SVG Capital plc Annual Report and Accounts 2010
SVG Capital plc Head office 61 Aldwych London WC2B 4AE Telephone 020 7010 8900 Fax 020 7010 8950 www.svgcapital.com
Annual Report and Accounts 2010
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01 Welcome to SVG Capital plc Early-stage Distributions 02 SVG Capital at a glance 06 Chairman’s statement Seed: Payments to investors after the realisation of investments of the 08 Chief Executive’s statement partnership. Overview • Financing provided to allow a business concept to be developed, perhaps involving production of prototypes and additional research, prior to bringing a product to market. Divestments (or realisations or exits) Start-up: Exits of investments, usually via a trade sale or an IPO (Initial Public • Financing provided to companies for the use in product development Offering) on a stock market. and initial marketing. Companies may be in the process of being set up or may have been in business for a short time, but have not sold their Draw downs/calls product commercially. Payments to the partnership by investors in order to finance investments. Other early-stage: Funds are drawn down from investors on a deal-by-deal basis. 10 Introduction • Financing provided to companies that have completed the product 10 Investment objective development stage and require further funds to initiate commercial 10 Investment policy manufacturing and sales. They will not yet be generating profit. Fund of funds 10 Key performance indicators Private equity funds whose principal activity consists of investing in other 11 Strategy private equity funds. Investors in funds of funds can thereby increase their 13 Marketplace Late-stage Business reviewBusiness level of diversification. 14 Financial review 15 Investment portfolio review Expansion financing: 20 20 largest underlying companies • Capital provided for the growth and expansion of a company which is 23 Fund management businesses Gearing, debt/equity ratio or leverage breaking even or even trading profitably. Funds may be used to finance 24 Contractual arrangements increased production capacity, market or product development and/or The level of a company’s borrowings as a percentage of 24 Risks and risk management shareholder funds. 26 List of investments (Group) provide additional working capital. Capital provided for turnaround situations is also included in this category. Management Buy-Out (MBO): Hurdle rate 28 Board of Directors • Funds provided to enable current operating management and investors Arrangement that caps the downside risk for investors. It allows investors 30 Report of the Directors to get preferential access to the profits of the partnership. In the absence 33 Remuneration report to acquire an existing business. of reaching the hurdle return, general partners will not receive a share of 38 Corporate governance Management Buy-In (MBI): 42 Corporate social responsibility the profit (carried interest). A hurdle rate of 10% means that the private • Funds provided to enable a manager or group of managers from equity fund needs to achieve a return of at least 10% before the profits We are... outside the Company to buy into the Company. are shared according to the carried interest arrangement. Corporate information Corporate SVG Capital – an international Follow-on investment Limited partnership A company which has previously received private equity. Most private equity firms structure their funds as limited partnerships. Investors represent the limited partners and private equity managers the private equity investor and fund general partners. Secondary purchase
45 Independent auditor’s report management business listed Purchase of existing shares in a company from another private equity Realisation 46 Consolidated income statement firm, or from other shareholders. 46 Consolidated statement of on the London Stock Exchange. The sale of an investment. comprehensive income 47 Company income statement Public to private 47 Company statement of comprehensive income Secondary market Purchase of the share capital of a company quoted on a stock exchange 48 Consolidated statement of changes in equity The secondary market enables institutional investors to sell their stakes in 49 Company statement of changes in equity with the intention of de-listing the company and taking it private.
Financial informationFinancial a private equity partnership before it is wound up. 50 Consolidated balance sheet 51 Company balance sheet General Terms 52 Consolidated cash flow statement Trade sale 53 Company cash flow statement Carried interest (“carry”.) 54 Notes to the accounts Sale of the equity share of an investee company to another company. Carried interest or simply ‘carry’ represents the share of a private equity fund’s profit (usually 20%) that will accrue to the general partners. Turnaround 91 Notice of Annual General Meeting Committed funds (or “raised funds” or “committed capital”) is capital 95 Company summary and E-communications committed by investors. This will be requested or ‘drawn down’ by A loss-making company which can be successfully transformed into a for shareholders private equity managers on a deal-by-deal basis. This amount is different profit maker. 96 Advisers from invested funds for two reasons. Firstly, most partnerships will invest 96 Financial calendar Further information on our website only between 80% and 95% of committed funds. Second, one has to 97 Glossary of terms deduct the annual management fee which is supposed to cover the cost www.svgcapital.com of operation of a fund. Company information Company Company information Company SVG Capital plc Annual Report 2010 Welcome to SVG Capital plc 01
Our objective... Overview SVG Capital’s investment objective is to achieve capital appreciation by investing principally in private equity funds that are managed or advised by Permira, a leading international private equity specialist. In addition, the Company invests in private equity funds that invest in Japan, North America, Asia and the life sciences sectors, and in unquoted and quoted businesses through specialist funds and co-investments alongside these funds. The Company may also invest in other private equity related assets and alternative asset classes. To complement this investment objective and create capital and income for the More detail on our Top 20 investments Company, its fund management business structures, markets, manages and advises 20 | 22 products for investment in private equity, private equity related assets, alternative p asset classes and in public equity using private equity techniques. Our business... The Group invests from its own balance sheet as well as on behalf of third-party investors through funds that it manages and/or advises. At 31 December 2010, total assets and commitments under advice or management were £4.7 billion, including £3.0 billion1 managed or advised on behalf of third-parties. Private equity investment SVG Capital invests in a portfolio of private equity funds, the majority of which are advised by Permira, a leading international private equity specialist. Fund management SVG Capital’s fund management businesses, SVG Advisers (SVGA) and SVG Investment Managers (SVGIM), structure, market, manage and advise products for investment in private equity and public equity using private equity techniques. Total assets Our balance sheet... £1,281.6m As at As at 31 December 31 December 2010 2009 Net investment portfolio Investment portfolio £1,248.8m £895.6m Cash £17.1m £144.1m £1,248.8m Other assets £15.7m £20.6m Since Total assets £1,281.6m £1,060.3m December Senior Notes (£198.5m) (£220.6m) 2009 +35.9% Bank facility (£19.3m) (£97.7m) Net assets of £999.4m Convertible loan notes (£101.9m) (£100.1m) Other liabilities and minority interests (£16.2m) (£21.5m) Shareholders’ funds (audited) £945.7m £620.4m 315.9p Directors’ valuation of SVGA and SVGIM (unaudited) £53.7m £77.2m Since Net assets (including SVGA and SVGIM) (unaudited) £999.4m £697.6m December +41.7% 2009 Net assets per share (unaudited) 315.9p 222.9p Net debt as % of Shareholders’ funds 31.9% 44.2% Shareholders’ funds Loan to value ratios Bank facility (maximum of 50.0% £945.7m including value of SVGA and SVGIM) 15.5% 18.4% Senior Notes (maximum of 55.0%) 16.2% 20.0%
1 This figure excludes SVG Capital’s commitments/investments in SVG Advisers’ managed or advised funds. SVG Capital plc Annual Report 2010 02 SVG Capital at a glance
Portfolio: Private equity funds
Dec 2010 Dec 2009 Valuation analysis
Value £1,054.7m £731.3m 4 1 Percentage of the investment portfolio 84.5% 81.7% 56
Focus: 3 By value Investing in 16 funds with an underlying portfolio of 115 companies, 95.4% of the
private equity funds portfolio and 80.6% of the total investment portfolio is invested 2 in Permira funds.
£m 31 Dec 31 Dec 731.3 77.1 (66.9) (10.5) 323.7 1,054.7 2010 2009 1100 % % (by value) (by value) 1000 1. Earnings 39 46 900 2. Written down – earnings 35 36 800 3. Quoted 18 11 700 600 4. Third-party 6 1 500 5. Written down 1 5 400 6. Cost 1 1 300 Geographical analysis 200 5 1 5 1 100 4 4 0 Opening Calls Distributions Income Return Closing valuation paid received received portfolio 3 3 By value *Cost Key features of the 12 months:
1. Total return of 40.1% over the year and 33.6% over the second half. 2 2
2. The portfolio companies have reported a strong recovery in operational 31 Dec 31 Dec 2010 2009 performance over the year. % % % (by value) (by value) cost* 3. Increased earnings supported by top-line growth which has been amplified by 1. Global 51 45 50 the extensive cost saving, debt reduction and operational efficiency measures 2. Continental Europe 24 24 31 taken by Permira and the portfolio company management teams during 2009. 3. UK 11 20 8 4. We ighted average year-on-year revenues have increased by 27% and earnings 4. Asia 11 7 9 have increased by 14% across the Permira funds’ portfolio. 5. North America 3 4 2 Sector analysis
8 1 8 1 Major unrealised portfolio movements 7 7 9 9 Change in year1 6 6 2 Galaxy 111.3 By value 2 *Cost +£71.6m 39.7 5 5
66.7 ProSiebenSat 4 4 +£66.7m 3 3
164.8 (0.7) Hugo Boss and VFG 31 Dec 31 Dec +£44.7m 120.8 2010 2009 % % % Ayrsta LifeScience 133.2 (by value) (by value) cost* +£40.4m 92.8 1. Retail 22 24 21 2. Chemicals 20 21 20 Provimi 101.9 +£39.9m 62.0 3. Electronics and 17 21 17 communications Freescale 63.4 4. Media 12 2 12 33.5 +£29.9m 5. Leisure 11 7 11 BorsodChem 16.0 6. Consumer 9 15 9 +£16.0m 7. Financial 4 4 4 New Look 13.5 8. Other services 3 1 3 25.7 (£12.2m) 9. Medical/health 2 5 2 p31 Dec 2010 £m2 p31 Dec 2009 £m2 pDistributions in 12 months * Fund reported local currency costs translated at 31 December 2010 foreign exchange rates 1 Including Permira feeder vehicles. 2 Gross of any carried interest provision. SVG Capital plc Annual Report 2010 03
20 largest underlying companies
Key to funds PEI: Permira Europe I PEII: Permira Europe II PEIII: Permira Europe III PIV: Permira IV SV: SV Asia Pacific Fund Overview Hugo Boss and Valentino Arysta LifeScience Galaxy 1 Fashion Group Fund: PIV 2 Fund: PIV 3 Fund: PIV £205.5m £151.5m £109.3m Cost Cost Cost £164.8m £133.2m £111.3m Value December 2010 Value December 2010 Value December 2010 15.0% 12.1% 10.1% of gross private equity portfolio of gross private equity portfolio of gross private equity portfolio
Provimi Birds Eye iglo TDC 4 Fund: PIV 5 Fund: PEIII 6 Fund: PEII & PEIII £52.4m £49.1m £40.8m Cost Cost Cost £101.9m £86.2m £75.0m Value December 2010 Value December 2010 Value December 2010 9.3% 7.9% 6.8% of gross private equity portfolio of gross private equity portfolio of gross private equity portfolio
ProSiebenSat.1 Media Freescale AA Saga (Acromas) 7 Fund: PIV 8 Fund: PIV 9 Fund: PEIII £140.3m £145.1m £41.8m Cost Cost Cost £66.7m £63.4m £52.5m Value December 2010 Value December 2010 Value December 2010 6.1% 5.8% 4.8% of gross private equity portfolio of gross private equity portfolio of gross private equity portfolio
Legico Telepizza All3Media 10 Fund: PIV 11 Fund: PEIII 12 Fund: PEIII £50.4m £12.3m £14.0m Cost Cost Cost £46.1m £24.2m £18.1m Value December 2010 Value December 2010 Value December 2010 4.2% 2.2% 1.7% of gross private equity portfolio of gross private equity portfolio of gross private equity portfolio
Marazzi BorsodChem Sisal 13 Fund: PIV 14 Fund: PIV 15 Fund: PEIII £41.9m £78.0m £16.9m Cost Cost Cost £17.2m £16.0m £14.6m Value December 2010 Value December 2010 Value December 2010 1.6% 1.5% 1.3% of gross private equity portfolio of gross private equity portfolio of gross private equity portfolio
New Look Maxeda NDS 16 Fund: PEII 17 Fund: PEIII 18 Fund: PIV £0.5m £0.5m £7.7m Cost Cost Cost £13.5m £13.0m £10.9m Value December 2010 Value December 2010 Value December 2010 1.2% 1.2% 1.0% of gross private equity portfolio of gross private equity portfolio of gross private equity portfolio
Just Retirement Holmes Place 19 Fund: PIV 20 Fund: PEII £3.5m £9.1m The Top 20… Cost Cost of the gross private £5.9m £5.5m equity fund portfolio Value December 2010 Value December 2010 0.5% 0.5% 95% of gross private equity portfolio of gross private equity portfolio SVG Capital plc Annual Report 2010 04 SVG Capital at a glance
Portfolio: Private equity funds of funds
Dec 2010 Dec 2009 Value £123.7m £85.7m Percentage of the investment portfolio 9.9% 9.6%
Focus: Key features of the 12 months: Investing in six diversified funds of funds, the majority of which are managed 1. Total return of 36.4% over the year or advised by SVG Advisers. and 14.3% over the second half.
£m 85.7 9.2 (5.1) (0.6) 34.5 123.7 2. Substantial rebound in the value of the private equity funds of funds portfolio
130 over the year as increases in the underlying investment values have 110 been enhanced by the leverage within
90 many of the fund structures.
70 3. The valuations of these holdings are predominantly based on 50 September 2010 underlying fund
30 valuations, adjusted for subsequent cash flows. 10 0 Opening Calls Distributions Income Return Closing valuation paid received received portfolio
Portfolio: Public equity funds
Dec 2010 Dec 2009 Value £49.4m £39.6m Percentage of the investment portfolio 4.0% 4.4%
Focus: Key features of the 12 months: Investing in five funds managed by SVG Investment Managers which invest in public 1. The funds managed by markets using private equity techniques. SVG Investment Managers saw significant gains and outperformed £m 39.6 6.2 (6.0) (0.2) 9.8 49.4 their relevant equity benchmarks over the year. This performance was driven 50 primarily by strong operating results from portfolio companies. 40 2. The SVG UK Focus Fund returned
30 30.4% for the year, and is now top decile over three years and top quartile 20 over five years compared to peers. 3. The SVG European Focus Fund 10 returned 10.2% over the year, bringing its two year return to 61.3%. 0 Opening Calls Distributions Income Return Closing valuation paid received received portfolio 4. The Strategic Funds appreciated in excess of 35.0%. Strategic Equity Capital passed a continuation vote and Strategic Recovery Fund II returned to a valuation comfortably above cost. SVG Capital plc Annual Report 2010 05
Warehoused assets Overview
Dec 2010 Dec 2009 Value £10.8m £29.8m Percentage of the investment portfolio 0.9% 3.3%
Focus: Key features of the 12 months: Holdings in private equity funds that SVG Capital is warehousing on behalf of 1. During the second half of the year SVG Advisers. the Company agreed the sale of eight of the nine warehoused funds £m 29.8 20.2 (33.0) (6.2) 10.8 and completed the sale of seven.
50 2. Since the year-end, the agreed sale of the eighth fund has completed
40 taking total net cash inflows to £30.7 million. 30 3. In aggregate, £57.6 million of unfunded commitments have 20 been released, since June 2010.
10 4. The remaining one fund is valued at £1.6 million with uncalled 0 Opening Calls Distributions/ Return Closing commitments of £1.5 million. valuation paid proceeds portfolio received
Other investments
Dec 2010 Dec 2009 Value £10.2m £9.3m Percentage of the investment portfolio 0.7% 1.0%
Focus: Key features of the 12 months: Holdings in two private equity funds focused on India. 1. Total return of 7.7% over the year despite a negative total return of £m 9.3 0.8 (0.7) 0.8 10.2 6.9% over the second half.
10 2. A reduction in values over the second half and negative foreign exchange
8 movements have offset some of the gains and positive foreign exchange
6 movements reported in the first half.
4
2
0 Opening Calls Distributions Return Closing valuation paid received portfolio SVG Capital plc Annual Report 2010 06 Chairman’s statement
I am pleased to report a second year of improved performance at SVG Capital, with net assets per share increasing by 41.7%1 and our share price rising by 66.0%. This compares to a FTSE All-Share total return of 14.5% and a sector total return of 41.3%2. At the end of September, when we announced an updated net asset value (NAV) following the introduction of quarterly valuations from Permira funds, we were able to report a significant increase over the June NAV, driven by a continued operating and earnings recovery at the underlying Permira portfolio companies. The continued strong performance of the Permira funds’ portfolio in the final quarter of this year has resulted in an increase in net assets per share to 315.9p (£999.4 million1) at 31 December 2010. Shareholders’ funds have risen in the year by 50.8% to 298.9p per share (£945.7 million). As discussed more fully in the CEO’s report, we have also made good progress in our strategy to improve the strength of the balance sheet. Specifically, we have extended our bank-line, repaid some of our senior borrowings and sold a number of non-core warehoused assets, which have reduced our uncalled commitments. In 2010 we strengthened the Board with two new additions: Andrew Sykes in the first half of the year, and Caroline Goodall in the second half. On behalf of the Directors, I welcome both of them to the Board. We also unified our management structure, with Lynn Fordham assuming full responsibility for the operational management of SVG Capital and SVG Advisers with the support of an Executive Committee. Turning to the wider market, 2010 has been a year of progress in the private equity sector. Private equity managers have continued to work hard on creating value at their existing portfolio companies – and this remains a priority – but we are now also starting to see increased activity in terms of both new deals and exits, the latter boosted by trade and secondary sales. During the year we have seen some realisations from the more mature Permira funds’ portfolio: the sale of Cognis to BASF, and the partial realisation of TDC, while the SV Asia Pacific Fund sold its holding in Strides Arcolab. SVG Capital plc Annual Report 2010 07
Although there is no doubt the sector has yet to return to ‘normality’, it has been encouraging to see private equity activity picking up. Research released this year from our advisory business, SVG Advisers, has also demonstrated the resilience of private
equity backed companies as a result of the broad and prompt actions taken Overview by management through the downturn. In the near term, the market will remain challenging for fundraising as investors maintain a cautious approach until they see more realisations emerging from current funds and we expect pressure on terms and conditions to continue. While there have been ripples in the financial markets following the Eurozone sovereign debt crisis, it would appear the public markets are more resilient to the impact of such events and, in general, have been improving. Despite a number of negative economic issues which may cast a shadow on the recovery, I am confident that the underlying portfolio companies are in a much stronger position to withstand any additional deterioration in the market. Increased regulation surrounds the private equity industry; the EU AIFM Directive finally received approval in the middle of November 2010, although the full extent of its impact will not be fully quantifiable until the next level of negotiations are finalised over the next two years. SVG Capital has made significant progress this year. It is encouraging to see both the underlying portfolio perform strongly and the team’s sterling efforts further improve the Company’s financial position.
Nicholas Ferguson Chairman 14 February 2011
A significant rebound in earnings across the portfolio has resulted in a 41.7% increase in net assets per share to 315.9p (£999.4 million)1.
1 Including the 31 December 2010 unaudited Directors’ valuation of SVG Advisers and SVG Investment Managers of £53.7 million (17.0p per share) 2 LPX 50 Total Return 31 December 2009 to 31 December 2010 SVG Capital plc Annual Report 2010 08 Chief Executive’s statement
SVG Capital has continued to make good progress through 2010, both in terms of improving balance sheet strength, and in the performance of its underlying portfolio. In the course of the year, we successfully renegotiated and extended the maturity of our revolving credit facility until 2013, and in the second-half we agreed the sale of the majority of the Company’s non-core warehoused assets, releasing £57.6 million of uncalled commitments. Just prior to the year-end, we pre-paid some of our Senior Notes at par, which has in turn reduced the Company’s interest costs. All of these actions have further de-risked the balance sheet. The investment portfolio returned 35.9% over the year, including the negative impact of currency movements. This is a significant improvement on 2009 and was driven by a rapid recovery of the operating performance of the underlying companies, many of which are now trading better than they were at acquisition. This strong recovery was helped by a much improved macro-economic environment last year and by the early defensive actions taken by management at the outset of the recession.
Investment portfolio The net investment portfolio has increased in value by £362.6 million over the year. The bulk of this return has been driven by investments in Permira IV, in particular Galaxy, ProSiebenSat and Hugo Boss, which together have added £183.0 million to the value of the portfolio. The improvement in the valuation of the investment portfolio has been driven by an especially strong operating performance at some of the larger companies, with the Permira funds’ portfolio reporting year-on-year weighted average earnings growth of 27%. Encouragingly, the bulk of the portfolio also reported top-line growth, with weighted average year-on-year revenues increasing by 14%. Like for like, the weighted average earnings multiple used to value the portfolio contracted marginally over the year. Distributions from the investment portfolio were above the level of 2009, with the completion of the sale of Cognis to BASF, realisation of Strides Arcolab and partial realisation of TDC taking distributions to £123.0 million for the year. We expect the level of distributions to pick up over the course of 2011. The Company paid calls of £113.5 million over the 12 months and uncalled commitments at the year-end stood at £209.8 million. The Company is currently operating well within its financial covenants and has available cash and borrowings of £276.3 million, a coverage of 1.3x our uncalled commitments.
SVG Capital has continued to make good progress through 2010, both in terms of maintaining and improving balance sheet strength, and in the performance of its underlying portfolio. SVG Capital plc Annual Report 2010 09
SVG Advisers and SVG Investment Managers Funds managed or advised by SVG Advisers and SVG Investment Managers remain
unchanged at €4.0 billion. The performance across the investment portfolios advised Overview by SVG Advisers has continued to improve, reporting five consecutive quarters of valuation gains. This has translated into positive net asset growth across all of the funds of funds, in particular the leveraged funds, such as SVG Diamond I and II, both of which have reported significant rebounds in NAV. Similarly, funds managed by SVG Investment Managers saw material gains and outperformed their relevant equity benchmarks over the year. The fundraising environment for private equity funds of funds remains challenging TDC and recent research has shown a sharp drop in the market share of funds of funds. In December, Permira announced the partial Private equity is a cyclical asset class and we will continue to invest in people and realisation of TDC through a placing of shares on upgrade the infrastructure of the business in order to ensure the business has a robust the Danish Stock Exchange. In 2006, funds advised platform for growth over the longer term. As highlighted in June, this investment will by Permira acquired TDC, the incumbent Danish telecom operator, through a public tender offer impact profitability. as part of a consortium of private equity advised funds. The company has successfully increased its At 31 December 2010, the Directors have placed an unaudited valuation on the earnings and is now one of the best performing business of £53.7 million (17.0p per share), a £23.5 million reduction on the previous incumbent telecom operators on key metrics. year with the valuation being impacted by lower comparable multiples and a slightly It has delivered EBITDA and free cash flow growth in recent years driven by continued operational reduced maintainable profit after tax. improvements and has successfully refocused its activities on the Nordic market. Following the disposal of Sunrise Communications, TDC is now Share price a focused pure-play Nordic telecom business with leading positions across market segments. Improving Shareholders’ total return is a priority for the Company. The shares have TDC has undergone a significant transformation, appreciated by 66.0% over the year. The discount to net asset value at which the achieving near best in class operating performance since acquisition. shares trade at has also narrowed from 43.0% to 33.3% over the year. We believe this tightening is a reflection of the overall positive shift in sentiment towards the sector, but also the improved outlook for the investment portfolio and further de-risking of the Company’s balance sheet, with net debt to Shareholders’ funds falling from 44.2% to 31.9% over the year. Ensuring the Company is well understood by a wide variety of stakeholders will also play a role in a potential further re-rating of our shares. During the course of 2010 we have invested a considerable amount of time in widening the shareholder base and will continue this effort in 2011.
Outlook We are encouraged by the significant rebound in the performance of the investment portfolio which has translated into a 41.7%1 increase in our net assets. The newsflow from the portfolio is positive with many of the underlying investee companies showing evidence of relative outperformance, in addition to gaining market share and expanding margins. Improving the strength of the balance sheet remains a priority for the management team. We will continue to look at ways to further de-risk the balance sheet in 2011. Since the year-end, we have agreed to repurchase a further £15.9 million of Senior Notes at par, reducing the par value of our Senior Note liabilities to £185.5 million, an 18.8% reduction on 2009.
Lynn Fordham Chief Executive 14 February 2011
1 Including the 31 December 2010 unaudited Directors’ valuation of SVG Advisers and SVG Investment Managers of £53.7 million (17.0p per share). SVG Capital plc Annual Report 2010 10 Business review
The Business review provides shareholders with an overview of SVG Capital’s: Investment objective and policy – Investment portfolio review – page 10 page 15 Key Performance Indicators – 20 largest underlying companies – page 10 page 20 Strategy – page 11 Fund management business – page 23 Marketplace – page 13 Contractual arrangements – page 23 Financial review – page 14 Risks and risk management – page 24
Introduction SVG Capital is an international private equity investor and fund management business with offices in London, Boston and Singapore. The Group invests from its own balance sheet as well as on behalf of third-party investors through funds that it manages and/or advises. At 31 December 2010, total assets and commitments under management and/or advice were £4.7 billion, including £3.0 billion1 managed or advised on behalf of third-parties.
Investment objective The Company’s investment objective is to achieve capital appreciation by investing principally in private equity funds that are managed or advised by Permira, a leading international private equity specialist. In addition, the Company invests in private equity funds that invest in Japan, North America, Asia and the life sciences sector, and in unquoted and quoted businesses through specialist funds and co-investments alongside these funds. The Company may The Group’s Financial Key also invest in other private equity related assets and alternative asset classes. Performance Indicators are: To complement this investment objective and create capital and income for the Shareholder total return* Company, its fund management business structures, markets, manages and advises products for investment in private equity related asset classes and in public equity using 66.0% private equity techniques. Year to 31 December 2010 Investment policy The Company invests principally in private equity funds managed or advised by 1.2% p.a. Permira, which provide it with exposure to a portfolio of companies that are diversified Since 1996 by vintage year, size, geography and industry sector. Under current legislation, the Company operates so as to ensure that, at the point of acquiring or adding to its Net asset per share growth investment in any company or group, its holding in that company or group does not ** exceed 15.0% by value of its overall investments. 41.7% The Company has a desired average level of gearing of approximately 20.0% over time Year to 31 December 2010 and has an absolute maximum limit on borrowings of two times its adjusted capital 3.4% p.a.** and reserves, as set out in the Articles of Association of the Company. Since 1996
* Source Bloomberg ** Including the 31 December 2010 Directors’ unaudited valuation of SVG Advisers and SVG Investment Managers More information on non-financial KPIs are contained in the Corporate social responsibility report on page 42.
1 This figure excludes SVG Capital’s commitments/investments in SVG Advisers’ managed or advised funds. SVG Capital plc Annual Report 2010 11
Strategy Investing in international private equity The Company’s core investment focus is on international private equity. Diversification The majority of the Company’s investments are focused on one manager, Permira, an international private equity specialist. The current contractual relationship with Permira is governed by the operating agreement of 21 March 2005 as set out in Contractual arrangements on page 23. Information on the Company’s investment portfolio, including the diversification of its underlying assets by vintage year, size, geography and industry sector is contained in the investment portfolio review on pages 15 to 19 and on page 2. Building a successful fund management business SVG Capital’s fund management businesses, SVG Advisers and SVG Investment Managers, structure, market, manage and advise products for investment in private equity and public equity using private equity techniques. Business reviewBusiness SVG Advisers SVG Advisers Limited (SVGA) is a specialist private equity fund management and advisory business. It was established in 2001 to provide investors with innovative ways to access the private equity asset class. SVGA has a strong track record of delivering private equity solutions for international investors and has funds and commitments under management and advice of €3.7 billion1. It now advises eight diversified private equity fund of funds and five single manager funds, providing investors with tailored access to private equity. SVGA has three offices in London, Boston and Singapore, offering ‘on the ground’ access to major private equity markets. It employs over 50 professionals across a broad range of complementary disciplines. Investment SVGA has a long, proven track record in selecting private equity funds with high performance potential. This is delivered through SVGA’s robust investment process and expertise in portfolio construction, asset allocation and manager selection. Over time SVGA’s investment professionals have developed deep knowledge of the private equity universe and built extensive relationships, providing clients with discerning access to a global network of managers. The investment team focuses mainly on US, European and Asian primary and secondary private equity opportunities. In addition, SVGA also advises the SVG Capital Board on its investment portfolio. Structuring and risk management SVGA’s investment offering is complemented by legal and corporate finance capabilities. SVGA has structured a number of innovative products to address investors’ specific investment requirements or constraints. This has included structuring the first private equity collateralised fund obligation and a number of feeder vehicles which have provided investors with an alternative access route to single manager funds. Effective risk management is critical to delivering an attractive return at an acceptable level of risk. SVGA’s corporate finance function has extensive experience in optimising investment portfolios with their financing. This optimisation is incorporated into the design and construction of investment vehicles and in their ongoing management. Investment and advisory solutions In addition to providing clients with access to private equity investment vehicles, SVGA provides clients with bespoke advice using its private equity, structuring and risk management capabilities.
1 At 31 December 2010 and including subsidiary undertakings. SVG Capital plc Annual Report 2010 12 Business review
SVG Investment Managers SVG Investment Managers (SVGIM) is a London based specialist fund manager, created with the objective of adopting private equity investment techniques and adapting them for use in the public markets. Established in 2002, SVGIM is one of Europe’s longest standing investors in this field. It has a proven track record of disciplined and responsible investing with assets under management of over £200.0 million1. SVGIM offers two investment strategies that follow the same distinctive investment process and are driven by a single research platform. These strategies are available to investors via specific funds and to certain types of investors as segregated mandates: Unconstrained mandates These mandates invest in the equity of publicly listed companies where private equity based research indicates they are undervalued and where SVGIM have identified a specific catalyst that should lead to an increase in shareholder value. These are focused portfolios typically made up of 25-35 holdings, offering full liquidity and transparency. Strategic mandates For the strategic mandates SVGIM employs a philosophy of constructive corporate engagement. These mandates invest in publicly listed companies where it has identified strategic, operational or management initiatives to create shareholder value. Having done so SVGIM aims to increase the value of these companies by working in partnership with management and other stakeholders. Strategic review In April 2009 the Company announced a strategic review with the objective of improving share price performance and liquidity. To date there has been no change to this strategy. Below is a summary of the review: –– SVG Capital will remain a long-term investor in private equity, which has historically outperformed other asset classes over the course of the economic cycle. In the near to medium term, the Board will seek to maximise shareholder value by focusing on maintaining and improving the strength of the balance sheet; and offering investors a choice between reinvestment in the private equity asset class and return of capital, once sufficient distributions are received. –– Until the Company is in a position to offer the choice of reinvestment or a return of capital to shareholders, no new commitments to third-party managers will be made. In this period, any new commitments will be minimal and limited to existing funds to protect or enhance shareholder value, and commitments to new SVG Advisers funds, which will be capped at amounts required as a general partner or manager of such funds. –– The timing, number and size of such offers will be driven by the timing and size of receipt of distributions; by the requirement to comply with the constraints of the Company’s senior borrowings; by relevant taxation legislation; and will be subject to the Company’s overall priority of maintaining a prudent level of debt. A key driver of the pricing of any return of capital will be net asset value. –– The mechanism chosen to return capital to shareholders will be decided nearer the time of distributions. Currently the Board anticipates using pro-rata tender or other share buy-back mechanisms to provide those shareholders who wish to do so, with the ability to receive a return of capital in a simple, equitable, transparent and low cost way. –– In accordance with existing contractual agreements, which were approved by shareholders in 2005, based on 31 December 2010 valuations, Permira funds currently represent 80.6% of the Company’s investment portfolio, and in the short term this is not expected to change materially. The world is going through a period of major economic change, and much of the outcome remains unclear. As it becomes clearer, the Board may adjust this investment strategy, in consultation with shareholders. –– SVG Advisers, the 100% owned subsidiary of SVG Capital, is a profitable, stand-alone fund management and advisory business. It is an important asset for the Company and its shareholders.
1 At 31 December 2010. SVG Capital plc Annual Report 2010 13
Marketplace 2010 has marked a year of good, but steady, progress for the private equity industry. Confidence has increased and helped drive deal and exit activity through the year. The global economy appears to have improved, upheld in part by the strength of Asia and other emerging economies, but remains sensitive to events in the wider marketplace, suggesting it is still too premature to declare a full recovery. Through the downturn private equity managers have adapted to the deteriorating environment and acted quickly and decisively to stabilise and maximise cost efficiencies at their underlying portfolio companies. As a result, earnings at investee companies continue to improve, aided by a recovery in the financial markets. Maintaining and improving the operating performance and actively monitoring the financing positions of underlying investments remains a continued focus for the managers, while also looking for appropriate exit routes for some of their more mature investments. Deal activity continues to build momentum. The fourth quarter of 2010 was particularly strong with US$65 billion of new deals announced – the highest since Q2 2008 – and US$72 billion of exits – the highest quarterly figure on record1.
2011 looks promising, with the pipeline for IPOs and potential listings in the US reviewBusiness and Europe said to be strong2, and a robust start to global M&A activity. A significant amount of unspent capital remains available for deals, keeping the pressure on pricing in the near term. Private equity managers, keen to put this money to work, should benefit from the emergence of good quality, better capitalised, businesses that are surfacing from the downturn. Managers are also focused on exiting appropriate investments. As this dynamic plays out, the pace of calls and distributions should continue to pick up. Debt markets have begun to ease, though terms are different to the pre-2008 era. As a result, we might expect equity contributions – which have been at high levels in the past few years – start to fall a little through 2011. Activity in the high yield bond market has increased as private equity managers, capitalising on renewed risk/reward appetite, use this as a viable route to refinance and push out debt maturities at their portfolio companies. In the short to medium term, private equity fundraising will likely remain challenging. In light of this environment, limited partners (LPs) continue to scrutinise private equity managers on their intentions around fund sizes, fees and strategy. The global private equity industry remains surrounded by a myriad of impending regulation. While much of this has been approved, the lengthy implementation process of the majority of this legislation means the impact will not be realised for some time yet. Confidence in the private equity asset class remains; recent research suggests twice as many LPs are intending to increase their target allocation to private equity than reduce it3. Despite the challenges of the last few years, the private equity asset class has, to-date, withstood the economic downturn well. While progress is likely to remain measured, the private equity market is beginning to move onto the front foot.
