REG-BACIT Limited: Annual Financial Report <Origin Href="QuoteRef">BACT.L</Origin> - Part 1
05/07/2016 07:05
BACIT LIMITED
YEARLY REPORT
The Company has today, in accordance with DTR 6.3.5, released its Annual
Financial Report for the year ended 31 March 2016. The Annual Financial
Report will shortly be available from the Company's website
www.bacitltd.com .
SUMMARY INFORMATION
Structure
BACIT Limited (the “Company”) is incorporated in Guernsey as a registered
closed-ended investment company. The Company’s Ordinary Shares were listed
on the premium segment of the London Stock Exchange (“LSE”) on 26 October
2012 when it commenced its business.
The Company has raised the following share capital:
£
Capital raised at launch of the Company 206,734,775
Net capital raised since launch of the Company to 31 March 2016* 204,376,781
Total capital raised by the Company (excluding share issue costs) 411,111,556
Shares in issue at 31 March 2016 Number of shares
Ordinary shares at launch of the Company 206,734,775
Ordinary shares since launch of the Company to 31 March 2016* 177,930,383
384,665,158
*During October 2013, the Company raised £200 million gross from the
issuance of C Shares. These shares were subsequently converted into the
Company’s Ordinary Shares effective 31 December 2013. Ordinary Shares
issued during the years 2015 and 2016 relate to the 2014 and 2015 scrip
dividends, respectively.
Financial Highlights
31.03.16 31.03.15
Total Net Assets (’000) £472,245 £479,064
Net Asset Value per Share £1.23 £1.25
Market Share Price £1.32 £1.21
Premium/(discount) to Net Asset Value 7.3% (3.2%)
Ongoing Charges
Ongoing Charges are calculated based on weighted average Net Asset Value
(“NAV”). The Ongoing Charges ratio of BACIT Limited and BACIT GP Limited
(together, the “Group” or “BACIT”) and BACIT Investments LP
Incorporated (the “Partnership”) for the year ended 31 March 2016 was
0.28% (31 March 2015: 0.21%) excluding charitable donations and 1.28% (31
March 2015: 1.28%) including charitable donations. Ongoing charges include the
fee paid to the Investment Manager but do not include any other net management
fees and performance fees, as there are no such fees payable by the Group and
the Partnership (other than those fees paid to CRT Pioneer Fund LP (“the
Pioneer Fund”)). Other operating costs are also charged by the underlying
funds. However these are immaterial and are therefore also excluded in the
calculation of Ongoing Charges.
CHAIRMAN’S STATEMENT
Dear Shareholder
For the year to 31 March 2016 BACIT’s Net Asset Value (“NAV”) total
return per share was
-0.2% (31 March 2015: 0.8%) and the share price total return was 8.5% (31
March 2015: 3.2%).
It was a difficult year for investors in most markets and the Company’s NAV
performance was relatively resilient. The Investment Manager’s report
explains our strategy and the main contributors to performance.
Since launch on 26 October 2012 the NAV total return has been 29.5%
(annualised return 7.9%) and the share price total return 31.5% (annualised
return 8.3%).
BACIT will pay a scrip dividend of 2.2 pence per share on 19 August 2016.
Shareholders will have the option to elect to receive this dividend in cash.
The Board will continue to operate a progressive dividend policy.
This year we are making charitable donations of £2.38 million (31 March
2015: £2.20 million) to The Institute of Cancer Research and £2.38 million
(31 March 2015: £2.20 million) to The BACIT Foundation for onward
distribution to the nominated charities. Including these donations since
launch we will have made charitable donations of more than £13.3 million.
In December 2014 shareholders approved a change in our investment policy to
allow BACIT to commit up to £20 million to the Pioneer Fund to meet our
commitment to invest up to 1% of our NAV each year into cancer research.
It is pleasing to report that the Pioneer Fund has had a very good year in
terms of research results and valuation uplifts as described in the Report of
the Investment Manager and note 21.
In December 2015 shareholders approved a change in our management
arrangements which puts our manager, BACIT (UK) Limited (“the Investment
Manager”) on a more sustainable basis for the long term as described in note
15.
There were three changes to the Board this year. Jon Moulton and Martin
Thomas retired and Arabella Cecil joined. Jon and Martin have made huge
contributions to getting BACIT to where it is today for which we are very
grateful. Martin is continuing as Chairman of the Investment Manager. Arabella
is Chief Investment Officer of the Investment Manager and has played a vital
role in the investment success we have achieved to date.
Since our year end markets have remained unsettled, not least by the UK
referendum on exit from the European Union. We remain optimistic for the
performance for our portfolio and grateful to our managers for giving us
fee-free access to their funds.
Jeremy Tigue
4 July 2016
REPORT OF BACIT (UK) LIMITED
12m ITD*
BACIT Total NAV Return -0.2% 29.5%
BACIT Share Price +8.5% 31.5%
MSCI World TR ($) -3.5% 35.5%
FT All Share TR (£) -3.9% 26.3%
Fund of Funds Index ($) -7.2% 10.5%
* ITD=Inception to date
BACIT started the financial year with 95.2% of NAV invested and ended it
97.4% invested across 33 underlying funds and 24 managers. On average the
portfolio was 95.9% invested during the year. The 33 funds include an
investment in the Pioneer Fund, an oncology-related investment, as part of a
£20 million commitment to funding that entity. This is held through BACIT
Discovery and referred to as such in the annual report.
BACIT broadly contained capital losses well during a period which saw
considerable volatility in markets, leaving some major indices far short of
where they started. Against a backdrop in which the Eurostoxx 600 index
ended down 15.0% and the CRB total return Commodity Index fell 19.4%,
seventeen of the thirty-three funds made money. BACIT has thus delivered
annualised returns of 7.9% since inception versus its targeted return of 10%
to 15% (BACIT Limited prospectus dated 1 October 2012).
