Final Results
26/09/2024 07:00
Strategic Equity Capital plc (‘SEC’)
Annual Report and Financial Statements for the year ended 30 June 2024
The Board of Strategic Equity Capital plc, the specialist alternative equity
investment trust investing in high-quality, dynamic, UK smaller companies, is
pleased to announce the Company’s Annual Results for the year ended 30 June
2024.
Highlights for the year ended 30 June 2024 include:
* Net Asset Value (NAV) per ordinary share up +15.9% to 396.87p (30 June 2023:
342.47p)
* NAV Total Return increase +16.6% (30 June 2023: +9.2%)
* Share Price Total Return growth of +19.2% (30 June 2023: +11.2%)
* Highly focused portfolio with 16 holdings and top 10 accounting for c.84% of
NAV and c. 5% of NAV held in cash at period end
Encouraging progress has been made to continue addressing the share price
discount to NAV and implementation of the marketing strategy to broaden the
shareholder base:
* Average discount to NAV of the Company’s shares during the period was
steady at 7.6% vs 7.4% for the year to 30 June 2023.
* Ongoing measures include the following: * A share buy-back policy aimed at
returning up to 50% of proceeds from profitable realisations, conducted at a
discount of more than 5% on a continuing basis in each financial year. For the
year ending 30 June 2024, 1,839,261 shares were repurchased and held in
Treasury at a cost of £5.8 million.
* A standing commitment from the investment manager to reinvest 50% of its
quarterly management fee in Company shares, if the shares trade at an average
discount of greater than 5% for the quarter. Gresham House currently holds
approximately 10% of the Company.
* The deferral of an annual continuation vote in favour of offering
shareholders a 100% realisation opportunity in November 2025.
* Successful sale by the Company’s largest shareholder of 10% of the
Company, which was placed with various UK wealth managers, increasing the
diversification of the shareholder register which should help to improve the
liquidity of the Company in addition to reducing the discount over time.
* Differentiation is being communicated through a range of marketing
activities including a retail-focused advertising campaign, an extensive PR
campaign, content creation throughout the period, plus regular commentaries
and webinars to keep shareholders and prospective investors up to date with
portfolio developments and performance.
Top performance contributors during the period were:
* XPS Pensions Group, which saw successive analyst upgrades throughout the
period and accounted for 22.9% of the Company’s NAV at year end;
* Fintel, a regulatory technology service provider, which completed a number
of strategic acquisitions expected to significantly increase the capabilities,
scale and IP of the organisation;
* The Property Franchise Group, a lettings-focused franchised estate agency
business, which completed two transformational acquisitions in the period
augmented by strong organic growth;
* Wilmington, a professional media provider, which demonstrated strong
operating fundamentals and forecast upgrades whilst successfully refocusing
the business on a digital first strategy in the governance, risk and
compliance market was exited in full during the year; and
* Tribal Group, a provider of technology products and services to the
education, learning and training markets, which amicably settled an ongoing
contractual dispute (at a significant discount to the counterparty’s claimed
damages) following strong full-year results, and the announcement (albeit the
transaction eventually lapsed post-shareholder vote) of a Recommended Cash
Offer in early October at a 42% spot premium.
William Barlow, SEC’s Chairman, commented:
“Against a challenging volatile market backdrop, the Board are pleased to
report that the Company achieved a 16.6% increase in net asset value (NAV) per
share on a total return basis for the year ending 30 June 2024. This is
modestly behind the 18.5% rise in the FTSE Small Cap (ex Investment Trusts)
Total Return Index. The underperformance experienced by the Company relative
to the index reflects the Manager’s strategy of avoiding more cyclical
sectors which outperformed during the period. The Company’s share price
delivered a total return of 19.2%, outperforming its NAV per share growth,
which reflects the efforts undertaken by the Company to reduce the Company’s
discount to NAV.
Over the past three years, the NAV per share has grown by 15.6%, significantly
outpacing the FTSE Small Cap (ex Investment Trusts) Total Return Index’s
0.8% growth.
Looking forward, our differentiated investment strategy continues to deliver
results for our shareholders. Under the leadership of our Fund Manager, Ken
Wotton, we’ve built a portfolio designed to deliver attractive long-term
real returns. There is strong M&A interest in UK equities, with notable
takeover approaches for portfolio companies such as Ten Entertainment Group
and Alpha Financial Markets Consulting during the period. Importantly, our
top-performing stocks also included those that were not the recipients of
takeover approaches, highlighting our ability to generate shareholder returns
through careful stock selection that becomes recognised by the market over
time. We remain optimistic about the opportunities ahead for sustained value
creation.”
Ken Wotton, Managing Director of Public Equity at Gresham House and SEC’s
Fund Manager, said:
“The year to 30 June 2024 brought its fair share of challenges, with
volatility driven by shifting macroeconomic conditions both in the UK and
abroad. In the UK, inflation fell sharply, and despite a brief recession, the
economy began to show tentative signs of growth towards the end of the period.
Internationally, concerns over persistent US inflation and rising geopolitical
tensions weighed on the markets.
Despite the uncertain backdrop our portfolio has performed robustly, supported
by strong fundamentals and a focus on sectors with long-term growth potential.
Many of our holdings outperformed expectations, reaffirming their resilience
and our confidence in their ability to deliver consistent returns.
We believe that our focus on business fundamentals will continue to deliver
long-term outperformance. We see many opportunities to back high-quality
growth companies at attractive valuations, especially in smaller, nimble
businesses with strong management teams that can gain market share and build
sustainable value over time.
Looking ahead, we remain optimistic. With attractive valuations and solid
growth drivers, our portfolio is well placed to navigate ongoing market
challenges and deliver strong returns. We remain focused on building a
high-conviction portfolio of less cyclical, high-quality businesses that can
thrive regardless of broader economic conditions.”
FINANCIAL SUMMARY
Capital Return As at 30 June 2024 As at 30 June 2023 % change
Net asset value (“NAV”) per Ordinary share + 396.87p 342.47p 15.9%
Ordinary share price 365.50p 309.00p 18.3%
Comparative index ++ 5,687.19 4,970.43 14.4%
Discount of Ordinary share price to NAV 1 (7.9)% (9.8)%
Average discount of Ordinary share price to NAV for the year 1 (7.6)% (7.4)%
Total assets (£’000) 191,683 170,784 12.2%
Equity shareholders’ funds (£’000) 189,965 170,223 11.6%
Ordinary shares in issue with voting rights 47,865,450 49,704,711
Performance Year ended 30 June 2024 Year ended 30 June 2023
NAV total return for the year 1 16.6% 9.2%
Share price total return for the year 1 19.2% 11.2%
Comparative index ++ total return for the year 18.5% (0.4)%
Ongoing charges 1 1.20% 1.22%
Ongoing charges (including performance fee) 1 2.03% 1.22%
Revenue return per Ordinary share 4.15p 3.53p
Dividend yield 1 0.96% 0.81%
Proposed final dividend for the year 3.50p 2.50p
Year’s Highs/Lows High Low
NAV per Ordinary share 396.98p 317.93p
Ordinary share price 370.00p 290.00p
+Net asset value or NAV, the value of total assets less current liabilities.
The net asset value divided by the number of shares in issue produces the net
asset value per share.
++ FTSE Small Cap (ex Investment Trusts) Index.
1 Alternative Performance Measures. Please refer to pages 75 and 76 of the
2024 Annual Report.
The full Annual Report and Financial Statements can be accessed via the
Company’s website at: www.strategicequitycapital.com or by contacting the
Company Secretary as below.
