INTERIM REPORT for the Period from 1 January 2008 to 30 September 2008 INSTAETREIMERNETPORFT the INVESTMENT MANAGER
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INTERIM REPORT for the period from 1 January 2008 to 30 September 2008 INSTAETREIMERNETPORFT THE INVESTMENT MANAGER INVESTMENT MANAGER’S REPORT POSITIVE NAV DEVELOPMENT IN 2008 In performance terms the first half of 2008 recorded stable development; the net asset value (“NAV”) of Princess showed a strong increase during the third quarter of the year of 3.6%, reaching EUR 9.52 per share by the end of September. The Princess NAV demonstrated resilience to market turbu - lences, and was able to record a respectable gain of 2.1% Princess Private Equity Holding Limited (“Princess”) is an investment holding company since the start of the year after inclusion of the dividend pay - ment of EUR 0.30 per share in June. domiciled in Guernsey that invests in private equity and private debt investments. Due to record levels of volatility and the necessary adjust - Investments include primary and secondary fund investments, direct investments and ments which had to be made to reflect the underlying investments at fair value, the NAV was negatively affected listed private equity. Princess aims to provide shareholders with long-term capital by 2.8%. However, despite the sharp decline in public mar - kets portfolio partnerships have overall reported increases in growth and an attractive dividend yield in the mid- to long-term. value to date, stressing their confidence in the underlying investments, which has lifted the NAV by 2.5%. Irrespective of the quality of the underlying assets, the pub - The shares are traded on the Frankfurt Stock Exchange (in the form of co-ownership licly listed part of the Princess portfolio – which comprises listed private equity funds as well as public portfolio compa - interests in a global bearer certificate) and on the London Stock Exchange. nies and accounts for approximately 11% of the total port - folio – did not escape the market downturn unscathed; this had a negative impact of 1.2% on the NAV during the first three quarters of 2008. In September, Princess reduced its listed private equity holdings by approximately 30%. A change in the Princess hedging policy from forward con - tracts to options has been implemented. This change has allowed Princess to benefit from the appreciation of the US dollar against the Euro while providing protection in a sce - nario where the US dollar would depreciate. The overall effect of the hedging gains made on the applied strategy, This document is not intended to be an investment advertisement or sales instrument; it constitutes neither an offer nor an attempt to together with the favorable foreign exchange impact on the solicit offers for the product described herein. This report was prepared using financial information contained in the company's books and records as of the reporting date. This information is believed to be accurate but has not been audited by any third party. This unhedged US dollar exposure resulted in an increase of report describes past performance, which may not be indicative of future results. The company does not accept any liability for actions 4.4% on the NAV as at the end of September. taken on the basis of the information provided. 2 STATEMENT OF THE INVESTMENT MANAGER Whereas the NAV of Princess has returned solid positive NEW COMMITMENTS OF EUR 79 MILLION IN 2008 Hanson V to fund their investment in Svendborg Brakes gains as at 30 September 2008, reflecting a healthy and sta - decreased further, adding up to a total amount of EUR 102 In 2008, Princess has made one secondary transaction, two ble underlying portfolio, the Princess share price has not million as at the end of September. Since the sellers’ price direct investments and six primary commitments to date, been immune to global stock market volatility and closed expectations are still in an adjust ment phase and funding bringing total commitments for the year to EUR 79 million as after the first nine months of the year down 26.0% in Frank - conditions remain stringent, deal volume stays below the lev - at 30 September 2008. The reduced level of Princess’ com - furt at EUR 5.64 per share when including the June dividend els seen in 2007. This holds true for the entire industry as mitment activity in 2008 reflects the generally prevailing payment. The bulk of the share price fall experienced in Sep - well. However, numerous deals are still being completed, appetite of the private equity industry for new investment, tember was principally attributable to the record levels of mainly in the small and mid-cap sectors . which reflects the tight lending standards and scarce financ - uncertainty and loss of confidence which prevailed in global ing facilities prevalent in the market. As a result of