprises multiple global brands specialising in agri-food
supply chains through its products and proprietary data. These acquisitions
complemented the company's investment in Kairos, a provider of commodity
market intelligence and commodity risk management, bought in 2021. These
acquisitions have established Mintec as the largest agri-food-focused price
reporting agency and global information provider with a unique portfolio of
feed-to-food commodity prices, forecasts, cost-modelling tools and fundamental
market data, serving over 5,000 customers in 50 countries.
Cera Care, Europe's largest provider of digital-first home healthcare, was a
strong contributor over the year following a further funding round to
accelerate its growth in August 2022, in which the Company made an additional
investment. We were pleased to have been able to participate in Cera's latest
financing and help them empower those in the care sector. Ageing populations,
post-pandemic recovery and major staff shortages have created a series of
issues facing healthcare providers and governments. Cera's proposition is
positioned to address these challenges. More recently, the company has taken
further steps to strengthen its offering through the use of artificial
intelligence, launching "Cera Brain", a platform that helps to automate and
power Cera's care delivery operations. This is discussed in further detail in
the top 10 holdings section below.
The Company's holding in EasyPark, the parking tech company that helps drivers
to find, manage and pay for both parking and electric vehicle charging, saw
its valuation increase over the period. The company continues to grow and
strengthen its position as the parking tech company with the widest coverage
in the world. In 2022, EasyPark grew both in new and existing markets, adding
new cities such as Paris and Boston, as well as new countries, such as
Slovakia. From an operational perspective, the company continues to deliver
very strong transaction and monthly active user volumes.
A further contributor was global designer, manufacturer, distributor and
service provider of purified drinking water dispensers, Waterlogic, which
completed its merger with Culligan International - the innovative brand in
consumer-focused, sustainable water solutions and services. The merger led to
the Company receiving £2.4m in sales proceeds, which is a key milestone
considering the Company only launched in December 2020. As at 31 March 2022,
the Company's holding in Waterlogic was valued at £6.0m. As at 31 March
2023, and following the £2.4m distribution, the holding was valued at £5.1m.
The Company's holding in CFC, one of the world's most successful
technology-led insurance platforms and a global leader in the cyber market,
was another strong contributor over the year. CFC operates a unique model in
the insurance industry, and benefits from a 20-year track record of innovative
insurance products. Cyber risk is a fast-growing market and CFC are well
positioned from an insurance perspective in this space to increase market
share.
On the more challenging side, Graphcore, which was added to the portfolio
towards the end of 2020 as part of a $222m Series E funding round alongside
Ontario Teachers' Pension Plan, Fidelity International and existing Graphcore
investors, has been revalued downwards over the year. Graphcore, which has
developed a next generation processor for machine learning and AI
applications, is currently facing a challenging market environment given the
long sales cycles that surround such revolutionary technologies. Additionally,
the company has not been immune to the US Department of Commerce's sweeping
set of export controls to restrict China from certain semi-conductor chips and
chip-making equipment announced in early October 2022. The scale of the
artificial intelligence and machine learning opportunity longer term remains
immense and Graphcore's technology continues to set new benchmarks in
performance. The situation is developing, and we continue to monitor it
closely.
As mentioned in the market section above, UK small and mid-caps in the public
equity market fared relatively poorly over the period and, given the focus of
the portfolio's public allocation of investing in small and medium-sized
businesses listed in the UK, performance was challenging for this part of the
portfolio in absolute terms. In particular, the share price performance of
holdings in National Express, GB Group, Ascential and Genuit weighed on
returns. However, there were bright spots, with the Company benefitting from
M&A activity in the market, as holdings in Euromoney, Ideagen and EMIS
Group were all subject to takeover bids over the period, with all three
positions subsequently exited. Meanwhile, shares in Volution Group, a leading
supplier of ventilation products, performed well. In March 2023, the company
reported a strong set of interim results, with half year revenues and adjusted
operating profits up 8.5% and 7.1% respectively year-on-year, following on
from strong annual results published in October 2022.
Revenue growth and analysis
The public equity element of the portfolio has an aggregate weighted average
revenue growth of 71.5% over the last financial year.(9)
We believe it is useful to contextualise the performance of the portfolio's
public equity allocation in the wider context of other UK smaller-company
investors. For illustrative purposes, when comparing the Company's public
equity allocation performance to the IA UK Smaller Companies peer group, it
ranks in the first quartile over the 12 months to 31 March 2023.(10)
Portfolio positioning & activity
The portfolio is diversified across a number of industry sectors. We believe
that diversification is key to the protection of capital. Whilst some areas of
the market may be in favour in certain periods, we believe that a diversified
portfolio should better protect investors in the long run, with more stable
investment returns.
The portfolio has been constructed from the bottom up, with a focus on high
growth businesses. The result is a portfolio that is well-exposed to companies
with a technology offering (notably in software & IT services areas of the
market), which reflects the digitalisation age of today as well as our belief
that this is likely to continue. However, the portfolio is well diversified to
include other sectors, such as consumer services, media, hotels, restaurants
& leisure and financial services.
We invest in growing companies that have a number of attractive
characteristics that we believe should allow them to withstand challenging
economic environments and prosper. Whilst the macroeconomic backdrop is
expected to ebb and flow, our core focus is to invest in quality, growth
companies that have strong balance sheets and that can sustainably compound
their earnings over the long run. These are typically companies that have
considerable pricing power, market leadership (or an opportunity to gain scale
via consolidation), attractive unit economics and strong management teams.
While there is exposure to the wider consumer discretionary sector, which
continues to face significant inflationary risk, we believe the
characteristics of our investments mean they are well-positioned to navigate
the current landscape and beyond. Furthermore, our investments are typically
profitable, with profitable companies(11) making up 74% of total investments
as at 31 March 2023.
Where we have invested in companies that have not yet reached profitability,
they are well-funded at point of investment and possess a clear route towards
profitability, and we expect them to deliver substantial value over the long
term.
The portfolio's private equity allocation is not focused on the pre IPO or
'crossover' area and earlier-stage venture capital companies that had
witnessed notable negative impacts to valuations during the downturn of late,
putting some of them at funding risk. In contrast, it is focused on growth
capital and small/mid market buyout-stage companies, where valuations have
contracted in some cases but declines have been moderate in comparison and
notably have been offset by robust growth in financial performance. The
businesses the Company is investing in have already cleared the higher risk
hurdles, and are now generating revenues, building scale and either already
profitable or close to it. That does not mean they are risk free but the
portfolio has already been substantially de-risked and the individual
businesses within it are now focused on fulfilling their significant growth
potential.