Copies of the announcement, annual reports, quarterly update presentations and
other corporate information can be found on the Company’s website at:
www.strategicequitycapital.com
For further information, please contact:
Strategic Equity Capital plc William Barlow (Chairman) (via Juniper Partners) +44 (0)131 378 0500
Liberum Capital Limited (Corporate Broker) Chris Clarke Darren Vickers Owen Matthews +44 (0)20 3100 2000
Juniper Partners Limited (Company Secretary) Steven Davidson +44 (0)131 378 0500
KL Communications (PR Adviser) gh@kl-communications.com +44 (0)203 882 6644
Charles Gorman
Adam Westall Charlotte Francis
Chairman’s Statement
I am pleased to report that, despite challenging and volatile market
conditions, the Company’s NAV per share (on a total return basis) increased
by 16.6% during the 12 months to 30 June 2024. The FTSE Small Cap (ex
Investment Trusts) Total Return Index (“FTSE Small Cap Index”), against
which the Company’s performance can be compared, rose by 18.5%. Over the
same period, the Company’s share price delivered a total return of 19.2%.
The underperformance relative to the reference index was primarily due to the
Company’s decision to avoid investing in cyclical sectors within the index
which performed well during the period.
Nevertheless, the NAV performance for the period was encouraging, with the
majority of portfolio investments delivering positive returns. This reflects
the Manager’s continued focus on higher quality companies that are
positioned in areas of structural growth and/or have self-help levers to drive
value creation. The Board remains confident that prioritising companies with
resilient business fundamentals and strong balance sheets will enable the
Company to continue to outperform over the medium to long term.
The Company’s NAV per share (on a total return basis) over the three years
to 30 June 2024 was 15.6%, compared to just 0.8% for the FTSE Small Cap Index.
An overview of the reporting period, performance, and portfolio is discussed
in detail in the Investment Manager’s Report below.
As a direct result of our deliberate and distinctive investment process, the
Company provides notable benefits for investors:
Performance
The performance of Strategic Equity Capital (“SEC”) has been strong
relative to its peers and, this has been driven by the distinctive nature of
the Company’s returns. This success reflects the skills of our Investment
Manager, Ken Wotton, and his team, as well as the advantages of applying a
private equity approach to public markets. The portfolio has been carefully
constructed with the objective of delivering real returns. There continues to
be clear and significant M&A interest in UK equities due to attractive
valuations, with several portfolio companies attracting takeover interest
during the period. Most notably, the acquisitions of Ten Entertainment Group
and Alpha Financial Markets Consulting by private equity bidders were
completed and announced during this period. However, it is worth noting that
none of the Company’s top five performance contributors during the period
were companies that received takeover bids. This highlights that, while
takeover activity can enhance portfolio performance, significant organic
shareholder returns can also be achieved through diligent stock selection and
a focus on high-quality businesses.
Performance Fee
The Company’s performance is assessed over rolling three-year periods ending
on 30 June each year, with the NAV total return per share compared to the
total return performance of the FTSE SmallCap (ex Investment Companies) Index.
Given the strong three year performance, a capped performance fee of
£1,409,000 has been earned by the Investment Manager in the period under
review. Specifically, the NAV total return per share, prior to any performance
fee accrual, surpassed both the Target NAV per share (which includes the FTSE
SmallCap Index return plus an additional 2.0% per annum) and the high
watermark – the highest NAV per Share for which a performance fee has
previously been paid. As a result, the Investment Manager is entitled to 10%
of the outperformance above the higher of these two benchmarks. Any
performance fee is capped at 1.4% per annum of the Company’s NAV at the end
of the relevant financial period. Further details of the performance fee
arrangements are detailed on page 33 of the 2024 Annual Report.
Risk Management
For investors looking for high quality small cap UK equity exposure, SEC
offers low correlations and a low beta to the broader market. When combined
with valuation discipline and a fundamentals based approach to stock
selection, this provides a strong margin of safety to underpin the long-term
upside potential of the portfolio.
Valuation
SEC currently offers investors an attractive discount at four different
levels:
* UK equities stand at a substantial discount to global markets, currently at
levels previously seen in the 1990s;
* Within the UK market, smaller capitalisation stocks trade at a notable
discount to large caps;
* The SEC portfolio of companies are both lower valued and higher quality than
UK small cap indices; and
* Investors are today able to purchase SEC shares at a discount to NAV.
Discount and Discount Management
The average discount to NAV of the Company’s shares during the period was
7.6%, compared to the equivalent 7.4% figure from the prior year. The discount
range was 2.9% to 11.6%.
Encouraging progress continues to be made to address the persistent share
price discount to NAV experienced by the Company. Following on from the
measures implemented in 2022 the discount has narrowed, in the current period
from 9.8% at the beginning to 7.9% at the end. For comparison, over the same
period the average UK Smaller Company Investment Trust discount decreased from
11.5% to 10.2%.
Some of these measures remain ongoing. These include: a buy back policy to
return up to 50 per cent. of proceeds from profitable realisations, at greater
than a 5 per cent. discount on an ongoing basis, in each financial year; an
ongoing commitment by Gresham House Asset Management to reinvest 50 per cent.
of its management fee per quarter in shares if the Company’s shares trade at
an average discount of greater than 5 per cent. for the quarter; and the
deferral of an annual continuation resolution in favour of the implementation
of a 100 per cent. realisation opportunity for shareholders in November 2025.
Marketing
The Board continues to oversee the implementation of the marketing plan and
strategy to broaden the shareholder base by increasing awareness of the
Company, and to ensure a clear investment proposition is presented to the
market.
During the year the Board oversaw the sale by the Company’s largest
shareholder of 10% of the Company, which was placed with various UK wealth
managers.
Increased diversification of the shareholder register should help to improve
the liquidity of the Company in addition to reducing the discount over time.
Communicating differentiation through a range of marketing activities has
included a retail-focused advertising campaign, an extensive PR campaign and
content creation throughout the period. There have also been regular
commentaries and webinars to keep shareholders and prospective investors up to
date with portfolio developments and performance. The Investment Manager has
also spoken at retail investor events to raise the profile of the Company.
All these activities have provided the opportunity to highlight the Investment
Manager’s distinctive and highly disciplined private equity approach to
public markets, coupled with constructive, active corporate engagement.
This messaging is reflected in all communications including on the
Company’s webpage (www.strategicequitycapital.com).
The Board values the importance of Marketing and Distribution more broadly, to
build the profile and positioning of the Company over time.
Gearing and Cash Management
The Company has maintained its policy of operating without a banking loan
facility. This policy is periodically reviewed by the Board in conjunction
with the Investment Manager and remains under review.
Dividend
For the year ended 30 June 2024 the basic revenue return per share was 4.15p
(2023: 3.53p). Although the Company is predominantly focused on delivering
long-term capital growth, due to the strongly cash generative nature of the
majority of the portfolio companies and low capital intensity, many pay an
attractive dividend. Accordingly, the Board is proposing a final dividend of
3.50p per share for the year ending 30 June 2024 (2023: 2.50p per share),
payable on 13 November 2024 to shareholders on the register as at 11 October
2024.
Realisation Opportunity
As announced by the Company on 9 February 2022 and reiterated in subsequent
publications, shareholders will be provided with a 100% realisation
opportunity in 2025 (the “2025 Realisation Opportunity”). The structure
and timing of the 2025 Realisation Opportunity will be communicated by the
Board in due course, having given careful consideration to the various options
available to maximise shareholder value.