1 Preqin PE Spotlight – January 2011 ‘2011: A year of recovery?’ 2 As reported in Private Equity News – 10 January 2011 ‘Industry prepares for IPO surge’. 3 Coller Global Private Equity Barometer Winter 2010-2011. SVG Capital plc Annual Report 2010 14 Business review
Financial review The net asset value per share increased by 41.7% during the year from 222.9p to 315.9p1. Shareholders’ funds have risen to 298.9p per share. The increase was primarily driven by the portfolio performance which is analysed in more depth in the investment portfolio review. Cash balances and uncalled commitments The Group’s cash balances decreased from £144.1 million at the prior year-end to £17.1 million at 31 December 2010. The decrease was the result of a repayment of £77.6 million in respect of the Company’s loan facility, a £26.8 million buy‑back of Senior Notes in the year, net investment inflows of £9.5 million2 and finance costs of £40.1 million. The Company made no new primary commitments during the year. Uncalled commitments fell significantly from £371.1 million to £209.8 million, partly due to the appreciation of sterling, but mainly as a result of the financing of calls to the investment portfolio and the sale of warehoused assets. Calls from Permira IV amounted to €57.8 million (2.4%), reducing the uncalled commitment to this fund from €166.1 million to €108.3 million, falling in sterling terms from £147.6 million to £92.8 million. In addition, during the year we agreed to sell eight of the nine warehoused funds and completed the sale of seven. Since the year-end, the agreed sale of the eighth fund has completed taking total net cash inflows to £21.8 million. Following the completion of the final sale in January 2011 these sales have released £57.6 million of aggregate uncalled commitments since June. Allowing for this final sale, uncalled commitments have reduced to £198.5 million from £209.8 million at the year-end. Borrowings As expected, net borrowings increased during the year by £27.3 million from £274.4 million to £301.7 million, largely due to finance costs exceeding net cash inflows on the investment portfolio. The undrawn balance of the Company’s revolving credit facility was £259.2 million at 31 December 2010, which is more than sufficient to cover the uncalled commitments to its investment portfolio. At 31 December 2010, the Company’s Loan to Value (LTV) ratio for its bank facility was 15.5% (2009: 18.3%) against a maximum covenant of 50.0% (including the value of SVG Advisers) and 16.2% (2009: 20.0%) against a maximum covenant of 55.0% for the Senior Notes. The covenants for all of the senior borrowings will reset on 1 July 2011 to a maximum LTV of 30.0% with the flexibility to go to 40.0% for one nine month period. In February 2010, the term of the Company’s revolving credit facility was extended from March 2011 to January 2013. At the same time the Company has agreed to reduce the size of the facility from €550.0 million to €325.0 million initially, with further step-downs to €320.0 million in March 2011, €315.0 million in September 2011 and €250.0 million in March 2012. The maximum LTV covenants remain unchanged but the cost of the facility has increased slightly. In December 2010, the Company purchased £26.8 million nominal of Senior Notes for cancellation at par value. Furthermore, since the year-end the Company has agreed Galaxy to purchase an additional £15.9 million of Senior Notes for cancellation at par value, SVG Capital’s investment in Galaxy Entertainment reducing the par value of the Company’s Senior Note liabilities to £185.5 million. Group increased in value by £71.6m during the year. Galaxy is one of the largest casino and hotel Foreign exchange operators in Macau SAR, China. It is one of only six gaming concessionaires licensed to operate casinos The appreciation of sterling against the euro had a negative impact on portfolio gains, in Macau SAR, the only legal gaming location in totaling an estimated £21.2 million. China and the world’s largest gaming market by revenue. Galaxy operates a flagship hotel casino, StarWorld, four ‘City Club’ casinos and owns a construction materials business. Galaxy is constructing ‘Galaxy Macau’, an Asian-centric integrated resort.
1 Including the December 2010 Directors’ unaudited valuation of SVG Advisers and SVG Investment Managers of £53.7 million (17.0p per share). 2 Including £11.3 million of income. SVG Capital plc Annual Report 2010 15
Large investments Listed below are the Company’s 10 largest fund investments as at 31 December 2010 Manager/ 2010 Fund adviser £000’s Permira IV Permira 632,043 Permira Europe III Permira 120,136 P25 SVG Advisers 103,689 P1234 SVG Advisers 55,000 SVG Diamond SVG Advisers 54,934 Permira Europe II Permira 50,105 P123 SVG Advisers 35,824 SVG Diamond II SVG Advisers 28,301 SV Life Sciences Fund IV SV Life Sciences Advisers 21,731 Strategic Recovery Fund II SVG Investment Managers 19,161
Investment portfolio review Business reviewBusiness The investment portfolio has reported a total return of 35.9% over the year and 29.6% over the second half, with valuations benefiting from the significant rebound in earnings across the portfolio. This is despite the negative impact of foreign exchange, with the euro weakening by approximately 4% against sterling during the year. Private equity funds’ portfolio – £1,054.7 million (84.5% of the net investment portfolio) The private equity funds’ portfolio is dominated by funds advised by Permira, which represent 95.4% of the private equity funds portfolio and 80.6% of the investment portfolio. Looking at the Permira funds’ portfolio, the strong recovery in the operational performance of the underlying portfolio companies in the first half has continued into the second half with the private equity funds’ portfolio reporting a 40.1% total return over the 12 months. This is a material improvement on 2009, and has been entirely driven by a significant rebound in portfolio company earnings, especially at some of the larger Permira IV companies. Like-for-like discounted earnings multiples used to value the portfolio recovered in the second half, but were still marginally down over the year. Encouragingly much of the earnings growth reported during 2010 has been supported by top-line growth, with weighted average year-on-year revenues increasing by 14%. This top-line growth has been enhanced by the extensive cost saving, debt reduction and operational efficiency measures taken by the underlying management teams in 2009 and has translated into a weighted average year-on-year earnings growth for the 12 months of 27%. The Permira funds and the underlying management teams have continued to work on de-risking the portfolio and strengthening capital structures, and extending debt maturities, where appropriate. Aggregate debt across the top 20 companies has decreased slightly by 6.0% over the year (in constant currencies) and at 31 December 2010, less than 15% of the Permira funds’ portfolio company debt was due to expire before 2014. The clear majority of portfolio companies end 2010 with stable capital structures and strong earnings momentum. As revenues continue to increase, companies should be well placed to use free-cash-flows to further pay down debt going forward. SVG Capital plc Annual Report 2010 16 Business review
Major unrealised portfolio movements Change in year1 £m Galaxy 111.3 +£71.6m 39.7 ProSiebenSat 66.7 +£66.7m 0 Hugo Boss and VFG 164.8 (0.7) +£44.7m 120.8 Ayrsta LifeScience 133.2 +£40.4m 92.8 Provimi 101.9 +£39.9m 62.0 Freescale 63.4 +£29.9m 33.5 BorsodChem 16.0 +£16.0m 0 Legico 46.1 +£15.4m 30.7 Birds Eye iglo 86.2 +£12.2m 57.1 16.9 New Look 13.5 (£12.2m) 25.7
p31 Dec 2010 £m2 p31 Dec 2009 £m2 pFollow-ons in 12 months pDistributions in 12 months 1 Including Permira feeder vehicles. 2 Gross of any carried interest provision. The portfolio remains concentrated with the five largest investments (Hugo Boss and VFG, Arysta LifeScience, Galaxy, Provimi and Birds Eye iglo) representing 54.4% of the gross private equity funds portfolio value. The largest value driver was Galaxy which increased by £71.6 million as its trading continued to improve and the development of Galaxy Macau nears completion (174% increase in its share price over the year). Following the recovery of the European advertising market throughout 2010, ProSiebenSat’s value has increased from zero to £66.7 million on the back of a rebound in earnings as well as an improvement in the stability of its capital structure. Since 31 December 2010, funds advised by Permira have sold eight million of preference shares, the proceeds of which have been used to repay debt and meet interest payment obligations. Hugo Boss and VFG’s value has increased by £44.7 million over the year and remains the largest holding within the portfolio (15.0% of the gross private equity funds’ portfolio value). The trading performance has been encouraging throughout the year and especially in Q4 2010. The company recently reported an increase in revenues of 24% over the fourth quarter and 7% over the year, in local currency terms, driven by double digit sales growth in all regions and distribution channels. EBITDA has increased by 31% over the year. Arysta LifeScience remains the second largest portfolio company, representing 12.1% of the gross private equity funds’ portfolio value. The company’s trading performance has continued to improve in line with the business plan which, combined with an increase in comparable public market multiples, has driven a £40.4 million gain in value over the year. Provimi’s focus on volume growth and improving efficiency, as well as the outperformance of a number of animal nutrition regions, has resulted in strong earnings growth and an increase in value of £39.9 million. Furthermore, the continuing growth momentum of the pet food division has had a positive impact on the valuation of the combined business. SVG Capital plc Annual Report 2010 17
Freescale (+£29.9 million) and Birds Eye iglo (+£12.2 million) together represent 13.7% of the gross private equity funds’ portfolio value. Both companies have continued to trade well with Freescale reporting six consecutive quarters of earnings growth and Birds Eye iglo enjoying higher standalone earnings. Following the completion of the acquisition of Findus Italy in October 2010, Birds Eye iglo should be well placed to generate further growth as the company benefits from operational efficiencies across the businesses. In January 2011, Wanhua Industrial Group, a Chinese chemical firm and strategic investor in BorsodChem, exercised a call option to acquire the Permira funds’ stake in the company. BorsodChem had been held at zero since December 2008 following a decline in operating performance and a consensual restructuring of the capital structure in 2009. It has been written up to £16.0 million at 31 December 2010, in line with the value of the call option. We expect to receive a distribution from Permira IV in relation to the exercise of the call option on this investment in due course. Legico is valued on a mark-to-market basis and has been written up by £15.4 million to reflect the increase in market prices of its underlying assets.
New Look, which represents 1.2% of the private equity funds’ portfolio value, reviewBusiness suffered from the worsening retail environment towards the end of 2010 and the adverse weather conditions during the Christmas period. A decline in like-for-like sales, a higher promotional mix and stock clearances have driven a decline in the company’s earnings and its value has been written down by £12.2 million. Despite this, New Look has maintained its position as the UK’s second largest womens’ wear retailer and its online business continues to perform strongly with an increase in online sales coming from outside the UK. Realisations Distributions of £77.4 million were received from the private equity funds’ portfolio over the year, following the sale of the final tranche of shares in Freenet, the full realisation of SVG Capital’s holding in Strides Arcolab, the completion of the sale of Cognis to BASF and partial realisation of TDC. The realisation of Cognis was announced at the half-year and completed in December 2010, generating £34.4 million of value for SVG Capital which represents a multiple of 2.9x investment cost. In December, Permira announced the partial realisation of TDC through a placing of shares on the Danish Stock Exchange. The shares were sold through a marketed offering at a price per share of DKK51.00 which represents a multiple of 1.9x original investment cost. In 2006, funds advised by Permira acquired TDC, the incumbent Danish telecom operator, through a public tender offer as part of a consortium of private equity advised funds. The company has successfully increased its earnings and is now one of the best performing incumbent telecom operators on key metrics. It has delivered EBITDA and free cash flow growth in recent years driven by continued operational improvements and has successfully refocused its activities on the Nordic market. Following the disposal of Sunrise Communications, TDC is now a focused pure‑play Nordic telecom business with leading positions across market segments. The company has a highly advanced infrastructure, including cable ownership, which provides TDC with a unique network position in Denmark. At 31 December 2010, TDC’s share price was DKK48.34 which valued SVG Capital’s remaining investment in the business at £75.0 million. The remaining shares are subject to a six month lock up period. SVG Capital plc Annual Report 2010 18 Business review
New investments Over the year, Permira IV has announced three portfolio company acquisitions which SVG Capital will indirectly participate in through its holdings in the Permira feeder vehicles and the SVG Diamond programme. eDreams is a leading independent European online travel agency which has experienced one of the highest growth rates in the European online travel marketplace. SVG Capital’s share of this investment is approximately £2.2 million. Asia Broadcast Satellite is one of the fastest growing premium satellite operators in the world, supplying bandwidth connectivity to broadcasting and telecom customers in around 30 countries. SVG Capital’s share of this investment is approximately £1.4 million. Creganna-Tactx Medical is a leading global provider of outsourced solutions to medical device manufacturers. The company specialises in design and manufacturing of delivery devices for minimal and less invasive therapies, providing a complete range of solutions to assist over 240 medical device and life science companies to take products from concept design to full scale production. SVG Capital’s share of this investment is approximately £1.2 million. Valuation basis On a like-for-like basis discounted earnings multiples declined by 4.1% over the year. At 31 December 2010, the average weighted discounted earnings multiple used to value the portfolio was 10.4x. This weighted average discounted earnings multiple is heavily influenced by the top five portfolio companies, which represent 54.4% of the gross private equity portfolio. The median discounted earnings multiple used to value the portfolio was 8.7x at 31 December 2010. Portfolio maturity – investments in companies – 31 December 2010 (£ million)
2010
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2000 Up to 1999 0 90 180 270 360 450 Write-downs Cost Quoted Earnings Earnings below cost Third-party Year of original investment in underlying companies. Other assets Private equity funds of funds portfolio – £123.7 million (9.9% of the investment portfolio) We have seen a substantial rebound in the value of the private equity funds of funds portfolio over the year as underlying valuation increases have been amplified by the leverage within many of the fund structures. At 31 December 2010, the funds were valued at £123.7 million, a 36.4% total return over the year. Public equity funds portfolio – £49.4 million (4.0% of the investment portfolio) The funds managed by SVG Investment Managers continue to outperform public markets. SVG UK Focus Fund reported top decile performance against its peer group over the year and the Strategic Recovery Fund II has reported a rebound in its value. At 31 December 2010, the funds were valued at £49.4 million, a 21.6% total return over the year. SVG Capital plc Annual Report 2010 19
Warehoused assets – £10.8 million (0.9% of the investment portfolio) Seven private equity funds in the warehoused assets have been successfully sold during the year. At 31 December 2010, the remaining two funds were valued at £10.8 million. Including proceeds received from the sales of the assets, this translates into a 12.6% negative total return over the year. Since the year-end, we have completed the sale of one further warehoused asset. In aggregate, these sales have released £57.6 million of uncalled commitments. At 31 December 2010, the remaining one warehoused asset was valued at £1.6 million with uncalled commitments of £1.5 million. Other investments – £10.2 million (0.7% of the investment portfolio) Other investments are made up of two investments in Indian private equity funds. At 31 December 2010, these funds were valued at £10.2 million, a 6.8% total return over the year. Fund commitments
Amount Uncalled called commitment Uncalled (local currency) (local currency) commitment6 Business reviewBusiness Permira funds Permira Europe III €352.4m €6.1m £5.2m Permira IV €1,336.1m €108.3m £92.8m P1234 €30.8m €7.7m £6.6m P25 €75.4m €6.6m £5.7m SVG Sapphire IV €12.2m €1.8m £1.5m Sapphire IV €0.9m €0.2m £0.2m £112.0m Other private equity funds The Japan Fund IV ¥4,601.5m ¥1,071.4m £8.4m SV Investments Fund I US$44.1m US$3.3m £2.1m SV Life Sciences Fund III US$14.6m US$0.4m £0.3m SV Life Sciences Fund IV US$37.6m US$12.4m £7.9m £18.7m Private equity fund of funds SVG Diamond III €47.2m €18.3m £15.7m SVG Asia Fund of Funds US$8.2m US$32.7m £20.9m Vintage I €11.2m €28.8m £24.7m Schroder Private Equity Fund of Funds III €0.9m €0.1m £0.1m £61.4m Public equity funds Strategic Recovery Fund II £25.5m £2.8m £2.8m £2.8m Other investments SVG India US$31.8m US$0.3m £0.2m Gaja Fund US$2.0m US$3.0m £1.9m £2.1m Warehoused private equity fund investments CVC European Equity Partners V (sold January 2011) €11.8m €13.2m £11.3m American Capital Equity II US$7.6m US$2.4m £1.5m £12.8m Total £209.8m
6 Based on exchange rates at 31 December 2010. SVG Capital plc Annual Report 2010 20 Business review
20 largest underlying companies Hugo Boss and VFG In the following pages we show the 20 largest investments of the private equity funds’ 1 portfolio, by value, as at 31 December 2010. The valuations of these companies have Germany and Italy
been presented in accordance with IFRS. Following the decision by the Company Cost £’000 205,530
to cap its commitment to Permira IV in December 2008, the valuations of all of Value £’000 164,818 the Permira IV investments made prior to 2009 include a provision against future Date of acquisition May 2007 distributions. Value attributable to follow-ons into Permira IV companies is not subject % of gross PE portfolio 15.0 to this provision. % of Shareholders’ funds 17.4 Underlying fund Permira IV Hugo Boss and VFG operate in over 100 countries, with more than 1,600 single-brand boutiques and 430 directly-managed shops. The group’s activities are broken down into three business units, covering the entire luxury and fashion sector: Hugo Boss, Valentino and licensed brands including Marlboro Classics and M Missoni. The valuation basis is earnings.
2 Arysta LifeScience Japan
The companies that Cost £’000 151,544 make up our top Value £’000 133,246 20 cover a range Date of acquisition February 2008 of sectors and geographic regions. % of gross PE portfolio 12.1 % of Shareholders’ funds 14.1 Underlying fund Permira IV Arysta LifeScience is the world’s largest privately held agrochemical company. The company markets a portfolio of over 150 products in more than 125 countries worldwide and specialises in conventional crop protection products including herbicides, insecticides, fungicides and growth regulators. The valuation basis is earnings.
3 Galaxy Greater China
Cost £’000 109,268
Value £’000 111,280 Date of acquisition November 2007 % of gross PE portfolio 10.1 % of Shareholders’ funds 11.8 Underlying fund Permira IV Galaxy Entertainment Group is one of the largest casino and hotel operators in Macau SAR, China. It is one of only six gaming concessionaires licensed to operate casinos in Macau SAR, the only legal gaming location in China and the world’s largest gaming market by revenue. Galaxy operates a flagship hotel casino, StarWorld, four ‘City Club’ casinos and owns a construction materials business. Galaxy is constructing ‘Galaxy Macau’, an Asian-centric integrated resort. The valuation basis is quoted. SVG Capital plc Annual Report 2010 21
4 Provimi 7 ProSiebenSat.1 Media 10 Legico The Netherlands Germany Luxembourg
Cost £’000 52,356 Cost £’000 140,324 Cost £’000 50,436
Value £’000 101,928 Value £’000 66,690 Value £’000 46,103 Date of acquisition April 2007 Date of acquisition March 2007 Date of acquisition January 2008 % of gross PE portfolio 9.3 % of gross PE portfolio 6.1 % of gross PE portfolio 4.2 % of Shareholders’ funds 10.8 % of Shareholders’ funds 7.1 % of Shareholders’ funds 4.9 Underlying fund Permira IV Underlying fund Permira IV Underlying fund Permira IV Provimi is a global leader in the growing market The ProSiebenSat.1 Group is a leading European Legico seeks to invest in credit market opportunities of animal nutrition and European private label media company. The Group’s core business is free by investing in senior, mezzanine and PIK pet food. The company operates through 80 TV, financed through advertising. Reaching more opportunities in both the primary and secondary production centres in 30 countries specialising in than 78 million households, the ProSiebenSat.1 markets. The company’s main geographical focus innovative products serving the nutritional and Group is the second-largest broadcasting group is the UK and Europe, although it does have the health needs of all animals. The valuation basis in Europe. In Germany, its family of stations are flexibility to invest worldwide. The valuation basis is earnings. number one in the TV advertising market. The is mark-to-market. Group also has strong market positions in free TV in The Netherlands, in Hungary and in Sweden. The valuation basis is earnings. reviewBusiness
5 Birds Eye iglo 8 Freescale 11 Telepizza UK USA Spain
Cost £’000 49,112 Cost £’000 145,058 Cost £’000 12,251
Value £’000 86,181 Value £’000 63,408 Value £’000 24,199 Date of acquisition November 2006 Date of acquisition November 2006 Date of acquisition September 2006 % of gross PE portfolio 7.9 % of gross PE portfolio 5.8 % of gross PE portfolio 2.2 % of Shareholders’ funds 9.1 % of Shareholders’ funds 6.7 % of Shareholders’ funds 2.6 Underlying fund Permira Europe III Underlying fund Permira IV Underlying fund Permira Europe III Birds Eye iglo is a leader in the European frozen food Freescale is a global leader in the design and Telepizza is currently the leading player in the market, operating mainly in the UK and Ireland manufacture of embedded semiconductors for Spanish home delivery and take-away pizza business under the ‘Birds Eye’ brand and in Continental wireless, networking, automotive, consumer and operating about 650 owned and franchised outlets. Europe under the ‘iglo’ brand. The company’s main industrial markets. Based in Texas, Freescale has The company has an international presence in products include fish, vegetable, poultry and ready a broad portfolio of more than 14,000 products Portugal, Chile, Central America and Poland meals, in addition to iconic products such as fish serving over 10,000 customers. The company where it has about 430 outlets. The valuation fingers and Schlemmer Filets. The UK, Germany and has over 50 sales offices located in 25 countries. basis is earnings. Austria are its three largest markets and in October The valuation basis is earnings. 2010 its acquisition of Findus Italy completed. The valuation basis is earnings.
6 TDC 9 AA Saga (Acromas) 12 All3Media Denmark UK UK
Cost £’000 40,798 Cost £’000 41,756 Cost £’000 14,023
Value £’000 75,047 Value £’000 52,533 Value £’000 18,138 Date of acquisition December 2005 Date of acquisition September 2004 Date of acquisition September 2006 % of gross PE portfolio 6.8 % of gross PE portfolio 4.8 % of gross PE portfolio 1.7 % of Shareholders’ funds 7.9 % of Shareholders’ funds 5.6 % of Shareholders’ funds 1.9 Underlying fund Permira Europe II & III Underlying fund Permira Europe III Underlying fund Permira Europe III TDC is a leading Danish-based provider of Acromas was formed in September 2007 by the All3Media is the largest UK independent TV communications solutions with approximately merger financing of the AA and Saga, bringing production business, comprising a group of 12,700 employees, around 11.7 million customers together the two brands to create the UK’s leading production companies in the UK, Germany, and nearly nine million customer accounts in affinity organisation with 18 million customers, The Netherlands, New Zealand, the USA and Denmark. It also has significant presence in markets providing motoring, travel, media and financial Australia. The group also includes a digital media in the other Nordic countries. The valuation basis services to the UK motorist and people aged over producer, a next generation advertising agency, is quoted. 50. The initial investment in the AA was made in an international distribution company and a talent September 2004. The valuation basis is earnings. management business. Key programmes include Hollyoaks, Midsomer Murders and Shameless. The valuation basis is earnings. SVG Capital plc Annual Report 2010 22 Business review
13 Marazzi 16 New Look 19 Just Retirement Italy UK UK
Cost £’000 41,892 Cost £’000 480 Cost £’000 3,485
Value £’000 17,168 Value £’000 13,462 Value £’000 5,869 Date of acquisition July 2008 Date of acquisition April 2004 Date of acquisition September 2009 % of gross PE portfolio 1.6 % of gross PE portfolio 1.2 % of gross PE portfolio 0.5 % of Shareholders’ funds 1.8 % of Shareholders’ funds 1.4 % of Shareholders’ funds 0.6 Underlying fund Permira IV Underlying fund Permira Europe II Underlying fund Permira IV Marazzi Group is a world leader in the design, New Look is a value fashion retailer, which has Just Retirement is a specialist life assurance group manufacturing and distribution of ceramic tiles with gained market share to become the No.2 retailer in in England and Wales focusing on the provision a global presence and a full product line. It has a UK womens’ clothing and accessories. New Look’s of financial services to those at or in retirement. strong track record in design and innovation with broad network is comprised of over 1,000 stores The valuation basis is earnings. production facilities in Europe, the USA and Russia with 602 in the UK and a growing presence in and sells in over 130 countries with direct Europe and internationally. In addition, in France distribution in the USA and Russia. The valuation and Belgium, the company also operates 307 stores basis is earnings. which trade under the MIM fascia. The valuation basis is earnings.
14 BorsodChem 17 Maxeda 20 Holmes Place Hungary The Netherlands UK
Cost £’000 78,016 Cost £’000 529 Cost £’000 9,134
Value £’000 15,989 Value £’000 13,025 Value £’000 5,453 Date of acquisition December 2006 Date of acquisition September 2004 Date of acquisition July 2003 % of gross PE portfolio 1.5 % of gross PE portfolio 1.2 % of gross PE portfolio 0.5 % of Shareholders’ funds 1.7 % of Shareholders’ funds 1.4 % of Shareholders’ funds 0.6 Underlying fund Permira IV Underlying fund Permira Europe III Underlying fund Permira Europe II BorsodChem is a leading European chemical Maxeda is one of the largest non-food retailers in After a series of disposals, Holmes Place is now a company focusing on the production of isocyanates The Netherlands. The valuation basis is earnings. holding company with an investment in the and PVC. BorsodChem completed a financial Virgin Active Group, a leading operator in the health restructuring in June 2010 and secured its long-term and fitness market in the UK, South Africa, Italy and funding requirements from Chinese strategic Spain with over 900,000 members. The valuation investor Wanhua. In January 2011, Wanhua basis is earnings. exercised the call option on Permira IV’s equity that it had acquired as part of the restructuring. Accordingly, SVG Capital expects to receive the December 2010 value of its investment in proceeds during Q1 2011. The valuation is third-party.
15 Sisal 18 NDS Italy UK
Cost £’000 16,916 Cost £’000 7,728
Value £’000 14,624 Value £’000 10,913 Date of acquisition October 2006 Date of acquisition January 2009 % of gross PE portfolio 1.3 % of gross PE portfolio 1.0 % of Shareholders’ funds 1.5 % of Shareholders’ funds 1.2 Underlying fund Permira Europe III Underlying fund Permira IV Sisal is Italy’s second largest player in the gaming NDS is a world leading provider of media content sector and the sixth largest lottery player worldwide. security, enabling technologies and interactive The group has four main activities: traditional games applications for pay-TV. It has a long standing (lotteries), sports and horse racing betting, slot relationship with leading pay-TV operators and machines and payment services, mobile phones offers solutions for the satellite, cable, IPTV and and satellite pay-TV prepaid card top ups. The group mobile TV markets. The valuation basis is earnings. is headquartered in Milan, operates about 38,000 points of sales and employs around 1,000 people. The valuation basis is earnings. SVG Capital plc Annual Report 2010 23
Fund management businesses Funds managed or advised by SVG Advisers and SVG Investment Managers remain unchanged at €4.0 billion1. The performance across the investment portfolios advised by SVG Advisers has continued to improve, reporting five consecutive quarters of valuation gains. This has translated into positive NAV growth across the entire range of funds, in particular the leveraged funds, such as SVG Diamond I and II, which have reported significant rebounds in NAV. Similarly, funds managed by SVG Investment Managers saw material gains and outperformed their relevant equity benchmarks over the year. The fundraising environment for private equity and particularly funds of funds remains challenging and recent research has shown a sharp drop in the market share of funds of funds. Private equity is a cyclical business and we will continue to invest in people and upgrading the infrastructure of the business in order to ensure the business has a robust platform for growth, over the longer term. As highlighted in June, this investment will impact profitability. Total external fee income, all of which is recurring, stood at £25.6 million, which compares to £28.8 million for 2009, with external fee income being impacted by reviewBusiness a number of funds moving from a commitment to NAV based advisory fee. Including fees paid by SVG Capital to SVG Advisers, total fees earned by the operating subsidiaries and other income were £31.5 million, contributing £7.7 million to the Group’s 2010 profit before tax. This is an increase on 2009 and has been driven by a reduction in the cost base. At 31 December 2010, the Directors have placed an unaudited valuation on the businesses of £53.7 million (17.0p per share). This valuation represents a decline of £23.5 million on 2009, a reflection of lower comparable multiples and a slightly reduced maintainable profit after tax being used for the valuation.
Contractual arrangements As was fully reported in a Circular to shareholders dated 24 March 2005, SVG Capital entered into arrangements with Permira which allowed SVG Capital full access to Permira IV and to its successor, Permira V. Concurrent with the arrangements, Permira subscribed for shares in the Company. The arrangements also included an operating agreement which imposes material limits on the extent to which the Group may have investments which are not in Permira funds or Permira products. These limits substantially prevent the Group from investing in private equity funds or products managed or advised by general partners or managers other than Permira during the term of the operating agreement. One of the principal undertakings made by SVG Capital is that the Company will operate with the intention that no more than 20% of the gross assets and uncalled commitments of the Group will be in non-Permira funds or products (subject to certain limited exceptions) at the time of commitment and subject to a maximum of 25%. The effect of the operating agreement therefore is to increase the Group’s reliance on Permira and increase its concentration risk. Subject to earlier termination, the operating agreement will terminate on the date on which the first closing of Permira V occurs if none of SVG Capital, any other member of the Group or any SVG product makes any commitment to Permira V or, if SVG Capital, any other member of the Group or any SVG product does so, the date of final closing of that fund. There can be no assurance as to when Permira V will be raised. If the first closing of Permira V has not occurred by 30 June 2012, the Company and Permira Holdings are each able to terminate the operating agreement by giving written notice. A copy of the Circular to shareholders is available on the Company’s website: www.svgcapital.com.
1 At 31 December 2010 and including subsidiary undertakings. SVG Capital plc Annual Report 2010 24 Business review
As at 31 December 2010, the Company was party to the following agreements that take effect, alter or terminate on a change of control of the Company following a takeover bid: (a) the multicurrency revolving facility agreement made between the Company, Bank of Scotland plc, The Royal Bank of Scotland plc and Unicredit Bank AG, London dated 10 March 2006. Under this agreement, the Company would be required to promptly notify The Royal Bank of Scotland plc, in its capacity as agent for the banks, of any change of control. Such notification would open a negotiation period of 60 days to determine whether the lenders shall continue to make the facility available and whether any amendment is required. Failing agreement, any lender may require repayment of the amount outstanding to it under the facility and cancel its commitment. (b) the note purchase agreements dated 18 July 2008 and 2 August 2007. Under these agreements, the Company would be required to promptly notify all noteholders of the change of control, offering to prepay the entire unpaid principal amount of notes held by each noteholder, with interest to the date of prepayment. Each noteholder has 30 days to accept or reject the prepayment offer. If no response is received by a noteholder, the offer shall be deemed to have been rejected. (c) the trust deed dated 5 June 2008 between the Company and HSBC Corporate Trustee Company (UK) Limited (as trustee) constituting the £120.0 million 8.25 per cent converted bonds issued by the Company with a maturity of 2016. Under this agreement, the Company shall give notice to the trustee and bond holders within 14 calendar days of any change of control. Within 60 calendar days of the giving of such notice, each bondholder may give notice of their intention to exercise their conversion rights (at a decreased conversion price) or require the Company to redeem their bonds with interest to the date fixed for redemption.
Risks and risk management The Board has prepared a matrix of key risks that have been identified which affect its business and has adopted a robust framework of internal control which is designed to monitor those risks and to provide a system to enable the Directors to mitigate these risks as far as possible. Further details of the Directors’ system of internal control and its monitoring system, is set out in the corporate governance statement. The principal risks have been identified as those most likely to occur and have a material impact on the Company. These principal risks are considered to be as follows: Current market and economic uncertainty The continuing current market and economic uncertainty has the potential to impact the Company. In particular, the impact of such uncertainty on portfolio companies and the Company’s subsidiaries will affect the returns earned by the Company and the trading price and value of its Ordinary Shares. The Company is generally a passive investor in private equity funds and has no ability to affect change in portfolio companies. The Company mitigates this risk by continually discussing the performance of portfolio companies with Permira to verify that the companies are reacting to such uncertainty, in addition to ongoing monitoring of market and economic developments. This risk has been assessed as stable. Borrowing and funding risk There is a risk that the Company may not be able to pay its unfunded commitments. At 31 December 2010, the Group had uncalled commitments, including warehouse commitments, of £209.8 million (2009: £371.1 million), compared to Shareholders’ funds of £945.7 million (2009: £620.4 million), including cash balances of £17.1 million (2009: £144.1 million). In addition, the Company has the ability to draw a further €302.5 million (£259.2 million) from its loan facility. Earlier this year the Company has reached an agreement with its bankers to extend the term of its revolving credit facility to January 2013, but at the same time reduce the size of the facility from €550.0 million to €325.0 million initially, with further step-downs to €320.0 million in March 2011, €315.0 million in September 2011 and €250.0 million in March 2012. At 31 December 2010, the Company had £198.5 million of unsecured Senior Notes in issue, after repurchasing 12% of the Senior Notes in December 2010. Since the year-end, the Company has agreed to repay a further £15.9 million of Senior Notes at par, reducing the par value of its Senior Notes liabilities to £185.5 million. The Senior Notes are repayable between 2013 and 2015. In addition the Company has £101.9 million of subordinated convertible bonds in issue, repayable in 2016. SVG Capital plc Annual Report 2010 25
The revolving credit facility and the Senior Notes each contain financial covenants. The consequences for the Company of breaching such covenants would be serious. The lenders under the revolving credit facility would no longer be required to advance amounts available under the revolving credit facility and amounts outstanding under the revolving credit facility and the Senior Notes may become immediately due and payable by the Company. In such circumstances, the Company may become obliged to sell its assets on unfavourable terms to repay its debts, thereby reducing the returns which shareholders may otherwise have earned. Any such default may also trigger a cross-default under other existing financing arrangements. The Group’s revolving credit facility and the Senior Notes may mature before the investments in underlying portfolio companies are realised. In that case, the Group will be required to seek a refinancing. There can be no assurance that the Group will be able to obtain new finance on competitive terms or at all and therefore it may suffer a loss as a result of having to dispose of investments at a price which does not reflect the full value of the asset which may be achieved upon its maturity. A failure to obtain new finance could result in a member of the Group defaulting on its obligations which could have a material adverse effect on the Group. The revolving credit facility is
currently available until January 2013. The convertible bonds mature in 2016 and the reviewBusiness Senior Notes are due in 2013, 2014 and 2015. Any reduction in the net asset value attributable to shareholders and the share price will be amplified by balance sheet gearing. The Board considers cash flow forecasts at each Board meeting and expects to meet a substantial portion of its uncalled commitments, as well as commitments to future funds, from distributions received from its investments and from borrowings available to the Group. The Directors keep the Group’s gearing under review and impose restrictions on borrowings to mitigate this risk. The Company is in ongoing contact with its lenders and it may seek to renegotiate with lenders, dispose of assets or raise capital to mitigate this risk. This risk has been assessed as stable. Currency risk The Group is exposed to currency risk directly since the majority of its assets and liabilities are denominated in foreign currency and their sterling value can be significantly affected by movements in foreign exchange rates. Currency risk is monitored on a regular basis by the Board. The Group may from time to time hedge against foreign currency movements affecting the value of its balance sheet. This risk has been assessed as decreasing due to hedging of liabilities that has taken place. Further information on the Group’s risks is included in note 30 of the accounts on pages 83 to 90. The above risks should therefore be considered in conjunction with the additional disclosures contained in note 30. SVG Capital plc Annual Report 2010 26 List of investments (Group) at 31 December 2010
SVG Capital’s Value of holding in SVG Capital’s Year Original life the fund holding % of total formed (years) % £’000 investments Europe Permira Europe I The first US$1 billion fund raised for private equity investment in Europe focusing on large and medium-sized leveraged buy-out opportunities. 1997 10* 13.5 1,450 0.1 Permira Europe II Focused on European buy-outs/ins, in addition to growth capital investments. 2000 10 15.2 50,105 4.0 Permira Europe III Focused on buy-outs/ins and growth capital investments in European businesses or of global businesses with a strong European presence. 2003 10 7.2 120,136 9.6 Permira IV Focused on buy-outs/ins and growth capital investments in businesses which have or intend to have significant activities in Europe. The fund may invest up to 30% of its committed capital in businesses which do not have or intend to have significant activities in Europe. 2006 10 22.2** 632,043 50.6 P123 A fund of Permira buy-out funds, with interests in Permira Europe I, II and III. 2003 15 24.8 35,824 2.9 P1234 A fund of Permira buy-out funds, with interests in P123 and Permira IV. 2006 15 42.8 55,000 4.4 P25 A fund of Permira buy-out funds, with interests in Permira Europe III and Permira IV. – limited partnership interest 2006 15 47.7 56,599 4.5 – interest in subordinated debt 80.0 47,090 3.8 Sapphire IV A feeder fund that invests solely in Permira IV. 2006 15 0.3 446 - SVG Sapphire IV A feeder fund that invests solely in Permira IV. 2006 15 34.2 6,254 0.5 Permira Italy II 1993 10* 21.0 800 0.1 Permira UK III 1993 10* 0.3 65 – Permira UK Venture III 1990 10* 8.7 123 – Permira UK Venture IV 1995 10* 4.2 232 – Total Europe 1,006,167 80.5
* The lives of these funds have been extended. ** Interest in existing portfolio companies as at the date of the Permira IV reorganisation in 2008.
