2010 Update & Investment Review any people will be aware of the success of Brian Souter, Chief MExecutive and co-founder of PLC, one of the world’s largest transport groups. Starting with just two buses, he founded Stagecoach with his sister, in 1980. Stagecoach floated on the in 1993 and, as a major bus and rail operator, today employs more than 40,000 people worldwide.

In addition to his business interests, Brian Souter and his wife Betty have established and funded the Souter Charitable Trust. The Trust assists projects engaged in the relief of human suffering in the UK and overseas, particularly but not exclusively, those promoting spiritual welfare. In the last three years, the Trust has awarded over 2,700 grants worth more than £20 million.

What is less well known is the extent of the Souter family’s investments beyond Stagecoach.

Since Stagecoach’s flotation, Brian Souter has built up a significant portfolio of investments outside of Stagecoach. Whilst always open to opportunities across all asset classes, the portfolio concentrated, until the formation of Souter Investments in late 2006, primarily on managed fund investments.

In December 2006 Brian Souter and Andy Macfie formed Souter Investments. Andy had previously spent 20 years in private equity, investing in early stage companies through to large, highly leveraged global organisations in a multitude of sectors.

In December 2008, recognising that more resource was required to actively evaluate, lead and manage an increasing number of private equity opportunities, the team was expanded with the recruitment of two investment managers, Calum Cusiter and John Berthinussen. Calum and John are both qualified CAs and have a background in property and unquoted investments.

Together with Janice Bailey and Lynn Robertson, Souter Investments LLP now has a team of five people with offices in Edinburgh and Perth.

2 Contents

Introduction by Brian Souter...... 4 Report by Andy Macfie...... 6 Our Larger Unquoted Investments (Appendix A)...... 10 Our Smaller Unquoted Investments (Appendix B).....18

3 “Like many entrepreneurs, I have historically been discreet about my family’s investment portfolio. However, given the extent of the portfolio and an increasing level of public interest, I have decided that, going forward, we should produce a report on activities on a regular basis.”

hen we launched Souter At Souter Investments we follow a WInvestments in December number of guidelines. Our focus is 2006, my vision was to create to invest in: a wide-ranging investment portfolio that would be resilient • A diversified portfolio of to economic downturns and managed funds and sound demonstrate a healthy level of private companies growth over the long term. • Unique transport related opportunities that are of no At that time we did not have interest to Stagecoach an inkling that the world was heading for the biggest financial crisis since the Great Depression. We do not invest in companies Introduction involved in alcohol, gambling, So how have we fared since tobacco or armaments. By Brian Souter Investments was formed? Have we invested wisely and does Over the years, individual our current investment portfolio investments in the portfolio Souter offer good growth prospects? have changed but at March 2010, half of our portfolio was Whilst we have had a few under in Stagecoach, a quarter in performers the vast majority unquoted companies with most of our investments have proved of the remainder split between resilient over the economic private equity funds and quoted downturn. companies.

Between March 2007 and March A balanced portfolio reduces risk, 2010, the net value of our but it’s also important to read investments has increased by the markets and be versatile. We 41%. This compares well against intentionally took the decision Britain’s largest quoted companies to reduce our commitment to forming the FTSE 100 as can be commercial property activities seen from the chart shown on from 2003 and in recent times the right. This performance is we have deliberately focused on particularly encouraging given private equity investments where that it is after we have paid all we have considerable experience. living and management expenses, corporation and income tax, and In particular, the Souter team made charitable donations of has recently found a number of £20m.