Following the resolutions of the Company's 2022 AGM in September 2022, the
50:50 public/private allocation guidance and the private equity limit of 60%
of the Company's gross asset value were removed, providing us with greater
flexibility to take advantage of further private equity opportunities. Since
then we have explored a number of further investments for the portfolio but
have rejected a number, largely as a result of maintaining price discipline.
However, we have a healthy pipeline of potential private equity investments
across a breadth of opportunities. As at 31 March 2023, private equity
investments represented 65% of total investments, compared to 42% as at
31 March 2022.
Over the year, the Company continued to take advantage of its broad investment
universe, scouring both private and public markets for the brightest growth
prospects in the UK, focusing on small and mid-sized companies. We added a
number of exciting companies to the portfolio while also increasing portfolio
concentration, demonstrating our conviction in the portfolio's investments.
Private equity activity
We announced three new private equity investments over the 12-month period. In
May 2022, we announced investments into Mintec (through Synova), a leading
provider of food-related commodity pricing, and CFC (through Vitruvian
Partners), a technology-driven global insurance business. These were followed
in June by the announced investment into Pirum (through Bowmark Capital), a
leading provider of post-trade automation and collateral management technology
for the global securities industry. We had been tracking these businesses for
an extended period prior to investment through our long-term relationships
with private equity firms Synova, Vitruvian Partners and Bowmark Capital, and
were delighted to complete investments in these strong, UK-based, market
leaders.
Additionally, the Company made a follow-on investment in August 2022 into Cera
Care, Europe's largest provider of digital-first home healthcare, as part of a
new funding round to accelerate the company's growth and expand from servicing
15,000 to 100,000 at-home patients each day.
Furthermore, we were pleased to report the first cash generation from our
private equity holdings. Following the completion of the merger in November
2022 between Waterlogic (a global designer, manufacturer, distributor and
service provider of purified drinking water dispensers) and Culligan
International (the innovative brand in consumer-focused, sustainable water
solutions and services), the Company received £2.4m in sales proceeds. The
Company remains invested as we believe the combined business has considerable
potential for future growth.
Public equity activity
Three of our public equity holdings received takeover approaches during the
12-month period to 31 March 2023. Shareholders approved a bid by Becketts
Bidco, a consortium of PE firms that comprised Astorg and Epiris, for
Euromoney Institutional Investor. In addition, shareholders approved a
£1.24bn all-cash takeover by Optum Health Solutions UK Ltd, a subsidiary of
UnitedHealth Group Inc, for Emis Group. Furthermore, Ideagen was acquired by
Rainforest Bidco Limited, a wholly owned subsidiary of funds managed by Hg. We
are pleased that these bids and the resultant exits of these positions
benefited portfolio performance.
We added Bytes Technology Group, one of the UK's leading resellers of
software, security and cloud-based products, to the portfolio in 2023. This is
a high quality, cash-generative company, and we expect it to be resilient
across economic cycles due to its sticky customer base and high renewal rates.
Elsewhere, we used periods of market weakness to increase existing positions
in stocks where we continue to have a high conviction. These included online
women's clothing retailer, Sosandar, and business review platform, Trustpilot.
Outlook
The sell-off in UK small and mid-caps in 2022 was indiscriminate, and not
discerning between the "good" and "less good" companies. We believe that when
clearer signs of a sustained economic recovery materialise and market
sentiment substantially improves, small and mid-caps should be the first to
re-rate in response. Our analysis shows that such market underperformance in
the past by UK small and mid-caps has usually been followed by outperformance
over three- to five-year periods relative to large cap companies in the FTSE
100.
Aside from the relative valuation opportunity with UK equities remaining
unloved relative to world markets in an historical context (as noted in the
investment case section), in aggregate, they are also attractive as a result
of their strong balance sheets, which has increased considerably since 2000.
The valuation opportunity can also be looked at through the lens of free cash
flow yields, with the UK having one of the highest yields in the world, making
the market a compelling investment opportunity in our view. Free cash flow is
the money a firm has left over after paying its operating and capital
expenses. The yield is calculated as free cash flow divided by market value.
In private equity markets, with financial engineering unlikely to propel
returns in the near term due to increased rates, inflation and macroeconomic
uncertainty, we believe strategies focused on identifying companies that
exhibit strong underlying financial performance are poised to do well. This
may be achieved by the expansion of product lines, geographic footprint, and
professionalising management to improve profit margins, for example. This is
all easier to do among small and medium-sized companies, and typically harder
to achieve at larger companies, which have often been through several rounds
of private equity or institutional ownership. Portfolio company EasyPark, for
example, has evolved as a company in terms of product offering, maturity in
the marketplace and thorough geographical expansion. We believe buy and build
strategies are also positioned to do well, with opportunities to buy smaller
companies with the intention to improve profitability and sell at higher
multiples in the future. Furthermore, despite the economic backdrop, we are
seeing strong significant deal flow across a breadth of opportunities. Given
our private equity team's established and formidable network in the UK (as
well as globally) with hard-to-access investment partners, we are well
positioned to seek out the best opportunities for the Company going forward.
Our differentiated public-private equity strategy enables us to continue to
invest without boundaries, whilst providing access to a broader investable
universe to the benefit of shareholders. We believe this differentiates the
Company from other investment trusts and provides us with an advantage when
selecting attractive investment opportunities. While we are pleased with the
investments in the portfolio at present, we continue to seek out high quality,
growth opportunities with the aim of delivering long-term total returns. The
investment team harnesses Schroders Capital's strong network of co-investment
partners developed over 25 years, giving them access to unique investment
opportunities. Meanwhile, our extensive resources in both public and private
equities work together to the benefit of the Company, providing a more
comprehensive view of the landscape in which companies operate, making us more
informed investors that we believe contributes to better investment
decision-making.
We believe that the current cash position (£7.8m as at 31 March 2023) and
prudent liquidity profile of the public equity allocation of the portfolio
provide us with an excellent opportunity to make further investments in high
growth companies and/or initiate positions in mispriced growth companies.
Furthermore, following the approval from shareholders to remove the 50:50
public/private allocation guidance and the 60% private equity limit provides
us with greater flexibility to take advantage of further private equity
opportunities, and utilise our healthy pipeline of potential private equity
investments.
Schroder Investment Management Limited
5 July 2023
(1)On an EBITDA profitability view
(2)The Articles require the Directors to put forward, at a general meeting of
the Company to be held in the year 2028 but in any event no later than 31 May
2028, a winding-up resolution to place the Company into voluntary liquidation.
(3)Source: FTSE Russell, 12 months to 31 March 2023, in GBP.
(4)Source for data: KPMG UK Mid-market PE review, February 2023.
(5)The net asset value increase of 1.5% differs to the 3.1% increase in NAV
per share over the period due to share buybacks conducted over the period.
(6)EBITDA = earnings before interest, taxes, depreciation and amortisation. It
is used as a measure of a company's profitability, specifically representing
cash profit generated by a company's operations.