SVG Capital’s Value of holding in SVG Capital’s Year Original life the fund holding % of total formed (years) % £’000 investments Asia Asia Pacific Trust 1990 8* 6.4 17 – Asia Pacific Fund II 1994 10* 14.0 2,725 0.2 Schroder Ventures Asia Pacific Fund 1999 10* 29.9 2,486 0.2 The Japan Fund IV 2004 10 27.2 4,186 0.4 Total Asia 9,414 0.8
* The lives of these funds have been extended. ** Interest in existing portfolio companies as at the date of the Permira IV reorganisation in 2008. SVG Capital plc Annual Report 2010 27
SVG Capital’s Value of holding in SVG Capital’s Year Original life the fund† holding % of total formed (years) % £’000 investments North America Schroder Canadian Buy-Out Fund III 2000 10 26.6 406 – Co-investments with Schroder Canadian Buy-Out Funds III and SV Investments Fund I 946 0.1 SV Life Sciences Fund III 2002 10 3.8 5,703 0.5 SV Life Sciences Fund IV 2006 10 9.0 21,731 1.7 SV Investments Fund I 1999* 10 19.4 10,364 0.8 Total North America 39,150 3.1 Total private equity fund portfolio 1,054,731 84.4 Private equity funds warehouse 10,748 0.9 Total private equity funds warehouse 10,748 0.9 Private equity funds of funds: SVG Diamond I 46,880 3.8 Business reviewBusiness SVG Diamond I (F Notes) 8,054 0.6 SVG Diamond II 24,385 2.0 SVG Diamond II (F Notes) 3,916 0.3 SVG Diamond III 13,976 1.1 Vintage I 21,657 1.7 Schroder Private Equity Fund of Funds III 623 0.1 SVG Asia Fund of Funds 4,198 0.3 Total private equity funds of funds 123,689 9.9 Public equity funds: Strategic Equity Capital 10,920 0.9 Strategic Recovery Fund II – co-investment 19,161 1.5 SVG UK Focus Fund 13,020 1.1 SVG European Fund 6,332 0.5 Total public equity funds 49,433 4.0 SVG India 9,112 0.7 Gaja Fund 1,061 0.1 Other –– Total other investments 10,173 0.8 Total investment portfolio 1,248,774 100.0 Other assets less total liabilities (303,097) Total Shareholders’ funds 945,677
† Direct interest in the fund. Comparative values for the 10 largest funds are shown in note 17 of the financial statements. * The life of this fund has been extended. SVG Capital plc Annual Report 2010 28 Board of Directors
Nicholas Ferguson Chairman Nicholas Ferguson was appointed as a Director on 12 February 1996 and Chairman on 25 April 2005. He was formerly Chairman of Schroder Ventures and instrumental in its development since 1984. He is Deputy Chairman of British Sky Broadcasting Group Plc. Committees: Nominations (Chairman)
Lynn Fordham Chief Executive Lynn Fordham was appointed as a Director on 1 July 2008. She is the Company’s Chief Executive Officer. She has over 20 years of financial experience and has worked in a number of companies including Mobil Oil, BAA plc, Boots Group plc and MAN Group plc. She is chairwoman of SVG Advisers. On 18 January 2011, Lynn joined Fuller, Smith and Turner P.L.C. as a non-executive director.
Francis Finlay Non-Executive Director Francis Finlay was appointed as a Director on 1 October 2004. His other non-executive directorships of investment companies include the London listed investment trust, Scottish Investment Trust plc, as well as Blakeney Investors, Boyer Allan Holdings Limited and Old Mutual (US) Holdings Inc. Committees: Remuneration (Chairman) Nominations
Caroline Goodall Non-Executive Director Caroline Goodall was appointed as a Director of the Company on 4 October 2010. She is currently a consultant to international law firm Herbert Smith, where she was a partner and held a number of senior management positions. Caroline is an independent non-executive of accountancy firm Grant Thornton UK LLP. She is also a non-executive director and trustee of the Woodland Trust and has sat as a non-executive on the Governing Body of Newnham College, Cambridge. Committees: Remuneration Nominations SVG Capital plc Annual Report 2010 29
Edgar Koning Non-Executive Director Edgar Koning was appointed as a Director on 12 February 1996 and is Executive Vice President with AEGON Nederland NV. He joined the AEGON Group in 1981 and has held various senior management positions in the AEGON Group. Committees: Nominations
Denis Raeburn Non-Executive Director Denis Raeburn was appointed as a Director on 25 June 2001 and was Managing Director of the asset management company Global Asset Management (GAM) between 1986 and 1999. Committees: Audit Remuneration Nominations
Charles Sinclair information Corporate Non-Executive Director Charles Sinclair was appointed as a Director on 1 January 2005. He is Chairman of Associated British Foods plc. He retired as Chief Executive of Daily Mail and General Trust plc on 30 September 2008, a post he held since 1989. Senior Independent Director Committees: Audit Nominations
Andrew Sykes Non-Executive Director Andrew Sykes was appointed as a Director on 8 February 2010. He is deputy chairman of Smith & Williamson Holdings Limited, chairman of Invista Foundation Property Trust Limited, Absolute Return Trust Limited. He is also a non-executive director of SVG Advisers Limited, Record plc, Gulf International Bank (UK) Limited and MBIA UK Insurance Limited and chairs the investment committee of the Schroder Retirement Benefits Scheme. Committees: Audit (Chairman) Nominations SVG Capital plc Annual Report 2010 30 Report of the Directors for the year ended 31 December 2010
The Directors submit their report and the audited accounts of the Company for the year ended 31 December 2010. Company’s business The Company carries on business as an investment trust and is an investment company within the meaning of Section 833 of the Companies Act 2006. In order to obtain exemption from capital gains tax, the Company has conducted itself with a view to being an approved investment trust for the purposes of Section 1158 of the United Kingdom Corporation Tax Act 2010. The last accounting period for which the Company has been treated as approved by HM Revenue & Customs as meeting the qualifying criteria for investment trust status is the year ended 31 December 2009 and the Company has subsequently conducted its affairs so as to enable it to continue to qualify for such approval. The Company is not a close company for taxation purposes. A review of the Company’s business and its likely future development is given in the Chairman’s statement on pages 6 and 7, the Chief Executive’s report on pages 8 and 9 and the Business review on pages 10 to 25. The Business review, Corporate Governance review and Corporate Social Responsibility review are to be treated as part of the Report of the Directors. Revenue and earnings The Company’s investment objective is one of capital growth and it is anticipated that returns for shareholders will derive primarily from capital. No final dividend is recommended for the year ended 31 December 2010 (2009: no dividend). The consolidated revenue loss for the year attributable to equity shareholders was £28,045,000 (2009: loss of £36,572,000). The Company’s revenue loss for the year was £30,086,000 (2009: loss of £28,025,000). The consolidated capital gain for the year attributable to equity shareholders was £354,942,000 (2009: gain of £59,447,000). The Company’s capital gain for the year was £345,701,000 (2009: gain of £60,597,000). Taking capital returns into account, the consolidated profit for the year attributable to equity shareholders was £326,897,000 (2009: profit of £22,875,000). The Company’s profit for the year was £324,615,000 (2009: profit of £32,572,000). Dividend The Company is prohibited by its Articles of Association from distributing as dividends any capital surpluses that arise from the realisation of investments. Accordingly, any dividends paid by the Company will be funded out of its revenue account. Policy for payment of creditors It is the policy of the Company to settle all investment transactions in accordance with the terms and conditions of the relevant markets in which it operates. All other expenses are paid on a timely basis in the ordinary course of business. The Company had no trade creditors at 31 December 2010 (2009: nil). Purchase of shares for cancellation At the AGM held on 21 April 2010, the Company was authorised to purchase up to 14.99% of share capital in issue on 8 March 2010. The Directors have not used this authority to purchase any of the ordinary shares of the Company and do not intend to exercise the authority prior to its expiry on 31 March 2011. Annual General Meeting The AGM will be held at 11.30 am on 31 March 2011 at 61 Aldwych, London WC2B 4AE. Details of the resolutions to be proposed at the AGM, together with explanations, appear in the Notice of AGM on page 91. Directors In accordance with the Company’s Articles of Association and the Company’s policy on tenure outlined on page 38, Nicholas Ferguson, Edgar Koning and Denis Raeburn will retire at the Annual General Meeting and, being eligible, offer themselves for re‑election. Caroline Goodall offers herself for election at the Annual General Meeting following her appointment as non-executive Director with effect from 4 October 2010. Caroline is currently a consultant to international law firm Herbert Smith, where she was a partner and held a number of senior management positions. Caroline is an independent non‑executive of accountancy firm Grant Thornton UK LLP. She is also a non-executive director and trustee of the Woodland Trust and has sat as a non-executive on the Governing Body of Newnham College, Cambridge. The Board recommends that you support the election of Caroline Goodall and re-elections of Nicholas Ferguson, Edgar Koning and Denis Raeburn who continue to demonstrate commitment to their roles and provide valuable contributions to the deliberations of the Board and its Committees. Edgar Koning and Denis Raeburn have each served as non-executive Directors of the Company for more than nine years. Edgar Koning is an employee of AEGON, a large shareholder in the Company. Andrew Sykes is a non-executive director of the Company’s subsidiary, SVG Advisers Limited. They are all considered to be independent in both character and judgement. Further details on independence are contained in the Corporate Governance review on page 38. Biographical details of all current Directors may be found on pages 28 and 29. SVG Capital plc Annual Report 2010 31
The Directors of the Company and their beneficial and family interests in the Company’s share capital as at 31 December 2010 are given below:
Ordinary shares of £1.00 each At At 31 December 1 January 2010 2010 Beneficial Nicholas Ferguson 879,618 879,618 Francis Finlay 250,000 250,000 Lynn Fordham 68,000 40,567 Caroline Goodall Nil N/A Edgar Koning 80,000 80,000 Denis Raeburn 328,332 328,332 Charles Sinclair 110,124 110,124 Gary Steinberg (resigned 12 January 2010) Nil 5,000 Andrew Sykes 21,000 N/A Non-beneficial Nicholas Ferguson 204,937 210,937
Nicholas Ferguson has options over ordinary shares, details of which are given on page 36. Denis Raeburn holds £800,000 Convertible Bonds due 2016 and Charles Sinclair holds £100,000 Convertible Bonds due 2016. Nicholas Ferguson and members of his family have an interest in the carried interest in respect of certain private equity funds. Nicholas Ferguson has foregone a portion of his entitlement to carried interest on existing private equity funds and any entitlement he may have to carried interest on Permira or Schroder Ventures’ funds launched after 2001 in return for share options granted by the Company under the Executive Share Option Plan. Nicholas Ferguson received no further options following his retirement as Chief Executive Officer in April 2005. Nicholas Ferguson also participates in the Schroder Ventures Co-Investment Scheme and Schroder Ventures Investments Limited. He has received no new carried interest allocations and made no new commitments since he joined SVG Capital plc in 2001. Lynn Fordham has a service contract with SVG Advisers Limited (“SVGA”). Andrew Sykes is a non-executive director of SVGA. No other Director has any material interest in any other contract that is significant to the Company’s business. Auditors The Company is required to appoint auditors for each financial year of the Company, to hold office until the conclusion of the next general meeting at which accounts are presented. Ernst & Young LLP have expressed their willingness to remain in office and resolutions information Corporate to re-appoint them and to authorise the Directors to determine their remuneration will be proposed at the Annual General Meeting. The Auditor provides non-audit services to the Group, including tax and regulatory services. The Audit Committee has adopted a pre-approval policy on the engagement of the Auditor to supply non-audit services to the Group. It is not considered that the independence of the Auditor has been prejudiced by the provision of non-audit services. Terms of Reference of the Audit Committee may be found on the Company’s website, www.svgcapital.com. Provision of information to auditors As far as the Directors are aware, there is no relevant audit information of which the Auditor is unaware and they have taken all steps they should have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information. Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards (“IFRS”) as adopted by the European Union. Under company law the Directors must not approve the Group financial statements unless they are satisfied that they present fairly the financial position of the Group and the financial performance and cash flows of the Group for that period. In preparing those financial statements, the directors are required to: –– select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently; –– present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; –– provide additional disclosures when compliance with the specific requirement in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance; –– make judgements and estimates that are reasonable and prudent; and –– state that the Group has complied with IFRS, subject to any material departures disclosed and explained in the financial statements. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. SVG Capital plc Annual Report 2010 32 Report of the Directors
They are responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Each of the Directors, whose names and functions are set out in this report, confirms that, to the best of their knowledge: –– the accounts, which have been prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and net return of the Group; and –– the Report of the Directors includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces. Substantial share interests As at 11 February 2011, the Company had 310,407,923 shares of £1 in issue. No shares were held in treasury. The total number of voting rights as at 11 February 2011 was 310,407,923. As at 11 February 2011, the Company has received notifications in accordance with the FSA’s Disclosure and Transparency Rule 5.1.2 R of the following interests in 3% or more of the voting rights attaching to the Company’s issued share capital: Voting rights attached to shares Number of Percentage ordinary of total shares voting rights Coller Investment Management Limited 62,000,000 19.97 AEGON Investment Management BV 59,507,330 19.17 Aviva plc 28,641,961 9.23 Schroders plc and its subsidiaries: – non-beneficial, managed for clients 18,742,385 6.04 – beneficial 14,226,898 4.58 Permira Capital Limited 12,000,000 3.87 Legal & General Group Plc 10,134,622 3.26
By order of the Board
Stuart Ballard Company Secretary 14 February 2011 Registered Number: 3066856 Registered Office: 61 Aldwych, London WC2B 4AE SVG Capital plc Annual Report 2010 Remuneration report 33 for the year ended 31 December 2010
Introduction This report provides details of the remuneration paid to the Directors for the year ended 31 December 2010 and describes the Remuneration Committee’s policy on the remuneration of the Directors for the coming year. This report has been prepared in accordance with the Companies Act 2006, Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and the Listing Rules of the Financial Services Authority. The report is divided into two parts. Part A, which is not subject to audit, describes the Remuneration Committee’s policy on the remuneration of Directors for the coming year. Part B, which is audited, contains tables detailing the Directors’ emoluments for the year ended 31 December 2010, their accrued pensions and their interests under the Companies’ long-term incentive arrangements. The Committee will be reviewing the remuneration arrangements of senior executives in light of the revised FSA Remuneration Code published in December 2010. A resolution to approve this report will be put to shareholders at the Company’s Annual General Meeting in March 2011. Part A – Unaudited section The Remuneration Committee (the “Committee”) The Committee’s members during the year were Francis Finlay (Chairman), Denis Raeburn and Gary Steinberg, who were all considered by the Board to be independent non-executive Directors. Gary Steinberg resigned from the Board and the Remuneration Committee on 12 January 2010. Since year end, Caroline Goodall has joined the Remuneration Committee. The biographies of the current members are provided on pages 28 and 29. The Chairman and selected executives, including the Chief Executive, and the Committee’s advisers are invited to attend as appropriate. None of the executives invited to attend during the year participated in discussions or decisions regarding their remuneration. The Committee is responsible for determining the remuneration policy throughout the SVG Group (including making a recommendation to the Board on the remuneration of the Chairman) and the operation of the Company’s Executive Share Incentive Plans. Its terms of reference take into account the provisions of the Combined Code on corporate governance. The Committee has appointed independent remuneration consultants, Hewitt New Bridge Street (a trading name of Aon Corporation), to advise it. Hewitt New Bridge Street also provides advice on the operation of the Company’s share schemes. Neither Hewitt New Bridge Street nor any other part of Aon Corporation provided other services to the Company during the year. The Committee meets at least twice a year and during the year under review it met formally twice, in April and December 2010. Both meetings were attended by Mr Finlay and Mr Raeburn. In addition, the subcommittee of the Remuneration Committee, comprising the Chairman of the Committee and the Company Secretary, met in April 2010 to effect a proposal for the granting of awards under the Performance Share Plan (“PSP”). In addition, a number of informal meetings of the Committee took place during the year. Corporate information Corporate During the year the Committee: –– Determined the aggregate bonus awards for the years to 31 December 2009. –– Approved the change to Lynn Fordham’s remuneration package. –– Approved the granting of awards under the PSP. –– Approved all remuneration packages for any Group executive with a proposed total cash remuneration in excess of £250,000 per annum. –– Approved the arrangements in connection with the departure of senior employees from the Group. Both SVGA and SVGIM have separate Boards with independent directors and separate remuneration committees. The SVG Capital Remuneration Committee sets parameters and principles for the salary increases, discretionary bonuses and long-term incentive plans for these subsidiaries which are consistent with effective risk management. Accordingly, the subsidiary remuneration committees, operating under specified delegated limits of authority from the main Board, met during the year to determine increases in salary and discretionary bonuses for all executives below main Board level. A summary of these were presented to the SVG Capital Remuneration Committee for its approval. A summary of the terms of reference of the Committee are set out on page 40. A copy of the full terms of reference of the Committee is available for inspection at the Company’s registered office during normal business hours. Policy on the remuneration of executive Directors The Committee’s aim is to ensure that remuneration packages should attract, retain and motivate senior executives (including executive Directors) while avoiding paying more than is necessary for this purpose and not encouraging excessive risk taking. At 31 December 2010, Lynn Fordham was the only executive Director of the Company. The Committee’s policy is that the fixed elements of remuneration should be sufficient to allow the Company to be competitive against other companies with which the Company competes for executive talent. The majority of the remuneration package should be performance-related so that it is linked to the returns created for shareholders and the total cost is sufficiently flexible to reflect changes in business performance. The variable element comprises a balance between short-term and long-term performance through the Company’s annual bonus and the performance share plan. In order to help mitigate risk and ensure that overall rewards are not excessive, incentive levels are capped at a level that encourages out-performance and allows the Company to deliver competitive levels of remuneration without encouraging undue risk taking. SVG Capital plc Annual Report 2010 34 Remuneration report
Basic salary Salaries are reviewed annually with changes becoming effective in April each year. The Committee decides on the increases awarded to the executive Directors and is consulted on increases for all employees of the business. The Committee considers Group performance, individual performance and pay and employment conditions of employees of the Group in reaching any decisions. The Committee considered the pay awards and other employment conditions of employees of the Group before approving the pay packages of any executive Directors. In addition, relevant compensation surveys are reviewed. No executive Director of the Company is involved in deciding his or her own remuneration. Lynn Fordham’s salary was increased in April 2010 from £340,000 to £350,000. With a view of maintaining cost control within SVGA, senior management there are not receiving salary increases. In light of this, Lynn Fordham’s salary will not be increased in April 2011. Annual bonus Annual bonuses are intended to reward achievement of Group and personal objectives. Bonuses are non-pensionable and discretionary. The Committee sets the performance targets for the annual bonus plan at the beginning of the financial year. The targets are chosen to reflect the successful implementation of the business plan and strategies agreed by the Board and may be adjusted to take account of risk. The normal maximum annual bonus for an executive Director has been set at 200% of salary, although, this cap can be exceeded in exceptional circumstances. The Committee believes that capping bonuses at this level enables the Company to provide competitive levels of remuneration while ensuring that executives are not incentivised to take inappropriate risks. The bonus awarded to Lynn Fordham in respect of her performance in the year to December 2010 amounted to £455,000. This reflects the key performance parameters for Lynn Fordham of implementing the financing strategy, developing investment policy, building relationships with stakeholders, and expanding the Company’s investor base. The overall bonus earned was above the on-target level reflecting the Committee’s assessment that the bonus targets were fully met and that Lynn Fordham had performed well during the year. Long-term incentives Lynn Fordham and selected employees of the SVG Group are eligible to participate in the Performance Share Plan (“PSP”) at the discretion of the Remuneration Committee. The Committee believes that participation in long-term incentives ensures that a significant part of executives’ potential remuneration is tied to the returns received by shareholders over the longer term through the use of performance conditions linked to the Group’s strategy and through exposure to the Group’s share price. This provides alignment between executives and shareholders and, because vesting of awards takes place three or four years after grant, provides an element of lock-in and encourages a focus on performance that is sustainable in the longer term. PSP awards are made annually, as this enables executives to build up a series of overlapping awards, which the Committee believes is more retentive than larger one-off awards. The PSP enables awards of conditional free shares (or nil or nominal cost options) to be made. Award levels are determined by reference to the level of salary and bonus earned in the previous year as this provides a link to individual performance. The maximum that can be awarded in any financial year is 200% of base salary and bonus. For the purposes of calculating these limits the maximum amount of bonus which may be used is capped at 300% of base salary and the value of an award shall be calculated and, if necessary, adjusted to take into account any employer’s secondary National Insurance contributions (or overseas equivalent) that may have been transferred to the award holder. In practice, the cap on the amount of bonus that may be included in the calculation of awards is unlikely to be reached as the normal maximum annual bonus of 200% of salary can only be exceeded in exceptional circumstances. In order to ensure that long-term incentives provide alignment with shareholders the Committee sets performance conditions that reward executives for delivering absolute growth in the value of the Group. The performance conditions used for the 2010 awards are the same as those for the 2009 awards and consist of (i) the average growth in the Company’s undiluted Net Asset Value per Share (“NAV”) over a four-year period and (ii) the Company’s average annual compound total shareholder return (“TSR”) over a three-year period, with each determining the vesting of 50% of the award. NAV-based awards will normally vest on the fourth anniversary of the award being granted provided that the award holder is a Director or employee within the SVG Group on that date and to the extent that the NAV performance condition has been satisfied. If average annual growth in NAV over the performance period is less than 7% per annum, none of this part of the award will vest. If average annual growth in NAV over the performance period is 15% per annum or more, all of this part of the award will vest. For NAV growth between these two points, between 0% and 100% of this part of the award will vest on a pro-rata basis. TSR based awards will normally vest on the third anniversary of the award being granted provided that the award holder is a Director or employee within the SVG Group on that date and to the extent that the TSR performance condition has been satisfied. If average annual compound TSR over the performance period is less than 10% per annum, none of this part of the award will vest. If average annual compound TSR over the performance period is 20% per annum or more, all of this part of the award will vest. For TSR performance that is between these two points between 0% and 100% of this part of the award will vest on a pro-rata basis. The Remuneration Committee believes that TSR and growth in NAV are appropriate measures of long-term performance for a business focused on delivering superior levels of NAV growth and returns to shareholders. In setting the performance targets for the 2010 awards the Remuneration Committee took account of the current shareholder expectations of future performance for the Company. The PSP replaced the 2001 ESOP following the 2007 AGM. However, whilst the Committee does not intend to make SVG Capital plc Annual Report 2010 35
further grants under the ESOP it has been retained for use in exceptional circumstances such as for the recruitment and retention of senior staff or to reward exceptional performance. Any grant of options under the ESOP will count toward the individual limits under the PSP and appropriately demanding performance conditions will be set at the time of grant. In addition, the Company introduced a SIP at the 2007 AGM. The SIP is a tax approved all-employee share plan with standard features. No awards have been made under the SIP. Benefits Benefits in kind (which are not pensionable) relate to the provision of health insurance and life assurance cover. Private health insurance is offered to all employees who have the option to cover their partners and dependent children. In addition, all employees are entitled to a contribution to their pension plans. External appointments The Company permits executive Directors of the Company to accept limited non-executive Directorships and other similar appointments, it being recognised that such appointments increase their commercial knowledge and business experience to the general benefit of the Company. Fees earned from such directorships may be retained by the executive Directors. Lynn Fordham joined the Board of Fuller, Smith and Turner P.L.C. as a non-executive director on 18 January 2011. The fees received in respect of this appointment will be disclosed in next year’s report. Executive Director service contracts Lynn Fordham’s contract provides for six months’ notice for termination and SVG Advisers Limited may terminate her employment by paying a sum in lieu of notice calculated by reference to her salary and other benefits. Date of last Notice period issued contract (months) Lynn Fordham 13 November 2009 6
Policy on the remuneration of non-executive Directors Remuneration paid to non-executive Directors is determined by the Board and reviewed each year. When considering remuneration levels, the Board will consider, amongst other things, industry practice and contribution to various committees and time spent on the business of the Company. Appointment, re-appointment and re-election of non-executive Directors All Directors are appointed for an initial term of three years, subject to election or re-election at the Annual General Meeting. Thereafter Directors retire by rotation at least every three years. The Chairman meets with each Director before a Director is proposed for re-election, and, subject to the evaluation of performance carried out each year, the Board agrees whether it is appropriate for that Director to seek an additional term. When recommending whether an individual Director should seek information Corporate re-election, the Board will take into account the provisions of the UK Corporate Governance Code. Non-executive Directors are appointed under letters of appointment and do not have service contracts. The letters of appointment are available for inspection at the Company’s registered office during normal business hours. Performance graph The TSR for the five years to 31 December 2010 is shown in the graph below. This graph looks at the value of £100 invested in SVG Capital on 31 December 2005 compared with the value of £100 invested in the FTSE All-Share Total Return Index. The other points plotted are the values at intermediate financial year ends. For this purpose, the Committee has decided that the FTSE All-Share Total Return Index is the most appropriate available index for comparative purposes because it is the principal index in which the Company’s shares are quoted.