4 interesting opportunities to invest and the portfolio should benefit New banking models need to be in good companies which required significantly as the economy clarified and it is likely that debt funds to finance growth and/or recovers. facilities available to small and strengthen their balance sheets. medium sized companies will Andy Macfie and his team at remain in short supply for some Today our unquoted portfolio Souter Investments have a time to come. spans companies involved in substantial war chest to invest transport, luxury goods, support in situations which match our We should see the return of a services, infrastructure services, criteria of low risk and high strong IPO market as we did in financial services, healthcare, returns. the 1990s and Souter Investments biofuels, power generation and is well placed to capitalise on the environmental sector. Many I am personally of the view that the opportunities which should are Scottish-based but we have a double dip recession is now emerge from this process. investments as far afield as New unlikely but liquidity problems Zealand. We look out for the right will persist for years. Recovery So, don’t hesitate to get in touch people and attractive dynamics. could be slow with ‘cash with Andy Macfie and his team at remaining king’ for some time to Souter Investments if you have The companies in our unquoted come. an opportunity that matches our portfolio have a combined investment profile and may whet turnover approaching £1.3bn Many asset prices have still to our appetite. and employ nearly 7,000 adjust down and lower multiples people. The majority are long- of valuation will be necessary. Brian Souter established corporations but we have a healthy number of early-stage businesses. Some of the names you will recognise, £m FTSE100 Rebased Net Asset Value Rebased including the bus and coach manufacturer, Alexander 200 Dennis, the luxury yacht builder, Sunseeker International, 150 insurance specialists, esure, and internet price comparison site, gocompare. 100

The outlook is positive for Souter Investments as we 50 continue to focus on value- creating opportunities where sound cash flows already exist 2007 2008 2009 2010

5 he last four years have been Despite this unfavourable Ta rollercoaster the extent of economic and investment which was difficult to predict. background the net asset value Much of the emphasis has been of investments held by the Souter on the banking sector. The five family, its trusts and the Souter largest U.S. investment banks, Charitable Trust has risen by 41% with combined liabilities or debts over the last three years whilst of $4 trillion, went bankrupt, the FTSE 100 was down 10%. were taken over or were bailed- out by the US government.

In the UK it was a similar story How has this with Lloyds and HBoS merging, Report by whilst Northern Rock, Lloyds been achieved? and RBS all benefited from very significant equity injections First, Stagecoach Group is the Andy Macfie by the government. The FTSE bedrock of the portfolio. Souter 100 and the S&P 500 (the US Investments has no role in the equivalent) fell from the pre- management of Stagecoach, but crisis peak in October 2007 to the it has proved to be a defensive trough in March 2009 by 52% and and resilient stock, producing a 57% respectively. Valuations of healthy dividend stream and a other asset classes also tumbled. very significant return of value Some recovery has taken place to shareholders in 2007. This but markets have continued to be provided us with the opportunity volatile this summer and we are to increase our investments in still well below peak valuations. other assets.

Turnover Investment Location Employees £m Date Transport Operations Buses Howick & Eastern , New Zealand 11 190 2008 Mana Wellington, New Zealand 9 150 2007 Ferries Fullers Auckland, New Zealand 16 275 2009 Transport Related Bus & Coach Falkirk, Guildford, 295 2,000 2004 Manufacturing Scarborough Bio Fuels Argent Motherwell 28 55 2009

Recycling Nutrafeed Corby and Wrexham 3 19 2010 Lawrence Waste Recycling Kidderminster 6 50 2009 Luxury Brands Sunseeker Yachts Poole, Dorset 306 2,200 2010

Support Services First Scottish Group Dunfermline 10 133 2009 SPH One Search 22 99 2007 Financial Services esure Reigate, Glasgow, Manchester, 453 1,500 2010 Portsmouth and Plymouth gocompare Newport, Wales 95 50 2010 Infrastructure Wireless Infrastructure Bellshill 15 27 2007 Group 1,269 6,748

6 Second, beyond our investment in Stagecoach we have a highly diversified portfolio of investments.

Third, we have invested through the cycle, acquiring equity Fifth, we shied away from stakes in a number of established commercial property investments private businesses. These stakes which we perceived in general to represent between 4% and 98% of be overvalued and structures over the equity, and vary in size from leveraged. small investments in earlier stage companies up to £15m in larger As you can see, Stagecoach more mature businesses. We represented 50% of the gross have seen significant increases in investment value at March 2010 valuations of a number of these compared to nearly 67% in 2007. businesses despite the global Unquoted investments increased recession. from 7% to 24% of gross assets.

