PR Newswire
London, October 4
PANTHEON INTERNATIONAL PARTICIPATIONS PLC (the "Company" or "PIP")
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2011
The full Annual Report and Accounts can be accessed via the Company's websiteat www.pipplc.com or by contacting the Company Secretary by telephone on 01392 412122.
PIP will be holding a webcast today at 2.30 pm BST to discuss the release ofthe 2011 Annual Report and Accounts.
The presentation can be viewed on www.meetingzone.com/presenter/?partCEC= 1556367 with Access Pin 1556367#. Please use the dial in details below and
ensure that you give your name, company name and the password PIP when dialling in for the webcast.
0808 109 0700 UK Toll Free +44 (0) 20 3003 2666 Standard International Access FINANCIAL SUMMARYHIGHLIGHTS 30TH JUNE 2011 30TH JUNE 2010 CHANGE Summary of results Adjusted NAV per share 1,104.1p 958.7p 15.2% Adjusted net assets £733.1m £636.5m 15.2% Ordinary shares Share price 714.0p 486.0p 46.9%
Discount to adjusted NAV per 35.3% 49.3%
share Redeemable shares Share price 710.0p 550.0p 29.1% Discount to adjusted NAV 35.7% 42.6% per share Investment activity Distributions £165.2m £72.5m 127.9% Investments called £84.1m* £67.3m 25.0% Net cash flow £81.1m £5.2m
* Excludes £18.8m acquisition cost of a new secondary transaction completed in theyear.
The adjusted NAV excludes a derivative asset relating to the Company's standbysubscription agreements with certain institutions under which thoseinstitutions can be called by the Company to subscribe for new redeemableshares in the Company ("Standby Commitments"). These agreements are required tobe included as an asset in the Company's accounts to comply with FRS 26. Theutilisation (such as that which took place on 24th August 2011 in respect of £100.5m of the £150m Standby Commitments) or expiry of Standby Commitments willlead to a reversal of the asset in the accounts at such times. The Boardconsiders that the best measure of the Company's economic value to shareholdersis the adjusted NAV per share which is directly comparable to previouslypublished NAV per share. See Notes 13 and 16 of the financial statements formore details. SINCE PERFORMANCE 1 YEAR 3 YEARS 5 YEARS 10 YEARS INCEPTION AT 30TH JUNE 2011 % % P.A. % P.A. % P.A. % P.A. Adjusted NAV per 15.2 (0.1) 6.7 5.8 11.7 share Share price 46.9 (1.6) (0.3) 2.9 10.2 FTSE All-Share Total 25.6 6.6 4.5 4.8 8.0 Return MSCI World Total 22.2 8.5 5.8 3.2 6.7 Return (sterling) PIP was launched on 18th September 1987. £1,000 invested at inception, assumingreinvestment of dividends, capital repayments and cash flows from the exerciseof warrants would have been worth £10,030 at 30th June 2011.CAPITAL STRUCTURE AT 30TH JUNE 2011 Ordinary shares 37,521,013 Redeemable shares* 28,871,255 Total 66,392,268 * On 24th August 2011 PIP issued 9,102,279 new redeemable shares, taking totalredeemable shares in issue to 37,973,534 and the total number of ordinary andredeemable shares to 75,494,547.
CHAIRMAN'S STATEMENT
I am pleased to report that the adjusted net asset value ("NAV") per shareincreased by 15.2% to 1,104.1p in the year to 30th June 2011. This performancewas driven by substantial valuation gains in our portfolio of private equityassets. Distributions in the year increased by 128% to £165m, many of whichwere completed at significant uplifts to carrying value.
Strengthened balance sheet
The Company experienced a substantial increase in cash flow during the year,with the portfolio generating £81m of net cash inflows before any newinvestment commitments, an increase of £76m relative to the previous financialyear. This cash flow, along with the Company's new loan facility which expiresin 2015 has strengthened the balance sheet. Furthermore, in August 2011, PIPexchanged its full balance of £100.5m of loan notes for new redeemable shares.As a result, the balance sheet is now debt-free and the capital structure hasbeen simplified.
Focus on opportunities in the secondary markets
As a consequence of the strengthened balance sheet, the Company resumed itssecondary investment programme in June 2011, with a £24m commitment to a highquality, global portfolio of 25 funds. As I have previously stated, the Companycurrently intends to place more emphasis with its new commitments on thesecondary market. This will allow the Company to acquire mature private equityassets, which tend to have shorter payback periods and relatively low levels ofundrawn commitments. The fundamentals driving the secondary market arecompelling, and the Company is well positioned to take advantage ofopportunities as they arise.
Discount does not reflect fundamental value
PIP's share price increased by 46.9% in the year to 30th June 2011, driven bythe strong NAV performance mentioned above, alongside a reduction of thediscount from 49% to 35%. Whilst this improvement is welcome, the Board's viewis that the discount, which subsequently widened to 44% by the end ofSeptember, does not reflect the high quality of the portfolio and theimprovements to the Company's balance sheet. In August 2011 the Company boughtback, for £6.4m, 940,000 redeemable shares at an average price of 683p,representing a 38% discount to the 30th June adjusted NAV per share. The Boardwill consider further targeted buybacks of ordinary and redeemable shares as ameans of enhancing NAV per share.
Performance
NAV per share performance driven by strong uplift in valuations
The Company has continued to see a significant recovery in valuations. Theadjusted net asset value of the Company increased by £96m to £733m during theyear. This was mainly due to the strong portfolio performance resulting ininvestment gains (excluding foreign exchange effects) of £121m. These gainswere partially offset by £20m of foreign exchange losses, largely due to theCompany's exposure to the US dollar, and £5m of net expenses and interest.
Strong portfolio returns across all stages
Investment gains of £121m (excluding the effect of foreign exchange) representa return of +16% on the Company's opening portfolio value. In a year when stockmarket performance was positive, buyout funds performed particularly well, withlarge buyout returns of +22% and mid-market and smaller buyout returns of +18%.PIP's venture and growth, and special situations funds also performed well,generating returns of +13% and +12% respectively.
Impressive growth at the underlying company level
A review of our largest 50 buyout funds and direct investments (representingapproximately 50% of the Company's buyout and direct investments by value)revealed weighted average revenue and EBITDA growth rates of +11% and +22%respectively, for the year to 31st December 2010. The relative strength of ourportfolio companies' EBITDA growth supports the view that private equitymanagers have been successful in targeting cost efficiencies as well as revenueincreases at the underlying company-level. In fact, these revenue and EBITDAgrowth rates comfortably outperformed the underlying comparable growth rates ofthe MSCI World and FTSE All-Share over the same period.
Investment Activity
The Company generated £81m of net cash inflows from the portfolio during theyear, up from £5m in the previous year.
Significant increases in distribution activity
Distributions received in the year were £165m, representing 22% of openingportfolio value - double the distribution rate¹ of 11% in the previous year.This increase in realisation activity, which was particularly significant fromthe fourth quarter of 2010, was due to a marked increase in IPO and M&Aactivity. In particular, the portfolio experienced strong rates of distributionfrom its US portfolio that includes a large proportion of mature venture andgrowth assets. Additionally, distribution rates were high in Asia, which hasbeen less affected by the financial crisis than other regions. PIP's Europeanportfolio, consisting mainly of less mature European buyout assets, distributedat a slower rate.The weighted average age of the funds in the Company's portfolio isapproximately 6.7 years. A high proportion of the Company's funds are currentlyin a cash-generative phase. The venture and growth portfolio in particular isvery mature at 7.7 years and consists of companies that have passed throughseveral rounds of financing and moved into a more stable growth stage, whenmanagers can focus on an exit. The largest 50 distributions in the periodgenerated substantial uplifts both to cost and carrying value, highlighting thecontinued ability of private equity managers to create significant value overthe course of an investment. PIP is likely to benefit further from realisedvaluation uplifts as the underlying managers in our mature portfolio continueto realise assets.
¹Distribution rate defined as distributions received in the year as apercentage of opening portfolio value.
Acceleration in call rates and resumption of secondary investments
The Company invested £84m through calls from underlying private equity funds.These calls represent approximately 25% of opening undrawn commitments, up from16% in the previous year. This increase coincided with improvements in creditmarket conditions and economic growth. 64% of our calls went into buyout funds,the majority of which were focused on small and mid-sized transactions. 25% ofcalls went into venture and growth funds, mainly in the USA, with the remainderfocused on special situations funds.In June 2011, the Board was pleased to announce the resumption of the Company'ssecondary investment programme with a £24m commitment to participate in a largeproprietary transaction alongside other Pantheon clients. The purchase, at adiscount to September 2010 underlying valuations, consisted of a globalportfolio of 25 high quality funds which were 79% funded at acquisition.We anticipate a strong flow of high quality secondary investment opportunities.The size and experience of Pantheon's secondary team, combined with its primaryinvestment platform, provides PIP with access to large, complex and, in manycases, proprietary transactions. Pantheon is one of a limited number ofmanagers globally who have the capability to execute such transactions.
Portfolio
Relatively low underlying leverage and diversification should reduce volatility
PIP's portfolio has a 40% exposure to venture and growth, special situationsand generalist funds, all of which tend to utilise low levels or no leverage.60% of the portfolio is invested in buyout funds and direct investments whichtypically utilise debt. The majority of the Company's buyout and directinvestment exposure is with managers that focus on small and mid-sizedtransactions, which tend to have more conservative levels of debt.In the sample of PIP's largest 50 buyout funds and direct investments, theweighted average debt to EBITDA multiple was 3.7 times at 31st December 2010,substantially lower than the debt levels associated with the peak of the buyoutboom, when multiples regularly exceeded 5 to 6 times.PIP is invested with over 300 private equity managers in over 600 funds,reducing exposure to underperformance from individual assets. Furthermore, theCompany's carefully selected portfolio is well diversified by stage, vintage,sector and region, which can significantly reduce the volatility of returns andcash flows. The quality, diversification and inclusion of non-leveragedstrategies, positions the portfolio relatively well if the current turmoil inglobal markets persists.
Financing and Capital Structure
A new loan facility and simplified capital structure
In June 2011 PIP signed a new multi-currency, revolving credit facilityagreement for $82m and €57m. This new facility will expire in June 2015, andreplaced the old facility of $117m and €86m that was due to expire in May 2012.The Board intends to utilise this facility to finance calls of undrawncommitments in the event that distributions from realised investments areinsufficient to do so. This provides the Company with greater flexibility toreinvest surplus cash generated from its portfolio without needing to reserveit for future calls of undrawn commitments.After the year end, in August 2011, the Company exchanged for new redeemableshares the full outstanding £100.5m balance of loan notes issued in 2008 and2010 to bridge calls under the Company's standby redeemable share subscriptionagreements with certain institutions ("Standby Commitments"). The newredeemable shares were issued under these Standby Commitments, at asubscription price equal to the adjusted NAV per share at 30th June 2011. As aresult of the exchange, the NAV of the Company increased by £100.5m and debtwas eliminated from the balance sheet. The Company has subsequently terminatedthe remaining £49.5m of Standby Commitments with effect from 30th September2011.
Together these actions have secured financing over the medium term, simplifiedthe capital structure and ultimately strengthened the Company's financialposition.
Undrawn commitments are well covered
Undrawn commitments at 30th June 2011 were £243m, down from £331m at the startof the year. This movement was mainly due to calls of £84m offset by theacquisition of £5m undrawn commitments via a secondary transaction. Theremaining movements were due to fluctuations in exchange rates andcancellations of outstanding commitments by general partners.
At 30th June 2011, the Company's available financing was £130.1m, comprisingsettled cash balances of £27.6m and an unutilised bank loan facility of £102.5m. This available financing (which excludes the unutilised StandbyCommitments that were terminated at the end of September 2011), alongside theprivate equity portfolio of £810m, represented 3.9 times the value of theCompany's £243m of undrawn commitments. This multiple has improved from 2.8times at 30th June 2010, and reflects the strengthening of the balance sheetover the period. It should also be noted that 28% of the undrawn commitmentsare greater than five years old, most of which relate to funds that are outsidetheir investment periods. Consequently, a portion of these undrawn commitmentsare unlikely to be called.The Board is confident that the Company's financing is sufficient to coverundrawn commitments, such that cash generated from net portfolio realisationscan be applied to new investment opportunities, as well as share buybacks ifdiscounts remain wide over the coming year.
Outlook
Since the year end, the Company has continued to see strong levels ofdistributions, with the cash position of the Company increasing from £27.6m at30th June 2011 to £43.7m at 30th September 2011. It is the Board's view thatmuch of this realisation activity reflects the deal activity consummated bymanagers in the first half of calendar year 2011, when the financial marketswere more settled.Recent volatility in stock markets and the tightening of the credit markets,particularly in Europe, are likely to cause a slowdown in activity. The FTSEAll-Share and MSCI World indices were down 13% and 14% respectively in theSeptember 2011 quarter, which provides a more negative backdrop for valuationsin the short-term.That said, PIP's diversified portfolio and strengthened balance sheet shouldprovide protection if the economic environment deteriorates. Net asset value,taking into account the newly issued redeemable shares, exceeds undrawncommitments by approximately 3.4 times. Given this ratio, the Company shouldremain cash-generative even if realisation rates are significantly impacted byweak financial markets. Many private equity managers have, over the past fewyears, deleveraged and strengthened their underlying portfolio companies, andit is our view that the Company's portfolio and balance sheet are substantiallymore resilient than at the start of the financial crisis in 2008.
With a difficult outlook in mind the Company will continue to take a cautiousapproach to investing in new opportunities.
Board Change
I would like to take this opportunity to thank Sandy Thomson for his valuablecontribution to the Company as a Director and member of our Audit Committee.Sandy, who has been a Director for the past eight years, will be retiring atthe Annual General Meeting.
Taking into account Sandy's retirement as a Director, we have appointed anindependent recruitment agency to assist in the identification of suitablecandidates to join the Board.