Total shareholder return
140
120
100
80
60
40
20
0 31-Dec 31-Dec 31-Dec 31-Dec 31-Dec 2006 2007 2008 2009 2010
SVG Capital FTSE All-Share Index Source: Datastream SVG Capital plc Annual Report 2010 36 Remuneration report
Part B – audited Directors’ remuneration The emoluments of the Directors in respect of the year ended 31 December 2010 were as specified below: Total Total emoluments emoluments Year to Year to Salary Annual Other 31 December 31 December and fee Benefits bonus§ compensation 2010 2009 £’000 £’000 £’000 £’000 £’000 £’000 Nicholas Ferguson 200 – – – 200 233 Lynn Fordham 348 62* 455 – 865 775 Damon Buffini (resigned 6 May 2009) –––– – 12 Francis Finlay 42 – – – 42 44 Caroline Goodall (appointed 4 October 2010) 9 – – – 9 – Anthony Hapgood (resigned 6 May 2009) –––– – 17 Edgar Koning 31 – – – 31 29 Denis Raeburn 49 – – – 49 44 Charles Sinclair 44 – – – 44 43 Andrew Sykes (appointed 8 February 2010) 36** – – – 36 – Gary Steinberg (resigned 12 January 2010) 1 – – – 1 48 Andrew Williams (resigned 8 May 2009) –––– – 673 Aggregate emoluments 760 62 455 – 1,277 1,918
* The Company attributes an amount equal to 30% of Lynn Fordham’s basic annual salary to her personal pension plan, subject to a notional salary cap equal to £200,000. For the year ended 31 December 2010 the Company made a total contribution of £60,000. ** Andrew Sykes received £23,209 for acting as a non-executive director of SVG Advisers Limited (“SVGA”) and received £13,582 for acting as the Company’s observer on the advisory committee to SVGA in respect of SVG Diamond Holdings Limited. § Bonuses include provision for amounts accrued but not paid in each year. Annual bonuses are awarded in respect of calendar years. Details of the Directors’ interests in shares are shown on page 31. Pension arrangements No defined benefit pension arrangements are in place for any of the Directors. Awards Under the Company’s Executive Share Incentive Plans Options held by Directors over ordinary shares of the Company under the 2001 ESOP The following Directors have been granted options over ordinary shares under the Executive Share Option Plan. No adjustments are required to the price or number of shares subject to award following the Rights Issue: During the year Exercise dates† At At 31 December Options Options Options 31 December Exercise price 2009 granted exercised lapsed 2010 (pence) Earliest Latest Nicholas Ferguson* 715,446 – – – 715,446 410.00 21 June 2004§ 20 June 2011 357,724 – – – 357,724 410.00 21 June 2005§ 20 June 2011 404,484 – – – 404,484 334.50 5 April 2005§ 4 April 2012 349,840 – – – 349,840 392.75 13 March 2006§ 12 March 2013 363,256 – – – 363,256 479.00 12 March 2007§ 11 March 2014 250,704 – – – 250,704 564.00 23 March 2008§ 22 March 2015 Total 2,441,454 – – – 2,441,454
* Options granted to Nicholas Ferguson were made at a time prior to his appointment as Chairman. † Options are exercisable subject to the satisfaction of performance conditions (see below). § Performance conditions have been met. The performance targets have been met in respect of all the options listed above. All of the above options were granted for nil consideration. All options under the 2001 ESOP were granted at the prevailing market price around the time of grant. SVG Capital plc Annual Report 2010 37
Awards held by Directors over ordinary shares of the Company* During the year Vesting dates** At At 31 Exercise price 31 December Awards Awards Awards December per share 2009 granted vested lapsed 2010 (pence) Earliest Latest L Fordham** 99,999*** – –– 99,999 0.00 25 September 2012 25 September 2018 412,044*** – –– 412,044 0.00 13 October 2012 13 October 2019 412,044*** – –– 412,044 0.00 13 October 2013 13 October 2019 – 384,446*** – – 384,446 0.00 15 April 2013 15 April 2020 – 384,446*** – – 384,446 0.00 15 April 2014 15 April 2020 Total 924,087 768,892 –– 1,692,979
* Awards made before 2009 will vest and become exercisable subject to the satisfaction of an NAV performance condition requiring the average annual growth in SVG’s NAV over four years to be between 10% per annum (25% of the award vests) and 18% per annum (100% vests). ** Of the 99,999 shares awarded to Lynn Fordham in 2008, awards over 83,478 shares were made under the PSP and the remaining 16,521 shares were awarded under a one-off agreement under Listing Rule 9.4.2R(2). The details of this award were fully disclosed in the 2008 Annual Report and Accounts. The one-off award was granted on substantially the same terms as the 2008 PSP award and is subject to the same NAV growth performance conditions. *** The awards granted in 2009 and 2010 were split equally between awards based on NAV growth and awards based on TSR (details summarised in the section headed ‘Long-Term Incentives’ above). The price of an ordinary share on 25 September 2008, when awards were granted to Lynn Fordham under the PSP and one-off agreement, was 579.0p. The price of an ordinary share on 13 October 2009, when awards were granted to Lynn Fordham under the PSP, was 126.2p. The price of an ordinary share on 15 April 2010, when awards were granted to Lynn Fordham under the PSP, was 170.7p. The mid-market price of shares at 31 December 2010 was 210.8p and the range for the year was 125.2p to 224.3p. External advisers will confirm the performance criteria calculations for the Committee, which will be measured on a consistent basis. Share Plan Dilution Limits The Company has established an employee benefit trust to enable it to subscribe for or purchase shares in the market to satisfy awards and options made to employees under the PSP and the 2001 ESOP. On 13 May 2010, the employee benefit trust acquired 3,125,000 shares at a price of 160p per share. The total number of shares held by the employee benefit trust is 3,125,000 (representing 1.01% of the Company’s issued share capital). The maximum number of shares that the Company may require to satisfy awards (assuming that all awards vest fully and are exercised) is 11,998,960 shares. The Board will continue to regularly review the benefit of using the trust to make market purchases. The Board may use new issue shares to satisfy grants or shares held in treasury (if any). In any ten calendar year period the Company may not issue (or grant rights to issue) more than 10% of the issued information Corporate ordinary share capital of the Company under the PSP, the 2001 ESOP and any other employees’ share scheme adopted by the Company. As at 31 December 2010, the total number of shares issued or issuable under awards and options made under the PSP and the 2001 ESOP was equal to 3.9% of the issued ordinary share capital on that date. On behalf of the Board
Francis Finlay Chairman, Remuneration Committee 14 February 2011 SVG Capital plc Annual Report 2010 38 Corporate governance
The Board is committed to high standards of corporate governance and has implemented a framework for corporate governance which it considers to be appropriate for the Company. The Combined Code on Corporate Governance (the “Code”), published in 2008 by the Financial Reporting Council (“FRC”), applies to disclosures in this statement. The Code is available to download from www.frc.org.uk. In 2010, the FRC has published an updated version known as the UK Corporate Governance Code (the “revised Code”). The revised Code will apply for financial years beginning on or after 29 June 2010. The Board is keeping its practices under review in light of the revised Code. Compliance Statement The UK Listing Authority requires all listed companies to disclose how they have complied with the provisions of the Code. This Corporate governance statement, together with the Statement of Directors’ responsibilities on page 31 and Going concern set out on page 40, indicates how the Company has complied with the principles of good governance of the Code and its requirements on internal control. The Board considers that the Company has, throughout the year under review, complied with the best practice provisions in Section 1 of the Code, other than the requirement that the Remuneration Committee comprise of at least three non-executive Directors. Caroline Goodall has been appointed to the Remuneration Committee subsequent to the year end bringing its membership to three. Role of the Chairman The Chairman is responsible for leading the Board, ensuring its effectiveness in all aspects of its role and setting its agenda. Role of the Board The Board determines and monitors the Company’s investment objectives and policy, decides on individual fund investments and considers the future strategic direction of the Company. The Board is responsible for presenting a balanced and understandable assessment of the Company’s position and, where appropriate, future prospects in annual and half-yearly reports and other forms of public reporting. It monitors and reviews the shareholder base of the Company, marketing and shareholder communication strategies, and evaluates the performance of all service providers, with input from its Committees where appropriate. A procedure for Directors, in the furtherance of their duties, to take independent professional advice at the expense of the Company has been agreed. Composition and independence At 31 December 2010, there was one executive and seven non-executive Directors, including the Chairman. Profiles of each of the Directors, including length of service, may be found on pages 28 and 29. Caroline Goodall joined the Board on 4 October 2010. The Board considers each of Francis Finlay, Caroline Goodall and Charles Sinclair to be independent. The Board considers Edgar Koning independent in both character and judgement, notwithstanding that he is an employee of AEGON, a large shareholder in the Company and has served on the Board for more than nine years. The Board considers Denis Raeburn independent in both character and judgement, notwithstanding that he has served on the Board for more than nine years. Andrew Sykes was appointed as a non-executive Director on 8 February 2010. The Board considers Andrew Sykes independent having considered his role as a non-executive director of SVGA and is comfortable this role increases the Company’s oversight of its subsidiary and does not affect his independence. The independence of each Director is considered on a continuing basis. A review of Board composition and balance, including succession planning for appointments to the Board, is included as part of the annual performance evaluation of the Board, details of which may be found below. The Board is satisfied that it is of sufficient size, with an appropriate balance of skills and experience, and that no individual or group of individuals is or has been in a position to dominate decision making. Senior Independent Director Charles Sinclair was appointed Senior Independent Director on 4 March 2009. The Senior Independent Director leads the evaluation of the performance of the Chairman and is available to shareholders if they have concerns that cannot be resolved through discussion with the Chairman. As part of the evaluation process, the non-executive Directors meet without the Chairman being present, and the Senior Independent Director chairs these meetings. Company Secretary The Directors have access to the advice and services of the Company Secretary, who is responsible to the Board, inter alia, for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. Tenure The Directors have adopted a policy on tenure that they consider appropriate for the Company as a self-managed investment trust. The Board does not believe that length of service, by itself, impacts on independence. The independence of non-executive Directors will continue to be assessed on a case-by-case basis. While the revised Code recommends that all directors be subject to annual re-election at the Annual General Meeting, the Directors believe that such a policy on tenure is not appropriate given the Company’s long-term investment horizon. However, any non-executive Director who has served for more than nine years will be subject to annual re-election at the Annual General Meeting. Otherwise, Directors retire by rotation at least every three years. This policy will be kept under review. SVG Capital plc Annual Report 2010 39
Induction and training When a Director is appointed he or she receives a full, formal and tailored induction. Changes affecting Directors’ responsibilities are advised to the Board as they arise. Advisers to the Company also prepare reports for the Board from time to time. In addition, Directors may attend ad hoc seminars covering issues and developments relevant to the Company. Performance evaluation The Board has adopted a formal and rigorous annual evaluation of its own performance and that of its Committees and individual Directors. This year, the evaluation was completed in December 2010 and was led by the Senior Independent Director. The process involved compiling a discussion guide which covered designated topics, with a particular focus this year on board dynamics and effectiveness, corporate governance, risk management and the development of strategy. The Senior Independent Director and Company Secretary undertook a confidential, unattributable interview with each Director based on the discussion guide. Following the meetings, the Senior Independent Director produced a written report which was discussed with the Chairman, before being sent to Board members and discussed at the following Board meeting. Among the main themes highlighted by this year’s evaluation were the importance of reviewing the development of strategy further and of continuing scrutiny of the composition of the Board and various committees. A list of action points to deal with the issues arising from the performance evaluation has been compiled and is being implemented under the direction of the Chairman. Overall the evaluation process confirmed that the Board and its principal committees had functioned efficiently during the year and that each Director continued to contribute to his or her role effectively and with proper commitment, including of time. The Board will consider whether the evaluation of its performance should be externally facilitated at least once every three years. Meetings The Board held six scheduled meetings during 2010 including one, full day, strategy event. Attendance at the Board and Committee meetings was as set out below: Audit Remuneration Nominations Director Board Committee Committee Committee Nicholas Ferguson 6/6 N/A N/A 2/2 Francis Finlay 5/6 N/A 2/2 2/2 Lynn Fordham 6/6 N/A N/A N/A Caroline Goodall (appointed 4 October 2010) 2/2 N/A N/A 0/0 Edgar Koning 4/6 N/A N/A 2/2 Denis Raeburn 6/6 3/3 2/2 2/2 information Corporate Charles Sinclair 6/6 3/3 N/A 2/2 Gary Steinberg (resigned 12 January 2010) 0/0 0/0 0/0 0/0 Andrew Sykes (appointed 8 February 2010) 6/6 3/3 N/A 1/1
The Board is satisfied that each of the Chairman and the other non-executive Directors commit sufficient time to the affairs of the Company to fulfil their duties as Directors. Information flows Management reports to the Board on at least a quarterly basis and as appropriate on specific matters. The Chairman ensures that Directors are provided, on a regular basis, with key information on the Company’s policies, regulatory requirements and internal controls. The Board receives and considers reports regularly from its advisers and ad hoc reports and information are supplied to the Board as required. Insurance and Indemnities During the year, the Company maintained cover for its Directors and Officers under a directors’ and officers’ liability insurance policy. The Company provides a Deed of Indemnity to each Director to the extent permitted by United Kingdom law whereby the Company agrees to indemnify such Director against any liability incurred in proceedings in which the Director is successful, and for costs in defending a claim brought against the Director for breach of duty where the Director acted honestly and reasonably. Conflicts of interest In the light of changes to the law resulting from the implementation of the Companies Act 2006, the Board has approved a policy on Directors’ conflicts of interest. Under this policy, the Directors are required to disclose all actual and potential conflicts of interest to the Board as they arise for consideration and approval. The Board may impose restrictions or refuse to authorise such conflicts if deemed appropriate. SVG Capital plc Annual Report 2010 40 Corporate governance
Committees The Board has delegated certain responsibilities and functions to Committees. Terms of Reference for each of these Committees are available on the Company’s website at www.svgcapital.com. Details of membership of the Committees at 31 December 2010 may be found below and information regarding attendance at Committee meetings during the year under review may be found above. Audit Committee The role of the Audit Committee is to ensure that the Company maintains the highest standards of integrity in financial reporting and internal control. The Board considers each member of the Committee to be independent. The Board also considers that members of the Committee have competence in accounting. To discharge its duties, the Committee met on three occasions during the year ended 31 December 2010 and considered the annual financial statements, the half-yearly financial statements and the quarterly valuation update, the external Auditors’ year end reports and management letters, the effectiveness of the audit process, the independence and objectivity of the external Auditor, the risk profile of the Group and the internal audit review process. Following Gary Steinberg’s resignation on 12 January 2010, Denis Raeburn acted as Chairman of the Audit Committee. With effect from 26 October 2010, Andrew Sykes replaced Denis Raeburn as Chairman of the Audit Committee Remuneration Committee The role of the Committee is to determine remuneration policy throughout the SVG Group and to operate the Company’s Share Awards Schemes. The Board considers each member of the Committee to be independent. To discharge its duties, the Committee met formally on two occasions during the year ended 31 December 2010 and considered the approval of annual bonus proposals and long term incentives for the executive Directors, and key staff based on performance in respect of the years ended 31 December 2009 and 31 December 2010. In addition, a number of informal meetings of the Committee took place during the year. Nominations Committee The role of the Committee is to consider and make recommendations to the Board on the Board’s composition and balance of skills and experience, and on individual appointments, to lead the process and make recommendations to the Board. To discharge its duties, the Committee met twice during the year ended 31 December 2010 and considered the appointment of Andrew Sykes and Caroline Goodall and considered an evaluation of the balance of skills,experience, independence and knowledge of the Company in the Board and succession planning. Neither an external search consultancy nor open advertising was used when recruiting Andrew Sykes, due to the fact that the Board was familiar with Mr Sykes prior to his appointment. Relations with shareholders The Board believes that the maintenance of good relations with both institutional and retail shareholders is important for the prospects of the Company. It has, since its launch, sought engagement with investors. The Chairman, the Chief Executive and other Directors, where appropriate, discuss governance and strategy with major shareholders and the Chairman ensures communication of shareholders’ views to the Board. The Board also undertakes shareholder perceptions research. During 2010, the Chairman and the Chairman of the Remuneration Committee met with major shareholders and their representatives to discuss governance issues ahead of the 2010 AGM. The Board believes that the Annual General Meeting provides an appropriate forum for investors to communicate with the Board, and encourages participation. The Annual Report and Accounts is, when possible, sent to shareholders at least 20 business days before the Annual General Meeting, which is normally attended by the full Board of Directors. Proceedings include a presentation on the activities of the Company. There is an opportunity for individual shareholders to question the chairmen of the Board, Audit and Remuneration Committees. Details of proxy votes received in respect of each resolution are made available to shareholders at the meeting. The Board believes that the Company’s policy of reporting to shareholders as soon as possible after the Company’s year end is valuable. The notice of AGM at page 91 sets out the business of the meeting. Going concern The Group’s activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman’s statement on pages 6 and 7, the Chief Executive’s report on pages 8 and 9 and the Business Review on pages 10 to 25. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 14 and 15. In addition note 30 to the financial statements includes details of the Group’s financial instruments and its risk profile. A description of the Group’s risks and risk management are also outlined in the Business Review on pages 24 to 25. In light of the Group’s financial resources, the Directors believe that the Group is positioned to manage its business risks successfully despite the continuing uncertain economic outlook, and, after making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. SVG Capital plc Annual Report 2010 41
Internal control The Code requires the Board to at least annually conduct a review of the adequacy of the Group’s systems of internal control and report to shareholders that it has done so. The Board has undertaken a full review of all the aspects of the Turnbull Guidance for Directors, as revised in October 2005 (the “Turnbull Guidance”) under which the Board is responsible for the Group’s system of internal control and for reviewing its effectiveness. The Board has approved a detailed Risk Map identifying significant strategic, investment-related, operational and service provider-related risks and has adopted an enhanced monitoring system to ensure that risk management and all aspects of internal control are considered on a regular basis. The Board has appointed Deloitte LLP to provide internal audit support and management are required to provide appropriate support to Deloitte LLP in its efforts. The Board believes that the key risks identified and the implementation of an ongoing system to identify, evaluate and manage these risks are appropriate to the Group’s business as an investment trust. The ongoing risk assessment, which has been in place throughout the financial year and up to the date of this report, includes consideration of the scope and quality of the systems of internal control (including whistleblowing polices where appropriate) adopted by major service providers, and ensures regular communication of the results of monitoring by third parties to the Board, the incidence of significant control failings or weaknesses that have been identified at any time and the extent to which they have resulted in unforeseen outcomes or contingencies that may have a material impact on the Group’s performance or condition. No significant control failings or weaknesses were identified during the course of the year and up to the date of this report from the Board’s continuing risk assessment. The Board considers that adequate controls exist over the financial reporting process. A single team is responsible for preparing and consolidating the financial reporting for each of the Group entities and ensuring that financial information is accurate, complete, reconciled and reviewed by senior members of staff, and that transactions and balances are recognised and measured on a consistent basis and in accordance with accounting policies and financial reporting standards. Although the Board believes that it has a robust framework of internal control in place, this can only provide reasonable and not absolute assurance against material financial mis-statement or loss and is designed to manage, not eliminate, risk. Corporate information Corporate SVG Capital plc Annual Report 2010 42 Corporate social responsibility
Introduction The long-term business success of the SVG Capital group requires effective management of both financial and non-financial performance. Our business relies in particular on strong relationships with our employees, our investors, and the general partners of the funds in which we invest. Although we are a major investor in private equity funds, regulations and commercial realities limit the degree to which we can have an active influence on those funds. We aim to develop open, long-term relationships with the general partners with whom we invest. Nonetheless we do engage with general partners to identify where non-financial issues may have an impact on our reputation and on that of our investors. We also engage with relevant industry associations and participate in other initiatives to help raise awareness and understanding of these issues, both within and outside the sector. The Group employs 70 people based in London, Boston and Singapore. As a financial services firm, the environmental and social impact of our activities is low. However, we are looking at ways to reduce this environmental impact, and to support local communities. We recognise the mutual benefits that can arise from doing so in a consistent way. Overall responsibility for the implementation of the Group’s Corporate Social Responsibility (CSR) Policy rests with the Board, working with relevant corporate functions, including a CSR committee chaired by Nicholas Ferguson. The Board’s strategic priorities with respect to the CSR policy are:
Employees Our objective is to recruit, train and retain high calibre employees, and to foster a work environment that helps them to fulfil their potential. To do this we aim to: –– provide a supportive work environment and corporate culture –– provide appropriate training and development –– address, where possible, employees’ interests regarding environmental, social and governance issues.
Investors Our objective is to ensure that our operations address investors’ policies relating to environmental, social and governance issues. To do this we aim to: –– maintain a high standard of corporate governance –– respond to investors’ environmental, social and governance concerns as they relate to our own operations –– give full consideration to investors’ concerns as they relate to our investment activities.
Funds in which we invest Our objective is to develop strong relationships, balancing the legitimate needs of the general partners of the funds in which we invest with our interests and the expectations of our investors. We aim to do this by: –– ensuring the highest levels of integrity in our relationships with general partners –– developing strong and open working relationships with general partners, so that we can maintain trust without unnecessary restrictions and unrealistic requests –– undertaking early and constructive engagement on environmental, social and governance issues of legitimate concern to our investors. Prior to investment, we evaluate how the general partners assess such issues as part of their due diligence on underlying companies and how they report on such issues. SVG Capital plc Annual Report 2010 43
Making a difference where we can Communities Our objectives are to support our employees’ volunteering and charitable donations through a matched giving scheme and to support communities by providing charitable donations from the Group of up to £350,000 in aggregate per annum. The CSR committee has responsibility for the implementation of the charitable donations policy which is focused on: –– creating opportunity –– providing access to education –– protecting the environment. In 2010, the Group agreed to continue to support the School for Social Entrepreneurs and Fairbridge and to start supporting the Venture Partnership Foundation. A total of £130,000 was committed in 2010. Fairbridge Based in 15 of the most disadvantaged areas in England, Scotland and Wales, Fairbridge supports young people aged 13-25 who are not in education, employment or training – giving them the motivation, confidence and skills they need to change their lives. For more information: www.fairbridge.org.uk School for Social Entrepreneurs The School for Social Entrepreneurs (“SSE”) exists to provide training and opportunities to enable people to use their creative and entrepreneurial abilities more fully for social benefit. SSE also want to recruit more innovative and capable people into voluntary and other organisations. The SSE runs practical learning programmes aimed at helping develop the individual entrepreneur and their organisation simultaneously: SSE’s approach, and belief, is that social change is people-powered, and that the most valuable assets and resources we have are human ones. For more information: www.sse.org.uk Venture Partnership Foundation VPF is a grant-making foundation dedicated to supporting social entrepreneurs and the dynamic charities that they run. Using a due diligence process, VPF sources small, fast growing and well-run charities with an innovative solution to a deep social need and entrepreneurial and visionary leadership. VPF provides these charities with financial support (£25,000 of unrestricted funding for three to five years) and significant non-financial pro-bono support from its members and volunteers, such as strategy expertise, senior management mentoring and pro-bono legal advice.
In 2010, a number of SVG Advisers’ staff took part in a volunteer-led due diligence process conducting web-based due diligence information Corporate followed by face-to-face interviews with a range of charities/social enterprises that VPF was looking to include into its portfolio – thereby supporting an important new philanthropic concept. The due diligence culminated in our staff making presentations to the VPF Board to ask for funding for the charities. VPF’s current portfolio of charities is as follows: Kids/Education Peas (2010 partner) MyBnk (2010 partner) Kid’s Company (2007 partner) Beatbullying (2008 partner) Teach First (2008 partner) Health/disability Basic Needs (2007 partner) Changing Faces (2008 partner) Riders for Health (2007 partner) Homelessness Homeless International (2008 partner) Training for Life (2007 partner) Humanitarian Shelterbox (2009 partner) Human Rights African Prisons Project (2010 partner) Livelihoods Twin (2008 partner) SVG Capital plc Annual Report 2010 44 Corporate social responsibility
Environment Greenworks (2009 partner) Excellent Development (2008 partner) Social Investments Charity Technology Trust (December 2008) Training for Life (December 2008) Riders for Health (2007 partner) For more information: www.vpf.org.uk/ Environment Our objective is to reduce the most significant environmental impact of our operations. We aim to do this by: – periodically undertaking a carbon footprint analysis – reducing the impact of our travel and energy use – disposing of office waste and used equipment in a responsible manner. During 2009 and 2010 we supported the ERM Low Carbon Fund. Engagement with the sector Our objective is to engage in debates on the role and impact of private equity. We aim to do this by: – working with relevant sector associations – participation in other relevant initiatives – engage in discussions with stakeholders.
In 2010 members of the Group’s legal team provided pro bono advice at the Islington Legal Centre. This volunteering initiative was conducted together with the law firm Slaughter & May LLP, who have supported the Islington Legal Centre for a number of years. SVG Capital plc Annual Report 2010 Independent auditor’s report 45 to the shareholders of SVG Capital plc
We have audited the financial statements of SVG Capital plc for the year ended 31 December 2010 which comprise the Consolidated and Company Balance Sheets, the Consolidated and Company Income Statements, the Consolidated and Company Statements of Comprehensive Income, the Consolidated and Company Statements of Changes in Equity, the Consolidated and Company Cash Flow Statements and the related notes 1 to 31. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors As explained more fully in the Directors’ Responsibilities Statement set out on page 31, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material mis-statement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements.
Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 December 2010 and of the Group’s and the parent Company’s profit for the year then ended; • the financial statements have been properly prepared in accordance with IFRS as adopted by the European Union; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. Corporate information Corporate
Opinion on other matters prescribed by the Companies Act 2006 In our opinion: • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and • the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Under the Listing Rules we are required to review: • the Directors’ statement, set out on page 41, in relation to going concern; • the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review; and • certain elements of the report to shareholders by the Board on directors’ remuneration. Sarah Williams (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London 14 February 2011 SVG Capital plc Annual Report 2010 46 Consolidated income statement
For the year ended 31 December 2010 For the year ended 31 December 2009 Revenue Capital Revenue Capital return return Total return return Total Notes £’000 £’000 £’000 £’000 £’000 £’000 Gains on investments – at fair value through profit and loss 9 – 351,231 351,231 – 51,322 51,322 Exchange gains on other items – 2,474 2,474 – 5,514 5,514 Movement in fair value of derivative contracts – 883 883 ––– – 354,588 354,588 – 56,836 56,836 Operating income Investment income 11,357 – 11,357 2,971 – 2,971 Income from investment advisory services 24,643 – 24,643 28,830 – 28,830 Other operating income 185 – 185 113 – 113 Total operating income 4 36,185 – 36,185 31,914 – 31,914 Operating expenses Administrative expenses 5 (24,433) – (24,433) (28,565) – (28,565) Other operating expenses ––– – 28 28 Total expenses (24,433) – (24,433) (28,565) 28 (28,537) Operating profit 11,752 – 11,752 3,349 28 3,377 Finance costs 8 (39,523) – (39,523) (40,904) 1,943 (38,961) (Loss)/profit before tax (27,771) 354,588 326,817 (37,555) 58,807 21,252 Tax 10 (275) 353 78 980 640 1,620 (Loss)/profit for the year (28,046) 354,941 326,895 (36,575) 59,447 22,872 Attributable to: Equity holders of the parent 12 (28,045) 354,942 326,897 (36,572) 59,447 22,875 Minority interest (1) (1) (2) (3) – (3) Earnings per share From continuing activities Basic 12 106.0p 8.0p Diluted 12 104.1p 8.0p
The total column of this statement represents the Group’s income statement, prepared in accordance with IFRS. The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies. All items in the above statement derive from continuing operations. The notes on pages 54 to 90 form an integral part of these accounts.
Consolidated statement of comprehensive income
For the year For the year ended ended 31 December 31 December 2010 2009 £’000 £’000 Profit for the year 326,895 22,872 Other comprehensive income: Net gain on cash flow hedges 694 2,762 Other comprehensive income 694 2,762 Total comprehensive income 327,589 25,634 Attributable to: Equity holders of the parent 327,591 25,637 Minority interests (2) (3) 327,589 25,634 SVG Capital plc Annual Report 2010 Company income statement 47
Notes For the year ended 31 December 2010 For the year ended 31 December 2009 Revenue Capital Revenue Capital return return Total return return Total £’000 £’000 £’000 £’000 £’000 £’000 Gains on investments – at fair value through profit and loss 9 – 350,920 350,920 – 50,757 50,757 Exchange gains on other items – 2,898 2,898 – 7,868 7,868 Movement in fair value of derivative contracts – 883 883 ––– – 354,701 354,701 – 58,625 58,625 Operating income Investment income 14,718 – 14,718 16,649 – 16,649 Other operating income 142 – 142 96 – 96 Total operating income 4 14,860 – 14,860 16,745 – 16,745 Operating expenses Administrative expenses 5 (7,531) – (7,531) (7,094) – (7,094) Other operating expenses ––– – 29 29 Total expenses (7,531) – (7,531) (7,094) 29 (7,065) Operating profit/(loss) 7,329 – 7,329 9,651 29 9,680 Finance costs 8 (39,549) – (39,549) (41,379) 1,943 (39,436) Loss before tax (32,220) 354,701 322,481 (31,728) 60,597 28,869 Tax 10 2,134 – 2,134 3,703 – 3,703 (Loss)/profit for the year 12 (30,086) 354,701 324,615 (28,025) 60,597 32,572 Earnings per share From continuing activities Basic 12 105.2p 11.4p Diluted 12 104.0p 11.3p
The total column of this statement represents the Company’s income statement, prepared in accordance with IFRS. The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Trust Companies. All items in the above statement derive from continuing operations. The notes on pages 54 to 90 form an integral part of these accounts.
Company statement of comprehensive income Financial informationFinancial
For the For the year ended year ended 31 December 31 December 2010 2009 £’000 £’000 Profit/(loss) for the year 324,615 32,572 Other comprehensive income: Net (loss)/gain on cash flow hedges (62) 71 Other comprehensive (loss)/income (62) 71 Total comprehensive (loss)/income 324,553 32,643 SVG Capital plc Annual Report 2010 48 Consolidated statement of changes in equity
Share Share Total capital and Share Revenue Capital Hedge option Other equity Minority own shares premium reserve reserve reserves reserve reserves holders interest Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 For the year ended 31 December 2010 Balance at 31 December 2009 310,408 131,230 (26,394) 92,477 (2,165) 5,512 109,364 620,432 127 620,559 (Loss)/profit for the year – – (28,045) 354,942 – – – 326,897 (2) 326,895 Other comprehensive income Recycled through the income statement: – currency contracts (investment advisory services) – – – – 971 – – 971 – 971 – interest rate swaps – – – – 199 – – 199 – 199 Movement in fair value of cash flow hedges – – – – (476) – – (476) – (476) 310,408 131,230 (54,439) 447,419 (1,471) 5,512 109,364 948,023 125 948,148 Issue of performance share awards – – – – – 2,654 – 2,654 – 2,654 Own shares purchased by EBT (5,000) – – – – – – (5,000) – (5,000) Balance at 31 December 2010 305,408 131,230 (54,439) 447,419 (1,471) 8,166 109,364 945,677 125 945,802
Share Total Share Share Revenue Capital Hedge option Other equity Minority capital premium reserve reserve reserves reserve reserves holders interest Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 For the year ended 31 December 2009 Balance at 31 December 2008 139,070 142,001 10,187 32,410 (4,927) 5,448 109,984 434,173 130 434,303 (Loss)/profit for the year – – (36,575) 59,447 – – – 22,872 (3) 22,869 Other comprehensive income Recycled through the income statement: – currency contracts (investment advisory services) – – – – 1,807 – – 1,807 – 1,807 – interest rate swaps – – – – 532 – – 532 – 532 Movement in fair value of cash flow hedges – – – – 423 – – 423 – 423 139,070 142,001 (26,388) 91,857 (2,165) 5,448 109,984 459,807 127 459,934 Dividends – – (6) – – – – (6) – (6) Issue of performance share awards – – – – –64 – 64 – 64 Issue of shares 171,338 (10,771) – – – – – 160,567 – 160,567 Buy-back of convertible loan notes – – – 620 – – (620) – – – Balance at 31 December 2009 310,408 131,230 (26,394) 92,477 (2,165) 5,512 109,364 620,432 127 620,559
The notes on pages 54 to 90 form an integral part of these accounts. SVG Capital plc Annual Report 2010 Company statement of changes in equity 49
Share Hedge Share capital and Share Revenue Capital reserve option Other own shares premium reserve reserve £’000 reserve reserves Total £’000 £’000 £’000 £’000 cash flow £’000 £’000 £’000 For the year ended 31 December 2010 Balance at 31 December 2009 310,408 131,230 (31,178) 93,136 (775) 5,239 109,364 617,424 (Loss)/profit for the year – – (30,086) 354,701 – – – 324,615 Other comprehensive income Recycled through the income statement – – – – 199 – – 199 Movement in fair value of cash flow hedges – – – – (261) – – (261) 310,408 131,230 (61,264) 447,837 (837) 5,239 109,364 941,977 Issue of performance share awards – – – – – 2,579 – 2,579 Own shares purchased by EBT (5,000) – – – – – – (5,000) Balance at 31 December 2010 305,408 131,230 (61,264) 447,837 (837) 7,818 109,364 939,556
Hedge Share Share Share Revenue Capital reserve option Other capital premium reserve reserve £’000 reserve reserves Total £’000 £’000 £’000 £’000 cash flow £’000 £’000 £’000 For the year ended 31 December 2009 Balance at 31 December 2008 139,070 142,001 (3,153) 31,919 (846) 5,175 109,984 424,150 (Loss)/profit for the year – – (28,026) 60,597 – – – 32,572 Other comprehensive income Recycled through the income statement – – – – 532 – – 532 Movement in fair value of cash flow hedges – – – – (461) – – (461) 139,070 142,001 (31,179) 92,516 (775) 5,175 109,984 456,793 Issue of performance share awards – – – – – 64 – 64 Issue of shares (note 22) 171,338 (10,771) – – – – – 160,567 Redemption of convertible loan notes – – – 620 – – (620) – Balance at 31 December 2009 310,408 131,230 (31,179) 93,136 (775) 5,239 109,364 617,424
The notes on pages 54 to 90 form an integral part of these accounts. Financial informationFinancial SVG Capital plc Annual Report 2010 50 Consolidated balance sheet
As at As at 31 December 31 December 2010 2009 Notes £’000 £’000 Non-current assets Property, plant and equipment 13 2,720 2,534 Investments designated as fair value through profit and loss 14 1,248,774 895,575 Derivatives at fair value through profit and loss 883 – Deferred tax asset 1,200 1,080 1,253,577 899,189 Current assets Other receivables 18 7,085 12,815 Tax recoverable 19 3,781 4,196 Cash and cash equivalents 18 17,111 144,067 27,977 161,078 Total assets 1,281,554 1,060,267 Current liabilities Other payables 19 (34,241) (117,873) Total assets less current liabilities 1,247,313 942,394 Non-current liabilities Senior Notes 20 (198,545) (220,577) Convertible bonds 20 (101,866) (100,148) Derivatives at fair value through profit and loss 20 (1,097) (952) Deferred tax liability (3) (158) (301,511) (321,835) Net assets 945,802 620,559 Equity Called up share capital 22 310,408 310,408 Own shares 23 (5,000) – Share premium account 24 131,230 131,230 Capital redemption reserve 24 3,204 3,204 Share purchase reserve 24 92,054 92,054 Share option reserve 24 8,166 5,512 Convertible bonds – equity 24 14,106 14,106 Hedge reserves 24 (1,471) (2,165) Capital reserve 24 447,419 92,477 Revenue reserve 24 (54,439) (26,394) Shareholders’ funds 945,677 620,432 Minority interest 125 127 Total equity 945,802 620,559 Net asset value per ordinary share (“Shareholders’ funds”) – undiluted 25 307.8p 199.9p – diluted 25 298.9p 198.2p
The notes on pages 54 to 90 form an integral part of these accounts. The Group’s financial statements were authorised for issue by the Board of Directors on 14 February 2011 and the balance sheets were signed on behalf of the Board by: Nicholas Ferguson Lynn Fordham SVG Capital plc Annual Report 2010 Company balance sheet 51
As at As at 31 December 31 December 2010 2009 Notes £’000 £’000 Non-current assets Investments designated as fair value through profit and loss 14 1,239,407 887,213 Investments in subsidiaries 17 22,603 19,181 1,262,010 906,394 Derivatives at fair value through profit and loss 883 – Total non-current assets 1,262,893 906,394 Current assets Other receivables 18 1,615 8,472 Cash and cash equivalents 18 7,912 131,067 9,527 139,539 Total assets 1,272,420 1,045,933 Current liabilities Other payables 19 (31,616) (107,009) Total assets less current liabilities 1,240,804 938,924 Non-current liabilities Senior Notes 20 (198,545) (220,577) Convertible loan notes 20 (101,866) (100,148) Derivatives at fair value through profit and loss 20 (837) (775) (301,248) (321,500) Net assets 939,556 617,424 Equity Called up share capital 22 310,408 310,408 Own shares 23 (5,000) – Share premium account 24 131,230 131,230 Capital redemption reserve 24 3,204 3,204 Share purchase reserve 24 92,054 92,054 Share option reserve 24 7,818 5,239 Convertible loan notes – equity 24 14,106 14,106 Hedge reserves 24 (837) (775) Capital reserve 24 447,837 93,136 Revenue reserve 24 (61,264) (31,178) Shareholders’ funds 939,556 617,424 Net asset value per ordinary share (“Shareholders’ funds”) – undiluted 25 305.8p 198.9p – diluted 25 297.0p 197.3p
The notes on pages 54 to 90 form an integral part of these accounts. The Company’s financial statements were authorised for issue by the Board of Directors on 14 February 2011 and the balance sheets were signed on behalf of the Board by:
Nicholas Ferguson informationFinancial Lynn Fordham SVG Capital plc Annual Report 2010 52 Consolidated cash flow statement
For the For the year ended year ended 31 December 31 December 2010 2009 Notes £’000 £’000 Investment management and advisory fee income 30,177 25,413 Interest income 1,195 1,786 Income distributions 10,822 613 Expenses of the management and advisory group (18,840) (19,778) Other expenses (3,802) (6,556) Finance costs (40,084) (40,995) Tax paid 279 (1,840) Net cash used in operating activities 26 (20,253) (41,357) Investing activities Capital distributions from core private equity fund portfolio 66,931 19,910 Receipts in respect of other investments 45,412 13,487 Calls paid to core private equity fund portfolio (77,108) (85,046) Payments in respect of other investments (36,253) (34,022) Purchases of property, plant and equipment (968) (2,118) Net cash used in investing activities (1,986) (87,789) Financing Loan facility (repayments)/drawdowns (77,586) 101,460 Proceeds on issue of ordinary shares – 171,338 Share issue costs – (10,771) Purchase of own shares by EBT (5,000) – Buy-back of Senior Notes (26,846) (88,451) Costs of buy-back of Senior Notes – (1,429) Buy-back of convertible bonds – (2,487) Dividends paid – (6) Net cash (used in)/from financing activities (109,432) 169,654 Net (decrease)/increase in cash and cash equivalents (131,671) 40,508 Cash and cash equivalents at beginning of year 144,067 130,627 Effect of foreign exchange rates on cash and cash equivalents 4,715 (27,068) Cash and cash equivalents at end of year 28 17,111 144,067
The notes on pages 54 to 90 form an integral part of these accounts. SVG Capital plc Annual Report 2010 Company cash flow statement 53
For the For the year ended year ended 31 December 31 December 2010 2009 Notes £’000 £’000 Interest income 1,004 2,170 Dividends from subsidiaries 3,421 13,745 Income distributions 10,821 614 Expenses (3,801) (6,513) Finance costs (40,094) (42,029) Tax received – 5,515 Net cash outflow from operating activities 26 (28,649) (26,498) Investing activities Capital distributions from core private equity funds’ portfolio 66,927 19,872 Receipts in respect of other investments 45,412 13,487 Calls paid to the private equity fund portfolio (77,105) (85,046) Payments in respect of other investments (36,230) (34,022) Investment in subsidiaries (169) (146) Net cash used in investing activities (1,165) (85,855) Financing Loan facility drawdowns (77,586) 101,460 Loans from subsidiaries drawn/(repaid) 10,000 (15,000) Proceeds on issue of ordinary shares – 171,338 Share issue costs – (10,771) Purchase of own shares by EBT (5,000) – Buy-back of Senior Notes (26,846) (88,451) Buy-back costs of Senior Notes – (1,429) Buy-back of convertible bonds – (2,487) Net cash (used in)/from financing activities (99,432) 154,660 Net (decrease)/increase in cash and cash equivalents (129,246) 42,307 Cash and cash equivalents at beginning of year 131,067 113,576 Effect of foreign exchange rates on cash and cash equivalents 6,091 (24,816) Cash and cash equivalents at end of year 28 7,912 131,067
The notes on pages 54 to 90 form an integral part of these accounts. Financial informationFinancial SVG Capital plc Annual Report 2010 54 Notes to the accounts
1 Accounting policies Basis of preparation The financial statements of the Company and the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”), which comprise standards and interpretations approved by the International Accounting Standards Board (“IASB”), and International Accounting Standards and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee (“IASC”) that remain in effect, and to the extent that they have been adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006. The principal accounting policies adopted are set out below. Where presentational guidance set out in the Statement of Recommended Practice (“SORP”) for the Financial Statements of Investment Trust Companies and Venture Capital Trusts issued by the Association of Investment Companies (“AIC”) in January 2009 is consistent with the requirements of IFRS, the financial statements have been prepared on a basis compliant with the SORP. The Group and Company financial statements are presented in sterling and all values are rounded to the nearest thousand pounds (£’000) except when otherwise indicated. The accounts have been prepared on a going concern basis as the Directors consider that for the foreseeable future the Group will continue to be able to meet its liabilities as they fall due. The accounting policies adopted are consistent with those of the previous financial year. Summary of new standards and interpretations not applied The IASB and IFRIC have issued the following standards and interpretations with an effective date after the date of these financial statements: Effective date* International Accounting Standards (IAS/IFRS) IAS 24 Related party disclosures (Amendment) 1 January 2011 IAS 32 Financial Instruments: Presentation – Classification of Rights issues (Amendment) 1 February 2010 IFRS 9 Financial Instruments: Classification and Measurement 1 January 2013 International Financial Reporting Interpretations Committee (IFRIC) IFRIC 14 Prepayments of a minimum funding requirement (Amendment) 1 January 2011 IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments 1 July 2010
* The effective dates stated are those given in the original IASB/IFRIC standards and interpretations. The Directors do not anticipate that the adoption of these standards will have a material impact on the Group’s financial statements in the period of initial application. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and all entities controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. Financial statements of all Group companies are prepared for the same reporting period. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Presentation of income statement In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the income statement between items of a revenue and capital nature has been presented alongside the income statement. In accordance with the Company’s status as a UK investment company under Section 833 of the Companies Act 2006, net capital returns may not be distributed by way of dividend. Financial instruments Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised when the Company’s contractual right to the cash flow from the asset expires or substantially all the risks and rewards of ownership are transferred. Financial liabilities are derecognised when the contractual obligation is discharged, with gains and losses recognised in the income statement. SVG Capital plc Annual Report 2010 55
1 Accounting policies Investments Investments are recognised and derecognised on a trade date where a purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value. As the Company’s business is investing in financial assets with a view to profiting from their total return in the form of income or capital gains, such financial assets are designated as fair value through profit or loss on initial recognition. Incidental costs on acquisition of such assets are expensed. Financial assets designated as fair value through profit or loss are measured at subsequent reporting dates at fair value, which for investment funds is at their net asset value based on the fair value of the underlying investments. Quoted instruments are valued at either the bid price or the last traded price, depending on the convention of the exchange on which the investment is quoted. 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 International Private Equity and Venture Capital (“IPEV”) Valuation Guidelines. Fair value is the price at which an orderly transaction would take place between market participants at the reporting date. Gains and losses arising from investments, designated as investments held at fair value through profit or loss, are included in the income statement in the period in which they arise. Foreign exchange gains and losses on fair value through profit or loss investments are included within the changes in its fair value. Derivative financial instruments The Group uses derivative financial instruments to hedge its risks associated with interest rate fluctuations and foreign exchange movements. It is not the Group’s policy to trade in derivative instruments. Derivative instruments are initially recognised in the balance sheet at cost and are subsequently re-measured at their fair value. Fair value is determined by reference to market values for similar instruments. Unless designated as cash flow hedges all changes in the fair value of derivative financial instruments are taken to the income statement. Cash flow hedges For cash flow hedges, the effective portion of the unrealised gain or loss on the hedging instrument is recognised in equity and recorded in the statement of comprehensive income, while the ineffective portion is recognised in the income statement. Amounts taken to equity are transferred to the income statement when the hedged transaction affects profit or loss, such as when a forecast sale or purchase occurs. Where the hedged item is the cost of a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or liability. If a forecast transaction is no longer expected to occur, amounts previously recognised in equity are transferred to the income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction occurs and are transferred to the income statement or to the initial carrying amount of a non-financial asset or liability as above. If the related transaction is not expected to occur, the amount is taken to the income statement. A hedging relationship qualifies for hedge accounting if all of the following conditions are met. • at the inception of the hedge there is formal designation and documentation of the hedging relationship and the entity’s risk management objective and strategy for undertaking the hedge. • the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk, consistently with the originally documented risk management strategy for that particular hedging relationship. • for cash flow hedges, a forecast transaction that is the subject of the hedge must be highly probable and must present an exposure to variations in cash flows that could ultimately affect profit or loss. • the effectiveness of the hedge can be reliably measured, i.e. the fair value or cash flows of the hedged item that are attributable to the hedged risk and the fair value of the hedging instrument can be reliably measured.
