Schroder UK Public Private Trust plc
(the "Company")
Report and Accounts
For the year ended 31 December 2022
Schroder UK Public Private Trust plc (the "Company") hereby submits its Final Results for the year ended 31 December 2022.
The Company's Annual Report and Accounts for the year ended 31 December 2022 (the "2022 Annual Report and Accounts") are being published in hard copy format and an electronic copy will shortly be available to download from the Company's webpage www.schroders.com/publicprivatetrust
It can also be viewed at the following link:
http://www.rns-pdf.londonstockexchange.com/rns/3397W_1-2023-4-15.pdf
Enquiries:
Schroder Investment Management Limited
Augustine Chipungu (Press) 020 7658 6000
Shilla Pindoria (Company Secretary) 020 7658 6000
John Spedding 020 7658 6000
Chair's Statement
Performance
It is disappointing that 2022 continued to be a difficult year for the Company. The invasion of Ukraine and pressure on financial markets led to deteriorating market sentiment, both for the portfolio itself and for shares in the Company. Against this backdrop, the Company's Net Asset Value (NAV) per share for the year to 31 December 2022 fell by 40.7% and the share price by 53.3% and the Board remains frustrated with this outcome. Performance during the year was primarily driven by the fall in the share price of our largest holding, Oxford Nanopore and other legacy private investments including Rutherford, BenevolentAI and Atom Bank.
Future returns will be driven by the performance of investments made by our Manager and the Manager has continued to make significant progress in tilting the portfolio towards venture, growth or life sciences, with six new private investments made in 2022. The change to a global mandate has opened world class opportunities for the portfolio and further details are provided in the Manager's Review section.
Portfolio Management
Last year, shareholders approved changes to the Company's investment policy to enable our Manager to consider global opportunities in private equity and to draw on Schroders Capital's strong long term track record in private equity investment. At the same time, we indicated that we would target around 75% of the portfolio to be in private equity investments and that the majority of the public holdings would be held as a consequence of private holdings going on to IPO enabling us to capture the full lifetime value of a portfolio company.
The transition to a global private equity portfolio is taking longer than we anticipated, mainly due to the continuing uncertainty in the private equity market, but further progress is expected to be made in 2023.
Schroders Capital has been managing private equity investments on behalf of investors since 1997. It has over 150 professionals committed to the private equity business worldwide and manages nearly £14 billion of private equity assets (as 31 December 2022). The Company's portfolio is managed by Tim Creed, Schroders Capital's head of private equity investments, and, in view of the greater investment emphasis on private equity, he will now be supported by Harry Raikes, who will join the team as a co-manager. Harry, who is a member of the Schroders Capital Private Equity investment team, has been instrumental in transitioning the portfolio since Schroders took over management. At the same time, Roger Doig will step away from the investment team.
Valuation Process
With effect from 30 September 2022, Schroder Unit Trusts Limited was appointed as the Company's alternative investment fund manager (AIFM), replacing Link Fund Solutions Limited. The Board are comfortable with the valuation process applied by the AIFM, using research and input from its own valuation specialist provider, IHS Markit (part of S&P Global), for the valuation of the private equity holdings, utilising the widely respected IPEVCV guidelines. Further details regarding the valuation approach adopted are explained in Note 1b in the notes to the Accounts.
Capital discipline and the introduction of a continuation vote
Schroders was appointed as the Company's portfolio manager in December 2019, following which the investment team took the necessary actions to stabilise the portfolio through the renegotiation of the debt facility, asset disposals to allow for a substantial reduction in the level of borrowings and engagement with the portfolio companies to determine an action plan for maximising returns from the legacy portfolio. The portfolio manager also developed a pipeline of opportunities to give investors access to some of the best and most attractive venture and growth companies globally. In that regard, the investment team have made 11 private investments since their appointment across technology, financials, business services and healthcare sectors.
A proposal to make amendments to the Company's Articles will be made at the Company's Annual General Meeting to include the introduction of a continuation vote at the 2025 Annual General Meeting, which will provide shareholders with the opportunity to vote on whether the Company should continue in its present form. There will also be a requirement to propose a similar resolution at the AGM every five years thereafter.