Princess’ healthy diversification over investment markets. However, it should be noted that the current dis - years, and despite experiencing a challenging exit environ - count is not based on revaluations within the underlying INVESTMENT ACTIVITY REMAINS CAUTIOUS ment, invested partnerships were still able to achieve attrac - portfolio. From the Investment Advisor’s point of view this tive returns on the sale of selected portfolio companies as discount does not reflect the high quality of Princess’ portfo - The investment activity for the third quarter was broadly in exemplified by Warburg Pincus, which successfully sold APT lio, which is broadly diversified across industries, regions, line with the development observed throughout the first two Generation just one year after its purchase. Total distribu - investment types and stages. quarters. After a very active year in 2007, investment activ - ity slowed down considerably in the first half of 2008. In the tions amounted to EUR 59 million in the first nine months of third quarter the capital called, amongst others by Doughty 2008. FULL INVESTMENT LEVEL PRICE AND NAV DEVELOPMENT (LAST THREE YEARS) * With capital calls from the general partners exceeding distri - R U 160 E butions, Princess was able to deploy some of its cash n i reserves during the year. The investment level of Princess 150 thus rose from 88% at year-end 2007 to 96% by the end of 140 the third quarter 2008, providing the investor with full undi - luted exposure to the underlying private equity investments. 130 OUTLOOK 120 Princess pursues a long-term investment strategy applying 110 a relative value approach, which is designed to capitalize on 100 the most attractive opportunities at any given point in time. Clearly with current market conditions, short term negative 90 impacts on the product performance cannot be ruled out, 5 6 6 7 6 6 7 8 7 8 7 8 0 0 0 0 0 0 0 0 0 0 0 0 however, in the mid to long term Princess and its Investment l l l t t t r r r n n n u u u k k k p p p a a a J J J J J J A A A O O O Advisor, Partners Group, remain confident about the develop - NAV incl. Dividends Closing price (Frankfurt) * Closing price and NAV prior to conversion on ment of the NAV, given the broad diversification and maturi - 8 December 2006 stated in USD and indexed ty of the portfolio. 3 ISNTAETREIMERNETPORFT THE INVESTMENT MANAGER MARKET TRENDS EXISTING PRIVATE EQUITY INVESTMENTS Private equity is typically less dependent on short-term fluc - tuations of the global financial markets but is rather linked to developments in the real economy. Even though private equity sponsored companies are also affected by a soften - Financial markets have been highly volatile, with equity markets showing a sharp cor - ing, or likely recessionary, environment, Partners Group is convinced that these are better positioned than their public rection recently, and consumer confidence has deteriorated. The current lack of liquidity, peers by the nature of the private equity business. which was triggered by the subprime mortgage crisis, has resulted in a severe impact First and foremost, private equity financed companies do not have a broadly diversified shareholder base, but usually – on credit globally. and this is especially true for the buyout side – only one to two majority shareholders. These majority shareholders are close to the firm, often have a very hands-on approach to its development and management, have the ability to adjust In response to the current public market situation and the challenging economic envi - strategies or management very swiftly if necessary, and, most importantly, are not dependent on the short-term ronment, Princess’ Investment Advisor, Partners Group, would like to provide an update focus of public markets. Private equity firms build companies and generate shareholder value over the long term, through of its private market views and the expected impact on private equity portfolios. business and market cycles. The Investment Advisor's lead - ing private equity investment partners have been through such times before and Partners Group is convinced they will successfully adapt again to the current environment, as they In assessing the current environment’s impact on private equity portfolios, Partners have managed to in the past. Group differentiates between the impact on existing portfolios and the current environ - Secondly, many private equity backed companies are financed better than their public counterparts. In particular, ment’s influence on future investments. they benefited in the past from highly attractive financing terms and “covenant-light” structures, putting them in a much better position to weather a softening, or likely reces - sionary, environment. In most cases, significant refinancing activities for these transactions are not expected to start until 2011/12