• the hedge is assessed on an ongoing basis and determined actually to have been highly effective throughout the financial reporting periods for which informationFinancial the hedge was designated. Investments in subsidiaries In its separate financial statements the Company recognises its investment in subsidiaries at cost, unless they are investment vehicles, in which case they are included at fair value. Investments in associates In accordance with IAS 28 ‘Investments in Associates’, the standard does not apply to investments held in associates by private equity organisations that are designated as fair value through profit or loss. Such investments are measured at fair value, with changes in fair value recognised in profit or loss in the period in which they occur. An associate is an entity over which the Group is in a position to exercise significant influence, but not control or joint control, through participation in the financial and operating policy decisions of the investee. SVG Capital plc Annual Report 2010 56 Notes to the accounts
1 Accounting policies Convertible loan notes Convertible loan notes are regarded as compound instruments, consisting of a liability component and an equity component. At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible debt. The difference between the proceeds of issue of the convertible loan notes and the fair value assigned to the liability component, representing the embedded option to convert the liability into equity of the Group, is included in equity. Issue costs are allocated proportionately to the liability and equity components. The liability component is accounted for as a borrowing. Bank borrowings and loan notes Interest-bearing bank loans and loan notes issued are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the income statement account using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Equity instruments Equity instruments issued by the Company are recorded as the proceeds received, net of direct issue costs. Own shares Own shares represent SVG Capital plc shares held in Employee Benefit Trusts to meet the future requirements of the employee share-based payment plans. The EBTs are accounted for as extensions of the parent company. Share-based payments The Group has applied the requirements of IFRS 2 ‘Share-based Payments’. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 January 2005. The cost of equity-settled share-based payments with employees of the Group are measured at fair value at the date of grant and recognised as an expense over the vesting period, which ends on the date on which the employees become unconditionally entitled to the award. Fair value is determined by an external valuer using an appropriate valuation model. In valuing equity-settled transactions, no account is taken of any non-market vesting conditions. At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management’s best estimate of the number of equity instruments that will ultimately vest. The movement in cumulative expense since the previous balance sheet date is recognised in the consolidated income statement, with a corresponding entry in equity. The cost of equity awards to employees of subsidiaries is added to the Company’s investment in subsidiaries. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for services provided in the normal course of business. Interest income is accrued on a time basis, by reference to the principal outstanding and the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount. Interest income is classified within operating activities in the cash flow statement. Dividend income from investments is recognised when the shareholders’ rights to receive payment has been established and is classified within operating activities in the cash flow statement. Investment management and advisory fees are accrued over the period for which the service is provided. Revenue that has been earned, but the receipt of which is contingent on the occurrence of a future event, such as investors receiving a return of capital, has not been recognised. The Group’s revenue and realised capital gains are derived primarily from distributions in respect of its holdings in fund investments. Realised gains on capital distributions which arise from the realisation of investments within the funds, and on sale of investments are credited to the income statement and taken to the capital reserve. Income distributions are credited to the income statement and taken to the revenue reserve. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Group as lessee Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term. SVG Capital plc Annual Report 2010 57
1 Accounting policies Retirement benefit costs Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. The costs relating to defined benefit schemes are accounted for in the same way as for defined contribution schemes where the Group is unable to identify its share of the underlying performance and financial position of the plan with sufficient reliability for accounting purposes. Such situations arise where the contributions payable by the Group are set in terms of the scheme as a whole and, as such, there is no consistent and reliable basis for allocating the Group’s obligations, plan assets, or costs. Foreign currencies The functional currency of the Company is pounds sterling, as this is the currency of the primary economic environment in which the Group operates. Transactions in currencies other than pounds sterling are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Gains and losses arising on retranslation are included in the income statement and are allocated either to revenue or capital, as appropriate. Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Investment trusts which have approval under Section 1158 Income and Corporation Tax Act 2010 are not liable for taxation on capital gains. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to other comprehensive income, in which case the deferred tax is also dealt with in equity. Property, plant and equipment Fixtures and equipment are stated at cost, including direct acquisition costs, less accumulated depreciation and any recognised impairment loss. Depreciation is charged so as to write off the cost less estimated residual value of assets over their estimated useful lives, using the straight-line method, on the following bases: Telecommunications and office equipment 10% – 20% Leasehold improvements 10% Computer equipment 20% – 33% The Group does not ordinarily provide for depreciation against art.
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of informationFinancial the asset and is recognised in income. The carrying values of property, plant and equipment are reviewed for impairment when events or circumstances indicate the carrying value may not be recoverable. Cash and cash equivalents Cash and cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment purposes. Assets are classified as cash equivalents if they are readily convertible to cash and are not subject to significant changes in value. The Company has classified short-term bank deposits, investments in money market funds and short-dated treasury bills as cash equivalents. SVG Capital plc Annual Report 2010 58 Notes to the accounts
2 Significant accounting judgements, estimates and assumptions The preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of profits and net assets at the end of the reporting period. However, uncertainty about these assumptions and estimates could result in outcomes that have a material impact on net assets in future periods. The key assumptions and sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to net assets within the next financial year are discussed below. Other areas of uncertainty and risk are discussed in note 30. Fair value of financial instruments The Group primarily invests in private equity limited partnerships (“Funds”) that in turn invest in companies that are typically unquoted. Valuing unquoted investments involves a significant degree of judgement. Fair values of the Funds in which the Group invests are typically provided by the general partner of such funds and are reviewed and, if considered appropriate, approved by the Board. The fair value of a Fund’s investment in an investee company is generally obtained by calculating the Enterprise Value (“EV”) of the company and then deducting financial instruments, such as external debt, ranking ahead of the Fund’s highest ranking instrument in the company. A common method of determining the EV is to apply a market-based multiple (e.g. an average multiple based on a selection of comparable quoted companies) to the ‘normalised’ earnings of the investee company. This market-based approach presumes that the comparator companies are correctly valued by the market. A discount is sometimes applied to market based multiples to adjust for points of difference between the comparators and the company being valued. Where the fair value of financial assets recorded in the Group’s balance sheet cannot be derived from active markets, they are determined using valuation techniques, in accordance with IPEV Valuation Guidelines, including the methodology briefly outlined above. The valuation techniques recommended by the IPEV Board are industry standard. However, amounts ultimately realised on disposal of an investee company can differ materially from the previous carrying value and therefore have a significant impact on the Group’s profits and net assets. Taxes Uncertainties exist with respect to the amount and timing of future taxable income. Significant deferred tax assets have not been recognised in respect of brought-forward tax losses that the Company can utilise to offset future taxable profits. Management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. The Company expects to derive returns primarily in the form of capital gains on its investment portfolio. As an investment trust, the Company is exempt from corporation tax on capital gains. Recovery of contingent fees Uncertainty exists with respect to the recoverability of certain investment advisory fees that are contingent on future events, such as investors receiving a return of capital. Management judgement is required to determine the probability that fees are recoverable and whether that probability is high enough to recognise income in respect of those fees.
3 Business segments For management purposes, the Group is currently organised into the following two principal activities: Investing activities SVG Capital’s investment objective is to achieve capital appreciation by investing principally in private equity funds that are managed or advised by Permira, an international private equity specialist. In addition, the Company invests in private equity funds that invest in Japan, North America, Asia and the life sciences sectors, and in unquoted and quoted businesses through specialist funds and co-investments alongside these funds. Investing activities are undertaken by SVG Capital plc, SVG India LP and The Platinum Trust. A further segmental analysis within investment activities is the Group’s exposure to Permira and non-Permira investments. Investment management and advisory services To complement this investment objective and create capital and income for the Company, its fund advisory businesses structure, market, manage and advise products for investment in private equity and in public equity using private equity techniques. Investment management and advisory services are provided by SVG Advisers Limited (“SVGA”), SVG Managers Limited (“SVGM”), SVG Advisers Inc. (“SVGI”), SVG North America (“SVGNA”), SVG Advisers (Singapore) Limited Pte. (“SVGS”) and SVG Investment Managers Limited (“SVGIM”). Investment management and advisory services can be further sub-divided into the following three main business areas: • SVGA – external private equity investment management and advisory services provided by SVGA, SVGNA and SVGS. • SVGIM – public equity investment management services provided by SVGIM, plus the ancillary operations of SVGM and SVGI. • Other – intra-Group services provided by SVGA to SVG Capital and the Permira feeder vehicles. SVG Capital plc Annual Report 2010 59
3 Business segments These activities are undertaken by SVG Advisers Limited, SVG Managers Limited, SVG Investment Managers Limited, SVG Advisers (Singapore) Pte. Limited, SVG Advisers Inc. and SVG North America Inc. Segmental information showing the performance of these business segments is presented below: For the year ended 31 December 2010 For the year ended 31 December 2009 Investment Investment management management Investing and advisory Investing and advisory activities services Eliminations Total activities services Eliminations Total Group £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Income from investment advisory services – 24,643 – 24,643 – 28,830 – 28,830 Other operating and investment income 11,407 135 – 11,542 2,977 107 – 3,084 Intra-group income 3,470 5,933 (9,403) – 13,780 4,898 (18,678) – 14,877 30,711 (9,403) 36,185 16,757 33,835 (18,678) 31,914 Performance shares and options fair value & N.I. – (4,333) – (4,333) – (64) – (64) Other administrative costs (1,812) (18,288) – (20,100) (2,909) (25,592) – (28,501) Intra-group expenses (5,905) – 5,905 – (4,423) – 4,423 – Other operating expenses –––– 28 – – 28 (7,717) (22,621) 5,905 (24,433) (7,304) (25,656) 4,423 (28,537) Operating profit/(loss) 7,160 8,090 (3,498) 11,752 9,453 8,179 (14,255) 3,377 Finance costs (39,523) – – (39,523) (38,961) – – (38,961) Intra-group finance costs (43) (34) 77 – (475) (34) 509 – Gains/(losses) on fair value through profit and loss, including derivatives 352,102 12 – 352,114 51,317 5 – 51,322 Exchange gains/(losses) 2,797 (323) – 2,474 7,898 (2,384) – 5,514 Profit before tax 322,493 7,745 (3,421) 326,817 29,232 5,766 (13,746) 21,252
Dividends –––– (6) – – (6) Intra-group dividends – (3,421) 3,421 – – (13,746) 13,746 – – (3,421) 3,421 – (6) (13,746) 13,746 (6)
Total assets 1,246,011 35,624 – 1,281,635 1,029,947 30,327 – 1,060,274 Total liabilities (325,700) (10,133) – (335,833) (422,435) (17,280) – (439,715) Intra-group assets/(liabilities) (12,376) 12,376 – – 6,105 (6,105) – – Net assets 907,935 37,867 – 945,802 613,617 6,942 – 620,559 Financial informationFinancial SVG Capital plc Annual Report 2010 60 Notes to the accounts
3 Business segments The Group’s investment management and advisory services can be further analysed between the following three categories (see earlier description): SVGA, SVGIM and Other. Investment management and advisory services Investment management and advisory services for the year ended 31 December 2010 for the year ended 31 December 2009 SVGA SVGIM Other Total SVGA SVGIM Other Total Group £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Income from investment advisory services 15,497 2,517 6,629 24,643 19,284 2,271 7,275 28,830 Other operating income 127 8 – 135 83 24 – 107 Intra-group income – – 5,933 5,933 – – 4,898 4,898 15,624 2,525 12,562 30,711 19,367 2,295 12,173 33,835 Performance shares and options fair value charge (2,656) – (1,677) (4,333) – – (64) (64) Other administrative costs (11,707) (1,460) (5,121) (18,288) (12,557) (1,476) (11,559) (25,592) (14,363) (1,460) (6,798) (22,621) (12,557) (1,476) (11,623) (25,656) Operating profit 1,261 1,065 5,764 8,090 6,810 819 550 8,179 Finance costs –––– –––– Intra-group finance costs (34) – – (34) – (34) – (34) Gains/(losses) on fair value through profit and loss 12 – – 12 5 – – 5 Exchange (losses)/gains (323) – – (323) (2,353) (31) – (2,384) Profit before tax 916 1,065 5,764 7,745 4,462 754 550 5,766
Exposure to Permira 31 December 2010 31 December 2009 Permira Non-Permira Total Permira Non-Permira Total Group £’000 £’000 £’000 £’000 £’000 £’000 Investment portfolio value 1,006,167 242,607 1,248,774 677,183 218,392 895,575 Uncalled commitments 111,951 97,849 209,800 189,500 181,600 371,100 Total exposure 1,118,118 340,456 1,458,574 866,683 399,992 1,266,675
31 December 2010 31 December 2009 Permira Non-Permira Total Permira Non-Permira Total Company £’000 £’000 £’000 £’000 £’000 £’000 Investment portfolio value 1,005,929 233,478 1,239,407 676,959 210,254 887,213 Uncalled commitments 111,951 97,849 209,800 189,500 181,600 371,100 Total exposure 1,117,880 331,327 1,449,207 866,459 391,854 1,258,313 Exposure to Permira includes direct investments in Permira funds plus investments in Permira Feeder Vehicles. SVG Capital plc Annual Report 2010 61
3 Business segments For the year ended 31 December 2010 For the year ended 31 December 2009 Investment Investment management management and advisory and advisory Investing activities services Total Investing activities services Total Company £’000 £’000 £’000 £’000 £’000 £’000 Total operating income 14,860 – 14,860 16,745 – 16,745 Other administrative expenses (7,531) – (7,531) (7,094) – (7,094) Other operating expenses – – – 29 – 29 Operating profit 7,329 – 7,329 9,680 – 9,680 Finance costs (39,549) – (39,549) (39,436) – (39,436) Gain/(loss) on fair value through profit and loss 351,803 – 351,803 50,757 – 50,757 Exchange gains/(losses) 2,898 – 2,898 7,868 – 7,868 Profit/(loss) before tax 322,481 – 322,481 28,869 – 28,869
Total assets 1,272,420 – 1,272,420 1,045,933 – 1,045,933 Total liabilities (332,864) – (332,864) (428,509) – (428,509) Net assets 939,556 – 939,556 617,424 – 617,424
SVG Capital is an investment company and does not provide any investment management and advisory services. Income arises mainly from UK operations. A geographical analysis of investments is included in note 16, with further details in note 30.
4 Revenue For the For the For the For the year ended year ended year ended year ended 31 December 31 December 31 December 31 December 2010 2010 2009 2009 Group Company Group Company £’000 £’000 £’000 £’000 Income from investments: Dividends from subsidiaries – 3,421 – 13,385 Income from money market instruments 84 24 774 707 Interest from funds and co-investments 451 451 1,583 1,583 Other income from funds and co-investments 10,822 10,822 614 974 Other operating income: Income from investment advisory services 24,643 – 28,830 – Other interest receivable and other income 185 142 113 96 36,185 14,860 31,914 16,745 Represented by: Interest 704 601 2,463 2,384 Income from investment advisory services 24,643 – 28,830 – Dividends from subsidiaries – 3,421 – 13,385 Other income from funds and co-investments 10,822 10,822 614 974 Other income 16 16 7 2 36,185 14,860 31,914 16,745 Financial informationFinancial SVG Capital plc Annual Report 2010 62 Notes to the accounts
5 Administrative expenses For the For the For the For the year ended year ended year ended year ended 31 December 31 December 31 December 31 December 2010 2010 2009 2009 Group Company Group Company £’000 £’000 £’000 £’000 Fees payable to SVG Advisers Limited – 5,905 – 4,423 Directors’ remuneration 1,277 412 1,918 470 Performance shares and options fair value charge 2,579 – 64 – N.I. on performance shares and options 1,754 – 145 – Staff costs (note 6) 10,386 – 13,136 – Depreciation (note 13) 886 – 593 – General expenses 7,218 1,025 12,414 2,044 Auditors’ remuneration – Statutory audit fees: Company 105 105 123 123 – Statutory audit fees: subsidiaries 102 – 95 – – Regulatory reporting 2 – 17 15 – Other services 124 84 60 19 24,433 7,531 28,565 7,094
The Directors are the only key management personnel of the Company. Their total remuneration is discussed in more detail in the Remuneration Report. The Company’s current executive Director, Lynn Fordham, received remuneration in the form of salary, bonus and benefits as a Director of SVG Capital of £865,000 (2009: £775,000) in respect of her employment with SVG Advisers Limited, a wholly-owned subsidiary. The fair value charge to the Group in respect of performance shares includes an amount of £432,000 (2009: £30,000) attributable by Lynn Fordham.
6 Staff costs For the For the For the For the year ended year ended year ended year ended 31 December 31 December 31 December 31 December 2010 2010 2009 2009 Group Company Group Company £’000 £’000 £’000 £’000 Wages, salaries and bonuses 7,655 – 7,675 – Redundancy costs 531 – 1,940 – Social security costs 1,001 – 1,074 – Pension costs (note 7) 510 – 1,467 – Other staff costs 689 – 980 – 10,386 – 13,136 –
The Company has no employees (2009: nil). The average number of staff employed by the Group was: For the For the year ended year ended 31 December 31 December 2010 2009 Number Number Employees 74 68 Seconded staff – 2 74 70 SVG Capital plc Annual Report 2010 63
7 Pension costs The charge for pension costs comprises: For the For the For the For the year ended year ended year ended year ended 31 December 31 December 31 December 31 December 2010 2010 2009 2009 Group Company Group Company £’000 £’000 £’000 £’000 Defined benefit schemes (322) – 696 – Money purchase schemes 832 – 771 – 510 – 1,467 –
The Group does not participate in a SVG Group pension scheme. Costs in respect of defined benefit schemes relate to payments due to the Schroders Retirement Benefits Scheme (“the Scheme”) in respect of four former employees of SVG Advisers Limited (“SVGA”), a wholly owned subsidiary of the Company, that were seconded from Schroder Investment Management Limited. SVGA and the Scheme’s trustees, taking advice from the independent actuaries, agree the contributions. In accordance with IAS 19, the Group’s contributions to the Scheme are accounted for as a defined contribution scheme on the basis that the Group is unable to readily identify its share of the underlying assets and liabilities of the Scheme at the balance sheet date as there is no consistent and reliable basis for allocating the obligations, plan assets and costs to the Group. Further details of the Scheme can be found in the Annual Report and Accounts of Schroders plc. In particular, the Scheme had 305 active members in the defined benefit section at 31 December 2009 and the accounts of Schroders plc disclosed a net pension deficit in respect of the Scheme of £41.1 million, calculated under IAS 19. During the year the Group paid £0.4 million to Schroders in respect of SVG Adviser’s share of the Scheme deficits up to 31 December 2008, and wrote back to the income statement the difference between this and the amount accrued in 2009. Whilst the Group does not expect to make further payments under this scheme, if the deficit increases, the Group may be required to make further payments. The Group believes there is too much uncertainty to reliably estimate any further such payments.
8 Finance costs For the For the For the For the year ended year ended year ended year ended 31 December 31 December 31 December 31 December 2010 2010 2009 2009 Group Company Group Company £’000 £’000 £’000 £’000 Convertible loan note interest 9,733 9,733 9,317 9,317 Amortisation of issue and listing costs plus premium to redemption on convertibles 1,718 1,718 1,988 1,988 Gain on buy-back of convertibles – – (1,943) (1,943) Senior Note interest 19,599 19,599 19,323 19,323 Amortisation of issue costs on Senior Notes 948 948 960 960 Swap payments 199 199 532 532 Loan facility finance costs 5,377 5,377 7,605 7,605 Amortisation of loan facility issue costs 1,713 1,713 1,134 1,134 Other finance costs 236 262 45 520 39,523 39,549 38,961 39,436
9 Operations in the year There is a large degree of uncertainty and risk involved in investing in private equity and the results of the Group and the Company are primarily dependent on the performance of its private equity fund investments. During the year ended 31 December 2010, gains on investments amounted to
£351.2 million (2009: gains of £51.3 million) for the Group and £350.9 million (2009: gains of £50.8 million) for the Company. informationFinancial As detailed in note 30, the Company had agreed that it should focus its investments mainly on Permira funds. As such, and given that our largest exposures currently are to Permira funds (see notes 3 and 31), we expect that the performance of the Company will be largely dependent on the performance of the Permira funds in which we invest. SVG Capital plc Annual Report 2010 64 Notes to the accounts
10 Tax (a) The charge for tax for the year is made up as follows: For the year ended 31 December 2010 For the year ended 31 December 2009 Revenue Capital Total Revenue Capital Total Group £’000 £’000 £’000 £’000 £’000 £’000 Current tax Corporation tax 437 (353) 84 649 (640) 9 Overseas tax – – – (15) – (15) Prior year adjustment (group relief) 16 – 16 (1,365) – (1,365) Total current tax 453 (353) 100 (731) (640) (1,371) Deferred tax Deferred tax (207) – (207) (261) – (261) Prior year adjustment 29 – 29 12 – 12 Total deferred tax (178) – (178) (249) – (249) Total tax charge/(credit) (note 10 (b)) 275 (353) (78) (980) (640) (1,620)
For the year ended 31 December 2010 For the year ended 31 December 2009 Revenue Capital Total Revenue Capital Total Company £’000 £’000 £’000 £’000 £’000 £’000 Current tax Group relief (2,722) – (2,722) (2,370) – (2,370) Prior year adjustment 588 – 588 (1,333) – (1,333) Total current tax (2,134) – (2,134) (3,703) – (3,703) Deferred tax Deferred tax – – – – – – Total deferred tax – – – – – – Total tax credit (note 10(b)) (2,134) – (2,134) (3,703) – (3,703)
There are no profits chargeable to corporation tax for the Company in the current year. Excess management expenses relating to the private equity funds’ portfolio are available to set against any taxable income of the Company. These excess management expenses are included within the investments in private equity funds in the balance sheet of the Company and are not reflected in the Company’s revenue account. If in a future year in relation to the private equity fund investments income exceeds expenses, the taxation charge to the Company’s revenue account will include tax on this excess with a suitable note by way of explanation. Deferred tax is calculated in full on temporary differences under the liability method using a tax rate of 27% (2009: 28%). A deferred tax asset of £204,000 (2009: £603,000) has been recognised by SVG Advisers Inc. in respect of US taxation. A deferred tax asset of £992,000 (2009: £473,000) has been recognised in respect of SVG Advisers Ltd. A deferred tax asset of £26.6 million (2009: £15.6 million), of which £nil (2009: nil) would have been recognised in equity, relating to losses and other temporary differences, has not been recognised as there is insufficient evidence that there will be sufficient taxable profits against which these losses and temporary differences can be utilised. The excess management expenses and other temporary differences to which this unrecognised asset relates are available indefinitely for offset against future taxable profits. Tax recognised directly in equity, in respect of share based payments was £75,000 (2009: £nil). SVG Capital plc Annual Report 2010 65
10 Tax (b) Factors affecting current tax charge for the year: The tax assessed for the year is lower than the standard rate of corporation tax in the UK of 28% for a large company (2009: 28%). The differences are explained below: For the For the For the For the year ended year ended year ended year ended 31 December 31 December 31 December 31 December 2010 2010 2009 2009 Group Company Group Company £’000 £’000 £’000 £’000 Profit/(loss) before tax 326,817 322,481 21,252 28,869 Corporation tax at 28% (2009: 28%) 91,509 90,295 5,951 8,083 Effects of: Non-taxable capital (gains)/losses (99,365) (99,316) (17,155) (16,967) Non-taxable income net of disallowable expenses (17) (989) 770 (3,664) Difference between accounting and taxable income from funds (2,696) (2,696) 6,375 6,375 Depreciation of items not eligible for capital allowances 25 – 55 – Income of subsidiary not taxable – – 55 – Income taxable at (lower)/higher rates – – (120) – Prior year adjustments re UK corporation tax 45 588 (1,353) (1,333) Temporary differences arising in the year on which deferred tax is not recognised – – 3,802 3,803 Unutilised current year losses carried forward 9,986 9,984 – – Overseas tax 297 – – – Share price movements on deferred tax assets relating to share options and long term incentive schemes 72 – – – Net overseas losses for which no deferred tax has been recognised 53 – – – Deferred tax adjustments in respect of changes in UK tax rates 13 – – – Total tax credit for the year (note 10(a)) (78) (2,134) (1,620) (3,703)
11 Dividends For the For the For the For the year ended year ended year ended year ended 31 December 31 December 31 December 31 December 2010 2010 2009 2009 Group Company Group Company £’000 £’000 £’000 £’000 Amounts recognised as distributions in the year: Dividend of nil (2009: nil) – – – –
In order to maintain investment trust status, the Company must not retain more than 15% of its income from shares and securities. The total dividend payable in respect of the financial year and which will be taken into account in determining the amount of net revenue retained under the requirements of Section 1159 of the Corporation Tax Act 2010, is set out below. For the For the For the For the year ended year ended year ended year ended 31 December 31 December 31 December 31 December 2010 2010 2009 2009 Group Company Group Company £’000 £’000 £’000 £’000 Dividend of nil (2009: nil) – – – – Financial informationFinancial SVG Capital plc Annual Report 2010 66 Notes to the accounts
12 Earnings per share The calculation of the basic and diluted earnings per share, in accordance with IAS 33, is based on the following data: For the For the For the For the year ended year ended year ended year ended 31 December 31 December 31 December 31 December 2010 2010 2009 2009 Group Company Group Company £’000 £’000 £’000 £’000 Earnings/(loss) for the purposes of basic earnings per share being net profit attributable to equity holders of the parent 326,897 324,615 22,875 32,572
Number Number Number Number Number of shares Weighted average number of ordinary shares for the purposes of basic earnings per shares 308,464,430 308,464,430 286,139,771 286,139,771 Effect of dilutive potential ordinary shares: Share options and performance shares 5,577,449 5,577,449 1,165,631 1,165,631 Weighted average number of ordinary shares for the purposes of diluted earnings per share 314,041,879 314,041,879 287,305,402 287,305,402 Earnings per share Basic 106.0p 105.2p 8.0p 11.4p Diluted 104.1p 103.4p 8.0p 11.3p
13 Property, plant and equipment (Group) Telecom- munications Leasehold Computer and office improvements equipment equipment Art Total £’000 £’000 £’000 £’000 £’000 Cost At 1 January 2010 1,471 1,146 683 101 3,401 Additions 135 917 10 10 1,072 Disposals – (21) – (3) (24) Exchange translation 1 3 3 – 7 At 31 December 2010 1,607 2,045 696 108 4,456 Depreciation At 1 January 2010 179 529 159 – 867 Charge for the year 168 637 81 – 886 Disposals – (21) – – (21) Exchange translation – 2 2 – 4 At 31 December 2010 347 1,147 242 – 1,736 Net book value At 31 December 2010 1,260 898 454 108 2,720 At 1 January 2010 1,292 617 524 101 2,534
Property, plant and equipment are assets of SVG Capital’s subsidiary companies. SVG Capital plc Annual Report 2010 67
13 Property, plant and equipment (Group) Telecom- munications Leasehold Computer and office improvements equipment equipment Art Total £’000 £’000 £’000 £’000 £’000 Cost At 1 January 2009 978 1,254 636 101 2,969 Additions 1,358 380 386 – 2,124 Disposals (837) (476) (326) – (1,639) Exchange translation (28) (12) (13) – (53) At 31 December 2009 1,471 1,146 683 101 3,401 Depreciation At 1 January 2009 670 795 365 – 1,830 Charge for the year 251 215 127 – 593 Disposals (742) (472) (325) – (1,539) Exchange translation – (9) (8) – (17) At 31 December 2009 179 529 159 – 867 Net book value At 31 December 2009 1,292 617 524 101 2,534 At 1 January 2009 308 459 271 101 1,139
14 Investments (a) Group Private Private equity fund Other Total equity fund Other Total portfolio investments portfolio portfolio investments portfolio 2010 2010 2010 2009 2009 2009 Fair value through profit or loss assets £’000 £’000 £’000 £’000 £’000 £’000 Valuation brought forward 731,275 164,300 895,575 595,797 145,315 741,112 Calls and purchases 77,108 36,253 113,361 85,049 34,169 119,218 Transfer from financial assets – – – – 15,039 15,039 Distributions and sales (66,931) (44,462) (111,393) (19,914) (11,062) (30,976) Gains/(losses) on investments 313,278 37,953 351,231 70,343 (19,161) 51,182 Valuation carried forward 1,054,730 194,044 1,248,774 731,275 164,300 895,575
(b) Company Private Private equity fund Other Total equity fund Other Total portfolio investments portfolio portfolio investments portfolio 2010 2010 2010 2009 2009 2009 £’000 £’000 £’000 £’000 £’000 £’000 Valuation brought forward 731,034 156,179 887,213 595,508 133,761 729,269 Calls and purchases 77,105 36,230 113,335 85,046 34,024 119,070 Transfer from financial assets – – – – 15,039 15,039 Distributions and sales (66,927) (44,460) (111,387) (19,872) (11,062) (30,934) Gains/(losses) on investments 313,264 36,982 350,246 70,352 (15,583) 54,769 Financial informationFinancial Valuation carried forward 1,054,476 184,931 1,239,407 731,034 156,179 887,213
The total gain of £350,920,000 (2009: gain of £50,757,000) shown in the Company’s income statement also includes gains on subsidiaries during the year of £674,000 (2009: loss of £4,012,000). All funds in the private equity fund portfolio are unlisted. However, some of the underlying companies held within those funds are listed. Included in the value of total private equity fund portfolio are gross valuations of listed investments amounting to £194,232,000 (31 December 2009: £85,579,000). The Group and Company investment portfolios include Permira IV at a value of £632.0 million, which is net of a 25% provision against future distributions on the realisation of investments held by Permira IV, in accordance with the terms of the Permira IV re-organisation in December 2008. It should also be noted that the value of the Permira IV investments attributed to follow-ons that were made after 2008 are not subject to a provision, as distributions in respect of such investments will be received in full. SVG Capital plc Annual Report 2010 68 Notes to the accounts
14 Investments Significant interests in investment funds Details of investments in which the Company or Group has an interest of 10% or more of any class of share/units are detailed in the list of investments on pages 26 and 27. In addition, SVG Capital has a 35.6% interest in the I Class units of the SVG UK Focus Fund, a 66.9% interest in the A Class and 49.0% interest in the R Class units of the SVG European Fund, all of which form part of SVG Investment Funds, a Dublin-listed OEIC managed by SVG Investment Managers Limited, of which SVG Capital has an aggregate interest of 28.8%. As the Company’s overall holding in SVG Investment Funds does not represent a controlling interest the fund is not a subsidiary. It also has a 20.0% interest in Strategic Equity Capital plc, a UK-listed investment trust managed by SVG Investment Managers Limited and a £13.3 million commitment to co-invest alongside the Strategic Recovery Fund II. Furthermore the Company has a 35.5% interest in SVG Diamond, a 35.6% interest in SVG Diamond II, and a 23.4% interest in SVG Diamond III, all of which are advised by SVG Advisers Limited. The Company also has a 100% interest in SVG India LP.