Tom BartlamChairman4th October 2011THE MANAGER'S REVIEWMARKET REVIEWSummary
Investment activity increased globally, driven by improvements in earningsvisibility and an increase in the availability of debt. A rise in realisationactivity resulted from an increase in the number of trade sales, IPOs and, inparticular, secondary buyouts. However, the future pace of investment andrealisation activity, particularly in the USA and Europe, could well beimpacted by heightened uncertainty in financial markets. In the secondarymarket for fund interests a strong recovery in activity is set to continue, asnew regulation and exposure factors encourage banks and other institutions
tosell private equity assets.US and European BuyoutsThe past year saw a resurgence in global buyout activity. The aggregate valueof buyout deals on a global basis executed in the first half of 2011 increasedby over 50% year-on-year. This was particularly marked in Europe where buyoutactivity in the first half of 2011 doubled year-on-year, albeit from a low base.Growth in the US market approximated 35%.¹ Buyout activity was facilitated by improved credit markets across both regions.An increase in high-yield bond issuance in the USA has helped to driveactivity, especially in the larger end of the market. It remains to be seen howrecent market volatility and growing concerns about the economic outlook in theUSA and Europe will impact managers' investment activities.Realisation activity increased correspondingly year-on-year in the first halfof 2011. M&A by trade buyers across both regions, IPOs particularly in the USA,and a revival of secondary buyouts particularly in Europe, all contributed tothis rise.Secondary buyouts are an established and accepted part of the European marketwhere, in some countries, secondary and tertiary buyouts account for more than50% of deal flow. Public to private transactions are often problematic toexecute in Europe. Public markets are also less accessible for European vendorsas an exit route. Trade buyers can provide compelling spin-outs and alsoconstitute attractive acquirers for private equity owned companies. However,sometimes the M&A expertise of private equity managers puts them at anadvantage to trade buyers allowing for an active secondary buyout market,particularly in the small and mid-markets. Thus, a company in Europe can oftenbenefit from serial private equity ownership, for example when small countryfunds sell on to regional funds, who in turn sell to pan-European or globalfunds.
Secondary buyouts can present a number of opportunities to private equitymanagers because a different type of private equity owner can stimulate thecreation of new opportunities to help companies achieve greater scale.Furthermore, timing and cash flow management are frequently morestraightforward in companies where the banks and management are alreadyfamiliar with the buyout's case.
¹ Source: Q2 2011 Prequin Quarterly.
US Venture Capital²
Over the year the US venture capital market has continued to recover. As growthhas remained subdued, venture capital managers and growth equity managers arecontinuing to target sectors with secular growth characteristics or withtechnologies to displace incumbents. Venture and growth investment activity hasbeen predominantly focused on the healthcare, IT and consumer services sectors,where fundamentals remain more favourable globally.The venture industry has experienced substantial rationalisation over the lastdecade. This rationalisation, in both the number of funds active in the sectorand the amount of dry powder available, has resulted in a more appealing marketenvironment for venture investors.The venture market also experienced a considerable increase in M&A activityover the period. US venture-backed M&A increased by 31% year-on-year in thefirst half of 2011. In addition, this year saw a rise in US venture-backed IPOswith $6.8bn of IPOs completed in the first half of 2011, up 180% on the sameperiod in 2010. The second quarter of 2011 was particularly strong with $5.5bn of US venture-backed IPOs executed, the highest level since thethird quarter 2000.³After the recent strength in venture-backed exits, IPO activity has alreadyslowed following recent stock market volatility. However, if markets stabiliseagain we could continue to see strength in M&A activity within the sector, ascash-rich IT and healthcare firms seek to acquire venture-backed companiesoperating in potentially disruptive technologies.
²As the majority of PIP's venture and growth portfolio is based in the USA ,the section focuses entirely upon this region.
³Source: National Venture Capital Association.
Asia
The Asian private equity market, which has been less impacted by the financialcrisis, has seen continued strong and consistent levels of investment, drivenby robust business confidence and growth in the region. China continues tomaintain its position as the largest market for private equity capital in theregion, followed by Australia and India. In the Chinese market, growth in the number of RMB denominated funds has given rise to an increasing number of new entrants. After a decline in 2010, overall investment activity inAustralia has increased this year, particularly at the upper end of themid-market. In India, domestic specialist funds have overtaken the activitylevels of regional funds in the upper mid-market.
During the first half of 2011, Asian private equity posted some of its besthalf-year realisations, with China and India dominating, although Australia also experienced some large exits during this period. These trends were evidentin the Company's portfolio where Asian call and distribution activityrepresented a relatively high proportion of the totals.
While overall listing activity is expected to moderate and in some casesdecline, key IPO markets like China and Australia may yet remain more resilientfor the remainder of 2011 and 2012. As was clear during the 2008 downturn,Asian M&A markets have established themselves as a continued source ofliquidity to private equity investors. Since July and through the recent marketdownturn, managers have continued to successfully turn to the M&A and secondaryprivate equity markets to book large exits or partial realisations.
Secondary Interests in Funds
After the low activity levels in the market for secondary fund interests in2009, which were associated with very weak pricing at the height of thefinancial crisis, deal volume recovered strongly in 2010 to some $20bn, up fromapproximately $10bn in 2009. This recovery continued in the first half of 2011with $14bn of deal volume transacted - the busiest first six months of any yearin the history of the market for secondary partnership interests.4As expected, deal activity has emanated particularly from financialinstitutions and pension funds, which together accounted for about 85% ofvolume in the first half of 2011.4 Banks started to significantly reduce theirprivate equity holdings in 2010, responding both to balance sheet pressures andnew capital adequacy regulations. We expect regulation to continue to stimulatedeal flow. The Dodd-Frank Act in the USA and Basel III regulations are forcinghigher the capital adequacy requirements in the banking sector. Similarly, thenew regulatory regime under Solvency II is likely to affect insurancecompanies, at least in Europe and possibly globally, with a potential to affectpension funds also. Pension funds have been active sellers whilst rebalancingtheir portfolios, either to reduce overall private equity exposure, or toreduce exposure to certain vintages or managers.
Meanwhile, the average discount for secondary transactions has narrowed toaround 15% in the first half of 2011. 4 This has further reduced the gapbetween buyer and seller pricing expectations, thereby stimulating the market.With the impetus for higher deal volumes likely to continue, there could beplenty of attractive secondary opportunities in the market over the comingyear. Pantheon will continue to focus on assets that can maintain theirresilience in the face of a weakening economic outlook.
Pantheon is one of the largest secondary fund-of-fund managers in the world,with a dedicated team of 23 investment professionals focusing on secondarytransactions. This enables the Company to participate alongside other Pantheonclients (according to an agreed allocation ratio) in complex deals that smallerand more inexperienced teams are unable to analyse. Pantheon's global primaryplatform and reputation as one of the largest and respected primary privateequity managers allows it to create proprietary deal flow, thereby avoidingbroad auctions, and enabling acquisitions at attractive prices.
4 Source: Cogent Partners
INVESTMENTS CALLED IN THE YEAR TO 30TH JUNE 2011
New investments financed during the year ranged across many sectors andregions, from telecommunications firms to leading restaurant chains, energycompanies to highly specialised manufacturers and from internet companies tofirms operating in the healthcare industry. Further investments will be made inthe coming year through calls from the Company's undrawn commitments of £243m,ensuring that PIP continues to invest throughout the economic cycle.
Calls
PIP paid £84m of calls in the year to 30th June 2011 , equivalent toapproximately 25% of opening undrawn commitments. This was substantially higherthan the rate last year which was 16%.
USA 38% Europe 44% Asia and other 18% Total 100%
DISTRIBUTIONS IN THE YEAR TO 30TH JUNE 2011
PIP received distributions from more than 400¹ funds, with many at significantuplifts to carrying value. The Company's mature and diversified portfolioshould continue to generate significant distributions in the coming quarters.
¹ This figure looks through feeders and fund-of-funds.
Distributions
PIP received £165m in proceeds from the portfolio in the 12 months to 30th June2011 , equivalent to approximately 22% of opening private equity assets.
USA 63% Europe 24% Asia and other 13% Total 100%
Cost Multiples on a Sample of the Largest Distributions in the Year to 30thJune 2011¹
On a sample of the largest 50 distributions, the weighted average cost multiplewas 7.2 times. 100% of the distributions in the sample generated multiples inexcess of 1.0 times cost for the underlying fund, over 80% achieved multiplesin excess of 2.0 times and over 20% of the sample generated multiples in excessof 10.0 times. These results highlight the continued ability of private equitymanagers to create significant value over the course of an investment.
Uplifts to Previous Valuations on a Sample of the Largest Distributions in theYear to 30th June 2011²
On a sample of the largest 50 distributions, the weighted average uplift was79%. 98% of the sample distributed an amount greater than the previousvaluation, over 70% of the sample generated uplifts in excess of 25%, and 14%generated uplifts in excess of 100%. These findings are consistent with ourview that distributions tend to be significantly incremental to returns. PIP'smature portfolio is well placed to continue to generate a good level ofdistributions in the coming year.
Approximately 54% of the largest 50 distributions were derived from tradesales, 26% from IPOs, 17% from sales to other private equity firms and 3% fromcapital reorganisations.
¹The available data in the sample represented approximately 35% of PIP's totaldistributions for the year to 30th June 2011 . This data is based upon costmultiples (gross or net) available at the time of the distribution.
²The available data in the sample represented approximately 28% of PIP's totaldistributions for the year to 30th June 2011 . This data set excludeddistributions from the sale of listed holdings.
FINANCE
Cash and Available Bank Facility
At 30th June 2011 the Company had settled cash balances equivalent to £27.6m.
In June 2011 the Company entered into a new multi-currency revolving creditfacility agreement ("New Loan Facility"), replacing its previous multi-currencyrevolving credit facility agreement that was due to expire in May 2012. The NewLoan Facility is due to expire in June 2015 and comprises facilities of $82mand €57m (down from $117m and €86m in the previous facility agreement). The NewLoan Facility remained undrawn at 30th June 2011.
Standby Financing and Loan Notes
Between 2005 and 2008 PIP entered into a number of standby agreements (the"Standby Commitments") with certain institutions under which the Company couldrequire the institutions to subscribe up to £150m for new redeemable shares, ata price equal to the prevailing NAV per share at the time of subscription. Thepurpose of these Standby Commitments was to provide an additional level ofassurance that PIP would be in a position at all times to meet its financialobligations. Furthermore, in December 2008 and September/October 2010, PIPissued to these institutions a total of £100.5m in unsecured subordinated loannotes which were due to mature on 15th November 2011 (the "Loan Notes") inorder to bridge calls under the Standby Commitments. At 30th June 2011, £150mof Standby Commitments and £100.5m of Loan Notes were outstanding.
Post Year End: Exchange of Loan Notes for Shares
On 24th August 2011 , PIP drew down £100.5m under the Standby Commitmentsresulting in the issue of 9,102,279 new redeemable shares (based on theprevailing adjusted NAV per share at 30th June 2011 of 1,104.12p).Simultaneously, the Company repaid £100.5m of Loan Notes, effectivelyexchanging the full balance of the Loan Notes for new redeemable shares. At theend of September 2011 the Board terminated the remaining £49.5m of StandbyCommitments.
These actions have enabled the Company to simplify its capital structure byremoving loan notes from the balance sheet.
Post Year End: Share Buyback
At the end of August 2011, PIP bought in the market 940,000 redeemable shareswhich are currently being held in treasury. At an average purchase price of683p (38% discount to the 30th June 2011 adjusted NAV per share), it is theBoard's view that these shares represented an attractive investment that willprove to be accretive to NAV per share. The Board will consider making furtherbuybacks at times when the Company's shares remain undervalued in the market.
Commitment Cover
At 30th June 2011, PIP's available financing, excluding the remaining StandbyCommitments terminated in September 2011, stood at £130.1m, comprising £27.6min settled cash balances and £102.5m in undrawn bank facility (sterlingequivalent). The sum of the Company's available financing and private equityportfolio exceeded its undrawn commitments by 3.9 times, up from 2.8 times at30th June 2010.It should be noted that a portion of the Company's undrawn commitments mightnot be called by the underlying managers. When a fund is past its investmentperiod, which is typically between five and six years, it generally cannot makeany new investments (only draw capital to fund existing follow-on investmentsor pay expenses). As a result, the rate of capital calls in these funds tendsto slow dramatically. 28% of the Company's undrawn commitments are in fundvintages that are greater than five years old.
PORTFOLIO OVERVIEW
The diversification of PIP's portfolio, with assets spread across differentinvestment styles and stages including buyout, venture and growth, and specialsituations, helps to reduce volatility of both returns and cash flows. Thematurity profile of the portfolio ensures that PIP is not overly exposed to anyone vintage. Furthermore, PIP's geographical diversification extends itsexposure beyond the USA and Europe, to regions with higher rates of economicgrowth such as Asia. As such, the Company offers a comprehensively global,diversified selection of private equity assets, carefully selected by Pantheonfor their quality.
Portfolio Analysis by Value as at 30th June 2011
Geography
The majority of PIP's geographical exposure is focused on the USA and Europe,reflecting the fact that these regions have the most developed private equitymarkets. PIP's assets based in Asia and other regions provide access tofaster-growing economies.USA 52% Europe 37% Asia and other 11% Total 100% StagePIP's portfolio is well diversified across different private equity investmentstyles and stages. The majority of the Company's buyout exposure is focused onmid- and small-cap funds, which have tended to utilise lower levels of leveragein their acquisition structures than the very largest funds. In addition, PIPhas a significant exposure to venture and growth-focused funds, many of whichwere acquired through the secondary market.Small/Mid Buyout 36% Large/Mega Buyout 22% Venture and 30% Growth Special 6% Situations Generalist 4% Directs 2% Total 100% Maturity
PIP's portfolio is well diversified by fund vintage (referring to the year thefund made its first drawdown). Only 16% of the portfolio relates to large/megabuyouts from fund vintages 2005 to 2007, indicating that the Company has arelatively low exposure to the higher levels of leverage experienced during thepeak of the buyout market.
Because PIP acquires many of its investments in the secondary market, itachieves further "backward diversification" and is able to acquire assets withgood visibility of underlying company quality and prospects.
2000 and earlier 19% 2001 6% 2002 2% 2003 3% 2004 6% 2005 14% 2006 20% 2007 23% 2008 7% 2009 0% 2010 0% Total 100% Primary/Secondary63% of the portfolio is derived from primary transactions and 37% fromsecondary transactions.Primary 63% Secondary 37% Total 100% PORTFOLIO ANALYSISDebt Multiples¹
Venture and growth, small/mid-size buyouts and large/mega buyouts account for88% of the portfolio value, and have differing leverage characteristics:
> The venture and growth portfolio accounts for 30% of portfolio value and hasvery little or no reliance on debt.
> The small/mid-size buyout portfolio sampled contains a moderate level ofdebt, with net debt / EBITDA of 3.2 times.