As we describe in greater detail below, the Pioneer Fund has made excellent
progress with its first drugs approaching Phase 1 clinical trials.
In pursuit of growth, with stability in down markets
As long-standing investors are aware, BACIT’s asset allocation is driven by
the opportunities which present themselves, rather than a pre-determined set
of weightings or any economic or financial market metrics. The portfolio
continues to have exposure to areas as diverse as long-short commodities,
interest rates, foreign exchange, private equity, and infrastructure
investing. Each of these has its own idiosyncratic drivers which should allow
it to perform on a trajectory uncorrelated to equity markets, as the results
for this year show.
The proportion of NAV allocated to managers running hedged strategies was
stable at 60.6%, from 61.4% twelve months earlier, while within the long
biased managers the proportion allocated to unlisted assets more than doubled
during the year (from 3.0% to 7.7%). As the quantum of uncalled capital on
private equity investments (£43 million, compared with £46 million at 31
March 2015) suggests, this proportion of NAV may increase. As a consequence of
these holdings in particular, during the ten worst months for the FTSE All
Share Total Return Index since BACIT’s inception, BACIT has shown a relative
outperformance of 26.2% against that index’s cumulative loss of 34.2% during
these months.
At 31 March 2016, 50.6% of NAV (31 March 2015: 52.3%) was invested into US
Dollar share classes, 25.8% of NAV being hedged back into Sterling (31 March
2015: 0.0%), and 14.1% was invested into Euro denominated share classes which
is entirely hedged back into Sterling. 0.8% of the portfolio was invested in
an unhedged Swedish Krona share class. All other currency exposures, including
Yen, are held through hedged US Dollar or Sterling classes.
BACIT is inherently exposed to currencies within the investee funds’
portfolios. In addition, BACIT has been long the US Dollar since launch as
BACIT did not hedge out US Dollar exposure acquired by investing in US Dollar
denominated share classes. As long-standing investors will also remember, the
typically inverse relationship of the US Dollar to risk assets in times of
market stress was expected to have the secondary effect of dampening the
volatility of BACIT’s NAV.
By late February, the decision was taken to protect returns from a violent
swing back to BACIT’s entry point (~$1.60), which would have negatively
impacted BACIT’s returns and the volatility of those returns, and to lock in
some of the gains for BACIT. We therefore hedged half of the US Dollar
exposure at $1.394.
Significant, if capped, exposure to Equity Markets
In order to estimate BACIT’s exposure to equity markets we aggregate the
underlying funds’ positions and convert them into units which we term
‘equity equivalents’. On a look-through basis BACIT ended the year
approximately 48% net long in equity equivalents, in the middle of the 37-57%
range since inception. The portfolio remains predominantly invested into funds
whose focus is listed equities: 55.7% vs 53.9% twelve months ago. We wrote
then of the growing recognition that a negative side-effect of the regulations
introduced since the Crisis has been to drain liquidity from the fixed income
markets. We are now hearing the same refrain from our equity managers.
We have made some redemptions in part to meet capital calls but, as
anticipated, manager turnover remains low and BACIT continues to hold 16 of
the 22 funds it invested in at inception. The portfolio’s fixed income and
credit exposure remains modest. During the financial year we switched one
holding to a second mandate run by the same commodity manager, and added four
new funds to the portfolio: a UK focussed fund with 40% exposure to unlisted,
early-stage, growth companies; a long-short Emerging Markets fund; a European
long-short equity manager and a venture capital fund, meeting one capital call
from the latter.
BACIT met two capital calls from Infracapital II during the course of the
year and ended the year with 37.0% of BACIT’s £25 million commitment drawn
and the fund 70% committed. Infracapital II now owns five assets across water,
metering, and energy across Northern Europe, and expects to diversify into
communications and transport with the balance of the fund. BACIT also met four
capital calls during the year from Permira V, which had drawn 66.3% of
BACIT’s €20 million capital commitment at 31 March 2016, now holding 15
investments, and the fund is 72% committed.
As we have advised in previous Management Reports, given BACIT’s ability to
raise cash at relatively short notice from its existing holdings, BACIT does
not match cash liquidity to outstanding commitments regarding private equity
investments. At the year end this was the case for the Partnership, with
£43.0 million of undrawn commitments and £12.4 million of cash at bank.
As the Chairman has noted BACIT has committed £20 million to the Pioneer
Fund, which has now in turn invested £17 million of the total £70 million
fund into seven investments. The Pioneer Fund is in late stage due diligence
on two additional drug candidates, thus well on the way to its target
portfolio of fifteen investments over the life of the fund. The manager has
contributed a brief commentary which is printed below.
This year the ground work put in since the CRT Pioneer Fund (“Pioneer
Fund”) was raised in March 2012 has started to bear real fruit with
scientific progress being made across the pipeline. At the year end the
portfolio of investments had grown to seven, with two more approved for
investment. Strong deal flow exists and a number of other prospective
investments have been identified and are being actively pursued for the coming
year. All of these projects represent exciting approaches to develop new
cancer therapies and emanate from world class academic institutions.
The Pioneer Fund’s first two investments (CHK1 – clinical trial
initiation and MPS1 – preclinical candidate nomination) each moved through
significant scientific and value creation milestones, whilst a third is due to
enter a Phase II clinical trial in the next quarter. In aggregate, this
positive technical progress has led to a significant write up in the fair
value of the pipeline at the year end.