15 Fair values The following table shows financial instruments recognised at fair value, analysed between those whose fair value is based on: • Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); • Those involving inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); and • Those with inputs for the instrument that are not based on observable market data (unobservable inputs) (Level 3). 31 December 2010 31 December 2009 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Group £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Private equity Permira funds and feeder vehicles – – 1,006,167 1,006,167 – – 677,183 677,183 Other private equity funds and co-investments – – 48,564 48,564 – – 54,093 54,093 Private equity funds warehouse – – 10,748 10,748 – – 29,777 29,777 Private equity funds of funds – – 123,689 123,689 – – 85,690 85,690 Public equity Listed investment trusts 10,920 – – 10,920 8,120 – – 8,120 Open-ended investment companies 19,352 – – 19,352 16,087 – – 16,087 Limited partnership co-investments scheme – – 19,161 19,161 – – 15,382 15,382 Other investments Indian limited partnerships and funds – – 10,173 10,173 – – 8,576 8,576 Other – – – – – – 667 667 Derivatives Currency swaps – 883 – 883 30,272 883 1,218,502 1,249,657 24,207 – 871,368 895,575 Financial liabilities Interest rate swaps – (837) – (837) – (775) – (775) Forward currency contracts – (634) – (634) – (1,390) – (1,390) – (1,471) – (1,471) – (2,165) – (2,165) SVG Capital plc Annual Report 2010 69
15 Fair values 31 December 2010 31 December 2009 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Company £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Private equity Permira funds and feeder vehicles – – 1,005,929 1,005,929 – – 676,959 676,959 Other private equity funds and co-investments – – 48,547 48,547 – – 54,075 54,075 Private equity funds warehouse – – 10,748 10,748 – – 29,777 29,777 Private equity funds of funds – – 123,689 123,689 – – 85,690 85,690 Public equity Listed investment trusts 10,920 – – 10,920 8,120 – – 8,120 Open-ended investment companies 19,352 – – 19,352 16,087 – – 16,087 Limited partnership co-investment scheme – – 19,161 19,161 – – 15,382 15,382 Other investments Indian limited partnerships and funds – – 1,061 1,061 – – 456 456 Other – – – – – – 667 667 Subsidiary investments at fair value – 9,990 9,990 – – 9,167 9,167 Derivatives Currency swaps – 883 – 883 30,272 883 1,219,125 1,250,280 24,207 – 872,173 896,380 Financial liabilities Interest rate swaps – (837) – (837) – (775) – (775) – (837) – (837) – (775) – (775)
The Group primarily invests in private equity via limited partnerships or other fund structures. Such vehicles are typically unquoted and in turn invest in unquoted securities. The Group’s investment portfolio is recognised in the balance sheet at fair value, in accordance with IPEV Valuation Guidelines. 31 December 31 December 2010 2009 Level 3 Level 3 Group £’000 £’000 Valuation brought forward 871,368 742,376 Payments 112,834 116,208 Receipts (110,738) (27,966) Fair value gains 345,038 40,750 Transfers – – Valuation carried forward 1,218,502 871,368
31 December 31 December 2010 2009 Level 3 Level 3 Company £’000 £’000 informationFinancial Valuation brought forward 872,173 743,566 Payments 112,831 116,205 Receipts (110,734) (27,924) Fair value gains 344,855 40,326 Transfers – – Valuation carried forward 1,219,125 872,173
Out of the total fair value gains recognised in the Group and Company Income Statements in respect of Level 3 investments, losses of £4,578,000 relate to warehouse assets sold in the year. The remaining gains are in respect of assets held at 31 December 2010. Transfers During the year there were no transfers between Levels 1, 2 or 3.
SVG Capital plc Annual Report 2010 70 Notes to the accounts
15 Fair values Fair value of financial instruments not held at fair value The Group’s debt instruments, such as the loan facility, senior notes and convertible bonds, are not held at fair value. Indicative fair values of these instruments are shown below along with the corresponding par value used as the basis for their carrying value in the balance sheet (see notes 19 and 20). 31 December 2010 31 December 2009 Par value £’000 Fair value £’000 Par value £’000 Fair value £’000 Group and Company Loan facility (€22.5 million) 19,279 19,261 97,734 97,382 9.10% Fixed Rate Series A Senior Notes due 18 July 2013 ($116.8 million) 74,600 77,039 77,163 74,848 7.57% Fixed Rate Series B Senior Notes due 18 July 2013 (€6.9 million) 5,870 5,852 13,025 12,035 Floating Rate Series C Senior Notes due 18 July 2013 (£2.4 million) 2,398 2,312 5,131 4,961 8.49% Fixed Rate Series A Senior Notes due 18 July 2014 ($128.275 million) 81,928 85,099 79,432 73,713 7.72% Fixed Rate Series B Senior Notes due 18 July 2014 – – 9,769 8,821 Floating Rate Series C Senior Notes due 18 July 2014 – – 3,256 3,110 9.10% Fixed Rate Series D Senior Notes due 18 July 2015 (£36.65 million) 36,650 38,061 36,650 31,666 Convertible bonds (£101.9 million) 114,950 110,352 114,950 83,914 Total 335,675 337,976 437,110 390,450
16 Geographical analysis of investments 31 December 2010 31 December 2009 Group Company Group Company £’000 £’000 £’000 £’000 Private equity funds and co-investments Europe* 1,006,167 1,005,929 677,183 676,959 Total Europe 1,006,167 1,005,929 677,183 676,959 Asia Asia Pacific 5,228 5,211 14,010 13,992 Japan 4,186 4,186 4,313 4,313 Total Asia 9,414 9,397 18,323 18,305 North America Canada 1,352 1,352 1,256 1,256 United States** 37,798 37,798 34,514 34,514 Total North America 39,150 39,150 35,770 35,770 Private equity fund portfolio 1,054,731 1,054,476 731,276 731,034 Private equity funds warehouse**: US 1,622 1,622 4,653 4,653 Europe 9,126 9,126 25,124 25,124 Total private equity funds warehouse 10,748 10,748 29,777 29,777 Public equity funds: UK 43,101 43,101 33,635 33,635 Europe 6,332 6,332 5,954 5,954 Total public equity funds 49,433 49,433 39,589 39,589 Other investments: Private equity funds of funds*** 123,689 123,689 85,690 85,690 Indian funds 10,173 1,061 8,576 456 Other – Europe – – 667 667 Total other investments 133,862 124,750 94,933 86,813 Total investment portfolio 1,248,774 1,239,407 895,575 887,213
Allocations are based on the expected geographical focus of the funds. A further analysis of the estimated currency exposure of assets is provided in note 30. * Permira funds have been included in Europe, which is the primary focus of such funds, although they can invest a significant amount of their committed capital in businesses which do not have significant activities in Europe. ** SV Life Sciences Fund III and SV Life Sciences Fund IV have been included within the US. *** Private equity funds of funds are relatively equally focused between Europe and the US. SVG Capital plc Annual Report 2010 71
17 Investments in subsidiaries Year ended Year ended 31 December 31 December 2010 2009 Company Company £’000 £’000 Cost at the beginning of the year 25,963 25,753 Cash contributions 169 146 Capital contribution in respect of performance shares and options over SVG Capital shares 2,579 64 Cost at the end of the year 28,711 25,963 Net unrealised loss on investment at the end of the year (6,108) (6,782) Carrying value at the end of the year 22,603 19,181
Analysed as: Subsidiaries at cost 12,613 10,014 Subsidiaries at fair value 9,990 9,167 22,603 19,181
In accordance with IFRS 2, the fair value amount of options issued that have been charged in the income statements of SVG Advisers Limited (“SVGA”) and SVG Advisers Inc. are treated as a non-refundable contribution to subsidiaries and added to the cost of subsidiaries in SVG Capital’s accounts. As an investment vehicle, the Platinum Trust is included in the Company’s balance sheet at its fair value of £889,000 (31 December 2009: £1,050,000). Similarly, SVG India LP is an investment entity and is included in the Company’s balance sheet at its fair value of £9,101,000 (31 December 2009: £8,117,000). The other subsidiaries are operating companies rather than investment vehicles and are included at cost. SVG Advisers Limited is included at cost of £12,068,000 (31 December 2009: £9,489,000). SVG Investment Managers Limited is included at cost of £275,000 (31 December 2009: £275,000). SVG Managers Limited is included at cost of £250,000 (31 December 2009: £250,000). SVG Investments Limited is included at cost of £20,000. SVG North America Inc., SVG Advisers Inc. and SVG Advisers (Singapore) Limited Pte. are wholly-owned subsidiaries of SVGA. Subsidiary undertakings at 31 December 2010: Profit after tax Number and Capital and for the year Country of class of reserves at ended registration, shares/units 31 December 31 December incorporation held by the Group 2010 2010 Company and business and operation Group holding £’000 £’000 The Platinum Trust (unit trust) – investment vehicle Guernsey 23,112 ‘A’ units 99% 988 (163) 900 ‘B’ units 90% SVG Advisers Limited – advisory and administration services UK 4,250,000 Ordinary Shares 100% 17,584 5,725 SVG North America, Inc. – broker/dealer US 3,000 Common Shares 100% 128 9 SVG Advisers, Inc – investment adviser US 100 Common Shares 100% 827 (429) SVG Investment Managers Limited – investment manager UK 25,000,000 ‘A’ Ordinary Shares 100% 830 165 2,500,100 ‘B’ Ordinary Non-voting Shares 50% SVG Managers Limited – investment manager UK 250,000 Ordinary Shares 100% 927 175
SVG Advisers (Singapore) Ltd Pte informationFinancial – advisory services Singapore 1,017,097 Ordinary Shares 100% 651 9 SVG Investments Limited – investment entity UK 20,100 Ordinary Shares 100% 7 (11) SVG India LP – investment vehicle Guernsey US$32,040,980 commitment 100% 9,101 835 SVG Capital plc Annual Report 2010 72 Notes to the accounts
18 Current assets 31 December 2010 31 December 2009 Group Company Group Company Other receivables £’000 £’000 £’000 £’000 Amounts falling due within one year: Amounts owed by Group undertakings – 782 – 6,105 Interest receivable 244 244 617 612 Distributions receivable 16 16 – – Prepayments and other debtors 1,711 573 3,174 1,755 Accrued investment advisory fee income† 5,114 – 9,024 – 7,085 1,615 12,815 8,472
† Investment advisory fee income of £2.6 million (2009: £0.4 million) has been deferred and has not been recognised by SVGA as its future recoverability is contingent on future events. We expect to recover these fees but as there is some uncertainty over the outcome we have not recognised these amounts in accordance with IAS 18 ‘Revenue’.
31 December 2010 31 December 2009 Group Company Group Company Cash and cash equivalents £’000 £’000 £’000 £’000 Bank balances and short-term deposits 7,489 2,802 14,146 7,220 Money market funds 9,622 5,110 129,921 123,847 17,111 7,912 144,067 131,067
Cash equivalents are highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of change in value, other than those arising from fluctuations in foreign exchange rates. Cash at bank and investments in money market funds earn interest at floating rates. Money market funds are redeemable for same-day value and are AAA-rated.
19 Current liabilities 31 December 2010 31 December 2009 Group Company Group Company Other payables £’000 £’000 £’000 £’000 Amounts owed to Group undertakings – 6,411 – – Loan facility drawings 19,279 19,279 97,734 97,734 Interest payable and similar charges 5,466 5,466 8,677 8,677 Other creditors and accruals 9,122 460 10,249 598 Fair value of forward currency contracts 374 – 1,213 – 34,241 31,616 117,873 107,009
Financial liabilities at fair value through profit or loss The fair value of forward currency contracts and interest rate contracts are determined using valuation techniques based on observable inputs (Level 2), as further detailed in note 15. Borrowings In February 2010, the Company renegotiated its loan facility with The Royal Bank of Scotland plc, The Bank of Scotland plc and Unicredit Bank AG. Under the terms of the renegotiations, the term of the loan facility was extended from March 2011 until January 2013 and the size of the facility was reduced from €550 million to €325 million, with further step-downs to €320 million in March 2011, €315 million in September 2011 and €250 million in March 2012. The facility is subject to financial covenants (see note 20). The Company made net repayments totalling €87.5 million from the facility during the year and had total outstanding drawings of €22.5 million (£19.3 million) at 31 December 2010. SVG Capital plc Annual Report 2010 73
19 Current liabilities Tax payable/(recoverable) For the For the For the For the year ended year ended year ended year ended 31 December 31 December 31 December 31 December 2010 2010 2009 2009 Group Company £’000 Company £’000 £’000 Group £’000 Current tax liability/(debtor) – corporation tax Balance brought forward (4,196) – (1,000) – Corporation tax recovered 355 – (1,840) – Overseas fax paid (40) – – – Corporation tax charged to income statement (note 10(a)) 84 – 9 – Prior year adjustment 16 – (1,365) – Balance carried forward (3,781) – (4,196) –
20 Non-current liabilities 31 December 2010 31 December 2009 Group Company Group Company £’000 £’000 £’000 £’000 Senior Notes 198,545 198,545 220,577 220,577 Convertible Bonds 101,866 101,866 100,148 100,148 Fair value of forward currency contracts 260 – 177 – Fair value of interest rate contracts 837 837 775 775 Deferred tax liability 3 – 158 – 301,511 301,248 321,835 321,500
Non-current liabilities include £220.6 million of Senior unsecured loan Notes. Further details of the Notes are provided in the following table: 31 December 2010 31 December 2009 Group Company Group Company £’000 £’000 £’000 £’000 9.10% Fixed Rate Series A Senior Notes due 18 July 2013 (US$116.8 million) 74,600 74,600 77,163 77,163 7.57% Fixed Rate Series B Senior Notes due 18 July 2013 (€6.9 million) 5,870 5,870 13,026 13,026 Floating Rate Series C Senior Notes due 18 July 2013 (£2.4 million) 2,398 2,398 5,131 5,131 8.49% Fixed Rate Series A Senior Notes due 18 July 2014 (US$128.3 million) 81,928 81,928 79,432 79,432 7.72% Fixed Rate Series B Senior Notes due 18 July 2014 – – 9,769 9,769 Floating Rate Series C Senior Notes due 18 July 2014 – – 3,256 3,256 9.10% Fixed Rate Series D Senior Notes due 18 July 2015 (£36.7 million) 36,650 36,650 36,650 36,650 Total nominal amount of Senior Notes 201,446 201,446 224,427 224,427 Unamortised issue costs (2,901) (2,901) (3,850) (3,850) 198,545 198,545 220,577 220,577
In December 2010, the Company repurchased at par and cancelled €22.5 million, US$7.8 million and £2.7 million of the original nominal amount of the Senior Notes in issue. In January 2011, the Company repurchased at par and cancelled US$7.8 million of the original nominal amount of the Senior Notes in issue.
The Company has agreed to repurchase at par and cancel a further €6.9 million, US$6.9 million and £0.7 million of the original amount of the Senior informationFinancial Notes in issue, effective 15 February 2011. In respect of certain foreign currency borrowings, the Company has executed currency swaps to hedge the foreign exchange risk on the principal outstanding and the interest payments on a portion of the $-denominated Senior Notes. The Company has entered into agreements to effectively swap US$180 million of its Senior Notes into euro. The contracts were entered into at an exchange rate of $1.347 : €1 and mature on 18 January 2013. The fair value gain on currency swaps is included in the balance sheet as non-current investments. At 31 December 2010, the fair value gain on currency swaps was £0.8 million. SVG Capital plc Annual Report 2010 74 Notes to the accounts
20 Non-current liabilities On 18 July 2006, the Company entered into an interest rate swap agreement with The Royal Bank of Scotland plc (“RBS”) to effectively fix the interest payments under the Series C 2013 Notes at a rate of 6.65% per annum (8.65% following the debt renegotiations in December 2008). With effect from 2 August 2007, the Company entered into an interest rate swap agreement with RBS to effectively fix the interest payments under the Series C 2014 Notes at a rate of 5.86% per annum (7.86% following the debt renegotiation in December 2008). The interest rate swaps have not been amended to reflect the repurchase and cancellation of floating rate notes in December 2010 and February 2011. Issue costs are charged to the revenue account over the term of the Senior Notes. Covenants The facility is subject to financial covenants. Until 30th June 2011, the maximum loan to value (“LTV”) covenant is 50% (including the unaudited Directors’ valuation of SVG Advisers (“SVGA”). The Senior Notes are subject to financial covenants. Until 30 June 2011, the maximum LTV covenants are 55% (excluding the unaudited Directors’ valuation of SVGA) and 50% (including the SVGA valuation). At 31 December 2010, the LTV was 15.5% (including the SVGA valuation) and 16.2% (excluding the SVGA valuation). With effect from 1 July 2011, the maximum LTV reduces to 30% (excluding the SVGA valuation), with the flexibility to go up to 40% for one nine month period. Non-current liabilities also include £101.9 million of Convertible Bonds. Further details are provided in the following table: 31 December 2010 31 December 2009 Group Company Group Company £’000 £’000 £’000 £’000 8.25% Subordinated Convertible Bonds 2016 – nominal 114,950 114,950 114,950 114,950 Unamortised premium, issue and listing costs (13,084) (13,084) (14,802) (14,802) 101,866 101,866 100,148 100,148
The Bonds were issued on 5 June 2008 and are redeemable at par on 5 June 2016. At issue the conversion option was valued at £14,726,000 and this amount has been credited to an equity reserve (see note 24). As a result of the Rights Issue and Placing, the Conversion Price was amended to £6.48 on 10 February 2009, in accordance with the Terms and Conditions of the Bonds. The Bonds are convertible at the option of the bond-holder. They are not currently dilutive as the Conversion Price is above the Company’s NAV per share. As the Bonds are subordinated to the Senior Notes and the loan facility, they are not counted as debt for the purposes of calculating the loan to value covenants for the Senior Notes and loan facility. SVG Capital plc Annual Report 2010 75
21 Capital commitments and contingencies At 31 December 2010, the Group had uncalled commitments to its fund investments as follows: 2010 2010 2009 Uncalled Uncalled Uncalled commitment commitment* commitment* (local currency) £’million £’million Permira funds Permira Europe III €6.1m 5.2 26.5 Permira IV €108.3m 92.8 147.6 P1234 €7.7m 6.6 6.8 P25 €6.6m 5.7 5.9 Sapphire IV €0.2m 0.2 0.2 SVG Sapphire IV €1.8m 1.5 2.5 112.0 189.5 Other core private equity funds SV Investments Fund I US$3.3m 2.1 2.3 SV Life Sciences Fund III US$0.4m 0.3 1.1 SV Life Sciences Fund IV US$12.4m 7.9 11.6 The Japan Fund IV ¥1,071.4m 8.4 7.1 18.7 22.1 Private equity fund warehouse Actis Emerging Markets III – – 4.5 American Capital Equity II US$2.4m 1.5 1.5 AXA IV – – 8.8 Barclays Private Equity III – – 5.2 Bridgepoint Europe IV – – 12.2 CVC Capital Partners Asia Pacific III – – 4.6 CVC European Equity Partners V €13.2m 11.3 17.9 Industri Kapital 2007 – – 9.2 PAI Europe V – – 14.9 12.8 78.8 Public equity funds The Strategic Recovery Fund II £2.8m 2.8 8.4 Private equity funds of funds SVG Diamond Private Equity III €18.3m 15.7 22.1 Vintage I €28.8m 24.7 25.6 SVG Asia Fund of Funds US$32.7m 20.9 21.5 Schroder Private Equity Fund of Funds III €0.1m 0.1 0.3 61.4 69.5 Financial informationFinancial SVG Capital plc Annual Report 2010 76 Notes to the accounts
21 Capital commitments and contingencies 2010 2010 2009 Uncalled Uncalled Uncalled commitment commitment* commitment* (local currency) £’million £’million Other investments SVG India US$0.3m 0.2 0.3 Gaja Capital Fund US$3.0m 1.9 2.5
2.1 2.8 Total 209.8 371.1
* Based on exchange rates at the relevant year-end. Commitments are payable at short notice. Operating leases The Group has the following obligations under operating leases: < 1 year 1–5 years > 5 years Total £’000 £’000 £’000 £’000 Operating lease obligation as at 31 December 2010 852 3,408 3,198 7,459 Operating lease obligation as at 31 December 2009 852 3,408 4,051 8,311
The obligation under operating leases relates to SVG Advisers, which holds a long-term lease (11 years) over its office space at 61 Aldwych. The lease terms are subject to upward only rent reviews every five years. Guarantees The Company has not granted any guarantees to third parties.
22 Share capital 31 December 2010 31 December 2009 Group Company Group Company £’000 £’000 £’000 £’000 Allotted, called up and fully paid: Opening balance of 310,407,923 (2009: 139,069,901) shares 310,408 310,408 139,070 139,070 Placing of 70,000,000 shares – – 70,000 70,000 Rights Issue of 101,338,022 shares – – 101,338 101,338 Issue of ordinary shares on exercise of options – – – – Closing balance of 310,407,923 (2009: 310,407,923) shares 310,408 310,408 310,408 310,408
Options over ordinary shares Options Options Options 31 December 31 December granted exercised lapsed Exercise price 2010 2009 Issue date Latest exercise date in the year in the year in the year per share number in issue number in issue 21 June 2001 20 June 2011 – – 3,658 410.00p 1,163,411 1,167,069 21 June 2001 20 June 2011 – – – 405.50p 3,699 3,699 5 April 2002 4 April 2012 – – 3,736 334.50p 514,795 518,531 5 April 2002 4 April 2012 – – – 335.00p 3,029 3,029 13 March 2003 12 March 2013 – – 3,309 397.75p 506,044 509,353 13 March 2003 12 March 2013 – – – 397.50p 3,522 3,522 15 October 2003 14 October 2013 – – 30,425 493.00p – 30,425 12 March 2004 11 March 2014 – – 31,731 479.00p 555,257 586,988 12 March 2004 11 March 2014 – – – 492.00p 4,684 4,684 23 March 2005 22 March 2015 – – 90,526 564.00p 477,175 567,701 23 March 2005 22 March 2015 – – – 569.50p 13,355 13,355 – – 163,385 3,244,971 3,408,356 SVG Capital plc Annual Report 2010 77
22 Share capital Options Options Options 31 December 31 December granted exercised lapsed Exercise price 2009 number 2008 number Issue date Latest exercise date in the year in the year in the year per share in issue in issue 21 June 2001 20 June 2011 – – 1,455,364 410.00p 1,167,069 2,622,433 21 June 2001 20 June 2011 – – 24,660 405.50p 3,699 28,359 5 April 2002 4 April 2012 – – 806,276 334.50p 518,531 1,324,807 5 April 2002 4 April 2012 – – 10,447 335.00p 3,029 13,476 13 March 2003 12 March 2013 – – 619,731 397.75p 509,353 1,129,084 13 March 2003 12 March 2013 – – 15,094 397.50p 3,522 18,616 15 October 2003 14 October 2013 – – – 493.00p 30,425 30,425 12 March 2004 11 March 2014 – – 652,398 479.00p 586,988 1,239,386 12 March 2004 11 March 2014 – – 10,467 492.00p 4,684 15,151 23 March 2005 22 March 2015 – – 544,159 564.00p 567,701 1,111,860 23 March 2005 22 March 2015 – – 8,884 569.50p 13,355 22,239 – – 4,147,480 3,408,356 7,555,836
For all options in issue, the performance target is for growth in the Company’s net asset value per ordinary share to exceed the growth in the Retail Prices Index plus 4% per annum over the three years from the date of grant. The performance target has been met for all options issued by the end of March 2005. Share-based payments No options were granted during the year (2009: nil). The range of exercise prices for options outstanding at the year-end was 334.5p to 569.5p (2009: 334.5p to 569.5p). The weighted average exercise price of options in issue at the year end was 430.5p (2009: 434.9p). All options in issue will be equity-settled. The mid-market price of shares at 31 December 2010 was 210.8p and the range during the year was 125.2p to 224.3p. No options were exercised during the year. The fair value of equity-settled share options granted is estimated as at the date of grant using a stochastic model, taking into account the terms and conditions upon which the options were granted. The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome. No other features of options grant were incorporated into the measurement of fair value. Performance shares A new performance share plan was approved at the 2007 AGM to replace further grants of options, other than in exceptional circumstances. Performance 31 December 31 December Performance shares vested/ Performance 2010 2009 Earliest vesting/(1) shares granted exercised shares lapsed Exercise price number number Issue date exercise date(1) Latest exercise date* in the year in the year in the year per share in issue in issue 15 May 2007 15 May 2011(1) 15 May 2017 – – 38,512 0.0p – 38,512 13 March 2008 13 March 2011(2) 13 March 2018 – – 526,430 0.0p – 526,430 13 March 2008 13 March 2012(3) 13 March 2018 – – – 0.0p 28,208 28,208 13 March 2008 13 March 2011(2) 13 March 2018 – – 2,319 100.0p – 2,319 25 September 2008 25 September 2011(2) 25 September 2018 – – 87,218 0.0p 87,218 25 September 2008 25 September 2012(3) 25 September 2018 – – – 0.0p 99,999 99,999 13 October 2009 13 October 2012(4) 13 October 2019 – – 5,943 0.0p 883,517 889,460 13 October 2009 13 October 2013(5) 13 October 2019 – – 5,943 0.0p 883,517 889,460
15 April 2010 13 October 2012(4) 13 October 2019 1,574,665 – 38,628 0.0p 1,536,037 – informationFinancial 15 April 2010 13 October 2013(5) 13 October 2019 1,574,665 – 38,628 0.0p 1,536,037 – 15 April 2010 15 April 2014(4) 15 April 2020 2,190,376 – 181,465 0.0p 2,008,911 – 15 April 2010 15 April 2014(5) 15 April 2020 2,190,376 – 99,047 0.0p 2,091,329 – 7,530,082 – 1,024,133 9,067,555 2,561,606 SVG Capital plc Annual Report 2010 78 Notes to the accounts
22 Share capital Performance 31 December 31 December Performance shares vested/ Performance Exercise 2009 2008 Earliest vesting/(1) shares granted exercised shares lapsed price number number Issue date exercise date(1) Latest exercise date* in the year in the year in the year per share in issue in issue 15 May 2007 15 May 2010(1) 15 May 2017 – – 459,057 0.0p – 459,057 15 May 2007 15 May 2011(2) 15 May 2017 – – 64,269 0.0p 38,512 102,781 15 May 2007 15 May 2010(1) 15 May 2017 – – 48,154 100.0p – 48,154 15 May 2007 15 May 2011(2) 15 May 2017 – – 275,984 100.0p – 275,984 25 October 2007 25 October 2010(1) 25 October 2017 – – 58,261 0.0p – 58,261 13 March 2008 13 March 2011(3) 13 March 2018 – – 88,540 0.0p 526,430 614,970 13 March 2008 13 March 2012(4) 13 March 2018 – – 29,513 0.0p 28,208 57,721 13 March 2008 13 March 2011(3) 13 March 2018 – – 58,621 100.0p 2,319 60,940 13 March 2008 13 March 2012(4) 13 March 2018 – – 396,262 100.0p – 396,262 25 September 2008 25 September 2011(3) 25 September 2018 – – 1,391 0.0p 87,218 88,609 25 September 2008 25 September 2012(4) 25 September 2018 – – – 0.0p 99,999 99,999 13 October 2009 13 October 2012(5) 13 October 2019 889,460 – – 0.0p 889,460 – 13 October 2009 13 October 2013(6) 13 October 2019 889,460 – – 0.0p 889,460 – 1,778,920 – 1,480,052 2,561,606 2,262,738
*Vesting of these awards will be satisfied by market purchase of shares. Performance condition footnotes: (1) Awards subject to performance conditions based on growth in the Company’s undiluted Net Asset Value per Share of the Company (“NAV”) over four financial years ending 31 December 2010. Specifically, 25% and 100% of an award will vest or become capable of exercise if average annual NAV growth over the performance period is equal to 10% and equal to or greater than 18% respectively. For performance between these two points awards will vest on a straight-line basis. The targets were not met and the awards have lapsed. (2) Awards subject to stretching growth targets in the gross value of SVG Advisers Limited over three financial years of the Company ending 31 December 2010. The targets were not met and the awards have lapsed. (3) Awards subject to performance conditions based on growth in the Company’s undiluted Net Asset Value per Share of the Company (“NAV”) over four financial years ending 31 December 2011. Specifically, 25% and 100% of an award will vest or become capable of exercise if average annual NAV growth over the performance period is equal to 10% and equal to or greater than 18% respectively. For performance between these two points awards will vest on a straight-line basis. (4) Awards subject to performance conditions based on growth in Total Shareholder Return (“TSR”) over three financial years ending 13 October 2012. Specifically, 25% and 100% of an award will vest or become capable of exercise if average annual NAV growth over the performance period is equal to 10% and equal to or greater than 18% respectively. For performance between these two points awards will vest on a straight-line basis. (5) Awards subject to performance conditions based on growth in the Company’s undiluted Net Asset Value per Share of the Company (“NAV”) over four financial years ending 31 December 2011. Specifically, 25% and 100% of an award will vest or become capable of exercise if average annual NAV growth over the performance period is equal to 10% and equal to or greater than 18% respectively. For performance between these two points awards will vest on a straight-line basis. The price of an ordinary share on 15 April 2010, when awards were granted under the PSP, was 170.7p. The price of an ordinary share on 13 October 2009, when awards were granted under the PSP, was 126.2p. The price of an ordinary share on 13 March 2008 and 25 September 2008, when awards were granted under the PSP, was 708.5p and 579.0p, respectively. The fair value of equity-settled performance shares granted is estimated as at the date of grant using a stochastic model, taking into account the terms and conditions upon which the performance shares were granted.
23 Own shares 31 December 31 December 2010 2009 £’000 £’000 Opening balance – – Additions (5,000) – Closing balance (5,000) –
Own shares consist of shares in SVG Capital plc held by the SVIIT Employee Benefit Trust and the SVIIT USA Employee Benefit Trust. During the year the Trusts acquired 3,125,000 shares at a cost of £5.0 million. At 31 December 2010 the Trusts held 3,125,000 shares in SVG Capital plc (2009: nil). The market value of these shares at 31 December 2010 was £6,587,500 (2009: £nil). The Trusts are funded by an interest-free loan from SVG Capital plc.
24 Reserve accounts The purpose of the various reserve accounts used by the Group is set out below. Share premium account The net proceeds of share issues in excess of the nominal value of such shares are credited to the share premium account. Capital redemption reserve This reserve represents the nominal amount of the Company’s own shares that have been purchased for cancellation. The amounts included in this reserve represent transfers from the Company’s share capital account. SVG Capital plc Annual Report 2010 79
24 Reserve accounts Share purchase reserve On 24 June 1998, the Company obtained permission from the High Court to cancel its share premium account (in existence at that date) and set up a new distributable reserve, the share purchase reserve, against which the cost of purchasing the Company’s own shares for cancellation can be debited. Share option reserve The Group’s share option reserve represents the fair value amounts in respect of options issued that have been charged through the income statements of SVG Advisers Limited and SVG Advisers Inc, as well as related deferred tax. The Company’s share option reserve represents the corresponding amount included in SVG Capital’s accounts as a contribution to subsidiaries (note 17). Convertible bonds – equity This reserve represents the equity component of the convertible bonds 2016, which were issued on 5 June 2008 (see note 20). Hedge reserves This reserve includes the effective portion of unrealised gains or losses on cash flow hedges. Capital reserves This reserve represents cumulative capital profits and losses. As an investment trust (defined by the Corporation Tax Act 2010), the Company is prohibited by its Articles of Association from distributing as dividend any surpluses arising from the realisation of investments. Revenue reserve As an investment company (defined by the Companies Act 2006, as amended), the Company’s revenue reserve represents its profits available for distribution.
25 Net asset value per ordinary share (“Shareholders’ funds”) 31 December 2010 31 December 2009 Group Company Group Company £’000 £’000 £’000 £’000 Basic 307.8p 305.8p 199.9p 198.9p Diluted 298.9p 297.0p 198.2p 197.3p
Calculations of the net asset values per share are based on Group net assets attributable to equity shareholders of the parent of £945,677,000 (31 December 2009: £620,432,000), Company net assets of £939,556,000 (31 December 2009: £617,424,000) and on 307,282,923 (31 December 2009: 310,407,923) ordinary shares in issue at the year end. The Group and Company diluted net asset values per share assume that share options and performance shares (note 22) with a strike price lower than the undiluted net asset value per share are exercised at the balance sheet date. This would result in the issue of 9,067,555 ordinary shares (31 December 2009: 2,561,606) for nil consideration (31 December 2009: £nil). The convertible bonds 2016 are exercisable at a strike price of 648p and are therefore not dilutive at 31 December 2009 or 2010. Therefore, the calculation of the diluted net asset value per share of the Group is based on Group net assets attributable to equity shareholders of £945,677,000 (31 December 2009: £620,432,000), Company net assets of £939,556,000 (31 December 2009: £617,424,000) and on 316,350,478 (31 December 2009: 312,969,529) ordinary shares in issue at the year end. Reconciliation of NAV per share
Undiluted Group £’000 Shares in issue NAV per share Opening shareholders’ funds 620,432 310,407,923 199.9p
Purchase of own shares (5,000) (3,125,000) 160.0p informationFinancial Opening balances adjusted for share movements 615,432 307,282,923 200.3p Gain attributable to equity shareholders of the parent company 326,897 307,282,923 106.4p Other reserve movements during the period (hedging) 3,348 307,282,923 1.1p Closing shareholders’ funds 945,677 307,282,923 307.8p
Diluted NAV Group £’000 Shares in issue per share Opening shareholders’ funds – dilutive basis 620,432 312,969,529 198.2p Adjustment re lapses and grants of performance shares – 6,505,949 Purchase of own shares (5,000) (3,125,000) 160.0p Opening balances adjusted for share changes 615,432 316,350,478 194.5p Loss attributable to equity shareholders of the parent company 326,897 316,350,478 103.3p Other reserve movements during the year 3,348 316,350,478 1.1p Closing shareholders’ funds – dilutive basis 945,677 316,350,478 298.9p SVG Capital plc Annual Report 2010 80 Notes to the accounts
26 Reconciliation of operating profit to net cash inflow from operating activities Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2010 2010 2009 2009 Group Company Group Company £’000 £’000 £’000 £’000 Profit before tax 326,817 322,481 21,252 28,869 Adjustments for: Gains on investments (351,231) (350,920) (51,322) (50,757) Exchange gains on other items (2,474) (2,898) (5,514) (7,868) Gain on derivatives 89 (883) – – Finance costs 39,523 39,549 38,961 39,436 Depreciation of property, plant and equipment 886 – 593 – Loss on sale of property, plant and equipment 3 – 7 – Share option expense 2,579 – 64 – Operating cash flows before movements in working capital 16,192 7,329 4,041 9,680 Decrease/(increase) in receivables 2,102 370 (3,898) (164) Increase in payables 1,258 3,746 1,335 500 Cash generated by operations 19,552 11,445 1,478 10,016 Taxes recovered/(paid) 279 – (1,840) 5,515 Interest paid (40,084) (40,094) (40,995) (42,029) Net cash used in operating activities (20,253) (28,649) (41,357) (26,498)
Purchases and sales of investments are considered to be investing activities rather than operating activities.