> The large/mega buyout portfolio sampled contains higher levels of debt withnet debt / EBITDA of 4.2 times, although relatively low compared to the debtmultiples of deals executed at the peak of the buyout market in 2006/2007.
Revenue and EBITDA Growth¹
> Weighted average revenue and EBITDA growth for the sampled buyout companieswas +11.2% and +21.6% respectively in the year to 31st December 2010. Thiscompares favourably with the S&P 500 and FTSE All-Share indices, both of whichrecorded single digit revenue growth and mid-teens EBITDA growth in the sameperiod.
> These revenue and EBITDA growth figures suggest strong performance at theunderlying company level. In particular, they suggest that, on the whole, ourmanagers have been successful in managing costs, driving efficiencies andpositioning their companies for top line growth throughout 2010.
Valuation Multiple¹
> Accounting standards require private equity managers to value their portfolioat fair value. This leads to volatility in valuations reflecting movements inthe broader markets. However, valuations of private equity assets can oftenleave some room for value enhancement when liquidity is released through asale.> Weighted average enterprise value/EBITDA for the buyout sample in the year to31st December 2010 was 9.5 times. This figure is lower than the FTSE All-Shareand MSCI World.¹Buyout Sample Methodology
The sample buyout figures were calculated from over 75% of the value of thecompanies within the largest 50 buyout funds and direct investments as at 31stDecember 2010. This accounts for approximately 50% of the value of PIP's buyoutand direct portfolio. The figures are based upon unaudited data. The revenueand EBITDA figures were based upon the year to 31st December 2010, or where notavailable the closest annual period disclosed. The net debt and enterprisevalue figures were based upon 31st December 2010 underlying valuations, or theclosest period end disclosed. The underlying company data was weighted by NAVto calculate an average. Individual company revenue and EBITDA growth figureswere capped between +1000% and -1000% to avoid large distortions from movementsrelative to a small denominator. FTSE All-Share and MSCI World data was takenfrom Bloomberg.
Impact of Distributions Upon Returns
> Distributing funds, defined as funds that paid a distribution during thequarter, have outperformed non-distributing funds in every quarter of thefinancial year. This data suggests that distributions, on the whole, have beenaccretive to performance.
> The outperformance of distributing funds is more marked for venture andgrowth funds, where valuations are often based upon cost or the latest round offinancing, relative to buyout funds whose valuations tend to be based upon themultiples of comparable listed companies.
> Venture and growth funds typically invest in disruptive technologies forwhich trade buyers can often be willing to pay a substantial premium. Theseresults are consistent with our sample of the largest 50 distributions. In thissample, the weighted average uplift for venture and growth realisations was151% versus 79% for the sample overall.
Venture and Growth Distribution Rates
> Over 40% of PIP's venture and growth assets are in funds dated 2001 andearlier. These companies are now mature and many are cash-generative, havingsurvived the bursting of the technology bubble and the latest downturn. Venturemanagers focus their attention on those companies that have the ability todrive meaningful returns and are generally quick to pull out of investments infailing companies. Consequently, only venture assets with good potentialsurvive to maturity.> Mature venture companies, which often resemble growth investments in terms ofcash generation and profitability, have shown an increased likelihood ofreturning cash to investors. It is our view that PIP's mature venture andgrowth assets can continue to generate a good level of distributions. Given thefact that distributions tend to lead to uplifts, especially in the venture andgrowth stage being so mature, PIP's venture and growth portfolio is stronglyplaced to perform well.
UNDERLYING PORTFOLIO COMPANIES
PIP has built a portfolio of interests in over 600 funds and over 3,500underlying companies. The analysis below looks at diversification at theunderlying company level.
Company Sector
PIP's portfolio is well diversified by the sectors in which the underlyingcompanies operate. This sectoral diversification helps to minimise the effectsof cyclical trends within particular industry segments. Relative to the FTSEAll-Share and MSCI World indices, PIP is underweight in many of the segmentsthat have been most recently associated with high levels of volatility, such asEnergy and Financials.Energy 6% Materials 4% Industrials 18% Consumer Discretionary 20% Consumer Staples 5% Healthcare 14% Financials 7% Information Technology 22% Telecom Services 4% Utilities 0% Total 100% Company Geography
The geographical exposure of PIP's underlying company investments isdiversified across North America , Europe and Asia . Notably, PIP's Europeanexposure is focused upon Northern European economies.
North America 50% UK 14% Asia and other 11% Germany 6% Scandinavia 6% Benelux 4% France 3% Central and Eastern 2% Europe Italy 2% Iberia 1% Other Europe 1% Total 100%
This data is based upon underlying company valuations at 31st December 2010 ,and accounts for approximately 90% of PIP's overall portfolio value.
OUTSTANDING COMMITMENTS
PIP's outstanding commitments to fund investments, 74% of which relate toprimary funds and 26% of which relate to secondary funds, are well diversifiedby stage and geography and will enable the Company to participate in futureinvestments with many of the highest quality fund managers in the privateequity industry.
Portfolio Analysis by Outstanding Commitments as at 30th June 2011
PIP's outstanding commitments to investments decreased to £243m at 30th June2011 compared with £331m at 30th June 2010. The Company paid calls of £84m andacquired £5m of outstanding commitments via a secondary transaction. Theremaining movements were caused by fluctuations in exchange rates andcancellations of outstanding commitments by general partners.
Geography
The USA and Europe have the largest outstanding commitments, reflecting thefact that they have the most developed private equity markets. Commitments to Asia and other regions provide access to faster-growing economies.
USA 45% Europe 43% Asia and other 12% Total 100% StagePIP's undrawn commitments are well diversified across all major stages ofprivate equity. The majority of the buyout exposure is with mid-cap and smallerfunds. Venture and growth forms a significant portion of the Company's undrawncommitments.Small/Mid Buyout 44% Large/Mega Buyout 20% Venture and Growth 26% Special Situations 7% Generalist 3% Total 100% Maturity28% of PIP's undrawn commitments are in the 2005 fund vintage or older. Mostrelate to funds that are outside their investment periods and, as such, shouldhave slower call rates. It is likely that a portion of these commitments willnot be drawn.2005 and earlier 28% 2006 15% 2007 31% 2008 23% 2009 2% 2010 1% Total 100% PANTHEON VEHICLESPantheon Ventures (UK) LLP ("Pantheon") is not entitled to management andcommitment fees in respect of PIP's holdings in, and outstanding commitmentsto, the firm's managed fund-of-funds vehicles. In addition, Pantheon has agreedthat PIP will never be disadvantaged in terms of fees compared with theposition it would have been in had it made investments directly into theunderlying funds rather than indirectly through such fund-of-funds vehicles.
TOP 20 MANAGERS BY VALUE AS AT 30TH JUNE 2011
% OF PIP'S TOTAL PRIVATE NUMBER MANAGER REGION STAGE BIAS EQUITY ASSET VALUE 1 Barclays Private EUROPE BUYOUT 2.9% Equity 2 Apax Partners EUROPE BUYOUT 2.6%
3 CVC Capital Partners EUROPE BUYOUT 2.4%
4 Nova Capital EUROPE BUYOUT 2.0% Management 5 Vision Capital EUROPE BUYOUT 1.7%
6 Brentwood Associates USA BUYOUT 1.7% 7 Golden Gate Capital USA BUYOUT 1.7% 8 Doughty Hanson & Co EUROPE BUYOUT 1.6%
9 Hutton Collins EUROPE SPECIAL SITUATIONS 1.6% 10 IK Investment EUROPE BUYOUT 1.5% Partners 11 Nordic Capital EUROPE BUYOUT 1.5% 12 Providence Equity USA BUYOUT 1.5% Partners 13 Carlyle Group GLOBAL GENERALIST 1.4% 14 Carlyle Group/ USA SPECIAL SITUATIONS 1.3% Riverstone Holdings 15 ABS Capital Partners USA VENTURE AND GROWTH 1.3%
16 Avista Capital USA BUYOUT 1.3% Partners 17 Bain Capital USA BUYOUT 1.3% 18 Oak Investment USA VENTURE AND GROWTH 1.3% Partners 19 BC Partners EUROPE BUYOUT 1.2% 20 Permira EUROPE BUYOUT 1.2%
TOP 20 MANAGERS BY OUTSTANDING COMMITMENTS AS AT 30TH JUNE 2011
% OF OUTSTANDING NUMBER MANAGER REGION STAGE BIAS COMMITMENTS 1 CVC Capital EUROPE BUYOUT 3.6% Partners 2 Hutton Collins EUROPE SPECIAL SITUATIONS 3.1% 3 Summit Partners GLOBAL VENTURE AND GROWTH 2.7% 4 Clessidra Capital EUROPE BUYOUT 2.5% Partners 5 Barclays Private EUROPE BUYOUT 2.2% Equity 6 Carlyle Group GLOBAL GENERALIST 2.1% 7 Doughty Hanson & EUROPE BUYOUT 2.1% Co 8 GrandBanks USA VENTURE AND GROWTH 2.0% Capital 9 Arcadia EUROPE BUYOUT 1.9% 10 Private Equity EUROPE BUYOUT 1.8% Partners 11 ABS Capital USA VENTURE AND GROWTH 1.8% Partners 12 Unison ASIA AND BUYOUT 1.7% OTHER 13 Mercapital EUROPE BUYOUT 1.7% 14 Mid-Europa EUROPE BUYOUT 1.6% Partners 15 Golden Gate USA BUYOUT 1.6% Capital 16 Baring Vostok EUROPE BUYOUT 1.5% Capital Partners 17 Vision Capital EUROPE BUYOUT 1.4% 18 Sagard Private EUROPE BUYOUT 1.4% Equity Partners 19 Gemini Israel EUROPE VENTURE AND GROWTH 1.3% Funds 20 Technology USA VENTURE AND GROWTH 1.3% Crossover Ventures
TOP 20 COMPANIES BY VALUE AS AT 30TH JUNE 2011
% OF PIP'S TOTAL PRIVATE NUMBER COMPANY SECTOR EQUITY ASSET VALUE 1 Carbolite INDUSTRIALS 1.1% 2 Attendo HEALTHCARE 1.0% 3 Nycomed HEALTHCARE 0.8% 4 Bibby Scientific INDUSTRIALS 0.7% 5 MYOB INFORMATION 0.5% TECHNOLOGY 6 Scilabware INDUSTRIALS 0.5% 7 TDC* TELECOMMUNICATION 0.5% SERVICES 8 Jack Wolfskin CONSUMER 0.4% DISCRETIONARY 9 Rosetta Stone* CONSUMER 0.4% DISCRETIONARY 10 InterXion* INFORMATION 0.4% TECHNOLOGY 11 Array Marketing Group CONSUMER 0.4% DISCRETIONARY 12 Global Blue FINANCIALS 0.4% 13 Siltron INFORMATION 0.4% TECHNOLOGY 14 BrightHouse CONSUMER 0.4% DISCRETIONARY 15 Sterilin INDUSTRIALS 0.4% 16 Glasshouse INFORMATION 0.4% Technologies TECHNOLOGY 17 Norit INDUSTRIALS 0.3% 18 Kinder Morgan* ENERGY 0.3% 19 CPL Industries ENERGY 0.3% 20 IFCO Systems* INDUSTRIALS 0.3%
* Quoted holding as at 30th June 2011 .
THE MANAGER (PANTHEON)
Pantheon, one of the world's foremost private equity specialists, has acted asManager to PIP since its inception in 1987, evaluating and managing investmentson PIP's behalf in line with the strategy agreed by the Board. Pantheon is alsoone of the largest and most experienced secondary managers, having committedmore than $6 billion to secondaries over more than 20 years.
Strong Private Equity Track Record
Pantheon is one of the leading private equity fund-of-funds managers in theworld, with global assets under management of $24.3 billion¹, and over 350institutional investors.
Pantheon has a strong and consistent private equity investment track record.For nearly 30 years Pantheon has made investments in over 1,000 private equityfunds, gaining exceptional insight and access to the most attractive funds inall the major private equity regions.
Risk Management
Pantheon has substantial experience of investing in private equity throughvarious economic cycles and in different regional markets. The firm's assetallocation, diversification strategies and disciplined investment process arestructured with the objective of producing the best possible risk-adjustedreturns. Pantheon's diversification strategy limits portfolio risk by includinga multi-strategy approach, targeting funds with a variety of different returncharacteristics and deploying capital over a number of vintage years, generallyensuring that the most attractive segments of the market are represented in theportfolio. When applying this approach, the Board works closely with Pantheonto ensure that the management of the Company is in line with its agreedstrategy.
Reputation as a Preferred Investor
Pantheon has been investing in private equity for nearly 30 years and has anenviable reputation in the industry. Pantheon is often considered a preferredinvestor due to its reputation, active approach and scale of commitments. Inaddition, Pantheon generally seeks advisory board seats to contribute activelyto governance during the life of the fund. As such Pantheon is represented onover 250 advisory boards worldwide. Long-standing partnerships with managers ona global basis can also enhance the firm's deal flow in the secondary market.
Team-Based Culture
Pantheon draws upon a deep pool of resources that contributes to a uniqueteam-based culture. With teams operating in London, San Francisco, Hong Kongand New York, Pantheon adopts a collegial approach to investmentdecision-making, globally leveraging the collective experience and expertise ofall investment professionals. The team's experience is also brought to bear onthe evaluation, selection and ongoing monitoring of fund investments.Pantheon's team of 62 investment professionals, supported by 96 otherprofessionals,² work together with the ultimate aim of producing strong andconsistent results.Secondary Investing
Pantheon is one of the largest and longest established secondary investors inthe world, with more than 20 years' experience of successful secondaryinvesting and a team of 23 investment professionals who focus onsecondary transactions. This size and experience means Pantheon can focus onlarge and complex deals in which many other, lower resourced, investors cannotparticipate.
Pantheon has committed more than $6 billion in the secondary market globallyacross more than 280 transactions, including more than 90 portfoliotransactions and more than 190 single fund secondaries.
Pantheon always aims to leverage the knowledge and due diligence information ofits primary fund teams and global offices. Long-standing partnerships withgeneral partners on a global basis help to enhance the firm's deal flow.
While the increase in scale of the secondary market has been paralleled bygrowth in the number of would-be acquirers of secondary assets, Pantheonbelieves that there is a relative shortage of experienced teams with theability to transact the full range of global secondary purchase types. As aresult, the differentiation between experienced and well-resourced globalspecialists and the rest is becoming increasingly apparent as the marketevolves.
