9738 SVG Diamond II Holdings A&R:9738 SVG Diamond Holdings II A&R 27/1/12 11:29 Page i SVG Diamond Holdings II Limited Audited financial statements For the year ended 30 September 2011 Job No.: Proof Event: Park Communications Ltd 9738 6 Alpine Way London E6 6LA Customer: Project Title: T: F: SVG Annual Report 30 Sept 2011 020 7055 6500 020 7055 6600 9738 SVG Diamond II Holdings A&R:9738 SVG Diamond Holdings II A&R 27/1/12 11:29 Page ii Company information Contents Directors Company information ii Elizabeth Ann Mills Investment adviser’s report 01 Peter John Richardson 20 largest investments 06 Investment adviser Directors’ report 08 SVG Advisers Limited Independent auditors’ report 09 61 Aldwych Profit and loss account 10 London WC2B 4AE Statement of total recognised gains and losses 10 Advisory committee Balance sheet 11 John McLachlan (Chairman) Statement of changes in net assets Jeffrey Hodgman attributable to holders of preferred equity shares 12 Sam Robinson Cash flow statement 13 Andrew Sykes Notes to the financial statements 14 James Witter Portfolio administrator, trustee, cash manager and custodian The Bank of New York Mellon (Ireland) Limited Hanover Building Windmill Lane Dublin 2 Issue and paying agent Bank of New York Mellon North America – London Branch One Canada Square London E14 5AL Corporate service provider and company secretary Structured Finance Management Offshore Limited 47 Esplanade St Helier Jersey JE1 0BD Registered office 47 Esplanade St Helier Jersey JE1 0BD Solicitors White & Case 7-11 Moorgate London EC2R 6HH Independent auditors Ernst & Young LLP 1 More London Place London SE1 2AF General enquiries SVG Advisers Charlotte Edgar [email protected] +44 207 010 8900 Job No.: Proof Event: Park Communications Ltd 9738 6 Alpine Way London E6 6LA Customer: Project Title: T: F: SVG Annual Report 30 Sept 2011 020 7055 6500 020 7055 6600 9738 SVG Diamond II Holdings A&R:9738 SVG Diamond Holdings II A&R 27/1/12 11:29 Page 01 Investment adviser’s report SVG Diamond Holdings II Limited and SVG Diamond Private One key development in the year was the implementation of a Equity II plc (together “SVG Diamond II” or the “Fund”) were new interest rate hedging strategy. In September 2011, the early established to provide investors with an enhanced exposure to a termination of the original interest rate swaps was successfully diversified portfolio of private equity funds. SVG Diamond II closed executed (for zero cost) and replaced with interest rate caps. As a on 22 February 2006 having raised €325.0 million of rated notes result of these transactions the weighted average cost of debt has (“Notes”) and preferred equity shares representing commitments of been reduced from 5.93% to 3.51% resulting in a significant €175.0 million. interest cost saving of up to circa €18 million 3 over the next 30 months. Overview Highlights We are pleased with SVG Diamond II’s performance over the 12 months to 30 September 2011. The Fund has reported an • SVG Diamond II reported an increase in NAV of 31% over the increase in net asset value (“NAV”) of 31% over the year driven by financial year – the Fund had an NAV of €101.6 million at the returns from the underlying portfolio as well as the enhancing 30 September 2011 which equates to an NAV per share of effect of the Fund’s leverage. In aggregate, the NAV has increased €0.58 (2010: €0.44) by €24.1 million to €101.6 million which equates to an NAV per • The underlying portfolio of funds has reported a positive total share of €0.58 at 30 September 2011 (30 September 2010: €0.44). return of 10% over the financial year largely driven by 30 September 30 September continued earnings and revenue growth at the underlying 2011 2010 portfolio company level Value of investment portfolio €429.0m €391.8m • The performance of the mezzanine portfolio continues to improve as the funds have continued to deleverage and Other liabilities (€2.0)m (€4.8)m strengthen their balance sheets, significantly reducing Net loan notes (€325.4)m (€309.5)m impairment risk. Following strong exit and refinancing activity in the first half of 2011, the fund has received distributions of NAV €101.6m €77.5m €9.2 million from its mezzanine fund investments over the Shares in issue 175.0m 175.0m financial year to end September 2011 NAV per share €0.58 €0.44 • New interest rate hedging strategy implemented: early termination of interest rate swaps (for zero cost) and Total return on NAV over the 12 months 31% 72% replacement with interest rate caps reducing the weighted Although the Fund remains behind its original projections, having average cost of debt from 5.93% to 3.51% and creating been severely impacted by the global economic environment interest cost savings of up to circa €18 million 