Fourth, we have benefited from We have also, in the meantime, having a global investment had exposure to other asset classes. In late 2007 we increased strategy, with our assets in US through a holding company. our commitment to hedge Dollars, Euros and NZ Dollars In some we have invested alone funds significantly. Although the all increasing in value as a while in others we are part performance of those hedge funds result of the significant Sterling of a syndicate led by Penta was in line with the market (-18%) devaluation. Capital, FL Partners, or Maven in 2008, we were disappointed Capital. Further details on these by the degree of correlation to investments are contained within equity markets. We, therefore, The changes in the distribution of Appendix A. the investment portfolio between took the decision to exit our US Dollar denominated hedge March 2007 and 2010 can be We have also £4m invested in a funds in early 2009 and in so seen in the graph below number of smaller early stage doing benefited from the very businesses, which we believe 100% significant appreciation in the US have the potential to grow using Dollar against Sterling. 90% patented technology. These investments include companies 80% involved in a diverse range of activities including drug 70% discovery, medical devices, semi- conductors, mudflaps and water 60% Unquoted filtration. We have a number of 50% smaller investments in syndicates Investments led by Archangel, the Edinburgh- 40% based angel network, and MMC The unquoted investment Ventures. Details of some of the 30% portfolio continues to evolve smaller investments we have are with more acquisitions made set out in Appendix B. 20% since March 2010. Most of the current portfolio is, as you can 10% Unlike many private equity funds, see, in larger companies with a which have a limited life, we can 0% total valuation of £100m. Our have a flexible exit strategy. We 2007 2010 individual investments between may hold some of our investments £1m and £15m are shown far left. Stagecoach Property Investments for decades to come, accepting Family Assets PE Fund Investments dividends as the companies grow We have invested directly in some Loans/Bonds Hedge Funds and expand while we anticipate of these companies, in others Quoted Investments Unquoted exiting from others through trade sales or stock market flotations.

7 A Diverse Portfolio Property Listed Investments

of Funds As we previously indicated, Listed equity investments make Brian reduced his commitment up the final strand of the portfolio Souter Investments also has to commercial property in 2003, which, as an asset class, is a significant portfolio of fund and we have invested only dominated by Stagecoach Group. investments spanning private selectively in residential property equity, hedge and property funds. (mainly in Cape Verde, Dubai These investments provide and Scotland) and commercial liquidity and diversity, We carefully select funds by property since then. However we and typically we adopt an sector and fund manager, have recently started to invest in opportunistic approach to equity benefiting from their larger both commercial and residential investing. That said we are firepower, sector expertise property once more, albeit in a not a team of day traders, and and geographical reach. This small way. continue to have relationships enables further diversification and significant holdings in quoted and provides access to deals that companies which Brian backed would not otherwise be available prior to them becoming listed, to us. including Bowleven the oil exploration business, Raven Russia Funds covered include Alpha the property company and Optos German Property, Charterhouse which makes and distributes Capital Partners VII, VIII and patented retinal imaging devices. IX , Credit Suisse Secondaries, We also actively invest in what we ePlanet Ventures I and II, perceive to be undervalued global EMAC Capital, Morgan Stanley, markets mainly through Exchange Paradigm, Pentech Ventures I Traded Funds. Right now our and II, Permira, SEP I, II and III, foreign market focus is on China, SL Capital Partners, Tosca Fund Russia, Brazil, India and Turkey. and the Virgin Green Fund. We also have invested in many funds Although we have not allocated managed by Goldman Sachs, significant funds to discretionary including Distress Debt, Mezzanine quoted fund managers, we have Debt, Private Equity, Property and such investments with Aberforth Hedge funds. Small Companies Trust and the Tosca Mid Cap fund.