¹ As at 31st March 2011
² All staff figures as at 1st September 2011
COMPANY STRATEGY
The Company's primary investment objective is to maximise capital growth byinvesting in a diversified portfolio of private equity funds and, occasionally,directly in private companies.
Company Strategy
The spread of performance in private equity is much wider than in other assetclasses and the selection of managers has a significant influence on investmentperformance. As a specialist fund-of-funds manager monitoring and researchingthe global private equity market, Pantheon, PIP's Manager, is well positionedto identify fund managers who have the skills and strategies to deliversuperior performance within their particular market segments.PIP's strategy is to invest with leading private equity managers whilstreducing investment risk through diversification of the underlying portfolio bygeography, investment stage and sector. This strategy is implemented throughPIP's access to Pantheon's primary, secondary and co-investment activities. PIPhas the flexibility to vary the size and emphasis of its investments dependingon its available financing.
The current portfolio reflects PIP's prolonged access to Pantheon's highlysuccessful primary and secondary investments over the past 23 years. Only fundsthat have passed rigorous due diligence and research are selected forinvestment.
Secondary Programme Emphasis
It is the Board's current intention to emphasise secondary investment as theCompany's new commitments.
Secondary purchases of existing interests in private equity funds are typicallyacquired between three and six years after a fund's inception, when such fundsare substantially invested. As a result they tend to have relatively low levelsof undrawn commitments. PIP benefits from secondaries because the fees andexpenses in the first few years have been paid and distributions from the fundwill be returned over a shorter time period. This helps to reduce the drag toperformance from young and immature funds, known as the "J-curve effect". Inaddition, secondary assets can be purchased at a discount, especially in caseswhere the seller has liquidity problems, increasing the opportunity foroutperformance. More details on secondary investments can be found below.
As the Company continues to build its financial resources through net portfoliorealisations, the shorter duration of secondary investments and lowerassociated undrawn commitments will help to further increase the Company'sfinancial strength.
In accordance with the terms of its management agreement with Pantheon, PIP isentitled under Pantheon's allocation policy to the opportunity to co-invest ina predetermined ratio alongside Pantheon's latest global secondary fund,Pantheon Global Secondary Fund IV, benefiting from access to larger secondaryopportunities that it would not have had the capacity to complete alone. Thesecondary programme enables PIP to acquire attractively priced secondaryinterests as they become available, and aims to outperform market averagesthrough judicious pricing and timing.
Share Buybacks
In certain circumstances, usually where the Company's shares are quoted at asignificant discount to NAV, the Board may view the shares as presenting anattractive investment opportunity relative to other uses of cash, such as newinvestment commitments. In such circumstances, the Board will consider targetedbuybacks of ordinary and redeemable shares instead of, or in addition to, newinvestments as a means of utilising cash generated from the Company'sportfolio.
CURRENT OUTLOOK FOR SECONDARY INVESTMENTS
What is a Secondary?
A secondary transaction generally consists of purchasing an interest in aprivate equity fund, or portfolio of multiple funds (consisting of investedcapital and remaining capital commitments) from an existing investor seekingliquidity prior to the termination of these funds. A secondary transaction canalso consist of purchasing direct company interests which are either privatelyheld or in which the trading of shares is restricted.
Why Invest in Secondaries?
A secondary investment exhibits several features that differentiate it fromother private equity assets, including the potential for timely deployment andearlier return of capital, portfolio transparency and the ability from time totime to acquire assets at a discount to Pantheon's assessment of the fairmarket value. Pantheon believes that these characteristics have the potentialto reduce the risks typically associated with private equity fund investing.
Timely Deployment of Capital
Investing in secondaries can be a particularly helpful strategy for investorsseeking to boost the proportion of their allocation to private equity actuallyat work "in the ground". Whereas a primary fund at inception has no assets, andwill draw down capital at an unpredictable rate over a period of years as itinvests into underlying companies, a fund acquired as a secondary is partiallyinvested at the time of purchase.
Earlier Return on Investment
Investing later in a fund's life reduces the impact of the "J-curve" normallyassociated with private equity fund investments. The visibility of assets makesit easier to identify outperforming funds and likely exit horizons.Furthermore, the write down of early, unsuccessful investments, the reducedimpact of early management fees and the shorter time horizon to liquidityprovides a number of benefits to the investor. Investors may expect an earlierreturn of capital on their investments, relatively fewer capital calls and ashorter investment holding period.
Reduced Investor Risk
Unlike investing in a fund at inception, when it represents a blind pool ofcapital, secondary investing allows detailed analysis of a fund's assets. Usinga rigorous due diligence process, Pantheon evaluates funds on acompany-by-company basis. This bottom-up analysis allows Pantheon to determinewhich companies are critical to a portfolio's success and evaluate theirpotential value at the time of exit. This transparency may decrease investmentrisk.Embedded knowledge of portfolios also enhances Pantheon's ability to assess andvalue portfolios accurately. Pantheon frequently has performance andoperational information on the assets for sale in the secondary market due toits position as an advisor or manager to existing investors in the fund,investment in a portfolio company through another fund or previous contact
withthe fund manager.Discount to Fair Market ValuePantheon undertakes detailed analysis on underlying assets in a portfolio toestablish value. Discounts to assessed fair market value may be applied toreflect the quality of the assets, the seller's motivation to divest, marketconditions and the illiquid nature of the asset class. In certain circumstancesa fund interest may be acquired at a premium to NAV, depending on asset qualityand fund manager valuation policy among other factors.
Time and Vintage Diversification
Secondary investment is a tool which enables investors in private equity to addan element of retrospective vintage diversification to their portfolios bybuying into a range of mature funds, typically three to six years into theirlives. This additional diversification serves to mitigate private equityinvestment risk at the portfolio level.
Current Outlook
The Manager believes that an oversupply of capital to the private equity marketfrom 2006 to 2008 and regulatory changes will continue to provide a stimulusfor an attractive market opportunity for secondaries. Furthermore, an emphasison secondary investing in the coming year will enable the Company to continueto enhance its financial strength by focusing on investments that have ashorter duration than new funds invested through the primary market.
OBJECTIVE AND INVESTMENT POLICY
The Company's primary investment objective is to maximise capital growth byinvesting in a diversified portfolio of private equity funds and, occasionally,directly in private companies.
The Company's policy is to make unquoted investments, in general, bysubscribing for investments in new private equity funds and buying secondaryinterests in existing private equity funds and, occasionally, by acquiringdirect holdings in unquoted companies, usually either where a vendor is seekingto sell a combined portfolio of fund interests and direct holdings or wherethere is a private equity manager, well known to the Company's Manager,investing on substantially the same terms.The Company may invest in private equity funds which are quoted. In addition,the Company may from time to time hold quoted investments in consequence ofsuch investments being distributed to the Company from its fund investments orin consequence of an investment in an unquoted company becoming quoted. TheCompany will not otherwise normally invest in quoted securities although theCompany reserves the right to do so should this be deemed to be in theinterests of the Company.The Company may invest in any type of financial instrument, including equityand non-equity shares, debt securities, subscription and conversion rights andoptions in relation to such shares and securities and interests in partnershipsand limited partnerships and other forms of collective investment scheme.Investments in funds and companies may be made either directly or indirectly,through one or more holding, special purpose or investment vehicles in whichone or more co-investors may also have an interest.The Company employs a policy of over-commitment. This means that the Companymay commit more than its available uninvested assets to investments in privateequity funds on the basis that such commitments can be met from anticipatedfuture cash flows to the Company and through the use of borrowings and capitalraisings where necessary.The Company's policy is to adopt a global investment approach. The Company'sstrategy is to mitigate investment risk through diversification of itsunderlying portfolio by geography, sector and investment stage. Since theCompany's assets are invested globally on the basis, primarily, of the meritsof individual investment opportunities, the Company does not adopt maximum orminimum exposures to specific geographic regions, industry sectors or theinvestment stage of underlying investments.
In addition, the Company adopts the following limitations for the purpose ofdiversifying investment risk:
› the requirement for approval as an investment trust that no holding in acompany will represent more than 15% by value of the Company's investments atthe time of investment;› the aggregate of all the amounts invested by the Company in (includingcommitments to or in respect of) funds managed by a single management group maynot, in consequence of any such investment being made, form more than 20% ofthe aggregate of the most recently determined gross asset value of the Companyand the Company's aggregate outstanding commitments in respect of investmentsat the time such investment is made;
› the Company will invest no more than 15% of its total assets in otherUK-listed closed-ended investment funds (including UK-listed investmenttrusts).
The Company may invest in funds and other vehicles established and managed oradvised by Pantheon or any Pantheon affiliate. In determining thediversification of its portfolio and applying the manager diversificationrequirement referred to above, the Company looks through vehicles establishedand managed or advised by Pantheon or any Pantheon affiliate.
The Company may enter into derivatives transactions for the purposes ofefficient portfolio management and hedging (for example, hedging interest rate,currency or market exposures).
Surplus cash of the Company may be invested in fixed interest securities, bankdeposits or other similar securities.
The Company may borrow to make investments and typically uses its borrowingfacilities to manage its cash flows flexibly, enabling the Company to makeinvestments as and when suitable opportunities arise and to meet calls inrelation to existing investments without having to retain significant cashbalances for such purposes. Under the Company's articles of association, theCompany's borrowings may not at any time exceed 100% of the Company's net assetvalue. Typically, the Company does not expect its gearing to exceed 30% ofgross assets. However, gearing may exceed this in the event that, for example,the Company's pipeline of future cash flows alters.The Company may invest in private equity funds, unquoted companies or specialpurpose or investment holding vehicles which are geared by loan facilities thatrank ahead of the Company's investment. The Company does not adopt restrictionson the extent to which it is exposed to gearing in funds or companies in whichit invests.THE DIRECTORS
The Directors in office during the year and at the date of this report are:
Tom Bartlam (Chairman)
Ian Barby (Audit Committee Chairman)
Richard CrowderPeter ReadmanRhoddy SwireSandy Thomson
EXTRACTS FROM THE DIRECTORS' REPORT
The Directors have pleasure in presenting their report together with theaudited financial statements of the Company for the year ended 30th June 2011 .
BUSINESS REVIEW
The Business Review which follows is designed to provide shareholders withinformation about the Company's business and results in the year to 30th June2011 . It should be read in conjunction with the Chairman's Statement andManager's Review.
Business and Strategy
Pantheon International Participations PLC (the "Company" or "PIP"), aclosed-ended investment trust, is the longest established private equityfund-of-funds quoted on the London Stock Exchange. It enables investors to gainaccess to a substantial portfolio of unquoted companies in the USA, Europe andAsia, within funds managed by experienced private equity managers selected fortheir ability to outperform.PIP's primary investment objective is to maximise capital growth by investingin a diversified portfolio of private equity funds and, occasionally, directlyin private companies. The Company's full Objective and Investment Policy areset out above.
The Company was incorporated and registered in England and Wales on 16 July1987 . It is registered as a public limited company and is an investment companyas defined by Section 833 of the Companies Act 2006. It is a member of TheAssociation of Investment Companies ("AIC").
The Company has received written approval from HM Revenue & Customs ("HMRC") as anauthorised investment trust under Section 1158/59 of the Corporation Tax Act2010 for the year ended 30th June 2010. This approval is subject to there beingno subsequent enquiry under corporation tax self-assessment. The Company hasbeen approved as an investment trust for all previous years. It is the opinionof the Directors that the Company has subsequently directed its affairs so asto enable it to continue to qualify for such approval.New regulations for obtaining and retaining investment trust status have beenpublished by HMRC and, subject to finalisation, these are expected to come intoforce in 2012. Overall these changes should be beneficial for the investmenttrust industry and no negative impact on the Company is anticipated. Anapplication for approval as an investment trust must be made within 90 daysafter the end of the first accounting period of the Company followingimplementation of the new regime. If the application is accepted, the Companywill be treated as an investment trust company for that period and for eachsubsequent accounting period (subject to any subsequent serious breaches of theregulations).The Company's status as an investment trust allows it to obtain an exemptionfrom paying capital gains tax on the profits made from the sale of itsinvestments. Investment trusts offer a number of advantages for investors,including access to investment opportunities that might not be open to privateinvestors and to professional stock selection skills at low cost.
Principal Risks and Uncertainties Facing the Company
The Company invests principally in private equity funds. However, the Company'sstrategy is to adopt a global fund-of-funds investment programme, maximisingreturns through selection of the best available funds, and to mitigateinvestment risk through diversification of the underlying portfolio bygeography, investment stage and sector. The principal risks facing the Companyinclude the following:
Funding of investment commitments
In the normal course of its business, the Company typically has outstandingcommitments to private equity funds which are substantial relative to theCompany's assets. The Company's ability to meet these commitments is dependentupon it receiving cash distributions (the timing and amount of which can beunpredictable) from its private equity investments and, to the extent these areinsufficient, on the availability of financing facilities.
Risks relating to investment opportunities
There is no guarantee that the Company will find sufficient suitable investmentopportunities, or that the private equity funds in which it invests will findsuitable investment opportunities, to achieve the level of diversificationwhich the Company seeks to achieve in relation to its investment portfolio.
Financial risk of private equity
The Company invests in private equity funds and unquoted companies which areless readily marketable than quoted securities and may take a long time torealise. In addition, such investments may carry a higher degree of risk thaninvestments in quoted securities. The Company may be adversely affected bythese risks notwithstanding the level of diversification which it seeks toachieve in relation to its investment portfolio.
Long-term nature of private equity investments
Private equity investments are long-term in nature and may take some yearsbefore reaching a level of maturity at which they can be realised. Accordingly,it is possible that the Company may not receive a return on investments made byit for a number of years.Liquidity risk
Due to the Company's investment policy, a large proportion of the Company'sportfolio comprises indirect participations in unquoted investments and directholdings in unquoted investments. Such investments are less readily marketablethan quoted securities and realisation of these investments may require alengthy time period or may result in distributions in kind to the Company.
Valuation uncertainty
In valuing its investments in private equity funds and unquoted companies andin publishing its net asset value, the Company relies to a significant extenton the accuracy of financial and other information provided by these funds andcompanies to the Manager. There is potential for inconsistency in the valuationmethods adopted by these funds and companies. In addition, the informationprovided is typically more than 90 days old at the time the net asset value ofthe Company's shares is reported.