(7)EBITDA-positive.
(8)Discount between the average of the respective portfolio Company's EBITDA
valuation multiple against the respective peer group sector comparable
averages, which has been elected by the independent valuation team.
(9)Past performance is not a guide to future performance and may not be
repeated. Revenue growth calculated using the last two financial year revenue
figures for each public portfolio company. Weighted averages calculated using
each position as a proportion of total public equity holdings in the
portfolio.
(10)Source: Schroders, Morningstar, Aladdin. Rankings are based on the
performance of the public equity portion of the Company (excluding cash). The
IA UK Smaller Companies peer group median average ongoing charge (0.90%) was
applied to the Company's public equity gross performance and compared against
the IA UK Smaller Companies peer group (net of fees).
(11)On an EBITDA profitability view.
The Company's top ten holdings as of 31 March 2023 are set out below, with
overviews of each company and recent updates regarding their businesses.
Fair value Fair value
Quoted/ as of % of total as of % of total
Top 10 holdings unquoted 31 March 2022 investments 31 March 2023 investments
(£'000) (£'000)
Mintec(1) Unquoted - - 8,614 11.6
Rapyd Financial Network(1) Unquoted 8,565 13.2 8,399 11.3
Cera Unquoted 4,509 7.0 6,986 9.5
Pirum(1) Unquoted - - 6,087 8.2
Culligan(1) Unquoted 6,045 9.3 5,053 6.9
EasyPark(1) Unquoted 2,775 4.3 4,492 6.1
CFC(1) Unquoted - - 4,098 5.5
Learning Curve Unquoted 2,336 3.6 2,455 3.3
Volution Quoted 1,192 1.8 2,012 2.7
Watches of Switzerland Quoted 1,721 2.7 1,908 2.6
Source: Schroders.
1. The fair value disclosed for the following investments
represents the Company's investment in an intermediary vehicle:
- Mintec (held via Synova Merlin LP).
- Rapyd Financial Network (held via Target Global Fund).
- Pirum (held via Bowmark Investment Partnership LP).
- Culligan (held via EPIC-1b Fund).
- EasyPark (held via Purple Garden Invest (D) AB).
- CFC (held via Vitruvian Investment Partnership).
- Learning Curve (held via Agilitas Boyd 2020 Co-Invest Fund).
Mintec
(unquoted holding)
The world's leading independent provider of global commodity price data, price
forecasts & market intelligence for the food, CPG and capital goods supply
chains
Mintec enables the world's largest food and manufacturing brands to implement
more efficient and sustainable procurement strategies. They do this through
their cutting-edge Software as a Service platform, Mintec Analytics, which
delivers market prices and analysis for thousands of commodities, food
ingredients and associated materials. Their data and tools empower their
customers to understand prices better, analyse their spend and negotiate with
confidence.
Latest updates:
• In May 2022, Mintec launched the latest version of its
multi-award-winning procurement and commodity price intelligence platform
(Mintec Analytics 4.1), including new features that increase price visibility
and improve efficiency for commodity buying teams.
• In December 2022, the company acquired French business,
CommoPrices, an independent provider of commodity price data and analysis
operating across similar sectors, to extend its coverage of commodity price
data and intelligence.
• In January 2023, Mintec announced the acquisition of
AgriBriefing, which includes the brands Urner Barry, Strategie Grains,
FeedInfo and Tropical Research Services. Building on previous acquisitions by
Mintec (including Kairos Commodities in 2021 and the aforementioned
CommoPrices), this established the combined company as the largest
agri-food-focused PRA and global information provider with a unique portfolio
of feed-to-food commodity prices, forecasts, cost-modelling tools and
fundamental market data, serving over 5,000 customers in 50 countries.
Rapyd
(unquoted holding)
Integrates the world's many payment networks and technologies into a single
platform
Rapyd is the fastest way to power local payments anywhere in the world,
enabling companies across the globe to access markets quicker than ever
before. By utilizing Rapyd's payments network and Fintech-as-a-Service
platform, businesses and consumers can engage in local and cross-border
transactions in any market. The Rapyd platform is unifying fragmented payment
systems worldwide by bringing together 900-plus payment methods in over 100
countries.
Latest updates:
• In May 2022, the company announced the launch of "Virtual
Accounts", a product that empowers businesses to expand globally while
supporting local payments. This new offering allows organizations anywhere in
the world to securely and reliably accept local bank transfers in 40 countries
in more than 25 currencies, including the US, UK, EU, and APAC regions.
• Also in May 2022, Rapyd opened its first office in the Dubai
International Financial Centre. The UAE emerged as an attractive fintech hub
during the pandemic with increased digital adoption, a booming eCommerce
economy, and transformative digital marketing initiatives.
• In July 2022, it was announced that Rakuten Viber had
partnered with Rapyd to unlock instant cross-border peer-to-peer payments.
• In 2022, Rapyd was named an EMEA 60 Leader by PYMNTS, the
global leader in payments industry news and data analytics, as well as being
named on Forbes' Cloud 100 list - the list of the world's top private cloud
companies.
Cera
(unquoted holding)
Europe's largest provider of digital-first home healthcare
Cera is Europe's largest provider of digital-first home healthcare. They are
transforming healthcare by moving services such as care, nursing, telehealth
and repeat medications out of hospitals and into people's own homes through
technology. In combining pioneering technology with their community of
professional carers and nurses, Cera are empowering people to live longer,
better, healthier lives in their own homes.
Latest updates:
• In August 2022, the company raised c.£260m in an equity and
debt funding round, with the goal of increasing the number of patients its
serves from 15,000 to 100,000. We were pleased to have been able to
participate in this financing to accelerate the company's growth and help Cera
empower those in the care sector.
• Subsequently, Cera announced its expansion into nursing
services across its UK network, marking the company's first move into
additional healthcare services, as part of its overall ambition to move more
aspects of healthcare out of hospitals and into people's own homes.
• More recently, Cera launched its latest AI-powered
technology, Cera Brain, a platform that helps to automate and power the
company's care delivery operations. Using AI across key features, Cera Brain
should enhance the company's impact in the sector, utilising technology to
automate administrative tasks, more efficiently match carers to patients,
enable better regulatory compliance checks, onboard patients faster and drive
healthcare workflow automation. This new technology should enable Cera to care
for more people, allowing carers to see an estimated 20% more patients per
day. It should also power a more efficient model of care delivery, making the
sector more sustainable by reducing overhead costs, allowing carers and
frontline staff to be paid better.
• Lastly, Cera has recently been ranked the Number 1 UK
HealthTech company in the HealthTech50 list for 2023, which is testament to
the company's continued technology-enabled growth.