Dr Robert James, Sixth Element Capital, manager of the CRT Pioneer Fund
A description of the portfolio by category follows.
Consolidated Portfolio Statement: Category Descriptions
Equity Funds (20.9% from 22.1% at 31 March 2015)
Japanese and UK equities account for the bulk of these investments, and the
Japanese investments are held in hedged sterling- and US Dollar-denominated
share classes. The balance is invested in Russian equities, hedged into US
Dollars. Global equity markets were challenged during the year, with the UK
market down mid-single digits and the Japanese market down double digits. The
Russian market fared better on the back of a recovering oil price and closed
just up. Both Russian funds and one Japanese fund significantly outperformed
their benchmarks with the other funds broadly in line with theirs.
Equity Hedge Funds (34.8% from 31.8%)
The managers in this allocation are geographically focussed – predominantly
on the UK and Continental Europe, South and sub-Saharan Africa, and the US –
and sector-biased, on mining. The Eurostoxx 600 fell 15% during the period,
while gold miners saw a strong recovery, and African stocks ended flat after
considerable volatility. Both merger arbitrage managers made strong returns,
and as a group the managers protected capital, notwithstanding the difficult
emerging markets environment.
Commodity Funds (5.7% from 4.5%)
Through this allocation BACIT is exposed to globally-traded agricultural
commodities; emissions; European, Australasian and North American electricity
prices; oil, natural gas, and coal. The volatility of commodity asset prices
means that these funds’ risk management is critical. Trades are principally
expressed through futures and other derivatives to create asymmetric
risk-reward profiles. The managers’ performances to date have been
uncorrelated with one another and with commodity and equity markets, and they
contributed meaningfully to NAV during the financial year.
Fixed Income and Credit Funds (16.1% from 16.6%)
There are seven funds in this category: an inflation-linked investment (3.4%
of NAV); two of the holdings (5.0%) invest in the US and Europe through
securitised mortgages. Notwithstanding the fact that these are backed by real
cashflows, this was a difficult market environment and they lost money during
the period. Two of the funds (5.5%) employ credit arbitrage and unlike the
other funds in this category, leverage in doing so, achieving mixed results.
Two funds mainly invested in private credit opportunities (2.2%), which should
be uncorrelated to the wider credit markets if the fundamental credit analysis
is sound. This proved to be the case during the period, when spreads widened
significantly but these funds made helpful returns. They will continue to
return capital to investors over the next two years.
Global Macro Funds (12.4% from 16.8%)
The three funds in this category pursue global macro strategies which are
differentiated from each other in terms of geographic focus and instruments
engaged. BACIT invests in this area to exploit the likely market volatility as
Quantitative Easing matures in the Developed Markets and Central Banks look to
exit. Two of the funds contributed helpfully to NAV, and as a group they held
their own.
Other Strategies (7.7% from 3.0%)
This group includes the Pioneer Fund holding and three funds which make
private investments into unlisted entities, and which are thus less likely to
be market sensitive in terms of pricing. Of these, Infracapital is already
starting to show significant gains from its investments.
Since the Financial Year End
Since BACIT’S financial year end on 31 March, market participants have
increasingly accepted that low rates are deflationary, with the market
grasping at the oil price as an indicator of inflation, future rates and
growth. The markets’ gyrations around the UK referendum underline just how
interconnected asset prices remain and at the date of this report it is too
early to assess the impact on the portfolio. Monetary policy continues to
drive markets, but the transmission mechanism connecting the real world
economy appears to be broken, so that now the words of a Central Banker carry
more weight than a jobs report. The risk of Central Banks losing credibility
is one our macro managers, particularly, are addressing.
We have added one fund to the portfolio since the financial year end,
Chenavari Deleveraging Opportunities, which invests in private credit
transactions in Europe.
Following the year end, three significant announcements were made regarding
the Pioneer Fund, held through BACIT Discovery, which have contributed to the
uplift in valuation of that holding. The drug known as CHK1 entered Phase 1
clinical trials. Tefinostat is also now ready to enter Phase 2 clinical
trials.
As the Chairman has described, donations totalling £4.75 million will
become available to the charities on BACIT’s roster. Half of this sum will
go directly to The Institute of Cancer Research (“the ICR”) and the
destination of the remainder will be for holders of shares at the dividend
record date to determine across the existing roster of 18 charities, which
was expanded during the year to include Cure Leukaemia and Supporting Wounded
Veterans. Any unallocated monies will be split equally between the selected
charities.
Thanks
BACIT held its own against the challenging backdrop of its third full
financial year, for which we are, as ever, thankful to the managers without
whose generosity and kindness BACIT would not exist. We continue to welcome
the approach of managers with a track record of delivering attractive returns.
Finally, thanks are due to the investors for the support they have given
BACIT to date, and the trust they have placed in us to meet the dual ambitions
of delivering absolute returns, and an annuity-like income stream which may
play a growing role in defeating cancer. We look forward to updating this
report later in the year.
BACIT (UK) Limited
4 July 2016
DIRECTORS’ REPORT
The Directors present their Annual Report and Audited Consolidated Financial
Statements for the year ended 31 March 2016 which have been properly prepared
in accordance with The Companies (Guernsey) Law, 2008.
The Directors of the Group, all of whom are non-executive, are listed below:
Jeremy Tigue (Chairman), aged 56, has more than 30 years’ investment
experience. He joined F&C Management in 1981 and was the fund manager of
Foreign & Colonial Investment Trust Plc from 1997 to 2014. He was a Director
of the Association of Investment Companies from 2003 to 2013 and was Chairman
of the Institutional Shareholder Committee from 2006 to 2008. He is a Director
of ICG Enterprise Trust PLC and The Mercantile Investment Trust plc, The Monks
Investment Trust PLC and Standard Life Equity Income Trust PLC. Mr Tigue is a
resident of the UK.