Gearing
The Company has four-year committed revolving dollar and euro credit facilitieswith The Royal Bank of Scotland plc and Lloyds TSB Bank plc. As at 30th June2011 these facilities were undrawn. At 30th June 2011 the Company hadborrowings of £100.5m in the form of unsecured subordinated loan notes (2010: total borrowings of £127m).The use of gearing can cause both gains and losses in the asset value of theCompany to be magnified. The Company may also invest in private equity funds orunquoted companies which are geared by loan facilities that rank ahead of theCompany's investment both for payment of interest and capital. As aconsequence, the Company may be exposed to gearing through the borrowings fromtime to time of such private equity funds and companies, therefore investmentin such assets presents a higher risk as to their capital return.
Foreign currency risk
The Company makes investments in US dollars, euros and other currencies as wellas sterling. Accordingly, the Company is exposed to currency exchange ratefluctuations.
Competition
The Company competes for investments with other investors. It is possible thatcompetition for appropriate investment opportunities may increase, thusreducing the number of opportunities available and adversely affecting theterms upon which such investments can be made.
Unregulated nature of underlying investments
The private equity funds and underlying unquoted investments that form thebasis of the majority of the Company's portfolio are not subject to regulationby the Financial Services Authority or an equivalent regulatory body. Funds andunquoted companies in which the Company invests (directly or indirectly) may bedomiciled in jurisdictions which do not have a regulatory regime which providesan equivalent level of investor protection to that provided under the laws
ofthe United Kingdom.Defaults on commitments
If, in consequence of any failure to meet a demand for payment of anyoutstanding unpaid capital commitment of the Company to any private equity fundin which the Company has invested, the Company is treated as a defaultinginvestor by that fund, the Company may suffer a resultant dilution in itsinterest in that fund and, possibly, the compulsory sale of that interest.
Taxation
Any change in the Company's tax status or in taxation legislation or practicecould affect the value of the investments held by and the performance of theCompany. In addition, the income and gains of the Company from its investmentsmay suffer withholding tax which may not be reclaimable in the countries wheresuch income and gains arise.
The Manager and other third party advisers
Like most investment trust companies, the Company has no employees and theDirectors are all non-executive. The Company is dependent upon the services ofPantheon Ventures (UK) LLP ("Pantheon") as Manager and may be adverselyaffected if the services of Pantheon cease to be available to the Company.
Other third party service providers on whom the Company relies include CapitaSinclair Henderson Limited, which provides administrative, accounting andcompany secretarial services, and HSBC Bank plc, which acts as Custodian inrespect of the Company's quoted equities and bonds.
Further information on risks
Further information on the principal risks the Company faces in its portfoliomanagement activities and the policies for managing these risks and the policyand practice with regard to financial instruments are summarised in Note 22
tothe financial statements.Review of 2010/2011Net asset valueThe Company's adjusted total net assets attributable to shareholders increasedduring the year to £733.1m (2010: £636.5m). The adjusted net asset value perordinary share and redemption value per redeemable share was 1,104.12p at 30th June 2011 (2010: 958.71p).The adjusted net asset value per share excludes the derivative asset relatingto the Company's standby subscription agreements with certain institutionsunder which those institutions can be called upon by the Company to subscribefor new redeemable shares in the Company ("Standby Commitments"). Under FRS 26,these agreements need to be included as an asset in the Company's financialstatements. The utilisation (such as that which took place on 24th August 2011in respect of £100.5m of the £150m standby facility) or expiry of the StandbyCommitments (which occurred with the cancellation of the remaining StandbyCommitments on 30th September 2011) will lead to a reversal of the asset in thefinancial statements at such times. The Board considers that the best measureof the Company's economic value to shareholders is the adjusted net asset valueper share (see Notes 13 and 16 to the financial statements for details of the adjustment).
Results and dividends
The results for the year are as set out in the Income Statement below. Thisshows that the Company's net revenue deficit on ordinary activities beforetaxation for the year was £3.4m (2010: deficit of £9.1m) and adjusted capitalreturns were £101.9m (2010: return of £133.1m) (excluding the loss on thederivative at fair value through profit or loss).
The Directors do not recommend the payment of a dividend in respect of the yearended 30th June 2011 (2010: nil).
Key performance indicators
The Board and the Manager monitor the following Key Performance Indicators:
1. The net asset value performance
PIP's adjusted net asset value per share increased by 15.2% to 1,104.12p in theyear to 30th June 2011. The net asset value returns over 1 year, 3 years, 5 years and 10 years and since inception are set out above. The 15.2% increase inPIP's adjusted net asset value per share compares with increases in the MSCIWorld Total Return (sterling) Index of 22.2% and the FTSE All-Share TotalReturn Index of 25.6% respectively.
2. The level of discount
PIP's ordinary share price during the year increased by 46.9% to 714p (2010: 486p) and the discount narrowed to 35.3% at the year end (2010: discount of49.3%) based on the adjusted net asset value.
3. The total expense ratio
The total expense ratio (calculated using average monthly net assets) of theCompany for the year ended 30th June 2011 was 1.45% (2010: 1.63%).
Future Developments
A review of the year to 30th June 2011 and the outlook for the coming year canbe found in the Chairman's Statement and the Manager's Review.
Share Capital
As at 30th June 2011 , the Company had 37,521,013 ordinary shares of £0.67 eachand 28,871,255 redeemable shares of £0.01 each in issue.
Subsequent to the year end, on 24th August 2011 the Company drew down £100,500,082.88 under commitments to subscribe for new redeemable shares of £0.01 each in the capital of the Company from the institutions with whom theCompany had entered into Standby Commitments. Simultaneously the Company repaid£100.5m of outstanding unsecured subordinated loan notes ("Loan Notes") held bythe same institutions. These actions effectively exchanged the full balance ofthe Loan Notes for new redeemable shares, and 9,102,279 new redeemable shares(with an aggregate nominal value of £91,022.79) were issued at a price of1,104.12p per share, being the adjusted net asset value per share as at 30th June 2011.
No shares were purchased by the Company and no shares were held in treasuryduring the year. Since the year end, 940,000 redeemable shares (with anaggregate nominal value of £9,400 and representing 3.3% of the redeemable sharecapital in issue on 30th June 2011 ) have been purchased in the market for atotal consideration of £6.5m. These shares have been placed into treasury.
As at the date of this report, the Company had shares in issue as shown in thetable below, all of which are admitted to trading on the London Stock Exchange:SHARE CAPITAL NUMBER OF % OF TOTAL VOTINGAND VOTING NUMBER OF VOTING RIGHTS SHARES RIGHTS RIGHTS AT SHARES ATTACHED TO HELD IN REPRESENTED
4TH OCTOBER 2011 IN ISSUE EACH SHARE TREASURY BY EACH CLASS ORDINARY SHARES OF 37,521,013 1 - 100
£0.67 EACH
REDEEMABLE SHARES 37,973,534 - 940,000 -
OF £0.01 EACH TOTAL VOTING 37,521,013 RIGHTS The redeemable shares do not carry any right to speak or vote at generalmeetings of the Company, including on resolutions authorising the issue orbuyback of shares, although holders of redeemable shares are entitled toreceive notice of general meetings of the Company and to attend such meetings.Redeemable shares do carry the right to vote at separate class meetings of theholders of redeemable shares. The sanction of holders of redeemable shares isrequired to various of corporate actions set out in the Articles ofAssociation.There are: no restrictions concerning the transfer of securities in theCompany; no special rights with regard to control attached to securities; noagreements between holders of securities regarding their transfer known to theCompany; and no agreements which the Company is party to that might affect itscontrol following a successful takeover bid.
Further details of the rights attaching to each of the Company's classes ofshare are included in Note 14 to the financial statements.
Amendment of the Company's Articles of Association and the giving ofauthorities to issue or buy back the Company's shares require an appropriateresolution to be passed by shareholders. Proposals for the renewal of theBoard's current authorities to issue and buy back shares are detailed in theAnnual Report and Accounts 2011.
Social, Environmental, Community and Employee Issues
The Company has no employees and the Board consists entirely of non-executiveDirectors. As an investment trust, the Company has no direct impact on thecommunity or the environment. The Manager is committed to the Principles forResponsible Investing and its policies which are set out in the Annual Reportand Accounts 2011. These Principles are integrated into Pantheon's investmentanalysis and decision-making process, as well as during post-investmentmonitoring.
Going Concern
The Company's business activities, together with the factors likely to affectits future development, performance and position, including its financialposition, are set out in the Chairman's Statement and Manager's Review.
At each Board meeting, the Directors review the Company's latest managementaccounts and other financial information. Its commitments to private equityinvestments are reviewed, together with its financial resources, including cashheld and the Company's borrowing capability. One-year cash flow scenarios arealso presented to each meeting and discussed.After due consideration of the balance sheet and activities of the Company andthe Company's assets, liabilities, commitments and financial resources, theDirectors have concluded that the Company has adequate resources to continue inoperation for the foreseeable future. For this reason, they consider itappropriate to continue to adopt the going concern basis in preparing thefinancial statements.
The full Annual Report contains the following statements regardingresponsibility for the Annual Report and financial statements (references inthe following statements are to pages in the Annual Report).
STATEMENT OF DIRECTORS' RESPONSIBILITIESIN RESPECT OF THE FINANCIAL STATEMENTS
The Directors are responsible for preparing the Annual Report and the financialstatements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for eachfinancial year. Under that law the Directors have elected to prepare financialstatements in accordance with United Kingdom Accounting Standards (UnitedKingdom Generally Accepted Accounting Practice). The financial statements arerequired by law to give a true and fair view of the state of affairs of theCompany and of the profit or loss of the Company for that period. In preparingthese financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable UK accounting standards have been followed, subjectto any material departure disclosed and explained in the financial statements;and
• prepare the financial statements on the going concern basis unless it isinappropriate to presume that the Company will continue in business.
The Directors, to the best of their knowledge, state that:
• the financial statements, prepared in accordance with UK AccountingStandards, give a true and fair view of the assets, liabilities, financialposition and return of the Company; and
• this Annual Report includes a fair review of the development and performanceof the business and the position of the Company together with a description ofthe principal risks and uncertainties that it faces.The Directors are responsible for keeping adequate accounting records thatdisclose with reasonable accuracy at any time the financial position of theCompany and enable them to ensure that the financial statements comply with theCompanies Act 2006. The Directors are responsible for ensuring that theDirectors' Report and other information in the Annual Report is prepared inaccordance with Company law in the United Kingdom, and that the Annual Reportincludes information required by the Listing Rules of the Financial ServicesAuthority. They also have responsibility for safeguarding the assets of theCompany and hence for taking reasonable steps for the prevention and detectionof fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of thecorporate and financial information included on the Company's website.Legislation in the United Kingdom governing the preparation and disseminationof financial statements may differ from legislation in other jurisdictions.
On behalf of the Board
Tom BartlamChairman4th October 2011
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company'sstatutory accounts for the years ended 30th June 2011 and 2010 but is derivedfrom those accounts. Statutory accounts for 2010 have been delivered to theRegistrar of Companies, and those for 2011 will be delivered in due course. TheAuditors have reported on those accounts; their report was (i) unqualified,(ii) did not include a reference to any matters to which the Auditors drewattention by way of emphasis without qualifying their report and (ii) did notcontain a statement under Section 498 (2) or (3) of the Companies Act 2006. Thetext of the Auditors' report can be found in the Company's full Annual Reportand Accounts at www.pipplc.com.INCOME STATEMENTYEAR ENDED 30th JUNE 2011 2011 2010 AS RESTATED REVENUE CAPITAL TOTAL* REVENUE CAPITAL TOTAL* NOTE £'000 £'000 £'000 £'000 £'000 £'000 Gains on 9b - 100,976 100,976 - 130,815 130,815 investments at fair value through profit or loss** Loss on derivatives - (10,404) (10,404) - (18,190) (18,190)contained in standby agreements at fair value through profit or loss
Currency gains on 19 - 911 911 - 2,758 2,758 cash and borrowings
Investment income 2 9,986 - 9,986 4,128 - 4,128 Investment 3 (8,836) - (8,836) (8,715) - (8,715) management fees Other expenses 4 (1,115) (37) (1,152) (668) (459) (1,127) RETURN ON ORDINARY 35 91,446 91,481 (5,255) 114,924 109,669 ACTIVITIES BEFORE FINANCING COSTS AND TAX Interest payable 6 (3,427) - (3,427) (3,840) - (3,840) and similar charges / finance costs RETURN ON ORDINARY (3,392) 91,446 88,054 (9,095) 114,924 105,829 ACTIVITIES BEFORE TAX Tax on ordinary 7 (1,920) - (1,920) (1,129) - (1,129) activities RETURN ON ORDINARY (5,312) 91,446 86,134 (10,224) 114,924 104,700 ACTIVITIES AFTER TAX FOR THE FINANCIAL YEAR RETURN PER ORDINARY 8 (8.00)p 137.73p 129.73p (15.40)p 173.10p 157.70p AND REDEEMABLE SHARE ADJUSTED RETURN PER 8 (8.00)p 153.41p 145.41p (15.40)p 200.50p 185.10p ORDINARY AND REDEEMABLE SHARE DILUTED RETURN PER 8 (6.64)p 114.34p 107.70p (12.46)p 140.09p 127.63p ORDINARY AND REDEEMABLE SHARE * The total column of this statement represents the Company's profit and lossaccount prepared in accordance with UK Accounting Standards. The supplementaryrevenue return and capital columns are prepared under guidance published by theAssociation of Investment Companies.
** Includes currency movements on investments.
The amounts for 2010 have been restated to reflect the inclusion of aderivative asset relating to the Company's standby commitments (see Notes 13and 20).
All revenue and capital items in the above statement derive from continuingoperations.
No operations were acquired or discontinued during the year.
There were no recognised gains or losses other than those passing through theIncome Statement.
The Notes form part of these financial statements.