27 Post balance sheet events On 7 January 2011, the Company repurchased at par and cancelled US$7.8 million of the original nominal amount of the Senior Notes in issue. The Company has agreed to repurchase at par and cancel a further €6.9 million, US$6.9 million and £0.7 million of the original nominal amount of the Senior Notes in issue, effective 15 February 2011. On 7 January 2011, the Company sold its investment in CVC European Equity Partners V, one of the two remaining warehoused funds in the balance sheet at the year-end, for €10.7 million (£9.1 million), releasing uncalled commitments of €13.2 million (£11.3 million).
28 Analysis of changes in net debt Cash and Cash Short-term Long-term Net cash/ For the year ended 31 December 2010 equivalents debt debt (debt) Group £’000 £’000 £’000 £’000 Balance brought forward 144,067 (97,734) (320,725) (274,392) Foreign exchange movements 4,717 869 (3,866) 1,720 Amortisation of issue costs – – (2,666) (2,666) Cash flow (131,673) 77,586 26,846 (27,241) Balance carried forward 17,111 (19,279) (300,411) (302,579)
Cash and Cash Short-term Long-term Net cash/ For the year ended 31 December 2009 equivalents debt debt (debt) Group £’000 £’000 £’000 £’000 Balance brought forward 130,627 – (434,834) (304,207) Foreign exchange movements (27,068) 3,726 22,742 (600) Amortisation of issue costs – – (2,943) (2,943) Transfer to equity on issue of convertible bonds – – 1,943 1,943 Cash flow 40,508 (101,460) 92,367 31,415 Balance carried forward 144,067 (97,734) (320,725) (274,392) SVG Capital plc Annual Report 2010 81
28 Analysis of changes in net cash/(debt) Cash and Short-term Long-term Net cash/ For the year ended 31 December 2010 cash equivalents debt debt (debt) Company £’000 £’000 £’000 £’000 Balance brought forward 131,067 (97,734) (320,725) (287,392) Foreign exchange movements 6,091 869 (3,866) 3,094 Amortisation of issue costs – – (2,666) (2,666) Cash flow (129,246) 77,586 26,846 (24,814) Balance carried forward 7,912 (19,279) (300,411) (311,778)
Cash and Short-term Long-term Net cash/ For the year ended 31 December 2009 cash equivalents debt debt (debt) Company £’000 £’000 £’000 £’000 Balance brought forward 113,576 – (434,834) (321,258) Foreign exchange movements (24,816) 3,726 22,742 1,652 Amortisation of issue costs – – (2,943) (2,943) Transfer to equity on issue of convertible bonds – – 1,943 1,943 Cash flow 42,307 (101,460) 92,367 33,214 Balance carried forward 131,067 (97,734) (320,725) (287,392)
29 Related party transactions Nicholas Ferguson and members of his family have an interest in the Carried Interest in respect of certain private equity funds. With the introduction of the Executive Share Option Plan in May 2001, Nicholas Ferguson gave up a portion of his entitlement to Carried Interest on existing private equity funds and any entitlement he may have to Carried Interest on certain private equity funds launched after 2001 in return for share options granted by the Company under the Executive Share Option Plan. Nicholas Ferguson also participates in the Schroder Ventures Co-Investment Scheme and Schroder Ventures Investments Limited. He has received no new carried interest allocations and made no new commitments since he joined SVG Capital in 2001. Lynn Fordham is a member of the Advisory Committees of certain of the Permira funds in which the Company invests. She does not receive fees for these services. Lynn Fordham is entitled to participate in the Performance Share Plan (“PSP”) at the discretion of the Remuneration Committee. During the year Lynn Fordham was awarded 768,892 (2009: 824,088) performance shares. The shares awarded were split equally between awards based on NAV growth and awards based on Total Shareholder Return. Lynn Fordham has a service contract with SVG Advisers Limited (“SVGA”), a wholly-owned subsidiary. Andrew Sykes is a non-executive director of SVGA and acts as SVG Capital’s observer in relation to SVG Diamond Holdings Limited. The Directors of the Company and their beneficial family interests in the Company’s share capital during the period to 31 December 2010 are shown in the Report of the Directors on page 31. In addition, certain Directors also have an interest in funds managed or advised by the SVG Capital group, as detailed below: Director Investment in SVG Funds* Nicholas Ferguson – 400,000 shares in Sapphire (PCC) Limited Denis Raeburn – 500,000 shares in SVG Diamond Holdings II Limited – 1,000,000 shares in SVG Diamond Private Equity III plc Charles Sinclair – 200,000 shares in Sapphire (PCC) Limited – 250,000 shares in Schroder Private Equity Fund of Funds III plc Financial informationFinancial – 900 shares in SVG UK Focus Fund – 100,000 shares in SVG Diamond Holdings II Limited – 150,000 shares in SVG Diamond Private Equity III plc Andrew Sykes – 100,000 shares in SVG Diamond Holdings Limited – 100,000 shares in SVG Diamond II Holdings Limited – 100,000 shares in SVG Diamond III plc – 43,182 shares in Schroder Private Equity Fund of Funds plc – 125,000 shares in Schroder Private Equity Fund of Funds III plc – 200,000 shares in Sapphire (PCC) Limited – 3,911 shares in SVG UK Focus Fund
* Holdings are unchanged from the prior year. No other Director has any material interest in any other contract that is significant to the Company’s business. The Directors are the only key management personnel of the Company. Details of their remuneration are included in the Remuneration Report. SVG Capital plc Annual Report 2010 82 Notes to the accounts
29 Related party transactions The Company invests in a number of funds for which its subsidiary companies, SVG Advisers Limited (“SVGA”), SVG Managers Limited (“SVGM”) or SVG Investment Managers Limited (“SVG IM”), act as either investment adviser or investment manager and receive fees for their services. The following table details funds managed or advised by SVG IM or SVGA that are also part of SVG Capital’s investment portfolio. Uncalled commitment Valuation Investment Manager/Adviser £’million £’million Permira feeder vehicles: P123 SVGM/SVGA – 35.8 P1234 SVGA 6.6 55.0 P25 SVGA 5.7 103.7 Sapphire IV SVGA 0.2 0.4 SVG Sapphire IV SVGA 1.5 6.3 Generalist funds of funds: SVG Diamond Holdings SVGA – 54.9 SVG Diamond Holdings II SVGA – 28.3 SVG Diamond Holdings III SVGM/SVGA 15.7 14.0 SVG Asia Fund of Funds SVGM/SVGA 20.9 4.2 Schroder PE Fund of Funds III Schroders/SVGA 0.1 0.6 Other investments: SVG India LP PEIAL* 0.2 9.1 Public equity vehicles: SVG Focus Fund SVG IM – 13.0 SVG European Fund SVG IM – 6.3 Strategic Equity Capital plc SVG IM – 10.9 Strategic Recovery Fund II co-investment SVG IM 2.8 19.2
* Private Equity Investment Advisers Limited (“PEIAL”) is a joint venture investment advisory company based in Mauritius in which SVGA holds a 50% interest in the equity shares. During the year the Company sold its investment in KC II, a Dublin-based corporate finance company. The Company held 29.9% of the issued shares of KC II (24.9% on a diluted basis). This holding was sold for consideration of €750,000. SVG Capital has no employees but uses the services of its wholly-owned subsidiary, SVGA, to provide certain advisory and administrative services to SVG Capital in return for a fee of 0.5% p.a. of gross assets. The fees payable in respect of these services for the year ended 31 December 2010 amounted to £5.9 million (2009: £4.4 million). SVGA pays for all staff costs, including the remuneration costs of the Company’s executive Director, Lynn Fordham, as well as the office costs incurred in providing the services to SVG Capital. SVG Capital has an interest in SVG India LP, in which it is the sole limited partner. PEIAL, a joint venture with SVGA, provides investment advice to SVG India LP, for which it currently receives a fee of $150,000 per annum. In 2007 the Company advanced a loan of £624,000 to SVG Investment Managers Limited, for regulatory capital purposes, which remains outstanding. Interest of 5% per annum is payable on the loan. During the year the Company received a loan of £10.0 million from SVGA at an interest rate of 5% per annum. During the year the Company received dividends of £3.4 million from SVGA (2009: £13.0 million), £0.02 million from SVGIM (£2009: £0.4 million). There were no other distributions paid by subsidiaries during the year. At 31 December 2010 the Company had uncalled commitments of £12.8 million to two private equity funds (2009: £78.8 million to nine funds) that were intended to be warehoused for future SVGA product launches. During the year seven warehoused funds were sold to third party investors releasing £59.4 million of the uncalled commitments as at 31 December 2009. In January 2011, CVC V was sold, releasing a further £11.3 million of uncalled commitments as at 31 December 2010. The only remaining warehoused fund is American Capital Equity II, with an uncalled commitment of £1.5 million. During the year SVGA received €1.6 million of SVG Diamond I Loan Notes and €0.9 million of SVG Diamond II Loan Notes, as part of its ongoing investment advisory fee arrangements. These Notes were purchased from SVGA by SVG Capital plc at par value on the date of issue, as the holding of investments is the main activity of the parent company. In addition, the Company received a further €0.3 million of SVG Diamond II Loan Notes in lieu of interest. As previously disclosed, the ‘Diamond Investment Scheme’ enabled staff to purchase shares in SVG Diamond II from SVG Capital. Until they have been transferred, shares remain in the name of SVG Capital but are held on trust for the beneficiaries. A total of 1.7 million Diamond II shares were sold during the year at NAV to members of staff. At 31 December 2010, the total amounts receivable by the Company under the Scheme was £0.5 million (2009: £1.7 million). A total of 40,000 Diamond II shares were repurchased by the Company during the year at prevailing NAV. Related party transactions during the year were made on terms equivalent to those that prevail in arm’s length transactions. SVG Capital plc Annual Report 2010 83
30 Risk Financial instruments and risk profile The Company’s primary investment objective is to achieve capital appreciation by investing principally in private equity funds which are managed or advised by Permira, a leading international private equity specialist. These investments are typically illiquid. In addition, the Company holds money market instruments, cash and short-term deposits and various items such as debtors and creditors that arise directly from its operations. These financial instruments held by the Company are generally liquid. The holding of securities, investing activities and associated financing undertaken pursuant to this objective involves certain inherent risks. Events may occur that would result in either a reduction in the Group’s net assets or a reduction of revenue profits available for dividend. As an investment trust, the Company invests in securities for the long term. The Company has not taken out any derivatives contracts to date, other than the interest rate swap and currency swap agreements referred to in note 20, which were executed to hedge against fluctuations in interest rates and foreign exchange rates with respect to the Senior Notes in issue. SVG Advisers Limited has entered into forward currency contracts, referred to in note 19, which are used to hedge against fluctuations in foreign exchange rates, since the majority of its fee income is euro-denominated but its ongoing costs are primarily sterling-denominated. Financial instruments (a) Financial assets Company Group Floating Fixed Non-interest Floating Fixed Non-interest rate rate bearing Total rate rate bearing Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Currency denomination of assets at 31 December 2010: Sterling 307 – 159,566 159,873 8,901 – 155,413 164,314 Euro 670 – 816,619 817,289 670 – 816,678 817,348 US dollar 6,935 – 141,627 148,562 7,540 – 141,678 149,218 Japanese yen – – 20,176 20,176 – – 20,176 20,176 Singapore dollar – – 1,398 1,398 – – 1,525 1,525 Hong Kong dollar – – 111,280 111,280 – – 111,280 111,280 Indian rupee – – 12,490 12,490 – – 12,502 12,502 Canadian dollar – – 1,352 1,352 – – 1,352 1,352 7,912 – 1,264,508 1,272,420 17,111 – 1,260,604 1,277,715
Company Group Floating Fixed Non-interest Floating Fixed Non-interest rate rate bearing Total rate rate bearing Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Currency denomination of assets at 31 December 2009: Sterling 2,531 – 163,610 166,141 15,089 – 161,215 176,304 Euro 1,972 – 561,328 563,300 1,972 – 533,543 535,515 US dollar 126,564 – 116,790 243,354 127,006 – 116,867 243,873 Japanese yen – – 4,312 4,312 – – 32,141 32,141 Singapore dollar – – 745 745 – – 745 745 Hong Kong dollar – – 39,671 39,671 – – 39,671 39,671
Indian rupee – – 27,154 27,154 – – 27,157 27,157 informationFinancial Canadian dollar – – 1,256 1,256 – – 1,256 1,256 131,067 – 914,866 1,045,933 144,067 – 912,595 1,056,662
Non-interest bearing assets represent non-monetary items such as the Group’s investment portfolio, warehoused assets and other short-term debtors. Floating rate financial assets consist of cash at bank, short-term deposits and AAA-rated money market funds. All financial assets are included at fair value. SVG Capital plc Annual Report 2010 84 Notes to the accounts
30 Risk (b) Financial liabilities The Company had £201.4 million nominal (2009: £224.4 million nominal) of Senior Notes outstanding at the year end. The Company had in place a loan facility of €550.0 million with The Royal Bank of Scotland plc, The Bank of Scotland plc and Unicredit Bank AG at 31 December 2010, from which it had drawn €22.5 million (2009: €110.0 million) at the balance sheet date. During the year, the loan facility was renegotiated. The maximum size of the facility is currently €325.0 million and the term has been extended until January 2013. The Company had £115.0 million nominal (2009: £115.0 million nominal) of subordinated convertible bonds in issue at the balance sheet date. The level of borrowing will impact on the Group’s performance by amplifying the effect of movements in the valuation of the investment portfolio. In addition to financial liabilities (note 20), the Company also has uncalled fund commitments (note 21) as at 31 December 2010 of £209.8 million (2009: £371.1 million), which are discussed below as part of commitment/liquidity risk. It should also be noted that fund investments and underlying investee companies may also utilise borrowings to varying degrees. This is particularly the case with respect to CLO funds and structured private equity funds of funds, which are highly leveraged vehicles. Currency denomination of the financial liabilities of the Group: 31 December 31 December 2010 2009 £’000 £’000 Sterling 152,280 154,032 Euro 161,986 125,337 US dollar 21,483 160,180 335,749 439,549 The currency exposure of liabilities is shown after adjusting for the $180 million currency swap referred to in note 20.
Gross contractual cash-flows* (cumulative interest and principal amounts) payable on the liabilities of the Group are as follows: 31 December 31 December 2010 2009 £’000 £’000 Loan facility drawndowns (final maturity date 17 January 2013) 20,603 106,451 Senior Notes due 18 July 2013 101,469 124,900 Senior Notes due 18 July 2014 106,273 127,350 Senior Notes due 18 July 2015 51,658 54,993 Convertible Bonds due 5 June 2016 167,109 176,592 Other creditors 9,123 10,249 Forward currency contracts (gross payments) 31,146 15,993 Interest rate swaps (net payments) 1,343 1,573 488,724 618,101
* Based on exchange rates at each year end and allowing for interest rate swaps. A more detailed analysis of the maturity profile of the Group’s financial assets, financial liabilities and gross-settled derivatives based on contractual undiscounted cash flows and year-end exchange rates is shown below. Gross settled derivatives are calculated based on the spot prices at the year-end. Financial liabilities (maturity) The maturity groupings are based on the remaining period from the end of the reporting period to the contractual maturity date. When a counterparty has a choice of when the amount is paid, the liability is allocated to the earliest period in which the Group can be required to pay. For loan facility drawdowns this will be within three months, although the amounts will be available to be re-drawn, subject to compliance with loan covenants. For the purposes of this analysis it is assumed that the outstanding loan amount will remain drawn until the quarter-end prior to the expiry date of the facility, i.e. 31 December 2012. Financial assets (maturity) Analysis of financial assets at fair value through profit or loss into maturity groupings is based on the long-term nature of these assets and, in the absence of evidence to the contrary, it is assumed that no distributions or realisations will occur within 12 months of the balance sheet date. Beyond that it is extremely difficult to judge the precise size or timing of such cash flows. It is, however, a requirement under IFRS 7 to disclose such an analysis and therefore a breakdown is provided in the following table for illustrative purposes only. It is emphasised that the analysis is provided purely to comply with accounting standards. It is not a forecast and should not be construed as such. It is based on broad assumptions, further details of which are provided below the table. For other assets, the analysis into maturity groupings is based on the remaining period from the end of the reporting period to the contractual maturity date or if earlier, the expected date the assets will be realised. SVG Capital plc Annual Report 2010 85
30 Risk Maturity analysis (Group) < 1 month 1–3 months 3–12 months 1–5 years > 5 years Total 31 December 2010 £’000 £’000 £’000 £’000 £’000 £’000 Financial assets Cash and cash equivalents 17,111 – – – – 17,111 Interest receivable 244 – – – – 244 Prepayments and other debtors 55 617 4,525 392 – 5,589 Accrued investment advisory fee income – 4,380 291 443 – 5,114 Financial assets at fair value through profit or loss 11,966 13,567 – 856,886 367,237 1,249,656 29,376 18,564 4,816 857,721 367,237 1,277,714
< 1 month 1–3 months 3–12 months 1–5 years > 5 years Total 31 December 2010 £’000 £’000 £’000 £’000 £’000 £’000 Financial liabilities Other creditors and accruals (9,123) – – – – (9,123) Loan facility drawdowns – (166) (497) (19,940) – (20,603) Senior Notes due 18 July 2013 (3,720) – (3,720) (94,029) – (101,469) Senior Notes due 18 July 2014 (3,478) – (3,478) (99,317) – (106,273) Senior Notes due 18 July 2015 (1,668) – (1,668) (48,322) – (51,658) Convertible Bonds due 5 June 2016 – – (9,483) (37,934) (119,692) (167,109) (17,989) (166) (18,846) (299,542) (119,692) (456,235)
Payments in respect of debt instruments shown above include interest and principal amounts. < 1 month 1–3 months 3–12 months 1–5 years > 5 years Total 31 December 2010 £’000 £’000 £’000 £’000 £’000 £’000 Derivatives Forward currency contracts – Gross cash inflow 3,753 – 16,660 10,342 – 30,755 – Gross cash outflow (3,856) – (16,794) (10,496) – (31,146) Interest rate swaps – Net cash inflow/(outflow) (158) – (155) (1,030) – (1,343) (261) – (289) (1,184) – (1,734) Available liquidity/(gap) 11,126 18,398 (14,319) 556,995 247,545 819,745
The Group’s actual liquidity profile is likely to be very different to the analysis outlined above. In particular, it is very difficult to predict the quantum and timing of returns on the Group’s long-term investment portfolio. As already mentioned, it is important to note that the maturity analysis in respect of financial assets at fair value (i.e. the investment portfolio) is highly subjective and is not a forecast of the expected cash flows. For the purposes of the maturity analysis it has been simply assumed that all financial assets will be realised at their year-end carrying value. The amounts receivable within three months are based on actual cash flows. The residual balance has been allocated 70:30 between less than and more than five years. This is considered to be a reasonable and prudent estimate, but is no more than that. It is not a forecast. The Group’s undrawn loan facility amounted to £259.2 million at 31 December 2010, and is subject to financial covenants as discussed in note 20. Uncalled fund commitments At 31 December 2010, the Group had uncalled fund commitments of £209.8 million, which are expected to be drawn over a number of years. It should be noted that when these commitments are funded they will typically be used to make investments and therefore create an asset that would be informationFinancial expected to be realised for cash over the longer term. The Group’s uncalled commitments are more than covered by the available loan facility. Uncalled commitments were reduced by £11.3 million in January 2011 following the disposal of CVC V at its carrying value of £9.1 million. Risks The main risks arising from the Company’s financial instruments are considered to be commitment risk and valuation risk. The Board reviews and agrees policy for managing these and other risks as summarised below. The Directors consider that the risks faced by the Group are primarily those faced by the Company. SVG Capital plc Annual Report 2010 86 Notes to the accounts
30 Risk Borrowing and funding risks The nature of investing in buy-out and development capital funds entails making significant financial commitments, as shown in note 21. At 31 December 2010, the Group had significant uncalled commitments of £209.8 million (2009: £371.1 million), compared to cash balances of £17.1 million (2009: £144.1 million) and shareholders’ funds of £945.7 million (2009: £620.4 million). The Company is a ‘closed-ended’ investment trust and is therefore not subject to redemption requests from its investors. The Company’s shares are listed on the London Stock Exchange. It is anticipated that over the longer term, and in normal circumstances, the Company’s commitments to private equity funds and other financial liabilities will be financed by available cash resources and distributions received on the realisation of underlying investments within the fund portfolio, although in the current market environment it is not anticipated that there will be significant realisations from the investment portfolio in the short term. In addition, the Group currently has a €325.0 million loan facility, of which €302.5 million (£259.2 million) was undrawn at 31 December 2010, that could be drawn on, subject to financial covenants as described in note 20, to meet fund commitments as they fall due. The Board monitors liquidity risk and, if considered appropriate, could renegotiate its lending arrangements or issue new securities. The Group’s investments are mainly illiquid but, in extremis, the Board could consider selective disposals of long-term investments, if required to meet commitments as they fall due. In these circumstances it is possible, dependent on prevailing market conditions, that the realisation value of such assets could be at a significant discount to their previous carrying value. A residual risk remains that the Group could be unable to meet its future commitments in full. If as a consequence of a failure to pay a call, the Company is treated as a defaulting investor to the relevant Fund, it will suffer a resultant dilution in interest and possibly the compulsory sale of its interest. A default on a fund commitment would also result in a cross-default on the Company’s senior debt. In December 2008 the Company agreed to reduce its commitment to Permira IV. The total direct commitment by the Company to Permira IV was €2.4 billion, of which 55.5% has been called as at 31 December 2010. The Company elected to cap its commitment at 60% of the total. At 31 December 2010 the Company had an uncalled commitment to Permira IV of €108.3 million (2009: €166.1 million), which will only be called to finance follow-on investments and fees. The terms of these arrangements require that future distributions from the realisation of portfolio companies receivable by those investors in Permira IV that elected to cap their commitments will be reduced by 25%, such benefit to accrue to the Limited Partners that did not elect to cap their uncalled commitments. The Company’s loan facility expires in January 2013. The Senior Notes in issue mature between July 2013 to July 2015 (see note 20). The Convertible Bonds are repayable in 2016. The Board manages liquidity risk by regularly and rigorously reviewing cash flow forecasts and available funding options. Commitments to fund investments are reviewed by the Board. Valuation/market price risk The Company’s exposure to valuation risk comprises mainly movements in the value of its underlying investments. A breakdown of the Fund portfolio is given on pages 26 and 27 and a detailed analysis of the 20 largest underlying companies is given on pages 20 to 22. In accordance with the Company’s accounting policies, set out on pages 54 to 59, all underlying investments are valued at fair value by the Directors in accordance with the current International Private Equity and Venture Capital (“IPEV”) Valuation Guidelines. The IPEV Guidelines contain detailed methodology setting out best practice with respect to valuing unquoted investments. It should be noted that a large proportion of the Company’s underlying investee companies are expected to be unquoted and therefore the valuation of such companies involves exercising judgement. The Company does not hedge against movements in the value of these investments. Uncertainty arises as a result of future changes in the valuation of the Company’s underlying investments, the majority of which are unquoted, and the effect changes in exchange rates may have in the sterling value of these investments. Development-stage equity investments and early-stage equity investments, by their nature, involve uncertainty as to the ultimate value likely to be realised on the disposal of those investments, particularly as their unquoted nature means that a ready market may not exist for them. As an indication of the valuation risk facing the Company, in 2010 the Group benefited from gains on its investment portfolio totalling £351.2 million (2009: gains of £51.3 million). The Company’s sensitivity to valuation risk will be affected by changes in the Company’s levels of borrowing (see note 20) and liquidity, as approved by the Board. It will also be affected by leverage in the funds in which we invest and the local currency denomination of such funds, which is considered separately under currency risk. At 31 December 2010, a 10% movement in the valuation of the Group’s aggregate investments designated as fair value through profit and loss, would result in a 13.3% (2009: 14.4%) change in Shareholders’ funds. Valuation risk will be affected by leverage in the underlying investee companies. A sensitivity analysis has been performed on the valuations of the 20 largest underlying investee companies, which had an aggregate valuation (before providing for carried interest) of £1,040.0 million or 94.8% of the gross private equity fund portfolio valuation (2009: £740.2 million or 92.9%), the results of which are set out in the table below. Hypothetical Hypothetical fair value fair value (10% write- Fair value (10% uplift)* down)* £’million £’million £’million 31 December 2010 Gross valuation of 20 largest investee companies 1,040.0 1,309.6 764.9 Change in valuation/effect on income +25.9% –26.5% 31 December 2009 Gross valuation of 20 largest investee companies 740.2 943.3 560.7 Change in valuation/effect on income +27.4% –24.3%
* All investments are included in the balance sheet at fair value. Quoted companies are valued based on market prices and recently acquired unquoted investments may be carried at cost. For such investments, a 10% movement in the valuation basis will have a 10% impact on fair value. For unquoted investments valued on a different basis, such as earnings-related, a 10% movement in the earnings of the investee company will not necessarily result in a 10% change in fair value, because of other factors such as the level of debt utilised by the investee companies. The Board manages valuation risk by reviewing and approving the valuation of the private equity fund portfolio. SVG Capital plc Annual Report 2010 87
30 Risk Holdings risk In certain circumstances, the Company may wish to transfer its holdings in particular funds. In a majority of the funds in which the Company will invest, the general partner, trustee or manager has the ultimate right, similar to that exercisable by a board of a private company, to refuse to register the transfer of an interest. While the Company has no reason to believe that any request for the transfer of an interest would be refused, it is of course conceivable that the general partner’s, trustee’s or manager’s overriding fiduciary duty could result in its refusing to register a particular transfer proposed by the Company. Concentration risk The Directors believe that the diversified nature of the underlying investments in the Group’s private equity fund portfolio reduces the risks normally associated with making investments in the buy-out and development capital markets. However, it should be noted that, in accordance with its stated investment objective, the Group intends to focus its investments principally in private equity funds that are managed or advised by Permira. As outlined in note 9, the future performance of the Group will therefore be largely dependent on the future performance of the Permira funds in which we invest (see notes 3 and 31 for an indication of the Group’s exposures). The Directors believe that this represents an opportunity, but investors should also be aware that greater concentration of the investment portfolio also presents a risk. The performance of Permira funds depends to a significant extent upon the skills and experience of Permira and its personnel. The continued service of these individuals is not guaranteed and there can be no assurance that key individuals can be replaced with equally skilled and experienced professionals by Permira. Therefore, the departure of one or several key investment professionals or partners at Permira may have an adverse effect on the performance of the Company and the value and trading price of the Ordinary Shares. Each fund investment proposition is considered by the Board in accordance with a structured investment process. This includes presentations from the manager of the proposed fund, extensive due diligence, consideration of the terms and conditions for investment in the fund, consideration of the Group’s own cash flows and future commitments and a review of the effect of any such investment on portfolio concentration. Interest rate risk The Group’s revenue will be affected by changes in prevailing interest rates since a large portion of its income ordinarily derives from money market instruments and bank deposit interest. It also pays interest on its Senior Notes and drawings on the loan facility that may be taken out from time to time. The Company’s primary objective is to achieve capital returns from its investments and, as such, the main exposure to interest rate risk is indirect, through its impact on the valuation of the private equity funds, although it is not possible to quantify such effects. Interest rates are one of the key determinants of economic growth. At a more specific level, interest rates and credit spreads also have an important role in the ability of private equity funds to secure profitable deals, as many transactions are partly financed by debt. The effect of interest rate changes on the valuation of investments and debt forms part of valuation risk, which is considered separately. At 31 December 2010, the Group held investments in AAA-rated money market funds valued at £9.6 million (2009: £126.4 million), earning interest at market rates. The money market funds are redeemable on less than 24 hours’ notice. Other floating rate financial assets comprised cash at bank or short-term deposits. At 31 December 2010, the Group had £198.5 million (2009: £220.6 million) of Senior Notes in issue and £101.9 million (2009: £100.1 million) of Convertible Bonds (see note 20). Interest rate risk on the Senior Notes and the Bonds is mitigated as the Bonds and most of the Notes pay fixed rates of interest and swap agreements have been taken out with respect to the relatively small amount of floating rate notes (“FRNs”), although the majority of the FRNs either have or will be repurchased. The weighted average interest rate payable on the Notes and the swaps amounted to 8.7% at 31 December 2010. The fair value of the interest rate swaps included in the balance sheet amount to a liability of £888,000 at 31 December 2010 (2009 liability of £775,000) and have been valued by The Royal Bank of Scotland plc, the swap counterparty. Credit risk There are no significant concentrations of credit risk within the Group unless otherwise disclosed. The Group is subject to credit risk on its cash and cash equivalents. The maximum credit risk exposure relating to cash and cash equivalents is represented by carrying value as at the balance sheet date. The Group’s cash and deposits are held with a variety of counterparties with a credit rating of AA or better. Cash equivalents at the year end comprised money market funds with a variety of counterparties, each fund having a credit rating of AAA.