3 over the next towards the end of 2008, it is encouraging to see SVG Diamond II’s 30 months. This means SVG Diamond II will now benefit from NAV improving over the year to 30 September 2011 and current low floating interest rates, but with the reassurance continuing to restore investor value. that, should rates rise, it will never pay more interest than what it would have under the original interest rate swaps The underlying portfolio funds reported nine consecutive quarters of growth to end June 2011. However, the fall in public markets in • At 30 September 2011, SVG Diamond II had current total 4 5 Q3 2011 adversely impacted portfolio valuations in the final commitments of €574.8 million to a portfolio of 74 funds 6 quarter of the financial year to September 2011. Despite this, the (607 portfolio companies ) and a portfolio valuation of portfolio reported a positive total return of 10% over the twelve €429.0 million month period. This return has largely been driven by continued • Unfunded commitments have reduced to €115.7 million at revenue and earnings growth at the underlying portfolio company 30 September 2011 (30 September 2010: €168.6 million) level which has been further amplified by the successful • SVG Diamond II’s liquidity position has continued to implementation of cost saving measures. However, we remain strengthen and its unfunded commitments are fully covered mindful of the impact that market volatility can have on by cash balances and a cash collateralised liquidity facility 2 comparable valuation multiples and forward earnings growth. • There has been a significant increase in the pace of portfolio In addition to the increase in portfolio value, SVG Diamond II company exits with SVG Diamond II receiving €73.3 million 1 received significant distributions of €73.3 million 1 of distributions from the portfolio funds over the year (2010: €37.1 million 1) from the underlying General Partners (12 months to 30 September 2010: €37.1million 1). Since (“GPs”) during the financial year driven mostly by the US focused inception, SVG Diamond II has received total distribution portfolio funds and furthermore, some large exits in the secondary proceeds of €217.4 million 1 portfolio. This outweighed calls of €63.5 million, reflecting the • The pace of new investments made by the underlying maturity of the portfolio. As a result, the Fund’s liquidity position portfolio funds has increased with 75 new companies being has significantly strengthened over the year and it is encouraging added to the portfolio 6. The Fund paid calls of €63.5 million to report that all uncalled commitments of €115.7 million are now over the year to 30 September 2011 (12 months to fully covered by cash and the available liquidity facility 2. (As at 30 September 2010: €49.5 million) 30 September 2010, 76% of the Fund’s uncalled commitments were covered by available cash balances and the cash collateralised liquidity facility 2). 3 Based on yield curves as estimated by SVG Advisers Limited as at 30 September 2011 4 Current total commitments equals funded commitments plus unfunded commitments 1 Including income distributions 5 Excludes realised fund BC European Fund VI 2 AIG funded SVG Diamond II’s liquidity standby reserve account on 7 October 2008. 6 All portfolio company information is as of 30 June 2011, the latest date at which full Available subject to compliance with its terms information at the company level is available SVG Diamond Holdings II Limited 01 Audited financial statements Job No.: Proof Event: Park Communications Ltd 9738 6 Alpine Way London E6 6LA Customer: Project Title: T: F: SVG Annual Report 30 Sept 2011 020 7055 6500 020 7055 6600 9738 SVG Diamond II Holdings A&R:9738 SVG Diamond Holdings II A&R 27/1/12 11:29 Page 02 Investment adviser’s report continued Highlights (continued) Funds reporting largest gains over 12 months to 30 September 2011 8 • In accordance with the transaction documentation, SVG Diamond II continues to defer the payment of cash paid Gains over last Total paid in interest on the Class C and M notes and the mezzanine 12 months capital advisory fee, further strengthening the Fund’s liquidity position € million € million • SVG Advisers Limited (“SVG Advisers”) continues to manage Permira IV 9.3 39.7 the Fund’s cash resources (in order to optimise the returns to Alcentra Mezzanine Fund I 4.9 30.4 the Fund) within the strict parameters of the definition of The fourth Cinven Fund 4.1 18.9 “Liquid Investments” set out in the transaction documents Barclays Private Equity European Fund III 4.0 14.4 Commitments Madison Dearborn Capital Partners V 2.8 18.5 8 SVG Diamond II is in a debt amortisation phase and its investment Funds reporting largest losses since inception period has ended.