8 “We have been very active since Souter Investments was formed four years ago and are very happy with the quality of our portfolio. We believe that it should continue to grow strongly in the years to come and we are always on the lookout for new opportunities.”

Andy Macfie

9 Appendix A

Our Larger Unquoted Investments

Transport Portfolio

Souter Holdings (NZ) has three operations in New Zealand – Mana Coach Services which runs 133 buses in Wellington, Howick & Eastern with 124 buses in Auckland, and Fullers Ferries which operates 15 ferries from Auckland Harbour as well as 16 buses. Fullers’ vessels are an attractive and well-known feature of the Auckland Harbour vista.

Souter Holdings (NZ) is a sizeable transport operator in New Zealand. The three companies carry 12.5 million passengers a year and provide a vital lifeline to locals and tourists alike.

Bill Rae is the executive chairman of Souter Holdings (NZ). He and his Finance Director, Treena Martin, both worked for Brian prior to becoming involved with Souter Holdings.

Bill commented: “I am pleased to say that all three operations are performing well. We have been successful in growing our businesses by investing in our fleets and our routes.

“Looking to the future, our philosophy is to continue our current growth strategy but we are constantly looking to seize upon opportunistic openings and we recently made a bolt on acquisition for Fullers – 360 Discovery, a water-based tour business.”

www.manacoach.co.nz www.howbus.co.nz www.fullers.co.nz www.360discovery.co.nz

10 New Zealand

1 Mana Coach Services 2 Howick & Eastern 3 Fullers Ferries 2 3

1

11 Transport Related

Argent Energy operates the Alexander Dennis is Britain’s biggest bus and coach manufacturer largest biodiesel plant in the with a UK heritage stretching back to the 1890s. It is the UK’s most UK, producing 50 million litres successful bus builder with a market share approaching 40%. of biodiesel a year. The company transforms waste and residues, The company has three brands – Alexander, which builds a wide range of primarily animal by-products single and double deck buses, Dennis which was the pioneer of low floor and cooking fat, into biodiesel buses and the creator of the midi bus together with Plaxton, the UK’s which can be used on its own leading coach builder, which it acquired in 2007. or blended with mineral diesel to reduce carbon emissions and Employing 1,850 people and building 1,750 vehicles a year, the company boost fuel efficiency in buses, is gearing up to extend its international reach. It already has products lorries and cars. The biodiesel operating in 30 countries, clocking up 2.5 billion miles a year, along with also acts as a lubricant in engines, sub-assembly operations in the United States, Hong Kong and mainland burns more completely thereby China, while the company’s aftercare teams have a global reach. reducing emissions and is virtually sulphur free. Argent was named Colin Robertson, Chief Executive Officer, believes that innovation is a Sustainable Biodiesel Producer key differentiator and that Alexander Dennis leads the industry when 2009 at the World Biofuels Market it comes to the design and production of low carbon vehicles that can Expo. make a difference to town and city environments. Alexander Dennis was the first manufacturer in the UK to successfully introduce hybrid- Customers include Shell, electric buses. It won £40m of new business in this sector during Mabanaft, Greenergy and Harvest the past year and is now Europe’s leading supplier of hybrid-electric Energy. buses. The company believes there is a significant opportunity to penetrate international markets with new-generation hybrids and is set www.argentenergy.com to introduce a left-hand-drive, 18 tonne single deck, hybrid-electric designed specifically for continental Europe.

www.alexander-dennis.com www.plaxtonlimited.co.uk

12 UK

1 Alexander Dennis 2 Argent Energy 7 10 3 Nutrafeed 8 4 Lawrence Waste Recycling 2 1 6 5 Sunseeker Yachts 6 First Scottish Group 7 SPH One Search