Board Composition
In addition, the timing of the 2025 Realisation Opportunity will take in to
consideration the Board’s long-term succession planning, so as to allow
shareholders to make an informed decision with certainty over the ongoing
Board composition. In the first instance Richard Locke, Non-Executive Deputy
Chairman, is expected to announce his retirement from the Board during 2025,
having been appointed as a Non-Executive Director in February 2015. Similarly,
I expect to announce my retirement from the Board during 2026, having been
appointed as a Non Executive Director in February 2016, and subsequently as
Non-Executive Chairman in November 2022.
Outlook
The global macroeconomic and geopolitical environment continues to demonstrate
volatility. Domestically, the UK economy has delivered a series of encouraging
metrics in recent months, with inflation having returned towards the Bank of
England’s target range, real wage growth returning, and GDP growth
recovering from what was feared early in 2024 to be the beginning of a
prolonged recession.
Across the portfolio, the Investment Manager has been encouraged by the
positive news flow, with the majority of the portfolio showing solid
performance. Valuations remain attractive when compared to historical levels,
large-cap UK equities, overseas equities, and recent M&A transaction
multiples. The strong performance during the period was primarily driven by
organic returns to equity, with additional upside from takeover premia.
Furthermore, the Investment Manager is confident in the significant growth
potential across the remaining portfolio, believing that the resilient
positioning of the Company’s holdings should enable it to outperform in the
medium to long term.
In addition, the enhanced marketing programme and ongoing share buybacks are
expected to support the Company’s ability to maintain a structurally
narrower share price discount to NAV over the coming year, building on the
positive momentum since the appointment of the current Investment Manager in
2020.
With the Labour government now in office, the Investment Manager is mindful of
the potential impact of their reforms. While these reforms may present both
challenges and opportunities, particularly in sectors such as infrastructure,
energy, and public services, the portfolio’s focus on companies with strong
fundamentals and exposure to structural growth themes positions it well to
navigate these changes. The Investment Manager believes this adaptability will
enable the Company to continue delivering value to shareholders in the
evolving political and economic landscape.
The Board, once again, thanks you for your continued support.
William Barlow
Chairman
25 September 2024
Investment Manager’s Report for the year ended 30 June 2024
1) Overview
The period from 1 July 2023 to 30 June 2024 has been characterised by notable
volatility and evolving macroeconomic conditions both domestically and
internationally.
In the UK steady progress was made on taming inflation, with the headline CPI
falling from 7.9% in June 2023 to 2.0% in June 2024, which culminated in a
25bps Base Rate cut post-period end (returning to the 5% level that marked the
start of the period). The first six months of the period saw the UK slip into
technical recession, the first time since 2020, but it quickly recovered to
deliver promising GDP growth particularly in the final quarter of the period.
Internationally, newsflow has been dominated by escalating geopolitical
tensions, fears over US inflation persistence and implications for yields, and
continued weakness in European industrial activity. Alongside this, political
volatility has been a recurring theme following a number of major election
cycles.
Despite this volatility, our portfolio has continued to demonstrate
considerable resilience, anchored by strong fundamental characteristics that
we seek in our bottom-up investment approach. Many of our holdings are
strategically positioned within structural growth trends or have significant
self-help opportunities, enabling them to perform robustly despite broader
economic uncertainties. We have deliberately avoided sectors more sensitive to
economic cycles and exogenous variables, such as banks, oil & gas, and mining
companies.
News flow over the period from our portfolio companies has been largely
positive, with a number of companies delivering one or more earnings upgrades
versus market expectations, reinforcing our confidence in the quality and
growth potential of the portfolio. Despite this strong fundamental
performance, UK equities, particularly in the small-cap segment, have
continued to trade at discounted valuations relative to international peers
and to private M&A transactions for comparable businesses. Continued net
outflows from UK equities have placed relentless selling pressure on the
sector, with June 2024 marking the 37th consecutive month of net outflows
(source: Calastone).
Attractive valuations of UK equities have prompted a significant acceleration
in takeover activity. After a robust calendar year in 2023, which witnessed 39
bids, H1 2024 has already seen 32 bids announced, with an overwhelming bias
towards smaller cap companies. Interestingly, whilst private equity bidders
accounted for the majority of transactions in 2023, corporate bidders have
been disproportionately active in the first six months of 2024, accounting for
72% of offers announced (source: Peel Hunt, “UK M&A – Further
acceleration”, 2 July 2024).
We continue to focus on bottom-up stock selection and on opportunities where
structural growth themes and/or self-help levers dilute the impact of broader
economic and market fluctuations. Our consistent investment philosophy, strong
relationships with company management teams, and extensive specialist network
continue to underpin our confidence in the portfolio. We remain committed to
high-quality businesses with clear value creation strategies, long-term demand
drivers, and durable competitive advantages.
2) Detailed Performance Overview
The net asset value (“NAV”) increased 16.6%, on a total return basis, over
the twelve months to the end of June, closing at 396.87p per share. This
increase in NAV reflected the positive returns delivered by the majority of
portfolio companies throughout the period, despite volatile equity market
conditions as geopolitical and macroeconomic concerns weighed on investor
sentiment.
Despite a strong absolute performance the Company underperformed its
comparator during the period, as the FTSE Smaller Companies (ex Investment
Trusts) Index grew by 18.5%. The underperformance against the index was
primarily due to the decision to avoid investing in cyclical sectors within
the index.
Despite the market volatility experienced over the year, we remain confident
about the resilient underlying fundamentals of the portfolio companies and
their ability to withstand the macroeconomic headwinds that look set to
persist through the current financial year.
Top Five Absolute Contributors to Performance
Security Valuation 30 June 2024 £’000 Period Contribution to return (basis points)
XPS Pensions Group 43,477 1,251
Fintel 17,373 541
The Property Franchise Group 12,481 175 +
Wilmington - 171
Tribal Group 9,026 158
+ All-share merger with Belvoir Group plc during the period; Belvoir
pre-merged contributed 40bps of performance to the Company such that the
aggregate contribution with The Property Franchise Group plc was 215bps
XPS Pensions Group, a pensions consulting, advisory and administration
services provider, which delivered results in excess of market expectations,
saw successive analyst upgrades throughout the period, and which divested a
non-core business at a significantly accretive valuation multiple to the wider
group. XPS Pensions Group accounted for 22.9% of the Company’s Net Asset
Value at the end of the year. Following the period end this was reduced by an
amount equivalent to 11.1% of Net Asset Value; Fintel, a provider of
tech-enabled regulatory services, following a number of strategic acquisitions
which will significantly increase the capabilities, scale and IP of the
organisation; The Property Franchise Group, a lettings-focused franchised
estate agency business, which completed two transformational acquisitions in
the period augmented by strong organic growth; Wilmington, a professional
media provider, which demonstrated strong operating fundamentals and forecast
upgrades whilst successfully refocusing the business on a digital first
strategy in the governance, risk and compliance market exited in full during
the year; Tribal Group, a provider of technology products and services to the
education, learning and training markets, following strong full year results,
the amicable settlement of an ongoing contractual dispute (at a significant
discount to the counterparty’s claimed damages), and the announcement
(albeit the transaction eventually lapsed post-shareholder vote) of a
Recommended Cash Offer in early October at a 42% spot premium.