Pirum
(unquoted holding)
A leading provider of post-trade automation and collateral management
technology for the global securities industry
Pirum has created a set of award-winning, highly innovative and flexible
services which are tailored to fully support the complexities of financial
institutions around the world. Pirum provides a secure processing hub which
seamlessly links market participants, allowing them to electronically process
and verify key transaction details. Through easy integration with their
services, Pirum's clients have increased processing efficiency, reduced
operational risk and improved profitability by reducing manual processing.
Latest updates:
• In October 2022, Pirum expanded its Trade Risk Manager
service to provide visibility of the collateral status at a transaction level.
• Knowing the status of collateral prior to releasing an
instruction to market is a key step in reducing counterparty risk and
preventing fails and CSDR fines.
• This expansion leverages Pirum's Loan Release service which
provides valuable automation for lenders to release their market instructions
on the back of the borrower collateralising the lender and provides extensive
prioritisation tools and controls to ensure loans are released within market
cut offs to increase settlement rates and market efficiency.
Culligan
(formerly Waterlogic) (unquoted holding)
The leading provider of drinking water dispensers for businesses across the
globe
Culligan is an innovative brand in consumer-focused, sustainable water
solutions and services. It was established in 1936 as a provider of water
softening solutions for residences in Northbrook, Illinois, and has since
grown to become a worldwide leader in water treatment needs, from the simplest
filtration system to complex industrial water solutions.
Latest updates:
• In November 2022, Culligan International - the innovative
brand in consumer-focused, sustainable water solutions and services - and
Waterlogic Group Holdings - a global designer, manufacturer, distributor and
service provider of purified drinking water dispensers - announced the
completion of their merger, creating a global leader in clean and sustainable
drinking water solutions and services.
• As result of the merger agreement, the Company received
£2.4 million, representing the first cash generation from the Company's
private equity portfolio.
• The Company remains a shareholder as the combined business
has considerable potential for future growth.
EasyPark
(unquoted holding)
Parking tech company that helps drivers to find, manage and pay for both
parking and electric vehicle charging
EasyPark's technology supports its users, cities and parking operators with
parking administration, planning and management. The company has a unique
market coverage with presence in over 20 countries and more than 3,200 cities.
Latest updates:
• In 2022, EasyPark grew both in new and existing markets,
launching in new cities such as Paris in France and Boston in the US, as well
as in new countries, such as Slovakia.
• The company launched support for the EasyPark app for
Android Auto.
• In a collaboration with French automobile manufacturer,
Renault, EasyPark launched direct in-car integration of the EasyPark app in
the New Renault Megane E-Tech infotainment system.
• Additionally, the company continued to expand collaborations
with both local and nationwide operators for electric car charging in Sweden,
Denmark, Finland, Norway and Slovenia.
CFC
(unquoted holding)
Technology-driven global insurance business
For over 20 years, CFC has built market-leading solutions to some of the
insurance industry's biggest challenges. The company uses technology and data
science to stay one step ahead. From developing cutting-edge insurance
products, pioneering autonomous underwriting, deploying advanced threat
intelligence, to offering unparalleled service to its partners and customers,
CFC is re-imagining the world of specialist insurance.
Latest updates:
• In July 2022, CFC enhanced its UK proposition, partnering
with legal services company, Farillio, to launch a digital platform for its
professional liability and management liability policyholders. Designed for
small business owners, the platform delivers practical tools and expert
resources to help customers grow and scale their businesses.
• Also in July 2022, the company announced the expansion of
its market-leading cyber threat analysis capability into North America and
Australia. CFC's cyber threat analysis, a critical component of its proactive
cyber insurance offering, focuses solely on identifying new cyber threats and
working with cyber customers to prevent attacks before they happen.
• In January 2023, CFC established a dedicated team to meet
increasing demand from fintechs, as part of its financial institutions
practice. Since launching its solution, built specifically to cover the risks
faced by organisations operating in the fintech space in 2020, CFC has seen
the volume of submissions increase by more than 100% year-on-year over the
past two years and has grown its fintech book by 100% over the past year.
• In March 2023, the company announced the expansion of its
"admitted product" suite with the addition of professional liability and
technology Errors & Omissions (E&O), having traded its admitted
solution for cyber since 2020.
Learning Curve
(unquoted holding)
UK training and education specialist
Learning Curve works with further education providers, employers and learners
to help them achieve success. Since 2004, the company has grown both
organically and through acquisition to become one of the largest and most
diverse providers in the country.
Latest updates:
• In September 2022, Learning Curve announced the acquisition
of Yorkshire-based White Rose Beauty Colleges, one of the largest beauty
therapy training providers in the UK, in a move which will complement its
existing academy provision. The acquisition is expected to see the addition of
a further 3,500 learners each year in nine new locations and 170 employees,
confirming Learning Curve's position as one of the largest providers of
high-quality beauty training in the country.
• In February 2023, the company announced it is expanding its
successful Hair and Beauty training academies in the London region with two
brand-new, state-of-the-art salons.
Volution
(quoted holding)
A leading supplier of ventilation products
Volution is a market leader in residential and commercial ventilation
solutions, covering the UK, Continental Europe and Australasia. They aim for
their products to enhance customers' experience of ventilation by reducing
energy consumption, improving indoor air quality and design and making them
easier to use. The company has primary markets in the UK, Continental Europe
and Australasia.
Latest updates:
• Volution published a strong set of interim results (6 months
to 31 January 2023) in March 2023, driven in particular by strong UK
residential RMI (repair, maintenance and improvement) demand, with the company
successfully managing inflationary headwinds and supply chain challenges
through pricing discipline and inventory optimisation.
• The interim results showed that revenue was up 8.5% (7.3%
organic growth and 1.2% inorganic growth), while adjusted operating margin
stood at 21.1% above the company's long-term operating margin target.
• Volution has continued to execute on its acquisition
strategy (acquiring Bera in Germany in July 2022 and the remaining shares of
ERI Corporation UK Limited more recently). The company is optimistic of being
able to add further earnings-accretive acquisitions in the future, given its
strong pipeline of potential candidates and strong balance sheet.
Watches of Switzerland
(quoted holding)
The UK's largest luxury watch retailer
Watches of Switzerland is the leading luxury watch specialist in the UK, with
a significant presence in the US with a complementary jewellery offering.
There are 15 Watches of Switzerland showrooms across the UK, including
dedicated Rolex and Jaeger-LeCoultre boutiques. The company's success is based
on strong, long-standing partnerships with the most prestigious luxury watch
brands, supported by impactful marketing and powered by leading edge
technology to provide clients with a modern, distinctive luxury experience.
Latest updates:
• In December 2022, Watches of Switzerland released its H1
(26 weeks to 30 October 2022) results, revealing that group revenue had
increased 23% on a constant currency basis and 31% at reported rates.