8 esure 1 9 gocompare 10 Wireless Infrastructure 8 Group 3

4 3

9 1 8 8 8 5

13 Insurance

In February 2010, Souter Independent research carried out Investments was part of a recently indicated that 90% of all syndicate which supported the people looking for car insurance, management buy-out of esure and 81% looking for home by Executive Chairman and serial insurance, used a comparison site insurance entrepreneur, Peter to find the best deal. Gocompare Wood. is the largest insurance aggregator in the UK having a healthy 20% of esure, which includes the Sheilas’ the online market where rivals Wheels brand, was founded in include moneysupermarket and 2000 as a joint venture between comparethemarket. We were Peter Wood and pleased to have been given the Halifax plc. opportunity to support Hayley Parsons, the Chief Executive of It now offers home, motor, gocompare, in continuing to grow travel and pet insurance, using this exciting business. the internet as a primary sales channel and has 1.8 million motor www.gocompare.com insurance policy holders, with hundreds of thousands more using esure’s home, pet and travel insurance. Unlike others, it has focussed on UK-only call centres where it employs 1,500 people.

www.esure.com www.sheilaswheels.com

14 Luxury Goods

Sunseeker is considered one of the world’s leading luxury and iconic motoryacht brands. This year marks the 50th anniversary of the founder, Robert Braithwaite CBE starting up in business, initially as a dinghy and outboard sales company.

Today Sunseeker builds some of the most luxurious semi-customised motoryachts in the world varying in length between 38 feet and 40 metres. These vessels are sold throughout the world and are known for their effortless combination of heart-pounding performance and jaw- dropping beauty. They are considered true innovators and have this year launched two new boats, the Manhattan 63 and the 40 metre Sunseeker yacht. Stewart McIntyre, Managing Director, believes that Sunseeker leads the market on design and innovation. Its new IPS engines improve maneuverability and fuel consumption whilst also creating more accommodation. Further innovation is expected in the next year again reducing weight, whilst improving fuel consumption and performance.

The company employs 2,200 staff including 500 carpenters and 300 electricians. It builds 200 yachts a year to meet advance customer orders. With a particularly strong order book from all over the world, Stewart McIntyre is confident that Sunseeker will continue to perform strongly. www.sunseeker.com

15 Environmental Businesses

Nutrafeed is a nationwide by- Lawrence started life as a product and waste recycling family skip hire business in Given Brian’s experience management business focused on 1984. Today it provides a total with Stagecoach taking a the food and drink sector, waste management solution, lead on environment matters with plants in Wrexham and operates Europe’s largest indoor it is hardly surprising that Corby. It turns food by-product Materials Recycling Facility, The the portfolio includes a into animal and fish food. It also Forge, and is a one-stop-shop good number of green provides a complete waste and for the collection, processing investments. recycling management service and management of waste. It for its clients, enabling them to specialises in three different Our green portfolio includes achieve zero landfill. types of waste - construction biodiesel, waste management and demolition, commercial and and recycling companies, Souter Investments bought out industrial, soils and aggregates water purification companies this business in the summer of and serves commercial and and a green mudflap 2010 alongside the management industrial companies across the business. Through the Virgin team. country. The company generates Green Fund we also get recycled products and tradable exposure to a number of new Clients include PepsiCo, Kellogg’s, commodities such as top soil, environmentally friendly Silverspoon, Greene King, Lidl and cardboard, paper, plastics and technologies. Ryvita. bio-mass feedstock from these waste materials. www.nutrafeed.co.uk Souter Investments has provided capital to fund expansion.

www.forge-recycling.co.uk www.lawrenceskiphire.co.uk

16 Business Services Infrastructure

First Scottish is a leading Scottish One Search provides searches to WIG has a network of business services provider. The the property industry in England. telecommunications towers which Company has four interesting We provided funding to SPH One it provides to mobile phone profit streams; Legal Post, a Search to finance expansion and operators. Its portfolio of over document exchange service for refinance bank facilities. Under 1,000 active sites makes it the legal and corporate customers; the leadership of Ronnie Park, second largest tower company First Scottish Searching Services, Chief Executive, the company in the UK and its geographic a legal and property search succeeded in taking 40% of the presence extends across much business targeting conveyancing HIPS market and repaying all bank of the UK. This company has lawyers and other professionals; debt and most of our investment. continued to perform well First Scottish Document throughout the recession and Management, a document www.onesearchdirect.co.uk expects to continue its growth as storage, scanning and secure a result of the increasing demand destruction business; and First for voice and data traffic. Post which is a nascent postal business. Under the leadership www.wirelessinfrastructure.co.uk of John Yorkston and Gavin Masterton it has grown its profits significantly and increased market share since our investment. www.firstscottish.com