Bottom Five Absolute Contributors to Performance
Security Valuation 30 June 2024 £’000 Period Contribution to return (basis points)
R&Q Insurance Holdings 5 (505)
Iomart Group 18,246 (240)
Inspired 7,420 (192)
Ricardo 14,584 (111)
Carr’s Group - (38)
The largest performance detractor in the period was R&Q Insurance Holdings, a
global non-life specialty insurance company, following a prolonged process to
separate its two businesses (“Accredited” and “Legacy”), a convertible
equity raise (to bolster capital adequacy), and weaker than expected trading.
Our investment thesis was predicated on the significant latent value potential
in R&Q, particularly on a sum of the parts basis, as the business transformed
from a capital intensive specialist insurance business to a faster growth and
more cash generative services business model. This value potential was
corroborated somewhat by the all-cash takeover approach received (but later
withdrawn) in 2022 that valued the company at £482m. Whilst the company made
positive steps to realise this value by separating its two businesses and
announcing the sale of its Accredited division to Onex Partners, the Legacy
division began to experience unforeseen balance sheet stress. Due to a
prolonged transaction timetable for the Accredited sale, combined with lower
than expected net cash proceeds (which were expected to alleviate the Legacy
division’s balance sheet challenges), the company unfortunately entered into
a provisional liquidation process which led to no recovery for equity holders.
Whilst the Investment Manager was able to mitigate some downside through
selling shares ahead of this process, having exhausted attempts to rectify the
situation in collaboration with other shareholders and the Board, the
conclusion has been a loss of principal for the remaining holding following
the liquidation process, and a 505bps negative performance contribution in the
12 months to 30 June 2024.
The Investment Manager acknowledges that, notwithstanding the portfolio’s
strong aggregate performance over the period, this investment led to a deeply
disappointing outcome for the Company. Whilst the Investment Manager follows a
bottom-up investment approach that places great focus on business fundamentals
and downside protection, in this instance we underestimated the extent to
which balance sheet complexity in this business could have led to financial
stress in a downside scenario. Going forwards, even greater scrutiny on
balance sheet simplicity will be adopted by the Investment Manager.
The next three largest detractors, by contrast, suffered from share price
weakness in response to short term developments that, we believe, do not
fundamentally change the long term values of the holdings.
These detractors included Iomart Group, a hybrid cloud managed services
provider, which despite delivering in-line full year results experienced some
small consensus downgrades reflecting organic growth expectations and the
ability to pass-through cost increases from VMWare. The Investment Manager is
encouraged by the orderly change of leadership that took place in the period,
with the appointments of a high quality CEO and experienced plc chair with a
track record of value creation in the IT services space; Inspired, despite
positive newsflow throughout the period. Inspired’s FY23 results came in
ahead of expectations, with 20% EBITDA growth at a group level, double digit
revenue growth in two divisions and >100% growth in its ESG division. In
addition the group disclosed a series of new KPIs evidencing the good progress
made in its cross-selling strategy; and Ricardo, a global strategic,
environmental, and engineering consultancy, which reported encouraging
half-year results with particularly strong growth in its Energy & Environment
and Rail divisions, mitigated by some softness in its non-core businesses as
customers delayed orders.
Finally the fifth largest detractor, Carr’s Group, was an investment that
was fully exited during the period. Carr’s Group was a new investment for
the Company in the latter half of the prior reporting period, which shortly
following our investment experienced a significant share price rally up to 30
June 2023 (the end of the previous reporting period). Following a subsequent
deterioration in performance and unexpected change of management announced in
August 2023, the shares retreated from their previous gains and we took the
opportunity to exit our position in full following a re-assessment of the
risk/reward potential. Despite the -38bps performance
contribution in the year ended 30 June 2024 the Company made a positive total
return on its investment in Carr’s Group, which equated to 16.8% IRR on an
annualised basis.
3) Portfolio Overview
The portfolio remained highly focused with a total of 16 holdings and the top
10 accounted for around 84% of the NAV at the end of the period, with c.5% of
NAV held in cash at the period end.
The Investment Manager made a number of new investments during the period,
including into Alpha Financial Markets Consulting, a financial
services-focused consultancy which received a Recommended Cash Offer from
Bridgepoint shortly after our investment, at a 50% premium to the undisturbed
share price; Costain Group, a leading UK infrastructure engineering and
consultancy services provider which is positioned to benefit from UK
infrastructure expenditure and which the Investment Manager believes trades at
a significant discount to intrinsic value; Halfords Group, the provider of B2C
automotive and cycling parts and services, and B2B fleet management services.
Halfords has faced some recent headwinds in its B2C offering as bicycle sales
mean-revert from an elevated COVID comparator period (exacerbated by
sector-discounting as a large cycling competitor entered into Administration)
and as some consumers delayed car tyre replacement. However, the Investment
Manager believes that these transitory issues have weighed disproportionately
on Halfords’ valuation, and Halfords’ B2B business continues to trade
strongly, following good progress by the management team in repositioning the
group towards B2B services; Team 17 Group, an independent video game developer
and publisher which is well known to the Investment Manager. Following an
unexpected profit warning in November 2023 and subsequent review, the
Investment Manager believes that the long-term fundamentals of the business
remain strong and that the reduced share price offered an attractive
opportunity to establish a position in the Company; The Property Franchise
Group and Belvoir Group, two leading UK residential franchised estate agencies
which completed an all-share merger post-investment by the Company. The
combined businesses are capital light, highly cash generative and
predominantly exposed to the resilient and structurally growing UK residential
lettings market, and are well known to the Investment Manager; Trufin, a
provider of financing and payment services as well as working capital finance
and technology solutions to SMEs, which the Investment Manager believes to be
significantly undervalued on a sum of the parts basis; and Pinewood
Technologies, a critical SaaS provider to the automotive dealership sector,
which was formerly part of Pendragon Group. The Investment Manager was
attracted to significant recurring revenue (90%) and margin profile (c.25%
EBIT margin and double digit expected growth). Following a rapid value uplift
the Company profitably exited its investment in Pinewood Technologies in full
during the period after concluding there was insufficient value opportunity
available from building a larger equity stake in order to build a proactive
engagement strategy for the holding.
In addition to new investments, the Company also made a number of follow-on
investments into existing holdings where the Investment Manager sought to
capitalise on attractive valuation opportunities and/or greater levels of
conviction in the returns potential. These included Brooks Macdonald, Fintel,
Iomart Group, Netcall and Ricardo.
Over the period, positions in Pinewood Technologies (IRR of 98%1), Belvoir
Group (IRR of 73%1,2), Ten Entertainment (IRR of 25%), Carr’s Group (IRR of
17%1), Medica Group (IRR of 25%3), Hostelworld Group (IRR of 35%4), Wilmington
(IRR of 43%5) and LSL Property Services (IRR of -13%) were exited in full.
1 Annualised IRR based on a <12 month holding period
2 “Exited” in an all-share merger with The Property Franchise Group plc
(“TPFG”), another holding of the Company, such that the Company’s shares
in Belvoir Group were exchanged for additional shares in TPFG
3 12% reflects the IRR from the Company’s initial investment in Medica Group
in 2017. 25% reflects the IRR since Ken Wotton became Investment Manager of
the Company in September 2020, and actively decided to upweight the
Company’s holding in Medica Group
4 9% reflects the IRR from the Company’s initial investment in Hostelworld
in 2019. 35% reflects the IRR since Ken Wotton became Investment Manager of
the Company in September 2020
5 8% reflects the IRR from the Company’s initial investment in Hostelworld
in 2019. 43% reflects the IRR since Ken Wotton became Investment Manager of
the Company in September 2020
The Company currently has a number of key holdings that the Investment Manager
believes trade at material valuation discounts to comparable private market
transaction values, which provides a strong margin of safety underpinning the
long term upside potential of the portfolio.