• The luxury watches division's revenue grew 31% year-on-year
on a reported rates basis to £667m, representing 87% of total group sales
(unchanged from H1 FY 2022), with growth driven by increases in average
selling price and volume.
• In terms of geography, its US revenues grew year-on-year 60%
and 80% on constant currency and reported rates bases respectively, with
revenue growth excluding acquisitions at +44% constant currency.
• Meanwhile, UK performance was driven by domestic clientele,
with revenue of £454m up 8% year-on-year.
• The company has continued to expand its retail network,
opening 20 showrooms across the UK, US and Europe in the first half of FY23.
Business Review
Principal risks and uncertainties
The Board is responsible for the Company's system of risk management and
internal control, and for reviewing its effectiveness. The Board has adopted a
detailed matrix of principal risks affecting the Company's business as an
investment trust and has established associated policies and processes
designed to manage and, where possible, mitigate those risks, which are
monitored by the audit and risk committee on an ongoing basis. The Board has
also adopted a risk appetite statement. This system assists the Board in
determining the nature and extent of the risks it is willing to take in
achieving the Company's strategic objectives. Both the principal risks and the
monitoring system are also subject to regular, robust review. The last review
took place in March 2023.
Although the Board believes that it has a robust framework of internal
controls in place this can provide only reasonable, and not absolute,
assurance against material financial misstatement or loss and is designed to
manage, not eliminate, risk.
Actions taken by the Board and, where appropriate, its committees, to manage
and mitigate the Company's principal risks and uncertainties are set out
below.
Emerging risks and uncertainties
During the year, the Board continued to discuss and monitor a number of risks
which could affect the Company or the valuations of investee companies. Two
emerging risks were considered, geopolitical risks and ESG risks. The Board
receives updates from the Portfolio Managers, Company Secretary and other
service providers on other potential risks that could affect the Company.
Geopolitical risk includes the impact of regional tensions, trade wars and
sanctions against companies. During the year, the Board noted that the Russian
invasion of Ukraine impacted supply chains, inflation and interest rates both
in the UK and globally. Increases in interest rates lead to increases in the
discount rates used to value growth companies. This has led to the Board
determining that the market risks faced by the Company have increased in the
last year.
ESG risks are increasing generally owing to greater awareness of the long term
cost of the environmental impact of corporate activities as well as changes in
investor requirements. This has led to the Board considering the market risks
affecting the pricing of the Company's investments as having increased during
the last year.
Strategic Risks Mitigation and management Change trend
The Company's investment objective may become out of line with the The appropriateness of the Company's investment remit is regularly reviewed
requirements of investors, or the Company's investment strategy may not be and the Board monitors the success of the Company in meeting its stated
sufficiently differentiated from other products resulting in the Company being objectives.
subscale and shares trading at a discount.
The Company has a fixed life which will only be extended if the Company
continues to meet investor requirements.
The Company has a fixed life. In the event that no alternative proposals are The private equity Portfolio Managers have extensive experience and a track
put forward to shareholders, or such proposals are not approved by record in accurately timing the exits of private equity investments.
shareholders, the Company will commence winding up in 2028. It could take
several years until all of the Company's private equity investments are
disposed of and any final distribution of proceeds made to shareholders.
The Board will ensure that any alternative proposals to be made to
shareholders, are put forward at an appropriate time.
Market Risks Mitigation and management Change trend
Underlying investee companies within the Company's portfolio may experience The Portfolio Managers adopt an active management approach and focus on
fluctuations in their operating results due to fluctuations in the market or sustainable businesses capable of generating long-term returns for
general economic conditions (including changes to interest rates, inflation, shareholders.
geopolitical and ESG related regulations). These would in turn affect the
performance of the Company. The increased risk reflects concerns around general economic conditions
following the ongoing war in Ukraine as well as higher inflation and interest
The Board receives quarterly reports from the Portfolio Managers on the rate rises.
performance of the Company's investments and the market outlook.
Changes to the framework of regulation and legislation (including rules The Company Secretary, Corporate Broker, Portfolio Managers and auditor
relating to listed closed-end investment companies or loss of the exemption appraise the Board of any prospective changes to the legal and regulatory
for investment trusts from UK tax on chargeable gains) within which the framework, so that requisite actions can be planned.
Company operates could have a material adverse impact on the Company.
Operational Risks Mitigation and management Change trend
The Company's shares may not trade in line with NAV, depending on factors such The Board monitors the NAV and receives regular updates. The Board has a
as supply and demand for the Company's shares, market conditions and general discount/premium policy and the Board consider whether a buyback would be for
investor sentiment. The operation of the Company's policy to manage any the benefit of the Company as a whole, its shareholders and take into account
discount could result in the Company's operating charges ratio becoming relevant factors and circumstances at the time.
excessive.
The increased risk reflects heightened market volatility.
The Board monitors marketing and distribution activity regularly.
The Company's investment portfolio is managed by the Portfolio Managers and, The Board regularly considers key man risk and seeks assurances concerning the
in particular, is led by two key individuals. Loss of a portfolio manager depth of expertise of the investment management teams which manage the
could affect performance and market sentiment leading to a widening discount Company's portfolio.
of the share price compared with the NAV.
The Board receives assurances from the Manager regarding the Portfolio
Manager's incentive arrangements and succession planning.
Private equity investments are generally less liquid and more difficult to Contracts are drafted to include obligations to provide information with
value than publicly traded companies. A lack of open market data and reliance regard to investee companies in a timely manner, where possible.
on investee company projections may also make it more difficult to estimate
fair value on a timely basis.
The Manager has an extensive track record of valuing privately held
investments.
The audit and risk committee reviews all valuations of unquoted investments on
a quarterly basis and challenges methodologies used by the Portfolio Managers.
Liquidity risks include those risks resulting from holding private equity Concentration limits are imposed on single investments to minimise the size of
investments as well as not being able to participate in follow-on fundraises positions.
through lack of available capital which could result in dilution of an
investment.
The Portfolio Managers consider liquidity risk when selecting investments.
The Portfolio Managers will seek to manage cashflow such that the Company will
be able to participate in follow up fundraisings where appropriate. The Board
receives quarterly reports from the Manager on the portfolio's liquidity.
Operational Risks Mitigation and management Change trend
The Company has no employees and the Directors have been appointed on a Experienced third party service providers are employed by the Company under
non-executive basis. The Company is therefore reliant upon the performance of appropriate terms and conditions and with agreed service level specifications.
third-party service providers. Service level agreements include clauses which set out the notice periods for
termination.
Failure of any of the Company's service providers to perform in accordance
with the terms of its appointment, to protect against breaches of the The Board receives regular reports from its service providers and the
Company's legal and regulatory obligations such as data protection, or to management engagement committee reviews the performance of key service
perform its obligations at all as a result of insolvency, fraud, breaches of providers at least annually.
cyber security, failures in business continuity plans or other causes, could
have a material detrimental impact on the operation of the Company.