Currency risk informationFinancial The Group is exposed to currency risk directly since the majority of its assets and liabilities are denominated in foreign currency and their sterling value can be significantly affected by movements in foreign exchange rates. The Company does not normally hedge against foreign currency movements affecting the value of its investments, but takes account of this risk when making investment decisions. The Group has issued Senior Notes of US$245.1 million and €6.9 million, respectively. As described in note 20 the Company has taken out a currency swap to effectively convert $180.0 million of Senior Notes into a euro exposure, which acts as a partial hedge against the currency risk on the value of its euro-denominated assets. A fair value gain of £0.9 million has been recognised in respect of this. The Group also has a €325.0 million loan facility which, if drawn, would also act as a hedge against the currency risk on the value of its euro-denominated assets. The Group has also entered into forward foreign exchange contracts to mitigate against movements in exchange rates. These contracts are primarily to provide a cash flow hedge against euro-denominated investment management and advisory fees receivable by subsidiary companies in 2010 and 2011. The total outstanding under such contracts at 31 December 2010 amounted to a sale of €36.4 million (2009: €18 million) in exchange for £30.8 million (2009: £14.6 million). A fair value loss of £0.6 million (2009: £1.4 million) was taken to equity in respect of these contracts as a result of the appreciation of euro against sterling since the contracts were entered into. SVG Capital plc Annual Report 2010 88 Notes to the accounts
30 Risk A sensitivity analysis has been performed on the valuations on the effect of exchange rate fluctuations on the value of shareholders’ funds, the results of which are set out in the table below. Hypothetical Hypothetical Equity value value shareholders’ (10% £ (10% £ funds depreciation) appreciation) £’million £’million £’million 31 December 2010 Equity shareholders’ funds 945.7 1,038.8 852.6 Change in shareholders’ funds/effect on income +9.8% –9.8% 31 December 2009 Equity shareholders’ funds 620.4 680.4 560.5 Change in shareholders’ funds/effect on income +9.7% –9.7%
Capital risk management The objective of the Company is to provide shareholders with long-term growth in capital. In pursuing this long-term objective, the Board has a responsibility for ensuring the Company’s ability to continue as a going concern. It must therefore maintain an appropriate capital structure through varying market conditions. This involves the ability to: issue and buy-back share capital within limits set by the shareholders in general; and borrow monies in the short and long term. Changes to ordinary share capital are set out in note 22. Borrowings are set out in notes 19 and 20. General risks associated with investment in private equity Investment in private equity involves a high degree of risk. The Group invests in private equity through its exposure to buy-out and development capital funds. Such investments are illiquid and as such may be difficult to realise, particularly within a short timeframe. The Directors seek to maintain a diversified portfolio of investments to mitigate these risks, although the portfolio does remain concentrated with respect to private equity fund managers and also to vintage as explained in concentration risk on page 87. Default risk A fund’s documentation generally provides for certain penalties in the event that an investor in the fund fails to meet a call. There is typically a grace period during which interest accrues on the unpaid amount. If the default continues, the investor may become subject to various sanctions, including termination of the investor’s right to participate in future investments, loss of its entitlement to distributions or income but not its liability for losses or expenses, mandatory transfer or sale of its interest, continuing liability for the principal and interest in respect of the defaulted amount and partial or total forfeiture of the investor’s interest. In addition, the general partner or manager may have other rights and remedies (including legal remedies). The investor may also remain liable for future calls in respect of the relevant fund as and when they are made. There can be no assurance as to the price which may be achieved in any mandatory transfer or sale following a default on a call. Certain funds give the general partner or manager the right to proceed directly to forfeiture proceedings following notice and continuation of default by an investor. In the case of a forfeiture, the share of the fund held by the defaulting investor would generally be allocated among the general partner or manager and the remaining investors. In addition, the investor may remain liable for the defaulted amount. Consequently, any failure by SVG Capital to meet any call may have a material adverse effect on the value of SVG Capital’s interest in a fund and/or on the net asset value of SVG Capital and/or on SVG Capital’s ability to generate returns for its Shareholders. In addition, a failure to meet a call may result in a cross-default under the Notes and the Revolving Credit Facility which could result in a substantial loss. If another investor or limited partner in a fund in which the Company holds an interest were to default on a call, this may result in the other investors (including the Company) in the fund in question becoming subject to individual calls of a larger amount (but subject to each investor’s original capital commitment) and, in addition, the fund in question may make fewer or smaller or more highly leveraged investments. Any such occurrence may lead to a reduction in the diversification of the Company’s interests in underlying portfolio companies, increase volatility, increase the Company’s financing requirements and may have an adverse effect on the Company’s business and prospects. Investment holding risk period Investment in private equity requires a long term commitment with no certainty of return. Many of the investments made by the Group are illiquid holdings in buy-out and development capital funds and, in some cases, may not be capable of being realised in a timely manner or at all. The timing of cash distributions, if any, made by the buy-out and development capital funds is uncertain and unpredictable. Recent market conditions have made it more difficult for general partners or other managers of private equity funds to dispose of investments at attractive prices and otherwise on favourable terms. The Company considers that, although signs of improvement are present, it is likely that these difficult circumstances will ease but continue in the short to medium term and, while they do continue, it may be that the returns of the Company from its investments will be reduced and/or delayed. Any further material change in the economic environment, including a continued slow-down in economic growth and/or changes in interest rates or foreign exchange rates, could have a negative impact on the performance and/or valuation of the underlying portfolio companies. SVG Capital’s performance may be affected by prolonged weakness or further deterioration in public markets and by market events, which may impact on not only its quoted portfolio companies but also the public company comparable earnings multiples used to value unquoted portfolio companies. A further consequence of the subdued market for portfolio companies exits is that the general partners, or other managers, of the private equity funds in which the Company holds interests are more likely to delay disposing of portfolio companies until market conditions improve. As a result, the Company is likely to receive distributions in respect of its investments at a slower rate than may have otherwise been the case in a more favourable economic environment. In addition to this, a fund manager’s ability to realise its interest in certain portfolio companies in whole or in part may be subject to contractual restrictions such as shareholder lock-up arrangements. It may therefore be the case that the Company decides to pay calls with debt finance rather than relying upon receiving distributions from investments which it has made which may therefore increase the Company’s SVG Capital plc Annual Report 2010 89
30 Risk borrowings and risk and volatility for shareholders. There can therefore be no assurance as to whether, and if so how much, the value of the Company’s assets will grow or the timing of return if any. Investments in buy-out and development capital funds may be difficult to value and dispositions may require a lengthy time period since there is only a limited market for secondary sales of private equity investments. Further, sales or other transfers of interests in buy-out and development capital funds sometimes require the written consent of the general partner of the fund, the granting of which is at its discretion. Accordingly, the Group may not be able to sell its investments in buy-out and development capital funds at their net asset value. The Company’s portfolio is concentrated with respect to private equity fund managers as explained below and this may impact the ability to place a large holding of a single fund on the secondary market at any one time. Portfolio company risks Since the Company invests through private equity funds in portfolio companies, the risks experienced by the portfolio companies will closely affect the returns earned by the Company and the trading price and value of its Ordinary Shares. The risks which the portfolio companies may experience, and the risks posed by an investment in such companies, include: • these companies may be highly leveraged and subject to significant debt service obligations, stringent operating and financial covenants and a higher risk of default under financing and other contractual arrangements, which would lead to severe adverse consequences for the relevant portfolio company and the value of the Company’s investment in such company if a default were to occur; • the valuations of highly leveraged companies are typically more sensitive to changes in value in public company comparable earnings multiples, declines in revenues, increases in expenses and interest rates and adverse economic, market and industry developments. The risk of loss associated with a highly leveraged company is generally far greater than for companies with comparatively less debt; • they may have limited financial resources and may be unable to meet their obligations under their debt facilities, or to refinance debt facilities when they fall due, which may be accompanied by a deterioration in the value of their equity securities in which the Company is ultimately invested; • they may require significant additional capital investment or operational or management support to improve their operations, finance expansions or maintain their competitive positions. Such investment and support may not be forthcoming; • often, little public information exists about these companies and investors in these companies generally must rely on information obtained by the general partner, or other manager, of the relevant fund which holds the portfolio company; • reliance is placed on the general partner as to the adequacy or accuracy of information provided during any due diligence exercise conducted prior to an investment being made. The general partner, or relevant manager, of the fund in question may have made judgments concerning the materiality of contingent or actual risks or liabilities identified during due diligence that may not in practice turn out to have been accurate; • the purchase agreements relating to the investment in question may contain only limited representations and warranties from the relevant vendors and these may be limited in, for example, time and amount. Such contractual protection would typically not be addressed to the Company directly and, in any case, there can be no assurance as to the ability of the relevant vendor to satisfy any claims which may be made under any such agreement; • general operating risks arising from or being, amongst other matters, the cost of goods and services, difficulty in obtaining customers, losses arising from customer failure, market developments, competition risk, key man risk, foreign exchange risk, financing risks, an increase in costs and the legal and regulatory framework within which the portfolio company operates; • there are likely to be prior claims on the assets of portfolio companies from debt providers which would reduce the amounts earned by the equity holders including, indirectly, the Company; and • lenders to portfolio companies may take actions which are adverse to the interests of the holders of equity interests in the portfolio company including, indirectly, the Company. The value of the portfolio companies held by the funds in which the Company holds interests may be affected by uncertainties, such as political developments, changes in government policies, regulations, laws, taxation, currency fluctuations, currency repatriation and other restrictions, in some
of the countries in which the funds may invest. The Company, directly or indirectly through the funds in which the Company holds interests, may also informationFinancial be exposed to these risks. Passive investor with limited recourse The Company is generally a passive investor and has limited powers under the governing documents of the funds in which it holds interests. The funds concerned are, within certain broad parameters, generally authorised to follow broad investment guidelines and, subject thereto, are able to invest in geographies, industries and investment opportunities at their discretion. The Company does not review each proposed investment and is, subject to certain limited exceptions, unable to refuse to meet a Call without suffering the consequences of a default. There can be no assurance that the strategies adopted by Permira or other general partners or managers of the funds in which the Company holds interests will be successful or that the portfolio companies of such funds, or the Company’s investments generally, will appreciate in value. The Company also holds some investments in funds in respect of which other members of the Group are the general partner, manager and/or adviser. In these instances, fiduciary duties are owed by the relevant members of the Group to other investors which, together with the terms of the relevant fund management or advisory agreement, mean that the relevant members of the Group are unable to submit each proposed investment for review by the Company which will, therefore, remain a passive investor in respect of the relevant fund. The Company cannot make claims against general partners or managers of the funds in which the Company invests even in cases of poor performance except in very limited circumstances typically involving severe culpability on the part of the general partner or manager. The Company’s recourse in the event of poor performance of the funds concerned is highly restricted. Removal of the general partner or manager of a fund generally requires a high level of investor participation and consent with the relevant threshold often being set so as to require the consent of holders of 75% of the capital committed to the fund in question. The Company is unlikely to be able to procure such participation and consent on its own and it may SVG Capital plc Annual Report 2010 90 Notes to the accounts
30 Risk therefore be very difficult to remove a general partner or manager of a fund in which the Company invests such that the Company may potentially find itself locked into an under-performing fund. The fund documentation relating to Permira IV contains no provision for the removal of the general partner or manager by vote of the limited partners save in circumstances involving severe culpability. Even if those circumstances were to arise, which the Company considers to be unlikely, the consent of a special majority of limited partners would be required which the Company is unlikely to be able to procure on its own. Once the Company has made a capital commitment to a fund, it may be difficult to terminate its participation or reduce its capital commitment even if the investment returns arising from that fund are poor or not competitive. Regulatory risks The regulatory environment in which the Group operates is increasingly complex and the Group faces a number of regulatory risks. Breaches of regulations such as the UK Listing Authority’s Listing Rules could lead to a number of detrimental outcomes and damage the Group’s reputation. Breaches of controls by service providers could also lead to reputational damage or loss. Key regulatory risks have been identified and appropriate monitoring of such risks is undertaken regularly on behalf of the Board. Three of the Company’s subsidiaries: SVG Advisers Limited, SVG Investment Managers Limited and SVG Managers Limited are authorised and regulated by the Financial Services Authority. Certain other subsidiaries are regulated by foreign regulators. There are a number of legislative initiatives to increase regulation of the alternative investments sector including private equity. Such legislation has not been finalised, however there is a risk that such legislation, when enacted, could materially affect the business of the Company or its subsidiaries. Risk of warehousing assets The Company has, in the past, occasionally made commitments to fund investments in order to seed a prospective SVG Advisers product and then warehoused the investments on the balance sheet until the product was launched. In difficult fund raising environments, there is a risk that no new funds will be raised in the future into which these commitments can be transferred. The Company will therefore then either have to sell these investments or hold them on its balance sheet. However, these assets are currently de minimis for the Group. Taxation risk Any change in the taxation legislation or practice could affect the value of the Group’s investments and as a result, its performance. A breach of Section 1158 of the United Kingdom Corporation Tax Act 2010 could result in the Group being subject to corporation tax on realised gains on the sale of portfolio investments which would have a material adverse effect on the net returns earned by SVG Capital. However, the Group has strict controls in place to ensure that it complies with the requirements of Section 1158 and contracts with specialist tax advisers to provide advice on changes to tax regulation and practice. However, there can be no guarantee in advance that the Company will satisfy the conditions for approval by HMRC as an investment trust under Section 1158 or that the Company will not become a close company, which would result in its being unable to qualify as an investment trust for tax purposes. The Company has agreed allocation arrangements within the documentation of Permira Funds in order to assist in compliance with the conditions for approval by HMRC as an investment trust under Section 1158. There can be no guarantee or assurance however that such arrangements will be secured for future investments. Any failure to do so will increase the risk of a breach of Section 1158.
31 Ten largest fund investments (by value) 2010 2009 Manager/Adviser £’000 £’000 Permira IV Permira 632,043 324,987 Permira Europe III Permira 120,136 109,321 P25* SVGA 103,689 71,745 P1234 SVGA 55,000 44,450 SVG Diamond SVGA 54,934 42,709 Permira Europe II Permira 50,105 80,447 P123 SVGA 35,824 40,548 SVG Diamond II SVGA 28,301 19,154 SV Life Sciences Fund IV SV Life Sciences Advisers 21,731 18,277 Vintage I Mizuho 21,658 n/a Strategic Recovery Fund II SVG IM n/a 15,382 1,123,421 767,020
* Inclusive of the €40 million follow-on investment in subordinated debt. SVG Capital plc Annual Report 2010 Notice of Annual General Meeting 91
NOTICE is hereby given that the fifteenth annual general meeting of SVG Capital plc will be held at 11.30 a.m. on 31 March 2011 at 61 Aldwych, London WC2B 4AE to consider and, if thought fit, pass the following resolutions, of which resolutions 1 to 9 will be proposed as ordinary resolutions and resolutions 10 to 12 will be proposed as special resolutions:
Ordinary resolutions 1. To receive the Report of the Directors and the audited Accounts for the year ended 31 December 2010 together with the Auditors’ report on those accounts. 2. To approve the Remuneration Report for the year ended 31 December 2010. 3 To elect Caroline Goodall as a Director of the Company. 4. To re-elect Nicholas Ferguson as a Director of the Company. 5. To re-elect Edgar Koning as a Director of the Company. 6. To re-elect Denis Raeburn as a Director of the Company. 7. To re-appoint Ernst & Young LLP as Auditors of the Company. 8. To authorise the Directors to determine the remuneration of Ernst & Young LLP as Auditors of the Company. 9. That, in substitution for all subsisting authorities, the Board be generally and unconditionally authorised to allot shares in the Company and to grant rights to subscribe for or convert any security into shares in the Company: (A) up to a nominal amount of £3,104,079 (equivalent to 1% of the issued ordinary share capital of the Company as at 18 February 2011) in connection with the SVG Capital plc Executive Share Option Plan 2001 and the SVG Capital 2007 Performance Share Plan; (B) up to a nominal amount of £103,469,307 (such amount to be reduced by the nominal amount allotted or granted under paragraph (C) below in excess of such sum); and (C) comprising equity securities (as defined in Section 560(1) of the Companies Act 2006) up to a nominal amount of £206,938,615 (such amount to be reduced by any allotments or grants made under paragraph (B) above) in connection with an offer by way of a rights issue: (i) to ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; and (ii) to holders of other equity securities as required by the rights of those securities or as the Board otherwise considers necessary, and so that the Board may impose any limits or restrictions and make any arrangements which it considers necessary or appropriate to deal with treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems in, or under the laws of, any territory or any other matter, such authorities to apply until the end of next year’s annual general meeting (or, if earlier, until the close of business on 30 June 2012) but, in each case, during this period the Company may make offers and enter into agreements which would, or might, require shares to be allotted or rights to subscribe for or convert securities into shares to be granted after the authority ends and the Board may allot shares or grant rights to subscribe for or convert securities into shares under any such offer or agreement as if the authority had not ended.
Special resolutions 10. That a general meeting other than an annual general meeting may be called on not less than 14 clear days’ notice. 11. That if resolution 9 is passed, the Board be given power to allot equity securities (as defined in the Companies Act 2006) for cash under the authority given by that resolution and/or to sell ordinary shares held by the Company as treasury shares as if Section 561 of the Companies Act 2006 did not apply to any such allotment, such power to be limited: (A) to the allotment of equity securities and/or sale of treasury shares up to a nominal amount of £3,104,079 (equivalent to 1% of the issued ordinary share capital of the Company as at 18 February 2011) in connection with the SVG Capital plc Executive Share Option Plan 2001 and the SVG Capital 2007 Performance Share Plan; (B) to the allotment of equity securities and sale of treasury shares for cash in connection with an offer of, or invitation to apply for, equity securities (but in the case of the authority granted under paragraph (C) of resolution 9, by way of a rights issue only): (i) to ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; and (ii) to holders of other equity securities, as required by the rights of those securities or as the Board otherwise considers necessary, and so that the Board may impose any limits or restrictions and make any arrangements which it considers necessary or appropriate to deal with treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems in, or under the laws of, any territory or any other matter; and (C) in the case of the authority granted under paragraph (B) of resolution 9, to the allotment (otherwise than under paragraph (B) above) of equity securities up to a nominal amount of £15,520,396 (equivalent to 5% of the issued ordinary share capital of the Company as at 18 February 2011), Company information Company SVG Capital plc Annual Report 2010 92 Notice of Annual General Meeting
such power to apply until the end of next year’s annual general meeting (or, if earlier, until the close of business on 30 June 2012) but, in each case, during this period the Company may make offers and enter into agreements which would, or might, require equity securities to be allotted (and treasury shares sold or transferred) after the power ends and the Board may allot equity securities (and sell or transfer treasury shares) under any such offer or agreement as if the power had not ended. 12. That the Company be authorised for the purposes of Section 701 of the Companies Act 2006 to make one or more market purchases (as defined in Section 693(4) of the Companies Act 2006) of its ordinary shares of £1.00 each (“Ordinary Shares”), such power to be limited: (A) to a maximum number of 46,530,147 Ordinary Shares (equivalent to 14.99% of the issued ordinary share capital of the Company as at 18 February 2011); (B) by the condition that the minimum price which may be paid for an Ordinary Share is £1.00 and the maximum price which may be paid for an Ordinary Share is the highest of: (i) an amount equal to 5% above the average market value of an Ordinary Share for the five business days immediately preceding the day on which that Ordinary Share is contracted to be purchased; and (ii) the higher of the price of the last independent trade and the highest current independent bid on the trading venues where the purchase is carried out, in each case, exclusive of expenses; and (C) by the condition that purchases may only be made pursuant to this authority if the Ordinary Shares are (at the date of the proposed purchase) trading on the London Stock Exchange at a discount to the net asset value, such power to apply until the end of next year’s annual general meeting (or, if earlier, until the close of business on 30 June 2012) but in each case so that the Company may enter into a contract to purchase Ordinary Shares which will or may be completed or executed wholly or partly after the power ends and the Company may purchase Ordinary Shares pursuant to any such contract as if the power had not ended. Shares purchased under this authority may be sold for cash, transferred to satisfy claims under employee share schemes or cancelled. 18 February 2011 By order of the Board Company Secretary Stuart Ballard Registered Office: 61 Aldwych, London WC2B 4AE Registered in England and Wales No. 03066856
1. Members are entitled to appoint a proxy to exercise all or any of their rights to attend and to speak and vote on their behalf at the meeting. A shareholder may appoint more than one proxy in relation to the annual general meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that shareholder. A proxy need not be a shareholder of the Company. A proxy form which may be used to make such appointment and give proxy instructions accompanies this notice. If you do not have a proxy form and believe that you should have one, or if you require additional forms, please contact Equiniti on 0871 384 2776. Calls to this number cost 8p per minute from a BT landline. Other providers’ costs may vary. Lines open 8.30 a.m. to 5.30 p.m., Monday to Friday. The Equiniti overseas helpline number is +44 121 415 7047. 2. To be valid any proxy form or other instrument appointing a proxy must be received by post or (during normal business hours only) by hand at Equiniti, Aspect House, Spencer Road, Lancing, West Sussex BN99 6ZR or at www.sharevote.com, in each case no later than 11.30 a.m. on 29 March 2011. 3. The return of a completed proxy form, other such instrument or any CREST Proxy Instruction (as described in paragraph 9 below) will not prevent a shareholder attending the annual general meeting and voting in person if he/she wishes to do so. 4. Any person to whom this notice is sent who is a person nominated under Section 146 of the Companies Act 2006 to enjoy information rights (a “Nominated Person”) may, under an agreement between him/her and the shareholder by whom he/she was nominated, have a right to be appointed (or to have someone else appointed) as a proxy for the annual general meeting. If a Nominated Person has no such proxy appointment right or does not wish to exercise it, he/she may, under any such agreement, have a right to give instructions to the shareholder as to the exercise of voting rights. 5. Th e statement of the rights of shareholders in relation to the appointment of proxies in paragraphs 1 and 2 above does not apply to Nominated Persons. The rights described in these paragraphs can only be exercised by shareholders of the Company. 6. To be entitled to attend and vote at the annual general meeting (and for the purpose of the determination by the Company of the votes they may cast), shareholders must be registered in the Register of Members of the Company at 6.00 p.m. on 29 March 2011 (or, in the event of any adjournment, 6.00 p.m. on the date which is two working days before the time of the adjourned meeting). Changes to the Register of Members after the relevant deadline shall be disregarded in determining the rights of any person to attend and vote at the meeting. 7. As at 17 February 2011 (being the last business day prior to the publication of this notice) the Company’s issued share capital consists of 310,407,923 ordinary shares, carrying one vote each. Therefore, the total voting rights in the Company as at 17 February 2011 are 310,407,923. 8. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the procedures described in the CREST Manual. CREST Personal Members or other CREST sponsored members, and those CREST members who have appointed a service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. 9. In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a “CREST Proxy Instruction”) must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s specifications, and must contain the information required for such instruction, as described in the CREST Manual (available via www.euroclear.com/CREST). The message, regardless of whether it constitutes the appointment of a proxy or is an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the issuer’s agent (ID RA19) by the latest time for the receipt of proxy appointments specified above. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp applied to the message by the CREST Application Host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means. 10. CREST members and, where applicable, their CREST sponsors, or voting service providers should note that Euroclear UK & Ireland Limited does not make available special procedures in CREST for any particular message. Normal system timings and limitations will, therefore, apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member, or sponsored member, or has appointed a voting service provider, to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting system providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. 11. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. 12. Any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a member provided that they do not do so in relation to the same shares. SVG Capital plc Annual Report 2010 93
13. Under Section 527 of the Companies Act 2006 members meeting the threshold requirements set out in that Section have the right to require the Company to publish on a website a statement setting out any matter relating to: (i) the audit of the Company’s accounts (including the auditors’ report and the conduct of the audit) that are to be laid before the annual general meeting; or (ii) any circumstance connected with an auditor of the Company ceasing to hold office since the previous meeting at which annual accounts and reports were laid in accordance with Section 437 of the Companies Act 2006. The Company may not require the shareholders requesting any such website publication to pay its expenses in complying with Sections 527 or 528 of the Companies Act 2006. Where the Company is required to place a statement on a website under Section 527 of the Companies Act 2006, it must forward the statement to the Company’s auditor not later than the time when it makes the statement available on the website. The business which may be dealt with at the annual general meeting includes any statement that the Company has been required under Section 527 of the Companies Act 2006 to publish on a website. 14. Any member attending the meeting has the right to ask questions. The Company must cause to be answered any such question relating to the business being dealt with at the meeting but no such answer need be given if (a) to do so would interfere unduly with the preparation for the meeting or involve the disclosure of confidential information, (b) the answer has already been given on a website in the form of an answer to a question, or (c) it is undesirable in the interests of the Company or the good order of the meeting that the question be answered. 15. A copy of this notice, and other information required by Section 311A of the Companies Act 2006, can be found at www.svgcapital.com. 16. You may not use any electronic address provided either in this notice or any related documents (including the proxy form) to communicate with the Company for any purpose other than those expressly stated.
Explanatory Notes to the Notice of Annual General Meeting The notes on the following pages give an explanation of the Resolutions. Resolutions 1 to 9 are proposed as ordinary resolutions. This means that for each of those Resolutions to be passed, more than half of the votes cast must be in favour of the Resolution. Resolutions 10 to 12 are proposed as special resolutions. This means that for each of those Resolutions to be passed, at least three-quarters of the votes cast must be in favour of the Resolution. Resolution 1: Annual Report and Accounts 2010 The purpose of this Resolution is to receive the Company’s Accounts and the Reports of the Directors and Auditors for the year ended 31 December 2010. Resolution 2: Remuneration Report The purpose of this Resolution is to approve the Directors’ Remuneration Report for the year ended 31 December 2010. This can be found on pages 33 to 37 of the Annual Report. Resolutions 3 to 6: Directors Biographical details of the Directors presenting themselves for election or re-election can be found on pages 28 and 29 of the Annual Report. Resolutions 7 and 8: Auditors The purpose of these Resolutions is to re-appoint Ernst & Young LLP as Auditors of the Company and to authorise the Directors to agree the remuneration of the Auditors. Resolution 9: General power to allot The Directors intend to exercise the authority referred to in paragraph (A) of Resolution 9 to grant options under the Company’s Executive Share Option Plan and the SVG Capital 2007 Performance Share Plan. Options granted pursuant to this authority will nevertheless count towards limits on the number of new Shares that may be issued pursuant to the exercise of options. Paragraph (B) of this resolution would give the Directors the authority to allot shares or grant rights to subscribe for or convert any securities into shares up to an aggregate nominal amount equal to £103,469,307 (representing 103,469,307 ordinary shares). This amount represents approximately one-third of the issued share capital of the Company as at 18 February 2011, the latest practicable date prior to publication of this notice. In line with guidance issued by the Association of British Insurers, paragraph (C) of this resolution would give the Directors authority to allot shares or grant rights to subscribe for or convert any securities into shares in connection with a rights issue in favour of Shareholders up to an aggregate nominal amount equal to £206,938,615 (representing 206,938,615 ordinary shares), as reduced by the nominal amount of any shares issued under paragraph (B) of this resolution. This amount (before any reduction) represents approximately two-thirds of the issued ordinary share capital of the Company as at 18 February 2011, the latest practicable date prior to publication of this notice. The Directors have no present intention to exercise any of the authorities sought under paragraphs (B) and (C) of this Resolution. However, if they do exercise the authorities, the Directors intend to follow recommendations from the Association of British Insurers concerning their use (including as regards the Directors standing for re-election in certain cases). The authorities sought under paragraphs (A), (B) and (C) of this Resolution will expire at the earlier of 30 June 2012 and the conclusion of the annual general meeting of the Company held in 2012. As at the date of this notice, no Shares are held by the Company in treasury. Company information Company SVG Capital plc Annual Report 2010 94 Notice of Annual General Meeting
Resolution 10: Notice of general meetings Changes made to the Companies Act 2006 by the Shareholders’ Rights Regulations increase the notice period required for general meetings of the Company to 21 days unless Shareholders approve a shorter notice period, which cannot however be less than 14 clear days. (Annual general meetings will continue to be held on at least 21 clear days’ notice.) Before the coming into force of the Shareholders’ Rights Regulations on 3 August 2009, the Company was able to call general meetings other than an annual general meeting on 14 clear days’ notice without obtaining such Shareholder approval. In order to preserve this ability, Resolution 10 seeks such approval. The approval will be effective until the Company’s next annual general meeting, when it is intended that a similar resolution will be proposed. The shorter notice period would not be used as a matter of routine for such meetings, but only where the flexibility is merited by the business of the meeting and is thought to be to the advantage of Shareholders as a whole. Note that the changes to the Companies Act 2006 mean that, in order to be able to call a general meeting on less than 21 clear days’ notice, the Company must make a means of electronic voting available to all Shareholders for that meeting. Resolution 11: General power to disapply pre-emption rights This Resolution will be proposed as a special resolution, which requires a 75% majority of the votes to be cast in favour. It would give the Directors the authority to allot shares (or sell any shares which the Company may elect to hold in treasury) for cash without first offering them to existing Shareholders in proportion to their existing shareholdings. The Directors intend to exercise the authority referred to in paragraph (A) of Resolution 11 to grant options under the Company’s Executive Share Option Plan and the SVG Capital 2007 Performance Share Plan. Options granted pursuant to this authority will nevertheless count towards limits on the number of new Shares that may be issued pursuant to the exercise of options. The Directors intend to exercise the authority referred to in paragraph (B) of Resolution 11 whenever they believe it is advantageous to Shareholders to do so. The Directors are seeking the authority referred to in paragraph (C) of Resolution 11 in order to provide flexibility in raising monies to take advantage of opportunities arising through the launch of new funds and for general corporate purposes. It is the intention of the Board that any equity securities allotted under this authority will be allotted at an effective premium to the estimated net asset value per Share at the date of pricing of the issue of the relevant equity securities. The authority in paragraphs (B) and (C) would be limited to allotments or sales in connection with pre-emptive offers and offers to holders of other equity securities if required by the rights of those securities or as the Board otherwise considers necessary, or otherwise up to a nominal amount of £15,520,396 (representing 15,520,396 shares). This nominal amount represents approximately 5% of the issued ordinary share capital of the Company as at 18 February 2011, the latest practicable date prior to publication of this notice. The authority will expire at the earlier of 30 June 2012 and the conclusion of the annual general meeting of the Company held in 2012. Resolution 12: Authority to undertake market purchase of own Shares Authority is sought for the Company to purchase up to 14.99% of its issued Shares, renewing the authority granted at previous annual general meetings. The Company did not purchase any Shares in the period from the last annual general meeting to the date of this notice under the existing authority. Shares purchased under this authority may be sold for cash, transferred to satisfy claims under employee share schemes or cancelled. The Directors would consider exercising the authority provided by this resolution to acquire shares to hold in treasury to satisfy share options. The Directors believe holding such shares as treasury shares will provide the Company with increased flexibility in managing its share capital. Otherwise the Directors have no present intention of exercising the authority to make market purchases, however the authority provides the flexibility to allow them to do so in the future as they keep under review the share price discount to net asset value. The Directors will exercise this authority only when to do so would be in the best interests of the Company, and of its Shareholders generally, and could be expected to result in an increase in the net asset value per Share taking into account relevant factors and circumstances at the time. The minimum price, exclusive of expenses, which may be paid for a Share is £1.00. The maximum price, exclusive of expenses, which may be paid for a Share is the highest of (i) an amount equal to 5% above the average market value for a Share for the five business days immediately preceding the date of the purchase and (ii) the higher of the price of the last independent trade and the highest current independent bid on the trading venues where the purchase is carried out. The total number of options to subscribe for ordinary shares outstanding at 18 February 2011 was 11,998,960, which represented approximately 3.9% of the issued ordinary share capital at that date. If the Company were to purchase the maximum number of ordinary shares permitted by this resolution then the options outstanding at 18 February 2011 would represent approximately 4.5% of the issued ordinary share capital. However, the Directors do not presently intend to exercise the existing authority prior to its expiry on 31 March 2011. The authority will expire at the earlier of 30 June 2012 and the conclusion of the annual general meeting of the Company held in 2012. SVG Capital plc Annual Report 2010 Company summary and E-communications for shareholders 95
The Company SVG Capital plc is a private equity investor and fund management business listed on the London Stock Exchange. SVG Capital plc carries on business as an investment trust. Investment trust companies are able to switch investments without liability for capital gains tax. This, together with the advantages of professional management and spread of risk, makes investment trusts a valuable investment medium. The Company carries on business as an investment company within the meaning of Section 833 of the Companies Act 2006. In order to obtain exemption from capital gains tax the Company conducts itself with a view to continuing as an approved investment trust for the purposes of Section 1158 of the United Kingdom Corporation Tax Act 2010. The Company is not a close company for taxation purposes.
Information for shareholders The Company’s shares are listed on the London Stock Exchange. The stock exchange code for the shares is SVI. The price of the shares is quoted daily in the Financial Times, the Daily Telegraph and The Times. The net asset value is calculated quarterly, with the Company publishing accounts with a full investment portfolio review as at 30 June and 31 December each year. A factsheet containing information including the diversification of the portfolio and the Company’s largest investments is published quarterly and is available on the website and also by request from the Company Secretary.
Registrar services and E-communications for shareholders Communications with shareholders are mailed to the address held on the share register. Any notifications and enquiries relating to registered share holdings, including a change of address or other amendment should be directed to Equiniti Registrars at Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA. The helpline telephone number of Equiniti Registrars is 0871 384 2776 (calls to this number cost 8p per minute from a BT landline, other providers’ costs may vary). Lines open 8:30am to 5:30pm, Monday to Friday. If calling from overseas, please call +44 (0)121 415 7047. SVG Capital would like to encourage shareholders to receive shareholder documents electronically, via our website or by email notification instead of hard copy format. This is a faster and more environmentally friendly way of receiving shareholder documents. The online ‘Shareview’ service from our registrar, Equiniti, provides all the information required regarding your shares. Its features include: The option to receive shareholder communications electronically instead of by post. Direct access to data held for you on the share register including recent share movements and dividend details. The ability to change your address or dividend payment instructions online. To receive shareholder communications electronically in future, including all reports and notices of meetings, you just need the ‘shareholder reference’ printed on your proxy form or dividend notices, and knowledge of your registered address. Please register your details free on: www.shareview.co.uk Should you require further information, please visit: www.svgcapital.com/capital/invrelations/shareholder_services or contact [email protected]/020 7010 8900 Company information Company SVG Capital plc Annual Report 2010 96 Advisers
Head office Registrar for ordinary shares 61 Aldwych Equiniti Limited London WC2B 4AE Aspect House Telephone 020 7010 8900 Spencer Road Fax 020 7010 8950 Lancing www.svgcapital.com West Sussex BN99 6DA Telephone 0871 384 2776* Overseas helpline +44 121 415 7047 Secretary and registered office *Calls to this number cost 8p per minute from a BT landline. Stuart Ballard Other telephone providers’ costs may vary. Lines open 8.30 a.m. to 5.30 p.m. Monday to Friday. 61 Aldwych website www.shareview.co.uk London WC2B 4AE Telephone 020 7010 8900 Solicitors Auditors Slaughter and May One Bunhill Row Ernst & Young LLP London EC1Y 8YY 1 More London Place London SE1 2AF Brokers and financial advisers Bankers J.P. Morgan Cazenove 20 Moorgate The Royal Bank of Scotland plc London EC2R 6DA Corporate Banking Office Numis Securities 5–10 Great Tower Street The London Stock Exchange Building London EC3P 3HX 10 Paternoster Square Bank of Scotland London EC4M 7LT Level 7 Execution Noble Bishopsgate Building 10 Paternoster Square 155 Bishopsgate London EC4M 7AL London EC2M 3YB Unicredit Bank AG, London Moor House 120 London Wall London EC2Y 5ET
Financial calendar
31 December Company’s year end February Preliminary results for the financial year announced February Annual Report published March Annual General Meeting April 31 March NAV published 30 June Company’s half year August Half-yearly results announced August Half-yearly report published October 30 September NAV published SVG Capital plc SVG Capital plc Annual Report 2010 Annual Report 2010 Glossary of terms 97
01 Welcome to SVG Capital plc Early-stage Distributions 02 SVG Capital at a glance 06 Chairman’s statement Seed: Payments to investors after the realisation of investments of the 08 Chief Executive’s statement partnership. Overview • Financing provided to allow a business concept to be developed, perhaps involving production of prototypes and additional research, prior to bringing a product to market. Divestments (or realisations or exits) Start-up: Exits of investments, usually via a trade sale or an IPO (Initial Public • Financing provided to companies for the use in product development Offering) on a stock market. and initial marketing. Companies may be in the process of being set up or may have been in business for a short time, but have not sold their Draw downs/calls product commercially. Payments to the partnership by investors in order to finance investments. Other early-stage: Funds are drawn down from investors on a deal-by-deal basis. 10 Introduction • Financing provided to companies that have completed the product 10 Investment objective development stage and require further funds to initiate commercial 10 Investment policy manufacturing and sales. They will not yet be generating profit. Fund of funds 10 Key performance indicators Private equity funds whose principal activity consists of investing in other 11 Strategy private equity funds. Investors in funds of funds can thereby increase their 13 Marketplace Late-stage Business reviewBusiness level of diversification. 14 Financial review 15 Investment portfolio review Expansion financing: 20 20 largest underlying companies • Capital provided for the growth and expansion of a company which is 23 Fund management businesses Gearing, debt/equity ratio or leverage breaking even or even trading profitably. Funds may be used to finance 24 Contractual arrangements increased production capacity, market or product development and/or The level of a company’s borrowings as a percentage of 24 Risks and risk management shareholder funds. 26 List of investments (Group) provide additional working capital. Capital provided for turnaround situations is also included in this category. Management Buy-Out (MBO): Hurdle rate 28 Board of Directors • Funds provided to enable current operating management and investors Arrangement that caps the downside risk for investors. It allows investors 30 Report of the Directors to get preferential access to the profits of the partnership. In the absence 33 Remuneration report to acquire an existing business. of reaching the hurdle return, general partners will not receive a share of 38 Corporate governance Management Buy-In (MBI): 42 Corporate social responsibility the profit (carried interest). A hurdle rate of 10% means that the private • Funds provided to enable a manager or group of managers from equity fund needs to achieve a return of at least 10% before the profits We are... outside the Company to buy into the Company. are shared according to the carried interest arrangement. Corporate information Corporate SVG Capital – an international Follow-on investment Limited partnership A company which has previously received private equity. Most private equity firms structure their funds as limited partnerships. Investors represent the limited partners and private equity managers the private equity investor and fund general partners. Secondary purchase
45 Independent auditor’s report management business listed Purchase of existing shares in a company from another private equity Realisation 46 Consolidated income statement firm, or from other shareholders. 46 Consolidated statement of on the London Stock Exchange. The sale of an investment. comprehensive income 47 Company income statement Public to private 47 Company statement of comprehensive income Secondary market Purchase of the share capital of a company quoted on a stock exchange 48 Consolidated statement of changes in equity The secondary market enables institutional investors to sell their stakes in 49 Company statement of changes in equity with the intention of de-listing the company and taking it private.
Financial informationFinancial a private equity partnership before it is wound up. 50 Consolidated balance sheet 51 Company balance sheet General Terms 52 Consolidated cash flow statement Trade sale 53 Company cash flow statement Carried interest (“carry”.) 54 Notes to the accounts Sale of the equity share of an investee company to another company. Carried interest or simply ‘carry’ represents the share of a private equity fund’s profit (usually 20%) that will accrue to the general partners. Turnaround 91 Notice of Annual General Meeting Committed funds (or “raised funds” or “committed capital”) is capital 95 Company summary and E-communications committed by investors. This will be requested or ‘drawn down’ by A loss-making company which can be successfully transformed into a for shareholders private equity managers on a deal-by-deal basis. This amount is different profit maker. 96 Advisers from invested funds for two reasons. Firstly, most partnerships will invest 96 Financial calendar Further information on our website only between 80% and 95% of committed funds. Second, one has to 97 Glossary of terms deduct the annual management fee which is supposed to cover the cost www.svgcapital.com of operation of a fund. Company information Company Company information Company SVG Capital plc Annual Report and Accounts 2010
SVG Capital plc Head office 61 Aldwych London WC2B 4AE Telephone 020 7010 8900 Fax 020 7010 8950 www.svgcapital.com
Annual Report and Accounts 2010
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