Changes in sector weightings have seen exposure to Healthcare decrease from
21.6% to 0%, which reflects the exit of Medica Group (the Company’s sole
Healthcare investment in the prior period) pursuant to its Recommended Cash
Offer from IK Partners. The next largest change in sector weighting was the
exposure to Business Services rising from 27.1% to 44.5%, which was driven by
a combination of strong stock-specific performance (including the Company’s
three strongest performers by attribution) and new investment activity. Whilst
the Business Services sector is broad and diversified with a range of
stock-specific qualities and nuances, the Investment Manager is attracted to
the types of capital light, operationally geared and cash generative B2B
services businesses that can occasionally be found in the sector. Similarly,
the Company’s exposure to Technology companies has increased from 15.6% to
25.1% during the period as the Investment Manager has sought to capitalise on
depressed valuations to invest in businesses with attractive financial
characteristics, through a combination of new investments (e.g. Trufin) and
follow-on investments into existing holdings (e.g. Iomart Group, Netcall).
4) Where We Engaged
Iomart Group
Engagement case study: Governance / Chair Recruitment
Engagement focus: Governance / Chair Recruitment
How we engaged: Meetings with executive management and significant
shareholder, introduction to potential chair candidate
Who we collaborated with: Significant shareholder
One of our investee companies required a new chair following a change in Board
roles. Based on our knowledge of the sector and our network we identified a
credible chair candidate with a blend of sector, plc and value creation
experience.
We introduced the candidate to the board and to the company’s significant
shareholder, and that candidate was put forward for consideration as part of
the board’s formal search programme.
Outcome: Following the board’s search programme our preferred candidate was
selected to be appointed as chair
5) Outlook – Year Ahead
We saw green shoots of economic improvement towards the end of the period and
are cautiously optimistic that positive trends can continue into the next
period. UK CPI is now tracking the target inflation level, the Bank of England
has (post-period) delivered one interest rate cut with markets pricing in
further rate cuts over the next twelve months, which should be supportive of
demand for our investee companies’ services. Similarly, UK consumer
confidence is at its highest level in almost three years, albeit consumption
remains subdued as shown by recent household saving data. However, with real
wages growing, the short-term prospect of unwinding mortgage costs, and the
relatively ‘de-leveraged’ UK household compared to 2008/09, the economic
environment looks more supportive of rising consumption than at any point over
the last couple of years.
However, the Investment Manager is mindful of the recent change in UK
Government and the potential economic ramifications thereof. Whilst material
further clarity is unlikely to be received until the publication of the Autumn
Budget in October 2024, the Investment Manager acknowledges the possibility of
more cautious fiscal policy and/or changes in public spending priorities in
the short to medium term. In addition to the potential impact on the
investment portfolio in aggregate, it is possible that different investee
companies will face their own combinations of opportunities and challenges
under the new economic regime, with portfolio construction implications
thereafter.
Turning to UK equity markets and interest rates, the prospect of falling bond
yields and price appreciation going forwards may create a favourable
‘denominator effect’ for UK equity fund flows, whereby asset allocators
re-weight portfolios towards equities to meet their target asset class
exposures. The ensuing liquidity injection into UK funds, and UK smaller
companies, could alleviate the downward share price pressure of the last two
years caused by ‘forced selling’. UK smaller company valuations may then
bridge the wide arbitrage versus their larger UK and international peers, as
well as precedent M&A transactions. We see these conditions as supportive of a
re-rating of UK smaller companies.
On a similarly positive note, the Investment Manager has seen a growing number
of ‘early look’ and formal pre-IPO meetings during the last calendar
quarter, which marks a welcome change from the previous theme of
de-equitisation and lack of investor appetite for quoted equity issuance.
While equity capital market activity during 2024 has primarily focused on
existing listed businesses, notable larger UK IPOs of Raspberry Pi and Aoti
took place during Q2, along with a smaller IPO of AI-focused IntelliAM in
early July. Together with the prospect of improving economic conditions and
the possibility of rising UK stock-market valuations, investor and corporate
confidence will have grown by observing strengthening post-deal share prices
in each instance. We therefore expect further IPO activity to present new
opportunities into H2 2024.
6) Final Thoughts
Despite positive recent macroeconomic green shoots, the Investment Manager’s
core planning assumption is that continued geopolitical and macroeconomic
uncertainty will drive market volatility in the next year. It is likely that
increasing focus on company fundamentals and valuation discipline will be
required to outperform in this environment, which plays to the strengths of
the Company’s investment strategy and the Investment Manager’s approach.
Elevated levels of takeover activity within the UK equity market are likely to
continue if current trends prevail, with a number of further bids announced
post-period end following an active last twelve months. The Investment
Manager’s investment process and private equity lens across public markets
enables the identification of investment opportunities with potential
strategic value that could be attractive acquisitions for both corporate and
financial buyers, which is reflected in the frequency of portfolio exits as
part of takeover processes (including in this period).
We continue to believe that our fundamentals-focused investment style has the
potential to continue outperforming over the long term. We see significant
opportunities for long-term investors to back quality growth companies at
attractive valuations in an environment where agile smaller businesses with
strong management teams can take market share and build strong long-term
franchises. We will maintain our focus on building a high-conviction portfolio
of less cyclical, high-quality, strategically valuable businesses, which we
believe can deliver strong returns through the market cycle regardless of the
performance of the wider economy.