The audit and risk committee reviews reports on the external audits of the
internal controls of certain key service providers.
Failure to price sustainability risks into an investment by the Portfolio
Manager which could lead to future losses.
The AIFM, the Portfolio Managers, the Depositary, the Company Secretary and
the Administrator perform services that are integral to the operation of the
Company and any of the Company's service providers could terminate their
contract.
Risk assessment and internal controls review by the Board
Risk assessment includes consideration of the scope and quality of the systems
of internal control operating within key service providers, and ensures
regular communication of the results of monitoring by such providers to the
audit and risk committee, including the incidence of significant control
failings or weaknesses that have been identified at any time and the extent to
which they have resulted in unforeseen outcomes or contingencies that may have
a material impact on the Company's performance or condition.
No significant control failings or weaknesses were identified from the audit
and risk committee's ongoing risk assessment which has been in place
throughout the year and up to the date of this report. The Board is satisfied
that it has undertaken a detailed review of the risks facing the Company.
An analysis of the financial risks facing the Company is set out in note 22 to
the accounts on pages 77 to 80 of the annual report and accounts.
Going concern
The Directors have a reasonable expectation that the Company has adequate
resources to continue in operational existence until 31 July 2024 which is
more than twelve months from the date when this Report and accounts was signed
and the Directors have accordingly adopted the going concern basis in
preparing this Report and accounts.
In reaching this assessment the Directors have considered the principal risks,
the impact of the emerging risks and uncertainties and the matters referred to
in the viability statement. They have additionally considered the liquidity of
the Company's portfolio of listed investments, the Company's cash balances and
the forecast income and expenditure flows as well as commitments to provide
further funding to the Company's private equity investee companies; the
Company currently has no borrowings. A substantial proportion of the Company's
expenditure varies with the value of the investment portfolio. In the event
that there is insufficient cash to meet the Company's liabilities, the listed
investments in the portfolio may be realised and the Directors have reviewed
the average days to liquidate the listed investments. The Company is a
closed-end investment trust and there is no requirement to redeem or buy back
shares. The Company has additionally performed stress tests which confirm that
a 50% fall in the market prices of the portfolio would not affect the Board's
conclusions in respect of going concern.
Viability statement
In accordance with the AIC Code the Board has considered the longer term
prospects for the Company beyond the twelve months required to assess the
Company's ability to continue as a going concern. The Board believes that a
period of five years reflects a suitable time horizon for strategic planning,
the investment cycle of private equity and the longer term view taken by the
Portfolio Managers and investors; this period is in line with the Company's
Key Information Document. The Company has a fixed life. In the event that no
alternative proposals are put forward to shareholders, or such proposals are
not approved by shareholders, the Company will commence winding up in 2028.
As an investment trust, the Company is entitled to beneficial treatment with
regard to chargeable gains. Any change to such taxation arrangements could
affect the Company's viability as an effective investment vehicle.
In their assessment of the prospects for the Company over the next five years,
the Directors have assumed that the Company will continue to adopt the same
investment objective, that the Company's performance will continue to be
attractive to shareholders and that the Company will continue to meet the
requirements so as to retain its status as an investment trust.
The Directors have considered each of the Company's principal and emerging
risks and uncertainties detailed on pages 34 to 36 of the annual report and
accounts. In particular, the Directors concluded that the emerging
geopolitical and ESG risks do not materially impact the viability of the
Company. The Directors have also considered a significant fall in equity
markets on the value of the Company's investment portfolio. The Directors
have, furthermore, considered the Company's projections of income and
expenditure as well as any commitments to provide funding to investee
companies. They have noted that the Company's investment portfolio will
continue to comprise a significant proportion of highly liquid listed equities
which can be readily realised and that a substantial proportion of the
Company's operating expenses vary with the value of the investment portfolio.
As stated in Going Concern above, the Company is a closed-end investment trust
and there is no requirement to redeem or buy back shares. A stress test to
evaluate the consequences of a 50% reduction in the market value of the
Company's investments over the five year period has also been evaluated.
The conclusion of this review is that the Board has a reasonable expectation
that the Company will be able to continue in operation and meet its
liabilities as they fall due over the next five years.
By order of the Board
Schroder Investment Management Limited
Company Secretary
5 July 2023
Statement of Directors' Responsibilities
The Directors are responsible for preparing the annual report, and the Report
and accounts in accordance with applicable law and regulations.
Company law requires the Directors to prepare the Report and accounts for each
financial year. Under that law, the Directors have prepared the Report and
accounts in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising Financial Reporting
Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and
Republic of Ireland" and applicable law). Under company law, the Directors
must not approve the Report and accounts unless they are satisfied that they
give a true and fair view of the state of affairs of the Company and of the
return or loss of the Company for that year. In preparing these Report and
accounts, the Directors are required to:
- select suitable accounting policies and then apply them
consistently;
- make judgements and accounting estimates that are reasonable
and prudent;
- state whether applicable UK Accounting Standards, comprising
FRS 102, have been followed, subject to any material departures disclosed and
explained in the Report and accounts;
- notify the Company's shareholders in writing about the use of
disclosure exemptions in FRS 102, used in the preparation of the Report and
accounts; and
- prepare the Report and accounts on a going concern basis unless
it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the Report and accounts and the Directors'
Remuneration Report comply with the Companies Act 2006. 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 Manager is responsible for the maintenance and integrity of the webpage
dedicated to the Company. Legislation in the United Kingdom governing the
preparation and dissemination of Report and accounts may differ from
legislation in other jurisdictions.
Each of the Directors, whose names and functions are listed on page 38 of the
annual report and accounts, confirm that to the best of their knowledge:
- the Report and accounts, which have been prepared in accordance
with United Kingdom Generally Accepted Accounting Practice (United Kingdom
Accounting Standards and applicable law), give a true and fair view of the
assets, liabilities, financial position and net return of the Company;
- the Strategic Report contained in the report and accounts
includes a fair review of the development and performance of the business and
the position of the Company, together with a description of the principal
risks and uncertainties that it faces; and
- the annual report and accounts, taken as a whole, is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the Company's position and performance, business model
and strategy.