The continuation vote at the AGM in 2025 will allow the Board and shareholders the opportunity to review the performance of the Manager over the five years since its appointment, which the Directors consider to be an appropriate timeframe for the investment team to have repositioned the portfolio, including having made a number of new investments against which its performance can be assessed.
While the portfolio progress over the last three years has been positive, the NAV has fallen as the Company continues to work through the issues in the legacy portfolio, which has been made more challenging with the change in the environment for growth capital investing. Against this backdrop, the discount at which the Company's shares trade in relation to net asset value has widened.
This discount widened further during 2022 and stood at 45.8% at 31 December 2022, reflecting not only the performance of the Company itself but also the poor sentiment and uncertainty surrounding the wider private equity sector.
The Board intends to make an amount equating to 25% of all net cash realisations from the portfolio inherited from the previous portfolio manager received between now and the 2025 Annual General Meeting available to be redeployed to make share repurchases by the Company.
The Board acknowledges that it is not possible to accurately forecast such realisations between now and 2025. In order to ensure that the Company remains active in buying back its stock, the Board intends in any event to purchase shares equal to at least 5% of the Company's issued share capital in each of the calendar years 2023 and 2024. The intention to undertake share repurchases outlined above is subject to the approvals detailed in the following section of this statement.
The Company's share buy back policy will be reviewed ahead of the continuation vote in 2025.
Share buybacks undertaken by the Company in 2022 and 2023
From 9 May 2022 to 21 December 2022, the Company undertook a series of share buybacks totalling 4,420,000 ordinary shares for a consideration of c.£812,000. In 2023, the Company has undertaken further share buybacks totalling 1,735,000 ordinary shares for a consideration of c.£257,000. Although the Company had a share premium account of £891 million at the time of the 2022 and 2023 share buybacks, as that had not been cancelled at the time, the Company did not have sufficient distributable profits and so those buybacks did not comply with the requirements of the Companies Act 2006.
The Company has been advised that, in order to rectify this, shareholders may approve various actions. Accordingly, the Company shall propose resolutions at the forthcoming AGM to:
(i) Cancel the Company's share premium account, subject to obtaining the requisite Court approval;
(ii) Conditional on the Court approval of the cancellation of the share premium account, appropriate such amounts as are necessary from the cancelled share premium account as distributable profits for the purposes of the 2022 and 2023 share buybacks; and
(iii) Enter into deeds of release in respect of the shareholders who received share buyback consideration and the directors who authorised the share buybacks.
The Board plans to recommence share buybacks and, in order to do so, shareholders must have approved these resolutions, along with the resolution to re-new the Company's authority to buyback shares. Following the AGM, the Company will apply to the Court for its share premium account to be cancelled, following which the Company will be able to re-commence share buybacks.
Change of Company Name
The Board has taken steps to change the Company's name to Schroders Capital Global Innovation Trust plc to more accurately reflect the changes in investment objective and policy agreed at the AGM in May 2022 and the strategy that has been followed as a result. The Company will make a further announcement following confirmation of the change of name by Companies House.
Gearing
At the year ended 31 December 2022, the Company had cash of £16.1 million (2021: £19.1 million). During the year, £22 million was drawn on the £40 million revolving credit facility and this was repaid in full and undrawn at the year end. The revolving credit facility expired on 30 January 2023 and although the Board remains of the view that gearing should be one of the tools available to the Manager to make use of the closed ended structure, the use of gearing is not a priority at this specific time. It will continue to monitor whether gearing should be used by the Manager.
Board Composition
Raymond Abbott, who has served on the Board since 2019, will retire following the conclusion of the AGM in June 2023. On behalf of the Board, I would like to thank Raymond for his considerable contribution to the Company and wish him well for his future plans. As part of its succession plan to promote regular refreshment and diversity, the Board has appointed an executive search firm and commenced the recruitment for a new director. The Board will make an announcement once a suitable candidate has been appointed.