Top 10 Investee Company Review
(as at 30 June 2024)
Company Investment Thesis Developments
XPS Pensions Group 22.9% of NAV Business Services * Highly defensive – high degree of revenue visibility and largely non-discretionary, regulation driven client activity * Delivered FY24 results ahead of market expectations with >20% revenue, EBITDA and EPS growth and further forecast upgrades, in addition to gaining FTSE 250 inclusion from 24 June 2024
* Significant inflation pass-through ability * An amount equivalent to 11.1% of SEC’s year-end Net Asset Value was divested post period-end generating a positive return of 268.3%, relative to cost and an IRR of 29.9%
* Highly fragmented sector with recent M&A activity, providing opportunity to XPS as a consolidator and potential target
Brooks Macdonald 9.9% of NAV Financial Services * Opportunity to leverage operational investments to grow margin and continue strong cash flow generation * Reported Q4 2023 fund flows which comprised a sequential increase in gross inflows and decrease in gross outflows, such that year-end funds under management had increased 7% year-on-year despite the challenging macro environment
* A consolidating market; opportunity for Brooks as both consolidator and potential target with recent takeover interest for sector peers * Also announced the retirement of CEO Andrew Shepherd to be replaced by current CFO (and former CRO of Aviva) Andrea Montague, effective October 2024 following an orderly handover
Iomart Group 9.6% of NAV Technology * Provides both self-managed infrastructure and cloud-managed services, with the latter being a key strategic focus area * Delivered in-line results but experienced some small consensus downgrades reflecting organic growth expectations and the ability to pass-through cost increases from VMWare
* Highly cash generative with significant recurring revenue
* Structural growth opportunity from hybrid cloud adoption
Fintel 9.1% of NAV Business Services * Strategically valuable technology platform with opportunity to drive material growth in revenues and margins through supporting customers’ digitisation journeys * Reported strong full year results which demonstrated 240bps of margin expansion, and announced two further strategic bolt-ons that broaden the capabilities that Fintel can provide to intermediaries
Ricardo 7.8% of NAV Industrial Goods & Services * Ongoing strategic transformation to refocus and prioritise the business towards higher growth, higher margin and less capital intensive activities * Announced a full year trading update which illustrated strong H2 2023 performance following some weakness earlier in the year, with particularly encouraging performance in its strategically core divisions (Energy & Environment, and Rail)
* Strong market position underpinned by significant sector expertise
The Property Franchise Group 6.6% of NAV Business Services * Structurally growing UK residential lettings market * Announced a strategic acquisition (The Guild of Property Professionals and Fine & Country) in addition to providing a trading update with lettings revenues up 9% YTD and sales revenues up 20% YTD
* Exceptional quality of earnings due to franchisees’ bias towards lettings revenues, and TPFG’s franchise fee revenue model
* Capital light and cash generative
Team 17 Group 5.7% Technology * Leading independent video game publisher and developer * Announced H1’24 trading in line with expectations, with good progress being made on previously announced cost actions following the temporary deterioration in trading in the prior period. Positive new release performance from H1’24 launches, with a number of releases planned for H2
* Earnings significantly underpinned by back-book franchises
* Significant founder ownership and experienced management team
Tribal Group 4.8% Technology * Strong defensive characteristics with high visibility of earnings * Announced a Recommended Cash Offer from Ellucian (strategic bidder backed by Blackstone and Vista Equity Partners) at a 41% spot premium, which did not receive sufficient shareholder support
* Transition to cloud-based platform has potential to drive growth, margins and rating * Later announced the successful settlement of an outstanding customer dispute which had previously been provided for
* Low valuation relative to software sector averages and sector transaction multiples
Alpha Financial Markets Consultancy 4.1% Financial Services * N/A – exited post-period via takeover * Announced a Recommended Cash Offer from Bridgepoint private equity at a 50% premium to the undisturbed share price
Inspired 3.9% Business Services * Leading player in a fragmented industry; significant opportunity to gain market share through client wins, proposition extension and M&A * Reported full year results which demonstrated 20% EBITDA growth, with revenue growth across all divisions. Subsequently announced that all deferred consideration will be cash settled in 2024
* Valued at a substantial discount to comparable private market transaction multiples
Portfolio as at 30 June 2024
% of invested portfolio at % of invested portfolio at
Date of first Cost Valuation 30 June 30 June % of net
Company Sector Classification Investment £’000 £’000 2024 2023 assets
XPS Pensions Group Business Services Jul 2019 16,851 43,477 23.8% 15.0% 22.9%
Brooks Macdonald Financial Services Jun 2016 18,115 18,796 10.3% 7.0% 9.9%
Iomart Group Technology Mar 2022 21,941 18,246 10.0% 5.4% 9.6%
Fintel Business Services Oct 2020 10,400 17,373 9.5% 6.4% 9.1%
Ricardo Industrial Goods & Services Sep 2021 14,585 14,864 8.2% 6.8% 7.8%
The Property Franchise Group Business Services Oct 2023 9,125 12,481 6.8% - 6.6%
Team 17 Group Technology Dec 2023 8,648 10,879 6.0% - 5.7%
Tribal Group Technology Dec 2014 11,742 9,026 4.9% 3.9% 4.8%
Alpha FMC Financial Services Mar 2024 5,471 7,846 4.3% - 4.1%
Inspired Business Services Jul 2020 13,754 7,420 4.1% 6.1% 3.9%
Benchmark Industrial Goods & Services Jun 2019 6,734 6,893 3.8% 3.6% 3.6%
Trufin Technology Jul 2023 4,111 5,422 3.0% - 2.9%
Netcall Technology Mar 2023 4,367 3,979 2.2% 1.8% 2.1%
Costain Group Business Services Jun 2024 3,846 3,834 2.1% - 2.0%
Halfords Group Consumer Jun 2024 1,899 1,823 1.0% - 1.0%
R&Q Insurance Holdings Financial Services Jun 2022 6,817 5 0.0% 4.3% 0.0%
Total investments 182,364 96.0%
Cash 9,153 4.8%
Net current liabilities (1,552) (0.8%)
Total shareholders’
funds
189,965
100.0%
Ken Wotton
Gresham House Asset Management
25 September 2024
Statement of Comprehensive Income
Year ended 30 June 2024
Revenue Capital
return return Total
£'000 £'000 £'000
Investments
Gains on investments held at fair value through profit or loss - 24,099 24,099
- 24,099 24,099
Income
Dividends 3,997 2,111 6,108
Interest 55 - 55
Total income 4,052 2,111 6,163
Expenses Investment Manager’s base fee (1,270) - (1,270)
Investment Manager’s performance fee - (1,409) (1,409)
Other expenses (756) - (756)
Total expenses (2,026) (1,409) (3,435)
Net return before taxation 2,026 24,801 26,827
Taxation - - -
Net return and total comprehensive income for the year 2,026 24,801 26,827
pence pence pence
Return per Ordinary share 4.15 50.84 54.99
The total column of this statement represents the Statement of Comprehensive
Income prepared in accordance with IFRS. The supplementary revenue and capital
return columns are both prepared under guidance published by the AIC. All
items in the above statement derive from continuing operations. No operations
were acquired or discontinued during the year.
Statement of Comprehensive Income
Year ended 30 June 2023
Revenue Capital
return return Total
£'000 £'000 £'000
Investments
Gains on investments held at fair value through profit or loss - 10,602 10,602
- 10,602 10,602
Income
Dividends 3,782 - 3,782
Interest 78 - 78
Total income 3,860 - 3,860
Expenses Investment Manager’s base fee (1,228) - (1,228)
Other expenses (803) - (803)
Total expenses (2,031) - (2,031)
Net return before taxation 1,829 10,602 12,431
Taxation - - -
Net return and total comprehensive income for the year 1,829 10,602 12,431
Return per Ordinary share 3.53p 20.44p 23.97p
Balance Sheet
As at 30 June 2024 As at 30 June 2023
£'000 £'000
Non-current assets
Investments held at fair value though profit or loss 182,364 169,274
Current assets
Trade and other receivables 166 268
Cash and cash equivalents 9,153 1,242
9,319 1,510
Total assets 191,683 170,784
Current liabilities
Trade and other payables (1,718) (561)
Net assets 189,965 170,223
Capital and reserves
Share capital 6,353 6,353
Share premium account 11,300 11,300
Special reserve - 3,590
Capital reserve 165,489 142,952
Capital redemption reserve 2,897 2,897
Revenue reserve 3,926 3,131
Total shareholders’ equity 189,965 170,223
pence pence
Net asset value per share 396.87 342.47
number number
Ordinary shares in issue 47,865,450 49,704,711
The financial statements were approved by the Board of Directors of Strategic
Equity Capital on 25 September 2024.
They were signed on its behalf by
William Barlow
Chairman
25 September 2024
Company Number: 05448627
Statement of Changes in Equity
For the year ended 30 June 2024 Share capital Share premium account Special reserve Capital reserve Capital redemption reserve Revenue reserve Total
£’000 £’000 £’000 £’000 £’000 £’000 £’000
1 July 2023 6,353 11,300 3,590 142,952 2,897 3,131 170,223
Net return and total comprehensive income for the year - - - 24,801 - 2,026 26,827
Dividends paid - - - - - (1,231) (1,231)
Share buy-backs - - (3,590) (2,264) - - (5,854)
30 June 2024 6,353 11,300 - 165,489 2,897 3,926 189,965
For the year ended 30 June 2023 Share capital Share premium account Special reserve Capital reserve Capital redemption reserve Revenue reserve Total
£’000 £’000 £’000 £’000 £’000 £’000 £’000
1 July 2022 6,353 11,300 19,767 132,350 2,897 2,363 175,030
Net return and total comprehensive income for the year - - - 10,602 - 1,829 12,431
Dividends paid - - - - - (1,061) (1,061)
Share buy-backs - - (16,177) - - - (16,177)
30 June 2023 6,353 11,300 3,590 142,952 2,897 3,131 170,223
All profits are attributable to the equity owners of the Company and there are
no minority interests.