On behalf of the Board
Neil England
Chairman
5 July 2023
Income Statement
For the year ended 31 March 2023
2023 For the nine months ended
31 March 2022(1)
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on investments held at fair value through profit or loss - 3,198 3,198 - (1,453) (1,453)
Losses on derivative contracts - - - - (481) (481)
Gains on foreign exchange - 16 16 - - -
Income from investments 392 - 392 296 - 296
Other interest receivable and similar income 77 - 77 - - -
Gross return/(loss) 469 3,214 3,683 296 (1,934) (1,638)
Portfolio management fee (458) - (458) (372) - (372)
Performance fee - (555) (555) - (714) (714)
Administrative expenses (650) - (650) (500) - (500)
Transaction costs - (4) (4) - 1 1
Net return/(loss) before finance costs and taxation (639) 2,655 2,016 (576) (2,647) (3,223)
Finance costs - - - (1) - (1)
Net return/(loss) before taxation (639) 2,655 2,016 (577) (2,647) (3,224)
Taxation - - - - - -
Net return/(loss) after taxation (639) 2,655 2,016 (577) (2,647) (3,224)
Return/(loss) per share (0.86)p 3.57p 2.71p (0.77)p (3.53)p (4.30)p
(1)The Company changed its accounting date to 31 March commencing 1 July 2021.
The comparative figures cover the nine month period from 30 June 2021 to 31
March 2022.
The "Total" column of this statement is the profit and loss account of the
Company. The "Revenue" and "Capital" columns represent supplementary
information prepared under guidance issued by The Association of Investment
Companies. The Company has no other items of other comprehensive income, and
therefore the net return/(loss) after taxation is also the total comprehensive
income.
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the year, or
comparative period.
Statement of Changes in Equity
For the year ended 31 March 2023
Called-up
share Special Capital Revenue
capital reserve reserves reserve Total
£'000 £'000 £'000 £'000 £'000
At 31 March 2022 750 72,765 5,598 (1,010) 78,103
Repurchase of the Company's own shares into treasury - (808) - - (808)
Net return/(loss) after taxation - - 2,655 (639) 2,016
At 31 March 2023 750 71,957 8,253 (1,649) 79,311
For the nine months ended 31 March 2022(1)
Called-up
share Special Capital Revenue
capital reserve reserves reserve Total
£'000 £'000 £'000 £'000 £'000
At 30 June 2021 750 72,765 8,245 (433) 81,327
Net loss after taxation - - (2,647) (577) (3,224)
At 31 March 2022 750 72,765 5,598 (1,010) 78,103
(1)The Company changed its accounting date to 31 March commencing 1 July 2021.
The comparative figures cover the nine month period from 30 June 2021 to 31
March 2022.
Statement of Financial Position
at 31 March 2023
31 March 31 March
2023 2022(1)
£'000 £'000
Fixed assets
Investments held at fair value through profit or loss 74,128 64,691
Current assets
Debtors 151 115
Cash at bank and in hand 7,759 15,452
7,910 15,567
Current liabilities
Creditors: amounts falling due within one year (1,543) (1,039)
Net current assets 6,367 14,528
Total assets less current liabilities 80,495 79,219
Creditors: amounts falling due after more than one year
Performance fee (1,184) (1,116)
Net assets 79,311 78,103
Capital and reserves
Called-up share capital 750 750
Capital reserves 80,210 78,363
Revenue reserve (1,649) (1,010)
Total equity shareholders' funds 79,311 78,103
Net asset value per share 107.32p 104.14p
(1)Restated as detailed in note 13 on page 72 of the annual report and
accounts.
Cash Flow Statement
Year ended For the nine
31 March 2023 months ended
£'000 31 March 2022(1)
£'000
Net cash outflow from operating activities (662) (180)
Investing activities
Purchases of investments (19,840) (7,285)
Sales of investments 13,601 5,650
Cash outflow from derivative instruments - (693)
Net cash outflow from investing activities (6,239) (2,328)
Net cash outflow before financing (6,901) (2,508)
Financing activities
Repurchase of Ordinary shares into treasury (808) -
Net cash outflow from financing activities (808) -
Net cash outflow in the year/period (7,709) (2,508)
Cash at bank and in hand at the beginning of the year/period 15,452 17,960
Net cash outflow in the year/period (7,709) (2,508)
Exchange movements 16 -
Cash at bank and in hand at the end of the year/period 7,759 15,452
Included under operating activities are dividends received during the year
amounting to £362,000 (period ended 31 March 2022: £230,000) and interest
receipts amounting to £62,000 (period ended 31 March 2022: nil).
(1)The Company changed its accounting date to 31 March commencing 1 July
2021. The comparative figures cover the nine month period from 30 June 2021 to
31 March 2022.
Notes to the Accounts
1. Accounting period
The Company changed its accounting date to 31 March commencing 1 July 2021.
The comparative figures cover the nine month period from 30 June 2021 to 31
March 2022.
2. Accounting policies
(a) Basis of accounting
Schroder British Opportunities Trust plc ("the Company") is registered in
England and Wales as a public company limited by shares. The Company's
registered office is 1 London Wall Place, London EC2Y 5AU, United Kingdom.
The accounts are prepared in accordance with the Companies Act 2006, United
Kingdom Generally Accepted Accounting Practice ("UK GAAP"), in particular in
accordance with Financial Reporting Standard (FRS) 102 "The Financial
Reporting Standard applicable in the UK and Republic of Ireland". The accounts
are prepared in accordance with Statement of Recommended Practice "Financial
Statements of Investment Trust Companies and Venture Capital Trusts" (the
"SORP") issued by the Association of Investment Companies in July 2022, except
for certain financial information required by paragraph 82(c) regarding
unquoted holdings with a value greater than 5% of the portfolio or included in
the top 10, where information is not publicly available. All of the Company's
operations are of a continuing nature.
The accounts have been prepared on a going concern basis with investments at
fair value through profit or loss. The Directors believe that the Company has
adequate resources to continue operating for the period to 31 July 2024, which
is at least 12 months from the date of approval of this report and accounts.
In forming this opinion, the Directors have taken into consideration: the
controls and monitoring processes in place, the Company's other payables, the
level of operating expenses, comprising largely variable costs which would
reduce pro rata in the event of a market downturn, the Company's cash flow
forecasts and the liquidity of the Company's investments. In forming this
opinion, the Directors have also considered the Company's principal risks,
including climate change. Further details of Directors' considerations
regarding this are given in the Chairman's Statement, Investment Managers'
Review, Going Concern Statement, Viability Statement and under the Principal
and Emerging Risks heading on page 34 of the annual report and accounts. The
accounts have been prepared on the assumption that approval as an investment
trust will continue to be granted.
The accounts are presented in sterling and amounts have been rounded to the
nearest thousand.
(b) Use of judgements, estimates and assumptions
The preparation of the accounts requires management to make estimates and
assumptions that affect the application of accounting policies and the
reported amounts of assets, liabilities, income and expenses. Actual results
may differ from these estimates. The resulting accounting estimates and
assumptions will, by definition, seldom equal the related actual results.
Estimates and underlying assumptions are reviewed on an on-going basis.