Arabella Cecil , aged 48, started working in financial services in 1987, for
Finbancaria (corporate finance, Milan), and later Banque Hottinguer (Paris),
and Credit Lyonnais Laing (London) where she was head of food manufacturing
research. Between 1998 and 2008 she owned and ran Gravity Pictures, which
specialised in filmmaking in the IMAX® format. Most recently she was an
investment manager and a member of the investment and risk committees of
Culross Global Management. She is also the CIO of the Investment Manager and a
Trustee of The BACIT Foundation. Ms Cecil is a resident of Sweden.
Peter Hames , aged 54, is a non-executive director of Polar Capital
Technology Trust PLC and MMIP Investment Management Limited. He is an
independent member of The Operating Committee of Genesis Asset Managers LLP as
well as serving on a number of Genesis fund boards. Mr Hames started his
investment career working for The Iveagh Trustees Limited, a family office
which handled the financial affairs of various members of the Guinness family.
In 1990 he joined Aberdeen Asset Management PLC and, in 1992, he relocated to
Singapore where he co-founded Aberdeen Asset Management Asia Limited. As
Director of Asian Equities he oversaw regional fund management teams
responsible for running a number of top-rated and award winning funds. He also
played an important role in the development of Aberdeen’s Global Emerging
Market products. He left Aberdeen in 2010. Mr Hames is a resident of Guernsey.
Thomas Henderson , aged 50, has over 25 years’ experience working in the
financial markets, investing in the UK, Continental Europe, Russia and the
United States. He is the founder and investment manager of New Generation
Haldane Fund Management Limited (previously Eden Capital). Previously, Mr
Henderson was a portfolio manager for Moore Capital and prior to that worked
with Cazenove & Co. in London and New York. He is also a Director of the
Investment Manager and Trustee of The BACIT Foundation. Mr Henderson is a
resident of the UK.
Colin Maltby , aged 65, is a Director of Abingworth BioEquities Fund Limited,
Ocean Wilsons Holdings Limited and BH Macro Limited and a member of the
Supervisory Board of BBGI SICAV SA. He was Head of Investments at BP from
August 2000 to June 2007 and was previously Chief Investment Officer of
Equitas Limited from its formation in 1996. His career in investment
management began in 1975 with NM Rothschild & Sons and included 15 years with
the Kleinwort Benson Group, of which he was a Group Chief Executive at the
time of its acquisition by Dresdner Bank AG in 1995. He was Chief Executive of
Kleinwort Benson Investment Management from 1988 to 1995. Mr Maltby is a
Fellow of Wolfson College, Oxford, a Fellow of the Royal Society of Arts, and
a member of the Institut National Genevois. Mr Maltby has served as a
non-executive Director of various public companies and agencies, and as an
advisor to numerous institutional investors, including pension funds and
insurance companies, and to private equity and venture capital funds in both
Europe and the United States. He is currently an Investment Advisor to Wolfson
College, Oxford. Mr Maltby is a resident of Switzerland.
Nicholas Moss , aged 56, is a founding member and executive director of the
Virtus Trust Group, a Guernsey and US based international fiduciary, corporate
services and investment consulting business. He has extensive experience in
the structuring and administering of complex onshore and offshore structures
for corporates and ultra-high net worth families as well as being specifically
involved in the selection of investment managers and funds for his clients and
their subsequent evaluation and ongoing monitoring. Previously he spent 16
years at Rothschild where latterly he was a managing director within that
group’s trust division. He holds a number of non-executive Board
appointments including the London-listed BH Global Limited and Carador Income
Fund PLC. He is a Fellow of the Institute of Chartered Accountants in England
and Wales and a resident of Guernsey.
The following summarises the Directors’ directorships in other public
companies:
Company Name Stock Exchange
Jeremy Tigue
ICG Enterprise Trust PLC London
The Mercantile Investment Trust Plc London
The Monks Investment Trust PLC London
Standard Life Equity Income Trust PLC London
Arabella Cecil
None
Peter Hames
Genesis Emerging Markets Investment Company SICAV Luxembourg
Genesis Smaller Companies SICAV Luxembourg
Polar Capital Technology Trust PLC London
The Smaller Companies Portfolio of the Genesis Emerging Markets Opportunities Fund Limited Ireland
Thomas Henderson
None
Colin Maltby
BBGI SICAV SA BH Macro Limited London London, Bermuda and Dubai
Ocean Wilsons Holdings Limited London and Bermuda
Nicholas Moss
BH Global Limited London, Bermuda and Dubai
Carador Income Fund PLC London
This does not include Channel Island Securities Exchange listed companies.
Principal Activity
The Company makes its investments through BACIT Investments LP Incorporated
(the “Partnership”), in which the Company is the sole limited partner. The
general partner of the Partnership is BACIT GP Limited (the “General
Partner”), a wholly-owned subsidiary of the Company. It also invests in
BACIT Discovery Limited (incorporated 8 November 2013) a wholly-owned
subsidiary of the Partnership. BACIT Limited and BACIT GP Limited are
collectively referred to as the “Group”.
Share Buyback Facility
The Company has the authority, subject to various terms as set out in its
Articles and in accordance with The Companies (Guernsey) Law, 2008, to acquire
up to 14.99% of the Shares in issue. The Company intends to renew this
authority annually. The Directors have no current intention to utilise this
authority.