Statement of Cash Flows
Year Ended 30 June Year Ended 30 June
2024 2023
£’000 £’000
Operating activities
Net return before taxation 26,827 12,431
Adjustment for gains on investments (24,099) (10,602)
Operating cash flows before movements in working capital 2,728 1,829
Decrease in receivables 102 374
Increase in payables 1,134 22
Purchases of portfolio investments (67,433) (30,473)
Sales of portfolio investments 78,465 30,463
Net cash flow from operating activities 14,996 2,215
Financing activities
Equity dividend paid (1,231) (1,061)
Shares bought back in the year (5,854) (16,275)
Net cash outflow from financing activities (7,085) (17,336)
Increase/(decrease) in cash and cash equivalents for year 7,911 (15,121)
Cash and cash equivalents at the start of the year 1,242 16,363
Cash and cash equivalents at 30 June 9,153 1,242
Principal and Emerging Risks
The Board believes that the overriding risks to shareholders are events and
developments which can affect the general level of share prices, including,
for instance, inflation or deflation, economic recessions and movements in
interest rates and currencies which are outside of the control of the Board.
The Board believes that there is an emerging risk faced by the Company in
relation to the conflicts in the Middle East and Ukraine which continue to
bring risk to economic growth and investors’ risk appetites and consequently
can impact the valuation of companies in the portfolio.
The Directors continue to work with the agents and advisers to the Company to
try and manage the risks, including emerging risks. The central aims remain to
preserve value in the Company’s portfolio and liquidity in the Company’s
shares. The Directors aim to ensure that the Company maintains its investment
strategy, has operational resilience, meets its regulatory requirements as an
investment trust (and in particular in the provision of regular information to
the market) and tries to navigate the financial and economic circumstances in
these very uncertain times.
The principal risks and uncertainties are set out on pages 22 to 24 of the
2024 Annual Report.
Responsibility statement of the Directors in respect of the Annual Financial
Report
We confirm that to the best of our knowledge:
* the financial statements, prepared in accordance with the applicable set of
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company; and
* the Strategic Report includes a fair review of the development and
performance of the business and the position of the issuer, together with a
description of the principal risks and uncertainties that it faces.
We consider 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.
Going Concern
In assessing the Company’s ability to continue as a going concern the
Directors have also considered the Company’s investment objective, detailed
on the inside front cover of the 2024 Annual Report, risk management policies,
detailed on pages 22 to 24 of the 2024 Annual Report, capital management (see
note 17 of the 2024 Annual Report), the nature of its portfolio and
expenditure projections and believe that the Company has adequate resources,
an appropriate financial structure and suitable management arrangements in
place to continue in operational existence for the foreseeable future and for
at least 12 months from the date of this Report. In addition, the Board has
had regard to the Company’s investment performance (see page 3 of the 2024
Annual Report) and the price at which the Company’s shares trade relative to
their NAV (see page 3 of the 2024 Annual Report).
The Directors performed an assessment of the Company’s ability to meet its
liabilities as they fall due. In performing this assessment, the Directors
took into consideration:
* cash and cash equivalents balances and, from a liquidity perspective, the
portfolio of readily realisable securities which can be used to meet
short-term funding commitments;
* the ability of the Company to meet all of its liabilities and ongoing
expenses from its assets;
* revenue and operating cost forecasts for the forthcoming year;
* the ability of third-party service providers to continue to provide
services;
* potential downside scenarios including stress testing the Company’s
portfolio for a 25% fall in the value of the investment portfolio; a 50% fall
in dividend income and a buy back of 5% of the Company’s ordinary share
capital, the impact of which would leave the Company with a positive cash
position; and
* the 2025 100% realisation opportunity.
Based on this assessment, the Directors are confident that the Company will
have sufficient funds to continue to meet its liabilities as they fall due for
at least 12 months from the date of approval of the financial statements, and
therefore have prepared the financial statements on a going concern basis.
Related Party Transactions and Transactions with the Investment Manager
Fees paid to Directors are disclosed in the Directors‘ Remuneration Report
on page 45 of the 2024 Annual Report. Full details of Directors‘ interests
are set out on page 45 of the 2024 Annual Report.
The amounts payable to the Investment Manager, which is not considered to be a
related party, are disclosed in notes 3 and 4 on page 62 of the 2024 Annual
Report. The amount due to the Investment Manager for management fees at
30 June 2024 was £116,000 (2023: £311,000). The amount due to the
Investment Manager for performance fees at 30 June 2024 was £1,409,000
(2023: £nil).
The Investment Manager, directly and indirectly through its in-house funds,
has continued to purchase shares in the Company.
Notes
1.1 Corporate information
Strategic Equity Capital plc is a public limited company incorporated and
domiciled in the United Kingdom and registered in England and Wales under the
Companies Act 2006 whose shares are publicly traded. The Company is an
investment company as defined by Section 833 of the Companies Act 2006.
The Company carries on business as an investment trust within the meaning of
Sections 1158/1159 of the UK Corporation Tax Act 2010.
The financial statements of Strategic Equity Capital plc for the year ended
30 June 2024 were authorised for issue in accordance with a resolution of the
Directors on 25 September 2024.
1.2 Basis of preparation and statement of compliance
The financial statements of the Company have been prepared in accordance with
International Accounting Standards in conformity with the requirements of
UK-adopted international accounting standards and with the requirements of the
Companies Act 2006, as applicable to companies reporting under those
standards. Where presentational guidance set out in the Statement of
Recommended Practice (“SORP”) for investment trusts issued by the AIC in
July 2022 is consistent with the requirements of IFRS, the Directors have
sought to prepare financial statements on a basis compliant with the
recommendations of the SORP.
The financial statements of the Company have been prepared on a going concern
basis.
The Directors performed an assessment of the Company’s ability to meet its
liabilities as they fall due. In performing this assessment, the Directors
took into consideration:
* cash and cash equivalents balances and the portfolio of readily realisable
securities which can be used to meet shortterm funding commitments;
* the ability of the Company to meet all of its liabilities and ongoing
expenses from its assets;
* revenue and operating cost forecasts for the forthcoming year;
* the ability of third-party service providers to continue to provide
services;
* potential downside scenarios including stress testing the Company’s
portfolio for a 25% fall in the value of the investment portfolio; a 50% fall
in dividend income and a buy-back of 5% of the Company’s Ordinary share
capital, the impact of which would leave the Company with a positive cash
position; and
* the realisation opportunity in 2025.
Based on this assessment, the Directors are confident that the Company will
have sufficient funds to continue to meet its liabilities as they fall due for
at least 12 months from the date of approval of the financial statements, and
therefore have prepared the financial statements on a going concern basis.