RECONCILIATION OF MOVEMENTS IN EQUITY SHAREHOLDERS' FUNDS
CAPITAL CAPITAL OTHER RESERVE ON SHARE SHARE REDEMPTION CAPITAL INVESTMENTS SPECIAL REVENUE CAPITAL PREMIUM RESERVE RESERVE HELD
RESERVE RESERVE TOTAL
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Movement for the year ended 30th June 2011 OPENING EQUITY 25,428 183,184 26 249,366 192,828 99,861 (50,234) 700,459 SHAREHOLDERS' FUNDS Return for the year - - - 39,424 52,022 - (5,312) 86,134 CLOSING EQUITY 25,428 183,184 26 288,790 244,850 99,861 (55,546) 786,593 SHAREHOLDERS' FUNDS Movement for the year ended 30th June 2010 as restated OPENING EQUITY 25,428 183,184 26 257,729 69,541 99,861 (40,010) 595,759 SHAREHOLDERS' FUNDS Return for the year - - - (8,363) 123,287 - (10,224) 104,700 CLOSING EQUITY 25,428 183,184 26 249,366 192,828 99,861 50,234) 700,459 SHAREHOLDERS' FUNDS
The Notes form part of these financial statements.
The amounts for 2010 have been restated to reflect the inclusion of aderivative asset relating to the Company's standby commitments (see Notes 13and 20).BALANCE SHEETas at 30th JUNE 2011 2011 2010 AS RESTATED NOTE £'000 £'000 Fixed assets
Investments designated at 9a/b 815,868 763,304 fair value through profit or
loss Current assets Debtors 11 2,440 917
Derivatives contained in 13 53,543 63,947 standby agreements at fair
value through profit and loss Cash at bank 18 27,645 6,431 83,628 71,295 Creditors: Amounts falling due within one year Other creditors 12 12,403 6,916 Bank loan 18 - 77,724 Loan notes 12 100,500 49,500 112,903 134,140 NET CURRENT LIABILITIES (29,275) (62,845) NET ASSETS 786,593 700,459 Capital and reserves Called-up share capital 14 25,428 25,428 Share premium 15 183,184 183,184
Capital redemption reserve 15 26 26
Other capital reserve 15 288,790 249,366 Capital reserve on 15 244,850 192,828 investments held Special reserve 15 99,861 99,861 Revenue reserve 15 (55,546) (50,234) TOTAL EQUITY SHAREHOLDERS' 786,593 700,459 FUNDS
NET ASSET VALUE PER SHARE - 16 1,184.77p 1,055.03p ORDINARY AND REDEEMABLE
ADJUSTED NET ASSET VALUE PER 16 1,104.12p 958.71p SHARE - ORDINARY AND
REDEEMABLE
DILUTED NET ASSET VALUE PER 16 1,104.12p 958.71p SHARE - ORDINARY AND
REDEEMABLE
The Notes form part of these financial statements.
The amounts for 2010 have been restated to reflect the inclusion of aderivative asset relating to the Company's standby commitments (see Notes 13and 20).
The financial statements were approved by the Board on 4th October 2011 andwere signed on its behalf by
TOM BartlamChairmanCompany No: 2147984CASH FLOW STATEMENTYEAR ENDED 30TH JUNE 2010 2011 2010 NOTE £'000 £'000 Cash flow from operating activities Investment income received 9,848 4,121 Deposit and other interest received 2 7 Investment management fees paid (8,873) (12,236) Secretarial fees paid (186) (178) Other cash payments (808) (3,382) NET CASH OUTFLOW FROM OPERATING 19 (17) (11,668) ACTIVITIES Servicing of finance Revolving credit facility and (501) (1,804) overdraft interest paid
Loan commitment and arrangement fees (1,752) (341) paid
Redeemable share commitment fees paid (312) (640) Interest on loan notes paid (1,831) (1,105) NET CASH OUTFLOW FROM SERVICING OF (4,396) (3,890) FINANCE Tax Net tax paid (1,920) (1,129) NET CASH OUTFLOW FROM TAX (1,920) (1,129) Capital expenditure and financial investment Purchases of investments (113,761) (75,857) Purchases of government securities (10,874) - Disposals of investments 167,053 118,188 Disposals of government securities 10,874 - NET CASH INFLOW FROM CAPITAL 53,292 42,331 EXPENDITURE AND FINANCIAL INVESTMENT NET CASH INFLOW BEFORE FINANCING 46,959 25,644 Financing Drawdown of loan 3,755 - Repayment of loan (80,839) (41,094) Issue of loan notes 51,000 - NET CASH OUTFLOW FROM FINANCING (26,084) (41,094) INCREASE / (DECREASE) IN CASH 17 20,875 (15,450)
The Notes form part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting Policies
A summary of the principal accounting policies, all of which have been appliedconsistently throughout the year, is set out below.
(A) Basis of Preparation
The financial statements have been prepared on the historical cost basis ofaccounting, except for the measurement at fair value of investments andfinancial instruments, and in accordance with applicable UK accountingstandards and on the basis that all activities are continuing. The Company'sfinancial statements are presented in sterling and all values are rounded tothe nearest thousand pounds (£'000) except when indicated otherwise.Following the recognition of the Company's Standby Commitment agreements as afinancial asset and treatment as derivatives in compliance with FRS 26Financial Instruments - Recognition and Measurement, the figures for 2010 havebeen restated. Please refer to Note 20 for further disclosures.
(B) Statement of Recommended Practice
The financial statements have been prepared in accordance with the Statement ofRecommended Practice (as amended in January 2009) for the financial statementsof investment trust companies and venture capital trusts issued by theAssociation of Investment Companies.
(C) Segmental Reporting
The Directors are of the opinion that the Company is engaged in a singlesegment of business, being investment business.
(D) Valuation of Investments
All investments held by the Company are classified as "fair value throughprofit or loss". As the Company's business is investing in financial assetswith a view to profiting from their total return in the form of interest,dividends or increases in fair value, quoted equities and fixed incomesecurities are designated as fair value through profit or loss on initialrecognition. The Company manages and evaluates the performance of theseinvestments on a fair value basis in accordance with its investment strategy.For investments actively traded in organised financial markets, fair value isgenerally determined by reference to Stock Exchange quoted market bid prices atthe close of business at the balance sheet date. For investments that are notactively traded in organised financial markets, fair value is determined usingreliable valuation techniques as described below:
(i) Unquoted fixed asset investments are stated at the estimated fair value.
In the case of investments in private equity funds, this is based on the netasset value of those funds ascertained from periodic valuations provided by themanagers of the funds. Such valuations are necessarily dependent upon thereasonableness of the valuations by the fund managers of the underlyinginvestments. In the absence of contrary information the values are assumed tobe reasonable. These valuations are reviewed periodically for reasonableness.In the case of direct investments in unquoted companies, the initial valuationis based on the transaction price. Where better indications of fair valuebecome available, such as through subsequent issues of capital or dealingsbetween third parties, the valuation is adjusted to reflect the new evidence.This information may include the valuations provided by private equity managerswho are also invested in the company. Valuations are reduced where thecompany's performance is not considered satisfactory.Private equity funds may contain a proportion of quoted shares from time totime, for example, where the underlying company investments have been takenpublic but the holdings have not yet been sold. The quoted market holdings atthe date of the latest fund accounts are reviewed and compared with the valueof those holdings at the year end. If there has been a material movement in thevalue of these holdings, the valuation is adjusted to reflect this.
(ii) Quoted investments are valued at the bid price on the relevant stockexchange.
(iii) The Company may acquire secondary interests at either a premium or adiscount to the fund manager's valuation. Within the Company's portfolio, thosefund holdings purchased at a premium are normally immediately revalued to theirstated net asset values irrespective of the purchase price. Those fund holdingspurchased at a discount are normally held at cost until the receipt of avaluation from the fund manager in respect of a date after acquisition, whenthey are revalued to their stated net asset values, unless an adjustmentagainst a specific investment is considered appropriate.
As at 30th June 2011 there was no aggregate difference to be recognised in theprofit or loss at the start or end of the period.
(E) Income
Dividends receivable on quoted equity shares are brought into account on theex-dividend date.
Dividends receivable on equity shares where no ex-dividend date is quoted arebrought into account when the Company's right to receive payment isestablished. The fixed return on a debt security is recognised on a timeapportionment basis so as to reflect the effective interest rate on thesecurity.
Other interest receivable is included on an accruals basis.
(F) Taxation
Corporation tax payable is based on the taxable profit for the year. The chargefor taxation takes into account taxation deferred or accelerated because oftiming differences between the treatment of certain items for accounting andtaxation purposes. Full provision for deferred taxation is made under theliability method, without discounting, on all timing differences that havearisen but not reversed by the balance sheet date, unless such provision is notpermitted by FRS 19 Deferred Tax.
The tax effect of different items of income/gain and expenditure/loss isallocated between capital and revenue on the same basis as the particular itemto which it relates, using the marginal method.
(G) Expenses
All expenses are accounted for on an accruals basis. Expenses, includinginvestment management fees, are charged through the revenue account except asfollows:
• expenses which are incidental to the acquisition or disposal of an investmentare treated as capital costs and separately identified and disclosed in Note 9;
• expenses of a capital nature are accounted for through the capital account;and
• investment performance fees.
(H) Foreign Currency
The currency of the Primary Economic Environment in which the Company operates("the functional currency") is pounds sterling ("sterling"), which is also thepresentation currency. Transactions denominated in foreign currencies arerecorded in the local currency at actual exchange rates as at the date oftransaction or, where applicable, at the rate of exchange in a related forwardexchange contract. Monetary assets and liabilities denominated in foreigncurrencies at the year end are reported at the rates of exchange prevailing atthe year end or, where appropriate, at the rate of exchange in a relatedforward exchange contract. Any gain or loss arising from a change in exchangerates subsequent to the date of the transaction is included as an exchange gainor loss in the Income Statement. For non-monetary assets these are covered
byfair value adjustments.(I) Other Capital Reserve
The following are accounted for in this reserve:
• investment performance fees;
• gains and losses on the realisation of investments;
• realised exchange differences of a capital nature; and
• expenses of a capital nature.
Capital distributions from investments are accounted for on a reducing costbasis; cash received is first applied to reducing the historical cost of aninvestment; any gain will be recognised as realised only when the cost has beenreduced to nil.
(J) Capital Reserve on Investments Held
The following are accounted for in this reserve:
• increases and decreases in the value of investments held at the year end.
(K) Investment Performance Fee
The Manager is entitled to a performance fee from the Company in respect ofeach 12 calendar month period ending on 30th June in each year. The fee payablein respect of each such period is 5% of any increase in the adjusted net assetvalue of the Company at the end of such period over the applicable "high-watermark" plus the hurdle rate of 10%.The applicable "high-water mark" in respect of any calculation period is theadjusted net asset value at the end of the previous calculation period in whicha performance fee was payable, compounded annually at the hurdle rate for eachsubsequent completed calculation period up to the commencement of thecalculation period for which the performance fee is being calculated.
(L) Derivatives
The derivative is comprised of standby commitments allowing the Company to callupon certain institutions to subscribe for new redeemable shares (see Note 13).It is accounted for as a financial asset at fair value through profit and lossand any gains or losses are analysed within the Income Statement as a capitalreturn.The derivative value represents the difference between the quoted price of theredeemable shares and the adjusted NAV per share multiplied by the number ofredeemable shares that would be issued (at adjusted NAV per share) assuming afull drawdown of £150m under the standby commitments. The time value is notconsidered in valuing the asset as its effect is deemed immaterial.2. Income 30TH JUNE 30TH JUNE 2011 2010 £'000 £'000 Income from investments Unfranked investment 9,984 4,121 income 9,984 4,121 Other income Exchange differences on 2 7 income 2 7 TOTAL INCOME 9,986 4,128 Total income comprises: Dividends 9,982 4,121 Interest 2 - Exchange differences on 2 7 income 9,986 4,128 Analysis of income from investments Unlisted 9,982 4,121 Listed 2 - 9,984 4,121
3. Investment Management Fees
30TH JUNE 30TH JUNE 2011 2010 REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL £'000 £'000 £'000 £'000 £'000 £'000 Investment management 8,836 - 8,836 8,715 - 8,715 fees 8,836 - 8,836 8,715 - 8,715
The investment management fee is payable monthly in arrears at the rate set outin the Directors' Report in the full Annual Report and Accounts 2011. At 30thJune 2011 £1,506,000 (2010: £1,543,000) was owed for investment managementfees. A performance fee of £5,057,000 is payable to the Manager at the year end(see Note 12) in respect of the initial 18 month performance fee calculationperiod ended 30th June 2008. Of this amount £3,660,000 was charged in the yearto 30th June 2008 with the remaining balance charged in the year to 30th June2007. No performance fee is payable in respect of the 12 calendar month periodto 30th June 2011. The basis upon which the performance fee is calculated isexplained in Note 1(K) and in the Directors' Report.4. Other Expenses 30TH 30TH JUNE JUNE 2011 2010 REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL £'000 £'000 £'000 £'000 £'000 £'000 Secretarial and 185 - 185 180 - 180 accountancy services Fees payable to the 38 - 38 40 - 40 Company's Auditors for the audit of the annual financial statements Fees payable to the Company's Auditors for other services: - all other services 27 - 27 17 - 17 Directors' remuneration 145 - 145 145 - 145 (see Note 5) Irrecoverable VAT 74 - 74 (274) - (274) Legal and professional 328 37 365 304 459 763 fees Printing 65 - 65 61 - 61 Other 253 - 253 195 - 195 1,115 37 1,152 668 459 1,127
The Directors do not consider that the provision of non-audit work to theCompany affects the independence of the Auditors.
5. Directors' Remuneration
Directors' emoluments comprise wholly Directors' fees. A breakdown is providedin the Directors' Remuneration Report.
6. Interest Payable and Similar Charges
30TH JUNE 30TH JUNE 2011 2010 £'000 £'000 Bank loan and overdraft 477 1,828 interest Loan commitment and 807 366 arrangement fees Redeemable share commitment 312 541 fee Loan notes interest 1,831 1,105 3,427 3,840
7. Tax on Ordinary Activities
30TH JUNE 2011 30TH JUNE 2010 AS RESTATED REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL £'000 £'000 £'000 £'000 £'000 £'000 Withholding tax deducted 1,920 - 1,920 1,129 - 1,129 from distributions Current tax
The current tax for the year differs from the standard rate of corporation tax in the UK (26%). The differences are explained below: Net return on ordinary (3,392) 91,446 88,054 (9,095) 114,924 105,829 activities before tax Theoretical tax at UK (933) 25,148 24,215 (2,547) 32,179 29,632 corporation tax rate of 27.5%* (2010: 28%) Non-taxable investment, - (25,159) (25,159) - (32,307) (32,307)derivative and currency gains Effect of expenses in - 11 11 - 128 128 excess of taxable income Unused management 933 - 933 2,547 - 2,547 expenses Withholding tax deducted (1,920) - (1,920) (1,129) - (1,129) from distributions TOTAL CURRENT TAX (1,920) - (1,920) (1,129) - (1,129)
* The corporation tax rate applied is based on the average tax rate for thefinancial year ended 30th June 2011 .