Investment Objective and Policy
The Group’s investment objective is to deliver superior returns from
investments in leading long-only and alternative investment funds across
multiple asset classes and targets an annualised return per Share in the range
of 10% to 15% per annum on the issue price of the Shares. Investments, except
in CRT Pioneer Fund LP (the “Pioneer Fund”), will only be made in cases
where the relevant investment manager provides investment capacity on a
‘‘gross return’’ basis, meaning that the Group does not bear the
impact of management or performance fees on the relevant investment. This is
achieved by the relevant manager or fund agreeing with the Group not to charge
management or performance fees, by rebating or donating back to the Group any
management or performance fees charged or otherwise arranging for the Group to
be compensated so as effectively to increase its investment return on the
relevant investment by the amount of any such fees.
The Group intends to achieve the investment objective primarily through
investments in long-only funds, hedge funds, private equity funds and real
estate funds. The Group is permitted to borrow and invest in long and short
positions in quoted and unquoted equities, fixed income securities, options,
warrants, futures, commodities, currency forwards, over the counter derivative
instruments (such as swaps), securities that lack active public markets,
private securities, repurchase agreements, preferred stocks, convertible bonds
and other financial instruments or real estate as well as cash and cash
equivalents. The Group may invest on a global basis.
The Group makes a Charitable Donation, in arrears, of one-twelfth of 1% of
the total NAV of the Company as at each month-end during the year to
charities. Half is donated to The Institute of Cancer Research (“the ICR”)
and half donated to The BACIT Foundation for onward distribution among other
charities in proportions which are determined each year by the Shareholders.
Please refer to note 7 for further details.
In addition to the Charitable Donation, the Group intends to invest up to 1%
of NAV each year to acquire interests in drug development and medical
innovation projects undertaken by the ICR or its subsidiaries which have the
potential for ICR Projects. To the extent that less than 1% of NAV is
allocated to ICR Projects in any given year, the amount available for
investment in such projects as and when appropriate opportunities become
available in subsequent years may be increased by such a proportion.
The Group has entered into a framework agreement with the ICR effective 1
October 2012, not to knowingly make any investment (directly or indirectly)
which contravenes the tobacco restriction contained in the investment policy
of the ICR and not to promote any relationship with any other cancer charity
other than the ICR, except to the extent relevant to The BACIT Foundation.
Following an Extraordinary General Meeting held on 15 December 2014,
shareholders approved a change in investment policy to include the following:
The Group has invested in the Pioneer Fund as if it were an ICR Project, save
that the Group can make up to a maximum capital commitment of £20 million,
notwithstanding that the Group is required to bear management and performance
fees, in the form of a general partner’s share and carried interest, in
respect of its investment.
The amount that the Group may contribute to drawdowns of the Pioneer Fund in
any one calendar year will not be subject to the one per cent. of NAV cap
otherwise applicable to investments in ICR Projects.
Full details were set out in the Circular dated 25 November 2014 which is
available on the Company’s website.
Principal Risks and Uncertainties
The Board is responsible for the Company’s system of internal controls and
for reviewing its effectiveness. The Board is satisfied that by using the
Company’s risk matrix in establishing the Company’s system of internal
controls while monitoring the Company’s investment objective and policy that
the Board has carried out a robust assessment of the principal risks and
uncertainties facing the Company. The principal risks and uncertainties which
have been identified and the steps which are taken by the Board to mitigate
them are as follows:
• Investment Risks: The Group is exposed to the risk that its
portfolio fails to perform in line with the Group’s objectives if it is
inappropriately invested or markets move adversely. The Board reviews reports
from the Investment Manager at each quarterly Board meeting, paying particular
attention to the constitution of the portfolio and to the performance and
volatility of underlying investments;
• Operational Risks: The Group is exposed to the risks arising from
any failure of systems and controls in the operations of the Investment
Manager or its service providers. The Board receives reports quarterly from
the Administrator and Investment Manager on their internal controls and is
able to challenge valuations provided by both these parties;
• Legal and Regulatory Risks: The Group is exposed to risk if it
fails to comply with the regulations of the UK Listing Authority or if it
fails to maintain accurate accounting records. The Administrator provides the
Board with regular reports on changes in regulations; and
• Financial Risks: The financial risks, including market, credit
and liquidity risk, faced by the Group, where appropriate, are set out in note
18. These risks and the controls in place to mitigate them are reviewed at
each quarterly Board meeting. The risks in this note do not solely reflect the
risks of the underlying investment portfolios of the financial assets at fair
value through profit or loss (“investment entities”) in the Group’s
Consolidated Statement of Financial Position. The Group has very significant
indirect exposure to a number of risks through the underlying portfolios of
the investment entities however this is the intention of the Group in order to
seek to achieve capital gains. There is no sensible mechanism to “control”
these risks without considerably prejudicing return objectives. Due to the
lack of transparency in many of the underlying assets it is not possible to
quantify or hedge the impact of these risks on the portfolio as each
investment entity may have complex and changing risk dynamics that are not
easily observable or predictable. These risks will include extensive interest,
foreign exchange and other market risks which are magnified by significant
gearing in many cases, resulting in increased liquidity and return risk.
The Board seeks to mitigate and manage these risks through continual review,
policy-setting and enforcement of contractual obligations and will update the
risk assessment matrix to reflect any changes to the control environment.
Viability Statement
In accordance with provision C2.2 of the UK Corporate Governance Code, the
directors have assessed the prospects of the Company, considering its ability
to continue in operation and meet its liabilities as they fall due over the
period to 31 March 2019.
In considering the three year period selected, the Directors have considered
the strategy period of the Company, the uncertainty of the investment world,
the environment in which the Company operates, its liabilities, the
performance of the underlying investments and the risks associated with the
Company.