Revisions to accounting estimates are recognised in the period in which the
estimates are revised and in any future periods affected.
The key estimates in the accounts are the determination of the fair values of
the unquoted investments by the Investment Manager for consideration by the
Directors. These estimates are key, as they significantly impact the valuation
of the unquoted investments at the year end. The fair valuation process
involves estimation using subjective inputs that are unobservable (for which
market data is unavailable). The key estimates and assumptions are described
in note 21 on pages 75 and 76 of the annual report and accounts.
Fair value estimates are cross-checked to alternative estimation methods where
possible to improve the robustness of the estimates. The risk of an over or
under estimation of fair values is greater when methodologies are applied
using more subjective inputs.
3. Gains/(losses) on investments held at fair value through
profit or loss
Nine
Year months
ended ended
31 March 31 March
2023 2022
£'000 £'000
Gains/(losses) on sales of investments based on historic cost 889 (274)
Amounts recognised in investment holding gains and losses in the previous 327 (310)
period in respect of investments sold in the period
Gains/(losses) on sales of investments based on the carrying value at the 1,216 (584)
previous balance sheet date
Net movement in investment holding gains and losses 1,982 (869)
Gains/(losses) on investments held at fair value through profit and loss 3,198 (1,453)
4. Income from investments
Nine
Year months
ended ended
31 March 31 March
2023 2022
£'000 £'000
Income from investments:
UK dividends 374 233
Overseas dividends 18 63
392 296
Other interest receivable and similar income:
Deposit interest 77 -
Other income - -
77 -
Total income 469 296
5. Investment management fee and performance fee
Nine
Year months
ended ended
31 March 31 March
2023 2022
£'000 £'000
Revenue:
Investment management fee 458 372
Capital:
Performance fee 555 714
The bases for calculating the investment management and performance fees are
set out in the Directors' Report on page 40 of the annual report and accounts
and details of all amounts payable to the Manager are given in note 19 on page
75 of the annual report and accounts.
6. Dividends
The Company has reported a revenue loss after taxation of £639,000 (period
ended 31 March 2022: £577,000) for the year and accordingly there is no
requirement to pay a dividend under Section 1158 of the Corporation Tax Act
2010.
7. Return/(loss) per share
Year ended Nine
31 March months
2023 ended
£'000 31 March
2022
£'000
Revenue loss (639) (577)
Capital return/(loss) 2,655 (2,647)
Total return/(loss) 2,016 (3,224)
Weighted average number of shares in issue during the year 74,376,633 75,000,000
Revenue loss per share (0.86)p (0.77)p
Capital return/(loss) per share 3.57p (3.53)p
Total return/(loss) per share 2.71p (4.30)p
8. Called-up share capital
The issued share capital at the accounting date was as follows:
31 March Nine
2023 months
£'000 ended
31 March
2022
£'000
Ordinary Shares allotted, called up and fully paid:
75,000,000 shares of 1p each: 750 750
Repurchase of 1,100,000 (2022: nil) shares into treasury (11) -
Subtotal of 73,900,000 (2022: 75,000,000) shares 739 750
1,100,000 (2022: nil) shares held in treasury 11 -
Closing balance(1) 750 750
(1)Represents 75,000,000 (2022: 75,000,000) shares of 1p each, including
1,100,000 (2022: nil) held in treasury.
During the year, the Company repurchased 1,100,000 of its own shares, nominal
value £11,000, to hold in treasury, representing 1.5% of the shares
outstanding at the beginning of the year. The total consideration paid for
these shares amounted to £808,000. The reason for these purchases was to seek
to manage the volatility of the share price discount to NAV per share.
9. Net asset value per share
31 March 31 March
2023 2022
£'000 £'000
Net assets attributable to shareholders (£'000) 79,311 78,103
Shares in issue at the year end 73,900,000 75,000,000
Net asset value per share 107.32p 104.14p
10. Transactions with the Manager
Under the terms of the Alternative Investment Fund Manager Agreement, the
Manager is entitled to receive a management fee, a company secretarial and
adminstrative fee, and a performance fee. Details of the bases of these
calculations are given in the Directors' Report on page 40 of the annual
report and accounts.
The management fee payable in respect of the year ended 31 March 2023 amounted
to £458,000 (period ended 31 March 2022: £372,000), and £458,000 (31 March
2022: £650,000) was outstanding at the year/period end. Any investments in
funds managed or advised by the Manager or any of its associated companies,
are excluded from the assets used for the purpose of the calculation and
therefore incur no fee. There have been no such investments during the year
(period ended 31 March 2022: nil).
A performance fee provision amounting to £555,000 (period ended 31 March
2022: £714,000) has been included in these accounts. An amount of £487,000
is immediately payable and has been included in these accounts as a creditor
falling due within one year. The remaining balance of £1,184,000 (31 March
2022: £1,116,000) is carried forward until such time as it may be paid under
the terms of the AIFM Agreement.
The company secretarial and administrative fee payable for the year amounted
to £180,000 (period ended 31 March 2022: £135,000). Company secretarial and
administration fees amounting to £420,000 (31 March 2022: £240,000) were
outstanding at the year end.
No Director of the Company served as a Director of any company within the
Schroder Group at any time during the year.
11. Events after the accounting date which have not been reflected
in the accounts
A performance fee amounting to £487,000 payable to the Manager, in relation
to the partial disposal of Waterlogic, is included in the Statement of
Financial Position within creditors falling due within one year. However since
the year end, the Board has accepted Schroders' offer to disregard the Payment
Amount, which would have triggered a performance fee pay-out in the year
ending 31 March 2024. This agreement will have the effect of moving this
performance fee into creditors falling due after more than one year in the
Statement of Financial Position. Schroders considers this concession to be
appropriate due to the disappointing performance of the share price versus the
net asset value.
Status of announcement
2022 Financial Information
The figures and financial information for 2022 are extracted from the
published Annual Report and Accounts for the period ended 31 March 2022 and do
not constitute the statutory accounts for that year. The 2022 Annual Report
and Accounts have been delivered to the Registrar of Companies and included
the Report of the Independent Auditors which was unqualified and did not
contain a statement under either section 498(2) or section 498(3) of the
Companies Act 2006.
2023 Financial Information
The figures and financial information for 2023 are extracted from the Annual
Report and Accounts for the year ended 31 March 2023 and do not constitute the
statutory accounts for the year. The 2022 Annual Report and Accounts include
the Report of the Independent Auditors which is unqualified and does not
contain a statement under either section 498(2) or section 498(3) of the
Companies Act 2006. The 2023 Annual Report and Accounts will be delivered to
the Registrar of Companies in due course.
Neither the contents of the Company's webpages nor the contents of any website
accessible from hyperlinks on the Company's webpages (or any other website) is
incorporated into, or forms part of, this announcement.
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