Factors That May Affect Future Tax Charges
The Company is an investment trust and therefore is not subject to tax oncapital gains. Deferred tax is not provided on capital gains and losses arisingon the revaluation or disposal of investments because the Company meets (andintends to meet for the foreseeable future) the conditions for approval as aninvestment trust company.No deferred tax asset has been recognised in respect of excess managementexpenses and expenses in excess of taxable income as they will only berecoverable to the extent that there is sufficient future taxable revenue. Asat 30th June 2011 excess management expenses are estimated to be in excess of £95m (2010: £70m).8. Return per Share 30TH JUNE 2011 30TH JUNE 2010 AS RESTATED REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL Return on ordinary (5,312) 91,446 86,134 (10,224) 114,924 104,700 activities after tax for the financial year in £'000 Loss on derivatives - 10,404 10,404 - 18,190 18,190 contained in standby agreements in £'000 Adjusted return on (5,312)101,850 96,538 (10,224) 133,114 122,890 ordinary activities after tax for the financial year in £'000* Ordinary and 66,392,268 66,392,268 redeemable shares Ordinary and 79,977,748 82,038,292 redeemable shares
following issue of new redeemable shares** Return per ordinary (8.00)p 137.73p 129.73p (15.40)p 173.10p 157.70p and redeemable share Adjusted return per (8.00)p 153.41p 145.41p (15.40)p 200.50p 185.10p ordinary and redeemable share* Diluted return per (6.64)p 127.35p 120.71p (12.46)p 162.26p 149.80p ordinary and redeemable share**
* The adjusted return excludes the unrealised loss on the derivative (see Note13) and is directly comparable to previously published return per sharefigures.
** The diluted return has been calculated on the basis of the total drawdown ofStandby Commitments of £150m. Using the 30th June 2011 adjusted net asset valueper share, the Company would have issued 13,585,480 new redeemable shares andreversed the loss on the derivative asset included in the return on ordinaryactivities.9a. Movements on Investments 30TH JUNE 30TH JUNE 2011 2010 £'000 £'000 Book cost brought forward 571,599 579,787 Acquisitions at cost 130,023 75,857 Capital distributions - proceeds (178,435) (91,575)
Capital distributions - realised gains 48,925 7,530 on sales
BOOK COST AT 30TH JUNE 572,112 571,599 Unrealised appreciation of investments Unlisted investments 243,756 191,705
VALUATION OF INVESTMENTS AT 30TH JUNE 815,868 763,304
9b. Analysis of Investments
30TH JUNE 30TH JUNE 2011 2010 £'000 £'000 Sterling Unlisted investments 44,741 37,497 Listed investments - - 44,741 37,497 US dollar Unlisted investments 553,359 562,010 Listed investments 544 470 553,903 562,480 Euro Unlisted investments 200,979 156,402 Listed investments* 5,419 - 206,398 156,402 Other Unlisted investments 10,826 6,925 Listed investments - - 10,826 6,925 815,868 763,304 Realised profits on sales 48,925 7,530
Amounts previously recognised as unrealised (306) 1,630 appreciation on those sales
Increase in unrealised appreciation 52,357 121,655 GAINS ON INVESTMENTS 100,976 130,815
* The listed investments denominated in euros are wholly comprised of treasurybills.
Further analysis of the investment portfolio is provided in the Manager'sReview.
Transaction costs incidental to the acquisition of investments totalled £nil(2010: £nil) and to the disposals of investments totalled £23,000 (2010: £16,000) for the year.
9c. Acquisition of Investments
In June 2011 the Company announced that it had resumed its investment programmewith the acquisition of a global secondary portfolio.
10. Fair Value Hierarchy
Financial Assets at Fair Value Through Profit or Loss at 30th June 2011
TOTAL LEVEL 1 LEVEL 2 LEVEL 3 £'000 £'000 £'000 £'000 Unlisted holdings 809,905 - - 809,905 Derivative asset 53,543 - - 53,543 Listed holdings 5,963 5,963 - - 869,411 5,963 - 863,448 Level 3 Financial Assets at Fair Value Through Profit or Loss at 30th June 2011 PRIVATE EQUITY INVESTMENTS AND DERIVATIVE ASSET TOTAL £'000 £'000 Opening balance 762,834 762,834 Derivative asset recognised 63,947 63,947 Opening balance as restated* 826,781 826,781 Purchases at cost 113,761 113,761 Sales proceeds (167,561) (167,561) Total gains or losses included in "Gains on investments" in the income statement - on assets sold 48,804 48,804 - foreign exchange gain on 121 121 disposal - on assets held as at 30th June 41,542 41,542 2011 CLOSING BALANCE 863,448 863,448
* The opening balance has been restated following the recognition of aderivative asset (see Note 13).
11. Debtors 30TH JUNE 2011 30TH JUNE 2010 £'000 £'000 Amounts owed by investment funds 1,086 540 Prepayments and accrued income 1,354 377 2,440 917
12. Creditors: Amounts Falling Due Within One Year
30TH JUNE 2011 30TH JUNE 2010 £'000 £'000 Investment management fees 1,506 1,543 Investment performance fee 5,057 5,057 Amounts owed to brokers 5,416 - Other creditors and accruals 424 316 Other creditors 12,403 6,916 Bank loan - 77,724 Loan notes 100,500 49,500 112,903 134,140 In June 2011 the Company entered into a new loan facility agreement with TheRoyal Bank of Scotland plc and Lloyds TSB Bank plc. Under the agreement, whichwill expire in June 2015, four-year committed revolving dollar and euro creditfacilities of $82m and €57m have been made available. Each individual drawdownbears interest at a variable rate agreed for the period of the drawdown. Inaddition, the Company has an overdraft facility of £5m with The Royal Bank ofScotland plc. At 30th June 2011 the sterling equivalent amount of £nil (30th June 2010: £77,724,000) was drawn down under the facilities.
Terms and Debt Repayment Schedule
Terms and conditions of outstanding loan notes were as follows:
2011 2010 NOTIONAL CARRYING CARRYING NOTIONAL AMOUNT AMOUNT INTEREST YEAR OF FACE VALUE FACE VALUE CURRENCY RATE MATURITY £'000 £'000 £'000 £'000 Unsecured GBP LIBOR* 2011** 100,500 100,500 49,500 49,500 subordinated +1.5% loan notes
* LIBOR is the published British Bankers' Association rate of interest for onemonth sterling deposits in the London interbank market on the date the interestperiod commences or the next business day if the interest commencement date isnot a business day. Interest is payable quarterly in arrears.** After the financial year end the Company announced its intention to drawdown commitments to subscribe for £100.5 million of new redeemable shares inthe capital of the Company, which would require an equivalent amount of theloan notes to be repaid under the terms of the loan note subscriptionagreements. The issue of new redeemable shares and the repayment of the loannotes was completed on 24th August 2011.13. Derivatives 30TH JUNE 2010 30TH JUNE 2011 AS RESTATED £'000 £'000 Beginning of year 63,947 82,137
Unrealised loss on derivatives (10,404) (18,190)
END OF YEAR 53,543 63,947
Between the years 2005 and 2008 PIP entered into standby commitments underwhich certain institutions agreed to subscribe up to an aggregate amount of
£150m for new redeemable shares in the Company when called upon by the Companyat a subscription price per share equal to the prevailing net asset value pershare at the time of subscription. In order to comply with FRS 26, the standbycommitments have to be treated as a derivative as the Company has the option torequire the institutions to subscribe for shares at a price (adjusted net assetvalue per share) which is different to the prevailing share price. Thederivative is valued as an asset accordingly (see Note 1(L) for moreinformation on the valuation of the derivatives).After the year end the Company announced its intentions to draw down under thestandby commitments and issued £100.5m of new redeemable shares on 24th August2011 (see Note 14).
The Company terminated the remaining standby commitments of £49.5m with effectfrom 30th September 2011 .
14. Called-up Share Capital 30TH JUNE 2011 30TH JUNE 2010 £'000 £'000 Allotted, called-up and fully paid: 37,521,013 (2010: 37,521,013) 25,139 25,139 ordinary shares of £0.67 each 28,871,255 (2010: 28,871,255) 289 289 redeemable shares of £0.01 each 25,428 25,428 After the year end the Company announced its intention to draw down commitmentsto subscribe for £100.5m of new redeemable shares of £0.01 each. Based on theadjusted net asset value per share of 1,104.12p as at 30th June 2011 (see Note16) 9,102,279 new redeemable shares were issued and admitted to trading on 24thAugust 2011.
Subsequently 940,000 redeemable shares were bought back in the market for atotal consideration, including commission and stamp duty, of £6,467,000. Theseshares are being held in treasury.
Redeemable shares rank equally with ordinary shares regarding dividend rightsand rights on winding up or return of capital (other than a redemption orpurchase of shares). The holders of redeemable shares have the right to receivenotice of and attend all general meetings of the Company but not to speak orvote. The holders of ordinary shares are entitled to one vote for each ordinaryshare held.The redeemable shares are redeemable at the option of the Company, at theprevailing adjusted net asset value per share, within 60 days following the endof each quarterly net asset value calculation date or within 60 days of anyother business day which is determined by the Directors to be a net asset valuecalculation date.15. Reserves CAPITAL CAPITAL OTHER RESERVE ON SHARE REDEMPTION CAPITAL INVESTMENTS SPECIAL REVENUE PREMIUM RESERVE RESERVE HELD* RESERVE RESERVE £'000 £'000 £'000 £'000 £'000 £'000 Beginning of year 183,184 26 249,366 192,828 99,861 (50,234) Net gain on - - 48,925 - - - realisation of investments Increase in - - - 52,357 - - unrealised appreciation Transfer on - - - (306) - - disposal of investments Loss on derivative - - (10,404) - - - Exchange - - 940 - - - differences on loan and currency Exchange - - - (29) - - differences on other capital items Legal and - - (37) - - - professional costs charged to capital Revenue return for - - - - - (5,312) the year END OF YEAR 183,184 26 288,790 244,850 99,861 (55,546)* Following the recognition of a derivative, the opening figure of the OtherCapital Reserve has been restated to include an unrealised loss in relation tothe derivative (see Note 13).
16. Net Asset Value per Share
The net asset values per share and the net assets attributable at the year endcalculated in accordance with the Articles of Association were as follows:
30TH JUNE 2010 30TH JUNE 2011 AS RESTATED Net assets attributable in £'000 786,593 700,459 Derivative asset contained in (53,543) (63,947) standby agreements in £'000 Adjusted net assets attributable in 733,050 636,512 £'000*
Ordinary and redeemable shares 66,392,268 66,392,268
Net asset value per share - ordinary 1,184.77p 1,055.03p and redeemable
Adjusted net asset value per share - 1,104.12p 958.71p ordinary and redeemable Diluted net assets attributable in £883,050 786,512 '000**
Ordinary and redeemable shares 79,977,748 82,038,573 following issue of new redeemable
shares** Diluted net asset value per share - 1,104.12p 958.71p ordinary and redeemable ** * The adjusted net asset value per share excludes a derivative asset (see Note13) relating to the Company's standby subscription commitments. The utilisation(such as that which took place on 24th August 2011 in respect of £100.5m of the£150m standby facility) or expiry of the standby commitments will lead to areversal of the asset in the financial statements at such times. The Directorstherefore consider that the best measure of the Company's economic value toshareholders is the adjusted net asset value per share which is directlycomparable to previously published net asset values per share.
The Company terminated the remaining standby commitments of £49.5m with effectfrom 30th September 2011 .
** The diluted net asset value per share has been calculated on the basis ofthe total drawdown of standby commitments of £150m. Using the 30th June 2011adjusted net asset value per share, the Company would have issued 13,585,480new redeemable shares (see Note 13) and the derivative would no longer be heldon the balance sheet.
17. Reconciliation of Net Cash Flow to the Movement in Net Debt
30TH JUNE 2011 30TH JUNE 2010 £'000 £'000 Increase / (decrease) 20,875 (15,450) in cash in year Non-cash movement - foreign exchange 339 1,960 gains CHANGE IN NET DEBT 21,214 (13,490) Net debt at beginning (120,793) (148,988) of year Loans drawn down (3,755) - Loans repaid 81,479 41,685 Loan notes (51,000) -
NET DEBT AT END OF (72,855) (120,793) YEAR
18. Analysis of Net Debt
AT 30TH JUNE AT 30TH JUNE 2011 2010 £'000 £'000 Cash at bank 27,645 6,431 Bank loan - (77,724) Loan notes (100,500) (49,500) (72,855) (120,793)
19. Reconciliation of Return on Ordinary Activities Before Financing Costs andTax to Net Cash Flow from Operating Activities
30TH JUNE 2011 30TH JUNE 2010 AS RESTATED £'000 £'000 Return on ordinary 91,481 109,669 activities before financing costs and tax Gains on investments (100,976) (130,815) Loss on derivative 10,404 18,190 Currency gains on cash (911) (2,758) and borrowings Increase / (decrease) 124 (6,143) in creditors (Increase) / decrease (139) 189 in other debtors NET CASH OUTFLOW FROM (17) (11,668) OPERATING ACTIVITIES 20. Prior Year AdjustmentsFollowing the recognition of the Company's Standby Commitments as a derivativeand inclusion as an asset (see Note 13) the figures for the 2010 financial yearhave been restated. An additional asset of £63,947,000 for 2010 has beenincluded, changing the net asset value as at 30th June 2010 to £700,459,000from £636,512,000. The value of the derivative represents the benefit to theCompany of being able to issue shares at adjusted net asset value rather thanthe Company's share price, which in 2011 and 2010 was lower than the adjustednet asset value per share. Due to the value of the derivative being dependenton the adjusted net asset value per share and the price of the redeemableshares as at the year end, an unrealised loss of £18,190,000 (see Note 13) hasbeen included in the capital column of the income statement for the year ended30th June 2010, representing the reduction in the value of the previouslyunrecognised asset as the gap between the Company's share price and its netasset value narrows. As a result, the total return on ordinary activities aftertax for the year ended 30th June 2010 has been restated to £104,700,000 from £122,890,000. Further disclosures for 2010 that have been restated include theReconciliation of Movements in Equity and Shareholders' Funds and Notes 7, 8,10, 13, 15, 16, 19 and 22.