The Company is required to put a discontinuation vote to shareholders every
five years, the first one occurring in 2017. In current circumstances the
Directors do not expect that this vote will be carried, and therefore they
have considered the ability of the Company to continue in operation past this
period.
In considering the viability of the Company over the three year period, the
Directors have assessed the principal risks and the procedures adopted to
mitigate those risks. These are more fully described above.
The Company’s investment performance depends upon the performance of the
underlying funds, as selected and monitored by BACIT (UK) Limited (the
“Investment Manager”). The Directors, in assessing the viability of the
Company, paid particular attention to the risks facing the Investment Manager.
The Investment Manager operates a risk management framework which is intended
to identify, measure, monitor, report and where appropriate, mitigate key
risks identified by it in respect of the Company’s investments.
The Company’s assets exceed its liabilities by a considerable margin where
total assets and total liabilities amounted to £477,130,000 and £4,885,000,
respectively. Further, the majority of the Company’s most significant
liabilities, being the charitable donation, fees owing to the Investment
Manager and to the Company’s administrator, fluctuate by reference to the
Company’s investment performance and NAV.
The continuation of the Company in its present form is dependent on the
Investment Management Agreement with the Investment Manager remaining in
place. The Directors note that the Investment Management Agreement with the
Investment Manager is terminable on 180 days’ notice by either party. The
Directors know of no current reason why either the Company or the Investment
Manager might serve notice of termination of the Investment Management
Agreement during the three year period covered by this viability statement. To
ensure that the Company maintains a constructive and informed relationship
with the Investment Manager, the Directors meet regularly with the Investment
Manager to review the investment portfolio’s performance and, through the
quarterly board meetings, they review the nature of the Company’s
relationship with the Investment Manager.
Going Concern
The Company has been established with an indefinite life. However, the
Company’s Articles provide that Shareholders will be entitled to vote on the
discontinuation of the Company every five years, starting with the Annual
General Meeting in 2017. The vote will require more than 50% of the votes cast
on the resolution to be in favour to require the Directors to formulate
proposals, to be put to Shareholders within six months of such resolution
being passed, for the reorganisation or reconstruction of the Company. These
proposals may or may not involve winding up the Company or liquidating all or
part of the Company’s then existing portfolio and there can be no assurance
that a discontinuation vote will necessarily result in the winding up of the
Company or liquidation of all or some of its investments. A special resolution
of the Shareholders with 75% or more of the votes cast being in favour of the
resolution is required to wind up the Company.
The Group’s assets currently consist mainly of securities amounting to
£460,418,000 (31 March 2015: £456,267,000) of which 32.0% are readily
realisable in three months and the Group has limited liabilities, amounting to
£4,885,000 (31 March 2015: £4,548,000). Accordingly, the Group has adequate
financial resources to continue in operational existence for 12 months
following the approval of the financial statements. Hence the Directors
believe that it is appropriate to continue to adopt the going concern basis in
preparing the Consolidated Financial Statements.
Results and dividends
The results for the year are set out in the Consolidated Statement of
Comprehensive Income. During the year ended 31 March 2016, the Company
declared a dividend of £8,040,000 (31 March 2015: £7,620,000) relating to
the year ended 31 March 2015 (31 March 2014). The dividend was comprised of
£5,819,000 (31 March 2015: £5,464,000) cash and a scrip dividend of
£2,221,000 (31 March 2015: £2,156,000). Refer to note 3 of the Consolidated
Financial Statements for further details.
Investment Manager
The investment portfolio is managed by BACIT (UK) Limited (the “Investment
Manager”), which is regulated by the Financial Conduct Authority.
Following the Extraordinary General Meeting held on 11 December 2015,
Shareholders approved a change in expense arrangements of the Group and with
effect from 1 January 2016, the amended Expenses Deed Agreement (the
“Deed”) entered into between the Company, the General Partner and Farla
Limited, a company controlled by Thomas Henderson, was terminated.
Prior to 1 January 2016, Farla Limited provided office space and equipment
for, and either paid directly or reimbursed the Group in respect of
out-of-pocket expenses of, the team managing the investment portfolio.
With effect from 1 January 2016, the operating expenses of the Investment
Manager, including those previously covered by the Deed, are covered by the
Management Expense Contribution, payable by the Company to the Investment
Manager equal to 0.19% of NAV per annum, payable in monthly instalments by
reference to the most recent month-end NAV. The Group also directly bear
certain other expenses of the Investment Manager up to an amount equal to two
per cent. of the NAV of the prior year end. The effect of these new
arrangements on Ongoing Charges will be higher in future financial years
because the arrangements have only been in operation for three months of the
year ended 31 March 2016.
Full details were set out in the Circular dated 24 November 2015 which is
available on the Company’s website.
Corporate Governance
To comply with the UK Listing Regime, the Company must comply with the
requirements of the UK Corporate Governance Code (September 2014) (the “UK
Code”) issued by the Financial Reporting Council or explain any departures
therefrom. The Company is also required to comply with the Code of Corporate
Governance issued by the Guernsey Financial Services Commission (the “GFSC
Code”).
The Board considers that reporting against the principles and recommendations
of the UK Code provides appropriate information to Shareholders. Companies
reporting against the UK Code are deemed to comply with the GFSC Code.
The Company has complied with the relevant provisions of the UK Code, except
for the following:
The UK Corporate Governance Code includes provisions relating to:
• the role of the chief executive;
• executive directors’ remuneration;
• the need for an internal audit function;
• whistle-blowing policy; and
• Remuneration Committee.
For the reasons set out in the UK Code, the Board considers these provisions
are not relevant to the position of the Company as being an externally managed
investment company. The Company has therefore not reported further in respect
of these provisions. The Directors are all non-executive and the Company does
not have employees, hence no whistle-blowing policy is required.