2. Income
Year ended 30 June 2024
Revenue Capital
return return Total
£'000 £'000 £'000
Income from investments
UK dividend income 3,997 2,111 6,108
3,997 2,111 6,108
Other operating income
Liquidity interest 55 - 55
4,052 - 4,052
Year ended 30 June 2023
Revenue Capital
return return Total
£'000 £'000 £'000
Income from investments
UK dividend income 3,782 - 3,782
3,782 - 3,782
Other operating income
Liquidity interest 78 - 78
3,860 - 3,860
3. Investment Manager’s base fee
Year ended 30 June 2024
Revenue Capital
return return Total
£'000 £'000 £'000
Base fee 1,270 - 1,270
1,270 - 1,270
Year ended 30 June 2023
Revenue Capital
return return Total
£'000 £'000 £'000
Base fee 1,228 - 1,228
1,228 - 1,228
A basic management fee was payable to the Investment Manager at an annual rate
of 0.75% of the NAV of the Company. The basic management fee accrues daily and
is payable quarterly in arrears. The Investment Manager is also entitled to a
performance fee, details of which are given in the Report of the Directors on
page 33 of the 2024 Annual Report.
4. Investment Manager’s performance fee
Year ended 30 June 2024
Revenue Capital
return return Total
£'000 £'000 £'000
Performance fee - 1,409 1,409
- 1,409 1,409
Year ended 30 June 2023
Revenue Capital
return return Total
£'000 £'000 £'000
Performance fee - - -
- - -
Details of the Performance fee calculation are noted in the Chairman’s
Statement on page 4 of the 2024Annual Report and in the Report of the
Directors on page 33 of the 2024 Annual Report.
5. Other expenses
Year ended 30 June 2024
Revenue Capital
return return Total
£'000 £'000 £'000
Secretarial services 181 - 181
Auditors’ remuneration for:
Audit services* 39 - 39
Directors’ remuneration 175 - 175
Other expenses 361 - 361
756 - 756
Year ended 30 June 2023
Revenue Capital
return return Total
£'000 £'000 £'000
Secretarial services 171 - 171
Auditors’ remuneration for:
Audit services* 65 - 65
Directors’ remuneration 161 - 161
Other expenses 406 - 406
803 - 803
All expenses include VAT where applicable, apart from audit services which is
shown net.
*No non-audit fees were incurred during the year
6. Taxation
Year ended 30 June 2024
Revenue Capital
return return Total
£'000 £'000 £'000
Corporation tax at 25.00% - - -
- - -
Year ended 30 June 2023
Revenue Capital
return return Total
£'000 £'000 £'000
Corporation tax at 20.50% - - -
- - -
As at 30 June 2024 the total current taxation charge in the Company’s
revenue account is lower than the standard rate of corporation tax in the UK.
7. Dividends
Under the requirements of Sections 1158/1159 of the Corporation Tax Act 2010
no more than 15% of total income may be retained by the Company. These
requirements are considered on the basis of dividends declared in respect of
the financial year as shown below.
30 June 30 June
2024 2023
£'000 £'000
Final dividend proposed of 3.50p (2023: 2.50p) per share 1,657 1,231
The following dividends were declared and paid by the Company in the financial
year:
30 June 30 June
2024 2023
£'000 £'000
Final dividend: 2.50p per share (2023: 2.00p) 1,231 1,061
Dividends have been solely paid out of the Revenue reserve.
8. Return per Ordinary share
Year ended 30 June 2024
Revenue Capital
return return Total
pence pence pence
Return per Ordinary share 4.15 50.84 54.99
4.15 50.84 54.99
Year ended 30 June 2023
Revenue Capital
return return Total
pence pence pence
Return per Ordinary share 3.53 20.44 23.97
3.53 20.44 23.97
Returns per Ordinary share are calculated based on 48,778,400 (30 June 2023:
51,853,838) being the weighted average number of Ordinary shares, excluding
shares held in treasury, in issue throughout the year.
9. Investments
30 June 2024 £’000
Investment portfolio summary
Quoted investments at fair value through profit or loss 182,364
182,364
30 June 2023 £’000
Investment portfolio summary
Quoted investments at fair value through profit or loss 169,274
169,274
Under IFRS 13, the Company is required to classify fair value measurements
using a fair value hierarchy that reflects the subjectivity of the inputs used
in measuring the fair value of each asset. The fair value hierarchy has the
following levels:
Investments whose values are based on quoted market prices in active markets
are classified within level 1 and include active quoted equities.
The definition of level 1 inputs refers to ‘active markets’, which is a
market in which transactions take place with sufficient frequency and volume
for pricing information to be provided on an ongoing basis. Due to the
liquidity levels of the markets in which the Company trades, whether
transactions take place with sufficient frequency and volume is a matter of
judgement, and depends on the specific facts and circumstances. The Investment
Manager has analysed trading volumes and frequency of the Company’s
portfolio and has determined these investments as level 1 of the hierarchy.
Financial instruments that trade in markets that are not considered to be
active but are valued based on quoted market prices, dealer quotations or
alternative pricing sources supported by observable inputs are classified
within level 2. As level 2 investments include positions that are not traded
in active markets and/or are subject to transfer restrictions, valuations may
be adjusted to reflect illiquidity and/or non-transferability, which are
generally based on available market information.
Level 3 instruments include private equity, as observable prices are not
available for these securities the Company has used valuation techniques to
derive the fair value. In respect of unquoted instruments, or where the market
for a financial instrument is not active, fair value is established by using
recognised valuation methodologies, in accordance with IPEV Valuation
Guidelines.
The level in the fair value hierarchy within which the fair value measurement
is categorised is determined on the basis of the lowest level input that is
significant to the fair value of the investment.
The following table analyses within the fair value hierarchy the Company’s
financial assets and liabilities (by class) measured at fair value at 30 June
2024.
Financial instruments at fair value through profit or loss
30 June 2024 Level 1 £’000 Level 2 £’000 Level 3 £’000 Total £’000
Equity investments 178,480 3,884 - 182,364
Liquidity funds - 1 - 1
Total 178,480 3,885 - 182,365
30 June 2023 Level 1 £’000 Level 2 £’000 Level 3 £’000 Total £’000
Equity investments 169,274 - - 169,274
Liquidity funds - 1 - 1
Total 169,274 1 - 169,275
There were no transfers between levels for the year ended 30 June 2024 (2023:
none).
Listed investments included in Level 2 are deemed to be illiquid. An
investment is categorised as illiquid when historic trading data indicates it
would take more than 250 days to liquidate. The fair value of these
investments has been determined by reference to their quoted prices at the
reporting date.
10. Nominal Share capital
Number £’000
Allotted, called up and fully paid Ordinary shares of 10p each:
Ordinary shares in circulation at 30 June 2023 63,529,206 6,353
Shares held in Treasury at 30 June 2023 (13,824,495) (1,382)
Ordinary shares in issue per Balance Sheet at 30 June 2023 49,704,711 4,971
Shares bought back during the year to be held in Treasury (1,839,261) (184)
Ordinary shares in issue per Balance Sheet at 30 June 2024 47,865,450 4,787
Shares held in Treasury at 30 June 2024 15,663,756 1,566
Ordinary shares in circulation at 30 June 2024 63,529,206 6,353
These are not statutory accounts in terms of Section 434 of the Companies Act
2006. Full audited accounts for the year to 30 June 2024 will be sent to
shareholders in October 2024 and will be available for inspection at 1
Finsbury Circus, London EC2M 7SH, the registered office of the Company. The
full annual report and accounts will be available on the Company’s website
www.strategicequitycapital.com
The audited accounts for the year ended 30 June 2024 will be lodged with the
Registrar of Companies.
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