21. Contingencies, Guarantees and Financial Commitments
At 30th June 2011 there were financial commitments outstanding of £242.8m(2010: £331m) in respect of investments in partly paid shares and interests inprivate equity funds.
22. Analysis of Financial Assets and Liabilities
The primary investment objective of the Company is to seek to maximiselong-term capital growth for its shareholders by investing in fundsspecialising in unquoted investments, acquiring unquoted portfolios andparticipating directly in private placements. Investments are not restricted toa single market but are made when the opportunity arises and on aninternational basis.
The Company's financial instruments comprise securities and other investments,cash balances and debtors and creditors that arise from its operations, forexample sales and purchases awaiting settlement and debtors for accrued income.
The principal risks the Company faces in its portfolio management activitiesare:
• liquidity/marketability risk;
• interest rate risk;• market price risk; and• foreign currency risk.
The Company has little exposure to credit risk. The Manager monitors thefinancial risks affecting the Company on a daily basis and the Directorsreceive financial information monthly, which is used to identify and monitorrisk.
In accordance with FRS 29 an analysis of financial assets and liabilities,which identifies the risk to the Company of holding such items, is given below.
Liquidity Risk
Due to the nature of the Company's investment policy, the largest proportion ofthe portfolio is invested in unquoted securities, many of which are lessreadily marketable than, for example, "blue-chip" UK equities. The Directorsbelieve that the Company, as a closed-end fund with no fixed wind-up date, isideally suited to making long-term investments in instruments with limitedmarketability. The investments in unquoted securities are monitored by theBoard on a monthly basis.There are limited opportunities for the Company to acquire secondary unquotedportfolios due to the cyclical nature of their occurrence. As a result, attimes of low investment opportunity, some funds may be invested in gilts andother fixed interest government bonds. It is the nature of investment inprivate equity that a commitment (see Note 21 for outstanding commitments as at30th June 2011) to invest will be made and that calls for payments will then bereceived from the unlisted investee entity. These payments are usually on anad-hoc basis and may be called at any instance over a number of years. TheCompany's ability to meet these commitments is dependent upon it receiving cashdistributions from its private equity investments, and to the extent these areinsufficient, on the availability of financing facilities. In order to coverany shortfalls, the Company has entered into revolving dollar and euro creditfacilities with The Royal Bank of Scotland Plc. In June 2011 a new agreementwas signed due to expire June 2015, which replaced the facility due to expirein May 2012. Under the new agreement the size of the facility has been reducedto $82m and €57m (down from $117.4m and €85.9 million respectively). At 30thJune 2011 the amount drawn down was the sterling equivalent of £nil (30th June2010: 77,724,000) (see Note 12 for further information).
The principal covenant that applies to the loan facility is that grossborrowings do not exceed 30% of adjusted gross asset value. All amounts payableunder the unsecured subordinated loan notes will be excluded from thecalculation of the Company's total gross borrowings for the purposes ofdetermining whether the financial covenant has been met.
Total available financing as at 30th June 2011 excluding Standby Commitmentsterminated in September 2011 , stood at £130.1m, comprising £27.6m in cashbalances, £102.5m (sterling equivalent) in undrawn bank facilities. Theavailable financing along with the private equity portfolio exceeded theoutstanding commitments by 3.9 times (2010: 2.8 times).
Interest Rate Risk
The Company may use gearing to achieve its investment objectives and managecash flows and uses a multi-currency revolving credit facility and unsecuredsubordinated loan notes for this purpose.
Interest on the revolving credit facility is payable at variable ratesdetermined subject to drawdown. Variable rates are defined as LIBOR or EURIBOR+ 2.75%, dependent on the currency drawn. The interest rate is then fixed forthe duration that the loan is drawn down. At 30th June 2011 there was thesterling equivalent of £nil funds drawn down on the loan facilities (30th June 2010: £77,724,000).Interest on the unsecured subordinated loan notes is payable quarterly inarrears at LIBOR + 1.5%. LIBOR is the published British Bankers' Associationrate of interest for 1 month sterling deposits in the London interbank marketon the date the interest period commences or the next business day if theinterest commencement date is not a business day. At 30th June 2011 there were£100.5m funds drawn down on the loan notes (30th June 2010: £49.5m). Fair valueis not considered to be materially different from par value. See the FinancialLiabilities section below for details of changes to the loan notes after theyear end.
The Company's bank accounts do not earn interest. Should any balance gooverdrawn then interest will become payable at variable rates.
Interest on the £150m standby subscription agreements is payable semi-annuallyin arrears at a fixed rate of 0.5% on the proportion not drawn throughunsecured subordinated loan notes. As at 30th June 2011 interest was incurredon £49.5m (2010: £100.5m).
The Company terminated the remaining Standby Commitments of £49.5m with effectfrom 30th September 2011 .
Non-interest rate exposure
The remainder of the Company's portfolio and current assets are not subject tointerest rate risks.
Financial assets for 2011 and 2010 consisted of investments, cash and debtors(excluding prepayments). As at 30th June 2011 , the interest rate risk andmaturity profile of the Company's financial assets was as follows:
FIXED INTEREST NO MATURES MATURES AVERAGE MATURITY WITHIN AFTER INTEREST TOTAL DATE 1 YEAR 1 YEAR RATE 30TH JUNE 2011 £'000 £'000 £'000 £'000 % Fair value interest rate risk financial assets Sterling - - - - - US dollar - - - - - Euro - - - - - Other - - - - - - - - - - Fair value no interest rate risk financial assets Sterling 100,062 46,519 53,543 - - US dollar 569,063 569,063 - - - Euro 218,092 212,673 5,419 - - Other 10,923 10,923 - - - 898,140 839,178 58,962 - -
The interest rate risk and maturity profile of the Company's financial assetsas at 30th June 2010 was as follows:
FIXED INTEREST NO MATURES MATURES AVERAGE MATURITY WITHIN AFTER INTEREST TOTAL DATE 1 YEAR 1 YEAR RATE 30TH JUNE 2010 AS £'000 £'000 £'000 £'000 % RESTATED Fair value interest rate risk financial assets Sterling - - - - - US dollar - - - - - Euro - - - - - Other - - - - - - - - - - Fair value no interest rate risk financial assets Sterling 101,539 37,592 63,947 - - US dollar 567,353 567,353 - - - Euro 157,900 157,900 - - - Other 7,430 7,430 - - - 834,222 770,275 63,947 - - As at 30th June 2011, the maturity profile of the Company's financialliabilities was as follows: NO MATURES MATURES MATURITY WITHIN AFTER TOTAL DATE 1 YEAR 1 YEAR 30TH JUNE 2011 £'000 £'000 £'000 £'000 Loan - - - - Loan notes 100,500 - 100,500 - 100,500 - 100,500 - As at 30th June 2010, the maturity profile of the Company's financialliabilities was as follows: NO MATURES MATURES MATURITY WITHIN AFTER TOTAL DATE 1 YEAR 1 YEAR 30TH JUNE 2010 £'000 £'000 £'000 £'000 Loan 77,724 - 77,724 - Loan notes 49,500 - 49,500 - 127,224 - 127,224 - Financial Liabilities
At 30th June 2011, the Company had drawn the sterling equivalent of £nil (2010: £77,724,000) of its new four-year committed revolving dollar and euro creditfacilities, expiring June 2015, of $82m and €57m respectively with The RoyalBank of Scotland plc and Lloyds TSB Bank plc. Interest is incurred at avariable rate as agreed at the time of drawdown and is payable at the maturitydate of each advance. At the year end, interest of £nil (2010: £24,000) wasaccruing.At 30th June 2011 the Company had unsecured subordinated loan notes worth £100.5m (2010: £49,5m) in issue. Interest is incurred at a variable rate andpayable quarterly in arrears as described in Note 12. At the year end, interestof £nil (2010: £nil) was accruing.After the financial year end the Company announced its intention to draw downcommitments to subscribe for £100.5m of new redeemable shares in the capital ofthe Company, which would require an equivalent amount of the loan notes to berepaid under the terms of the loan note subscription agreements. The issue ofnew redeemable shares and the repayment of the loan notes were completed on24th August 2011.With the exception of the loan notes, revolving credit facility and bankoverdraft, there was no interest risk associated with other short-termcreditors at 30th June 2011 or 30th June 2010. At 30th June 2011 and, with theexception of the loan notes, at 30th June 2010, all other financial liabilitieswere due within one year. The revolving credit facility is included increditors falling due within one year.
Market Price Risk
The method of valuation of the fixed asset investments is described in Note 1(D). The nature of the Company's fixed asset investments, with a highproportion of the portfolio invested in unquoted securities, means that theinvestments are valued by the Directors after due consideration of the mostrecent available information from the underlying investments.
PIP's portfolio is well diversified by the sectors in which the underlyingcompanies operate. This sectoral diversification helps to minimise the effectsof cyclical trends within particular industry segments.
The method of valuation of the derivative included in the Standby Commitmentsis described in Note 13.
If the investment portfolio fell by 20% from the 30th June 2011 valuation, withall other variables held constant, there would have been a reduction of £189,473,000 (2010 as restated based on a fall of 20%: £179,811,000) in thereturn before taxation. An increase of 20% would have increased the returnbefore taxation by £179,556,000 (2010 as restated based on a 20% increase:
£169,308,000).
In relation to the derivative, if the share price of the Company's redeemableshares fell by 20% from the 30th June 2011 closing price, with all othervariables held constant, there would have been an increase of £19,291,000 (2010based on a 20% fall: £17,211,000) in the return before taxation. Similarly, anincrease of 20% would have had an equal and opposite effect.
Foreign Currency Risk
Since it is the Company's policy to invest in a diverse portfolio ofinvestments based in a number of countries, the Company is exposed to the riskof movement in a number of foreign exchange rates. A geographical analysis ofthe portfolio and hence its exposure to currency risk is given in the Manager'sReview. Although it is permitted to do so, the Company did not hedge theportfolio against the movement in exchange rates during the financial year asthere was no significant increase in the perceived risk of exchange ratemovement.The investment approach and the Manager's consideration of the associated riskare discussed in further detail in the Manager's Review. The Company settlesits transactions from its bank accounts at an agreed rate of exchange at thedate on which the bargain was made. As at 30th June 2011, realised exchangelosses of £38,000 (2010: £205,000 gains) and unrealised gains relating tocurrency of £339,000 (2010: £1,459,000 gains) have been taken to the capitalreserve.If the sterling/dollar and sterling/euro exchange rate had reduced by 10% fromthat obtained at 30th June 2011, it would have the effect, with all othervariables held constant, of increasing equity shareholders' funds by £2,382,000(2010: decreasing by £7,925,000). If there had been an increase in the sterling/dollar and sterling/euro exchange rate of 10% it would have the effect ofdecreasing equity shareholders' funds by £1,949,000 (2010: increasing by £6,484,000). The calculations are based on the financial assets and liabilitiesand the exchange rate of 1.60545 sterling/dollar and 1.1073 sterling/euro as at30th June 2011.
An analysis of the Company's exposure to foreign currency excluding privateequity investments is given below:
30TH JUNE 30TH JUNE 30TH JUNE 30TH JUNE 2011 2011 2010 2010 ASSETS LIABILITIES ASSETS LIABILITIES £'000 £'000 £'000 £'000 US dollar 15,163 - 4,982 41,127 Euro 11,694 5,416 1,416 36,597 Swedish krona - - 505 - Norwegian 98 - - - krona 26,955 5,416 6,903 77,724
Fair Value of Financial Assets and Financial Liabilities
The financial assets of the Company are held at fair value. Financialliabilities are held at amortised cost, which is not materially different fromfair value.
Managing Capital
The Company's equity comprises ordinary shares and redeemable shares asdescribed in Note 14. Capital is managed so as to maximise the return toshareholders while maintaining a capital base that allows the Company tooperate effectively in the marketplace and sustain future development of thebusiness.
As at 30th June 2011 the Company had bank debt facilities and commitments byinstitutional investors ("Standby Commitments") to subscribe for redeemableshares against part of which subordinated loan notes had been issued toincrease the Company's liquidity. Details of borrowings at the year end can befound earlier in this Note and in the Extracts from the Directors' Report anddetails of the Standby Commitments can be found in the Finance section of theManager's Review. On 24th August 2011 the Company drew down commitments tosubscribe for £100.5m new redeemable shares and repaid the outstandingsubordinated loan notes (see Notes 13 and 14). Subsequently, the remainingStandby Commitments of £49.5m were terminated with effect from 30th September2011.
The Company's assets and borrowing levels are reviewed regularly by the Boardof Directors with reference to the loan covenants.
The Company's capital requirement is reviewed regularly by the Board ofDirectors.
23. Related Party Transactions
The Manager, Pantheon Ventures (UK) LLP, is regarded as a related party of theCompany. Mr R.M. Swire, a Director of the Company, is a director of PantheonVentures Limited, a parent undertaking of the Manager.
The amounts paid to the Manager are disclosed in Note 3.
The Company is entitled to invest in funds managed by Pantheon. The Manager isnot entitled to management and commitment fees in respect of PIP's holdings in,and outstanding commitments to, these funds.
ANNUAL GENERAL MEETING
The Company's Annual General Meeting will be held on 22nd November 2011 at 12noon at the offices of Pantheon, Norfolk House, 31 St James's Square, LondonSW1Y 4JR.
CLASS MEETING OF REDEEMABLE SHAREHOLDERS
A separate meeting of the holders of redeemable shares relating to a proposedamendment to the articles of association will be held on 22nd November 2011 at12.30 pm (or as soon thereafter as the Annual General Meeting has beenconcluded or adjourned and Pantheon's presentation to shareholders, scheduledto immediately follow the Annual General Meeting, has been concluded) at theoffices of Pantheon, Norfolk House, 31 St James's Square, London SW1Y 4JR.
NATIONAL STORAGE MECHANISM
A copy of the Annual Report and Financial Statements and the Notice of ClassMeeting of Redeemable Shareholders will be submitted shortly to the NationalStorage Mechanism ("NSM") and will be available for inspection at the NSM,which is situated at: www.hemscott.com/nsm.do
ENDS
Neither the contents of the Company's website nor the contents of any websiteaccessible from hyperlinks on this announcement (or any other website) isincorporated into, or forms part of, this announcement.