17 Appendix B

Our Smaller Unquoted Investments

CBX Biosciences Electro-Flow Controls Elonics

CXR Biosciences was a spin out Electro-Flow Controls is a leading Elonics is a leading-edge silicon from University in 2001. It designer and manufacturer of tuner business with patented combines proprietary technologies hazardous area instrumentation, radio frequency technology. The and world-class scientific expertise monitoring and control systems company’s silicon tuners are to provide two key services. By and also mechanical handling smaller, more cost effective and understanding the pathways that solutions to the global oil & use less power than competing define the sensitivity of cells gas industry. An MBI, the deal products, and are sold into to chemicals, the company can involved the combination of the manufacturers of electronic goods evaluate the actual hazard to established Electro-Flow business including TVs, radios and mobile humans of drugs and chemicals. and the fast growing start-up phones. We provided seed funding In addition, the company has Celeris Engineering. The Company and the company recently secured helped customers of all sizes solve is based in Aberdeen and the deal over £6 million of new funding issues relating to the selection of completed in December 2009. which will be used to drive the drug candidates and the safety of business forward. This round was compounds. www.efcgroup.net led by SEP, one of our venture fund managers. www.cxrbiosciences.com www.elonics.com

Neoss

Neoss manufactures dental implants. The simplicity of the product is its competitive advantage. Neoss implants contain about 250 parts whereas competitor implants can have up to 2,000 parts. The simplicity of technology means Neoss implants are easier to install and patients experience lower rates of rejection. Germany is the number one market for Neoss but with the growth in the US market and cosmetic dentistry around the world, the potential is enormous.

www.neoss.com

18 Spraydown Filter Clear MPathy Medical

Spraydown has developed and Filter Clear owns a patented, MPathy Medical is a medical patented mudflap technology for deep-bed, multilayer filtration device company which has a HGVs that improves safety and technology that can be used in any patented mesh used in women’s boosts fuel efficiency by reducing process that needs a dependable pelvic health operations. The mesh the spray and drag from large quality of water inflow or output. is extremely lightweight, thin vehicles. Tests have proven that and physiologically compatible Spraydown mudflaps cut spray by The business is focussed on serving leading to lower rejection rates 40% while improving fuel efficiency water companies, food and drinks and trauma and improved recovery by 3.5%. Spraydown’s mudflaps are producers, and desalination plants times. Mpathy is headquartered in today installed by Tesco, ASDA, but it has huge potential to market Glasgow but has operations both in Morrisons, DHL, Sainsbury’s and its product range to lots of other the UK and US. Homebase. Although it is still sectors including agriculture and early days for Spraydown, it is also mining. So far, the business has www.mpathymedical.com making progress in the US where it mainly concentrated on the UK has an exclusive licensing partner. market but is planning to roll out sales, marketing and maintenance www.spraydown.com to customers around the world. www.spraydownusa.com Orders have already been secured for a desalination plant in Saudi Arabia.

www.filterclear.com

19 Edinburgh Souter Investments LLP 35 Melville Street, Edinburgh, EH3 7JF Phone: +44 (0) 131 225 7688 Fax: +44 (0) 131 225 7369 Perth Souter Investments LLP Algo Business Centre, Glenearn Road, Perth, PH2 0NJ Phone: +44 (0) 1738 450 475 Fax: +44 (0) 1738 450 476 [email protected] www.souterinvestments.com