AGM
The Company will be posting a separate notice of AGM to shareholders in early May, for an AGM to be held in early June. The Board looks forward to welcoming shareholders to attend and participate in the meeting.
Shareholders will also have the opportunity to hear a presentation from the Manager and light refreshments will be served. Please note that all voting will be on a poll and we encourage all shareholders to exercise their votes by means of registering them with the Company's registrar ahead of the meeting, online or by completing paper proxy forms, and to appoint the Chair of the meeting as their proxy.
In the event that shareholders have a question for the Board, please email amcompanysecretary@schroders.com in advance of the AGM.
Changes to the Articles of Association
One of the resolutions that will be proposed at the AGM is an amendment to the Company's articles of association (the "Articles") to allow for periodic continuation votes from 2025 and thereafter at 5 yearly intervals, as noted above and the flexibility to hold shareholder meetings (wholly or partially) by electronic means. This latter change would allow the Board to hold hybrid or virtual meetings when in the best interests of shareholder safety, for example, in the event of a future pandemic. The amendments will not prevent the Company from holding physical meetings and the Board's intention is always to hold a physical general meeting when safe and practical to do so. Further details will be included in the notice of AGM to be posted in early May.
Change of Auditor
Following a competitive tender process, the Company's auditor, Grant Thornton UK LLP will not be seeking re-appointment as auditor and a resolution to appoint Ernst & Young LLP as the Company's auditor will be made at the AGM.
Change of Registrar
In accordance with the change of the majority of its service providers in 2022, the Board has decided to change registrar from Link to Equiniti with effect from 30 June 2023.
Web Conference - Update from Schroders
Please join the Manager for a webinar in which they will report on the year ended 31 December 2022 and outline their thoughts on the future direction of the portfolio. The presentation will be followed by a live Q&A session. The webinar will take place on 18 April 2023 at 2pm. Register for the event at https://registration.duuzra.com/form/suppannualresults2022.
Outlook
Although 2022 was disappointing for the Company, the Manager has continued to diversify the portfolio and the Board believes that the global remit, adopted in 2022, enables access to the best innovation ideas in the most promising themes, wherever they are in the world. The pivot towards private investments, which has taken longer than anticipated due to the uncertainty of private markets in 2022, is expected to make further progress in 2023.
The Company offers investors access to the leading growth businesses of the future, selected by a Manager with a leading track record in private equity investing over the last 25 years with a themed focus across technology and healthcare.
The Board believes that the package of measures taken to narrow the discount coupled with the ability of the Manager to capture global innovation opportunities will help to restore shareholder and investor sentiment.
Tim Edwards
Chair
14 April 2023
Manager's Review
Summary
- The Company reported a net asset value ("NAV") of 28.52p per share as of 31 December 2022, a decrease of 40.7% relative to the NAV share per share as of 31 December 2021 (48.08p) and -7.6% relative to the NAV per share as of 30 September 2022 (30.88p).
- Inflation, tightening monetary conditions and heightened geopolitical tensions led to deteriorating market sentiment during the year, which weighed on the performance of the portfolio. Performance over the year was largely driven by the fall in the share price of the Companyʼs largest holding, Oxford Nanopore Technologies plc ("Oxford Nanopore"), while other legacy investments, including Rutherford, BenevolentAI and Atom Bank also weighed on returns.
- With caution given the challenging market backdrop, the Company continued to invest in ground-breaking companies, adding dedicated renewed technology marketplace, Back Market, to the portfolio, as well as building out its diversified portfolio of innovative life science businesses targeting key unmet medical needs, with new positions in Epsilogen, Araris Biotech, iOnctura, A2 Biotherapeutics and Anthos Therapeutics. Post period-end, the Company continued to utilise its broadened global investment remit, announcing its first transaction in Asia with an investment in AgroStar, one of Indiaʼs foremost agricultural technology start-ups.
- We welcome the steps taken by the Board to change the name of the Company, while our appointment of Harry Raikes as co-manager aligns with the greater investment emphasis on private equity. These changes reflect our ambition to provide shareholders with access to the leading growth businesses of the future and achieve long-term capital growth.