The key service providers all have whistle-blowing policies in place. The
Board is satisfied that any issues can be properly considered by the Board.
Due to the Company’s premium listing on the LSE, the Company is required to
disclose its Environmental Policy. Being an investment company, the Company
has no direct social, environmental or human rights responsibilities; its
policy is focussed on ensuring its portfolio is properly managed and invested.
The Company seeks to express its social concerns principally through its
charitable donations and its support to cancer research.
Details of compliance are noted below. There have been no other instances of
non-compliance.
Composition and Independence of the Board
The Board currently consists of six non-executive Directors, four of whom are
independent. Under the UK Code, Mr Henderson is not considered to be
independent by reason of his significant shareholding and his role within the
Investment Manager. Ms Cecil is also not considered to be independent by
reason of her role within the Investment Manager.
On 9 September 2015, Jonathan Moulton resigned as a director and after due
consideration by the Board Arabella Cecil was appointed on that date. Nicholas
Moss became Chairman of the Audit Committee with effect from 9 September
2015.
On 18 March 2016, Martin Thomas resigned as a director.
The Chairman of the Board is Mr Jeremy Tigue. Biographies for all the
Directors can be found in the Directors’ Report. In considering the
independence of the Chairman, the Board has taken note of the provisions of
the UK Code relating to independence and has determined that Mr Tigue is an
Independent Director. Mr Colin Maltby has been appointed as Senior Independent
Director.
The Board is responsible for the appointment and monitoring of all service
providers to the Group.
The Board holds quarterly Board meetings while the Audit Committee and
Nomination Committee meet at least three times a year and once a year,
respectively. In addition, there are a number of ad-hoc meetings of the Board
to review specific items between the regular scheduled quarterly meetings.
Attendance at the Board, Audit and Nomination Committee meetings during the
year was as follows:
Scheduled
Quarterly Audit Nomination
Board Committee Committee
Number of Meetings Held Meetings Meetings Meetings
4 3 2
Jeremy Tigue (Chairman) 4 1** 2
Arabella Cecil* 3* 1** Not a member
Peter Hames 4 1*** 2
Thomas Henderson 4 1** 2
Colin Maltby 4 3 2
Nicholas Moss 4 3 Not a member
Jonathan Moulton**** 2 1 Not a member
Martin Thomas**** 4 3** Not a member
* Appointed to the Board on 9 September 2015
** In attendance
*** Appointed to the Audit Committee on 23 November 2015
**** Jonathan Moulton resigned on 9 September 2015 and Martin Thomas
resigned on 18 March 2016
At the Board meetings the Directors review the management of the Group’s
assets and all other significant matters so as to ensure that the Directors
maintain overall control and supervision of the Group’s affairs.
At each annual general meeting of the Company, all the Directors at the date
of the notice convening the annual general meeting shall retire from office
and each Director may offer himself for election or re-election by the
Shareholders. In accordance with the Articles, no person shall be or become
incapable of being appointed a Director, and no Director shall be required to
vacate that office, by reason only of the fact that such Director has attained
the age of 70 years or any other age.
The Board, Audit Committee and Nomination Committee undertake an evaluation
of their own performance and that of individual Directors on an annual basis.
This includes a formal process of self-appraisal together with the Chairman
reviewing each member’s performance, contribution and commitment to the
Group. The Group’s Nomination Committee has considered the Davies Report and
its implications to the Group. The Chairman also has responsibility for
assessing the individual Board members’ training requirements.
The Board needs to ensure that the Annual Report, taken as a whole, is fair,
balanced and understandable and provides the information necessary for
Shareholders to assess the Company’s performance, business model and
strategy. In achieving this, the Directors have set out the Company’s
investment objective and policy and have explained how the Board and its
delegated Committees operate and how the Directors review the risk environment
within which the Company operates and set appropriate risk controls.
Furthermore, throughout the Annual Report the Board has sought to provide
further information to enable Shareholders to have a fair, balanced and
understandable view.
Directors’ and Other Interests
As at 31 March 2016, Directors of the Company held the following Ordinary
Shares beneficially:
Number of shares 31.03.16 Number of shares 31.03.15
Jeremy Tigue (Chairman) 348,871 343,039
Arabella Cecil* 387,282 380,801
Peter Hames 69,773 68,607
Thomas Henderson** 11,742,400 16,742,000
Colin Maltby 69,773 68,607
Nicholas Moss 15,000 nil
*108,187 Shares are held by Gravity Partners Limited, a company controlled by
Arabella Cecil.
**Shares are held by Farla Limited, a company controlled by Thomas Henderson.
Committees of the Board
Audit Committee
The Group’s Audit Committee conducts formal meetings at least three times a
year. Full details of its structure, duties and assessments during the year
are presented in the Report of the Audit Committee.
Nomination Committee
The Company has established a Nomination Committee with the primary purpose
of filling vacancies on the Board. The Nomination Committee reviews the Board
structure, size and composition, to make recommendations to the Board
concerning any matters relating to the continuation in office of any Director
at any time, including the suspension or termination of service of that
Director, and to make a statement in the annual report about its activities.
The Nomination Committee chairman reports formally to the Board on its
proceedings after each meeting on all matters within its duties and
responsibilities and reviews its own performance at least once a year, reviews
composition and terms of reference and recommends any changes it considers
necessary to the Board for approval. The Nomination Committee meets at least
once a year and otherwise as required. The Nomination Committee is appointed
by the Board and is made up of at least three members. The Nomination
Committee is chaired by Colin Maltby and its members are Peter Hames, Thomas
Henderson and Jeremy Tigue.