- We are not complacent about the challenges that lie ahead. While we have made significant progress in transforming the portfolio into one which is gradually reflecting the opportunity set that we see, it would be wrong to suggest that the job is anywhere near complete. The Company still has a significant exposure to legacy investments made by the previous Portfolio Manager and much work is required to restore the reputation of the Company in the eyes of the investing public. Nevertheless, we believe the Company is now on a path that the broader Schroders Capital business has been following successfully for twenty-five years. We know where it is heading, and we are confident that the journey represents a compelling long-term growth opportunity. Now it is time for us to deliver that opportunity.
Introduction
Our journey so far
Schroders took on the management of the Company in December 2019 and the journey since then has involved a lot of work and many hurdles have been overcome. In many respects, our transformation of the portfolio remains a work in progress, but we believe it is important to look back on the important steps that we have taken and reflect on the prospects that await the Company.
In the early months of Schroders' tenure managing the Company, our key task was to get our arms firmly around the portfolio by understanding the underlying holdings in great detail. It was evident from the outset that the legacy portfolio contained a few real gems, some of which are still held today, but other assets required greater input and careful nurturing. Against the backdrop of the Covid pandemic and a global economy in lockdown, the initial progress was gradual but measured, allowing us to gain a clearer sense of which assets would form part of the long-term future of the Company, while thinking strategically about how to optimise value from other parts of the portfolio. Other priorities included increasing the liquidity of the portfolio and reducing the level of financial gearing.
A first key step in this process was completed in March 2021, with the sale of seven assets to Rosetta Capital for more than £50 million. That transaction represented many months of hard work, with significant contributions from several team members. Then, in April 2021, the sale of clinical-stage biotechnology company Kymab to Sanofi for $1.1bn plus milestones was completed, resulting in a significant profit for the Company.
Importantly, these activities paved the way for other positive developments. Crucially, the proceeds allowed us to fully repay the inherited debt burden which stood at £112.9 million as of 31 December 2019. Thus, we were able to establish a much sounder financial platform for the Company, and the prospect of making new investments into ideas generated by Schroders Capital's well-established and highly-experienced venture capital team was suddenly much closer.
Indeed, the first new investment for the portfolio was committed in May 2021, when we acquired a stake in the private, high potential UK cyber-security business, Tessian. This was quickly followed by positions in UK neobank Revolut, leading market research technology platform Attest, and the AI-based digital health business Ada Health, in a series of new investments committed through the rest of 2021, 2022 and continuing into this year. We are confident that this new idea pipeline will continue to deliver the opportunity to invest in similarly exciting young innovative companies that, we believe, represent the leading growth businesses of the future.
In the meantime, we have also seen the successful IPOs of Oxford Nanopore and Immunocore, and the holdings in Kymab, Inivata and Kuur Therapeutics have all been acquired by larger healthcare businesses. These events have collectively realised a valuable gain for the Company. By contrast, several of the portfolio's publicly traded holdings have performed poorly in what has been a challenging period for equity markets, particularly over the last eighteen months. Meanwhile, the holding in Rutherford Health was written down to zero when the business failed to attract sufficient new funding, and several other legacy private holdings have seen write-downs due to disappointing developments, including Industrial Heat, Mafic and Spin Memory. It is the nature of early-stage investments that the performance of individual holdings are likely to diverge significantly. Some have developed positively and are fulfilling their high potential, whereas others, inevitably, have fallen by the wayside. The disappointments have been in businesses that were part of the portfolio long before Schroders took on its management, and in most cases, we believe there has been little we could do to turn their fortunes around.
Another key milestone for the Company was the widening of its investment powers to include a more global remit, which was approved in May 2022. This too was influenced by Schroders Capital's significant global resources, which we believe can now be fully deployed for shareholders benefit, in providing access to the best venture and growth investment opportunities worldwide. The Company's proposed name change reflects this global remit. It also captures the essence of the current shape of the portfolio and its direction of travel.