Management Committee
The Board has not deemed it necessary to appoint a management committee as a
result of being comprised wholly of non-executive Directors. The Board is
responsible for the review of the performance of the Investment Manager in
relation to the performance of the investment portfolio.
Remuneration Committee
As all the Directors are non-executive, the Board has resolved that it is not
appropriate to form a remuneration committee. Directors’ remuneration is
considered on an annual basis. The Board’s collective fees shall not exceed
£500,000 in any financial year. The Board may grant reasonable additional
remuneration to any Director who performs any special or extra services to, or
at the request of, the Group. Further, the Directors shall be paid all
reasonable travelling, hotel and other expenses properly incurred by them in
and about the performance of their duties. Directors’ and Officers’
liability insurance cover is maintained by the Group on behalf of the
Directors. Refer to the Directors’ Remuneration Report for details of fees
paid to the Directors during the year.
Internal Controls
The Board is ultimately responsible for establishing and maintaining the
Company’s system of internal control and for maintaining and reviewing its
effectiveness. To achieve this, a process has been established which seeks to:
• Review the risks faced by the Company and the controls in place
to address those risks;
• Identify and report changes in the risk environment;
• Identify and report changes in the operational controls;
• Identify and report on the effectiveness of controls and errors
arising; and
• Ensure no override of controls by its service providers, the
Investment Manager or the Administrator.
The Company’s risk matrix continues to be used as the basis for analysing
the Company’s system of internal control. The risk matrix is prepared and
maintained by the Audit Committee which initially identifies the risks facing
the Company and then collectively assesses the likelihood of each risk, the
impact of those risks and the strength of the controls operating over each
risk. The Company’s system of internal control is designed to manage rather
than to eliminate the risk of failure to achieve business objectives and by
its nature can only provide reasonable and not absolute assurance against
misstatement and loss.
These controls aim to ensure that assets of the Company are safeguarded,
proper accounting records are maintained and the financial information for
publication is reliable. The Board confirms that there is an ongoing process
for identifying, evaluating and managing the significant risks faced by the
Company.
The UK Code requires the Board to conduct at least annually a review of the
Company’s system of internal control, covering all controls, including
financial, operational, compliance and risk management. The Board has
evaluated the systems of internal controls of the Company. In particular, it
has prepared a process for identifying and evaluating the significant risks
affecting the Company and the policies by which these risks are managed.
The Board has delegated the management of the Company, the administration,
corporate secretarial and registrar functions including the independent
calculation of the Company’s NAV and the production of the Annual Report and
Financial Statements, which are independently audited. Whilst the Board
delegates these functions, it remains responsible for the functions it
delegates and for the systems of internal control. Formal contractual
agreements have been put in place between the Company and providers of these
services. On an ongoing basis Board reports are provided at each quarterly
Board meeting from the Investment Manager, Administrator and Company Secretary
and Registrar.
In common with most investment companies, the Company does not have an
internal audit function. All of the Company’s management functions are
delegated to the Investment Manager, Administrator and Company Secretary and
Registrar which have their own internal audit and risk assessment functions,
where applicable.
A report is tabled and discussed at each Audit Committee meeting, and
reviewed once a year by the Board, setting out the Company’s risk exposure
and the effectiveness of its risk management and internal control systems. The
Board believes that the Company has adequate and effective systems in place to
identify, mitigate and manage the risks to which it is exposed.
Further reports are received from the Administrator in respect of compliance,
London Stock Exchange continuing obligations and other matters. The reports
have been reviewed by the Board. No material adverse findings were identified
in these reports.
Anti-Bribery and Corruption Policy
The Board has adopted a formal Anti-bribery and Corruption Policy. The policy
applies to the Company and to each of its Directors. Furthermore, the policy
is shared with each of the Company’s main service providers.
International Tax Reporting
For the purposes of the US Foreign Account Tax Compliance Act, the Company
registered with the US Internal Revenue Services (“IRS”) as a Guernsey
reporting Foreign Financial Institution (“FFI”), received a Global
Intermediary Identification Number (WPC4ID.99999.SL.831) and can be found on
the IRS FFI list.
The Common Reporting Standard (“CRS”) is a standard developed by the
Organisation for Economic Co-operation and Development (“OECD”) and is a
global approach to the automatic exchange of tax information. Guernsey has now
adopted the CRS which came into effect on 1 January 2016. The CRS has
replaced the UK Inter-Governmental Agreement (“IGA”) with effect from
1 January 2016. However, it will still be necessary to submit the 2014 and
2015 reports for the UK IGA by 30 June 2016. The first report for CRS will be
made to the Director of Income Tax by 30 June 2017.
The Company is subject to Guernsey regulations and guidance based on
reciprocal information sharing inter-governmental agreements which Guernsey
has entered into with the United Kingdom and the United States of America. The
Board will take the necessary actions to ensure that the Company is compliant
with Guernsey regulations and guidance in this regard.
Alternative Investment Fund Managers Directive (“AIFMD”)
On 19 December 2014, the Company appointed as its Alternative Investment
Fund Manager, BACIT (UK) Limited, which is authorised and regulated by the
Financial Conduct Authority. This was a response to the fact that the
structure within the BACIT Limited group of companies is likely to fall within
the definition of an alternative investment fund as set out in the UK rules
that give effect to the AIFMD.
BACIT Foundation
As discussed in the Group’s investment objectives and policy, of
one-twelfth of 1% of the total NAV of the Company at each month-end during the
year is donated annually by the Group to charity, with half donated to the ICR
and half donated to The BACIT Foundation for onward distribution among other
charities in proportions which are determined each year by the
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