During the 12 months to 31 December 2022, the Company made six new private equity investments including one new growth investment and five new life science strategy investments. Our efforts to increase the private equity allocation further were impacted by overheating in late-stage and pre-IPO markets which temporarily allowed private company valuations to become detached from underlying fundamentals with some overflow effects into other areas of the market. Our investment team did come close on several other opportunities, however with strict valuation discipline were ultimately unable to agree terms. However, we remain hopeful that the current more normalised valuation environment will allow us to make further progress in 2023, and as such we are excited to announce the investment in AgroStar, one of Indiaʼs foremost agricultural technology start-ups.
The portfolio's longer-term strategic positioning is underway, in line with our ambition to provide investors with access to innovative companies wherever they are in the world, focusing on venture, growth and life sciences opportunities, which is discussed in more detail in the Strategic Review section of this report.
2022: Economic and market backdrop
Geopolitics and public equity markets
Global equity markets saw steep declines in 2022. Despite relatively resilient earnings throughout much of the year, inflation, tightening monetary conditions and geopolitical tensions drove increased volatility across equity, bond and currency markets. Russia's invasion of Ukraine in late February caused a global shock, with equities declining and commodity prices soaring. This contributed to a further surge in inflation as well as supply chain disruption. In effect, this brought about an end to the loose monetary policy era across many developed markets as central banks moved, often belatedly, to raise rates and halt asset purchase programmes launched in the previous decade. This policy shift kept shares prices under pressure through the spring and summer of 2022 as investors moved to price in expectations of future interest rate rises and an increased risk of recession. Shares did however briefly make gains in November as improved sentiment drove a bear market rally until hawkish central bank rhetoric amidst a slowing growth backdrop ultimately led markets to further losses in December.
Private equity and venture capital markets
In 2022, global venture capital (VC) funding declined 35% to $415 billion1 with particular weakness in the fourth quarter reflecting a 64%1 year-on-year fall from an exuberant 2021. This decline was reflected in both deal volumes and average deal sizes. During the year, average deal sizes declined by 32%1 towards more normalised levels seen in 2020. Of particular note, the number of mega-rounds - funding rounds of more than $100 million - declined 78% in the fourth quarter, highlighting the retrenchment of investors that do not typically have roots in venture capital, which had become a cause for concern in 2021. This market cooling was also evident in the plummeting rate of unicorn2 creation through the year with 19 new unicorns created in the fourth quarter, a fraction of the 139 created twelve months earlier.
1CB Insights State of Venture Global 2022 recap.
2Defined as a venture capital-backed company with a value of over $1 billion.
Portfolio composition and valuation reviews
As of 31 December 2021, the Company had 35 portfolio holdings, including 11 public equity holdings and 24 private equity holdings (excluding 9 holdings with no value). During the period, the number and composition of holdings was impacted by the following events:
- One new investment completed as part of the growth strategy:
- New investment in leading, dedicated renewed technology marketplace, Back Market (incorporated as Jung S.A.S).
- Five new investments completed as part of the life sciences strategy:
- Innovative developer of immunoglobulin E antibodies to treat cancer, Epsilogen Ltd ("Epsilogen").
- Antibody-drug conjugates development company, Araris Biotech AG ("Araris").
- Clinical stage oncology company, iOnctura SA ("iOnctura").
- T-cell development company, A2 Biotherapeutics Inc ("A2 Bio").
- Clinical-stage biopharmaceutical company, Anthos Therapeutics LLC ("Anthos").
- Continued portfolio rebalancing and diverging performance of legacy holdings:
- Sale of Seedrs Ltd ("Seedrs").
- Rutherford Health plc ("Rutherford Health") announced the withdrawal of its shares from trading on the AQSE Growth Market and was subsequently revalued to no value after its Board resolved to wind-up the company. Further details of the engagement undertaken as part of this process can be found in the dedicated Sustainability section of this report.
- BenevolentAI completed its business combination with Odyssey Acquisition S.A. ("Odyssey"), a Euronext Amsterdam- listed investment company.
- Disposals of small, residual positions in Reneuron, Xeros and Plenti.
- Mafic and Metaboards revalued to zero.
As of 31 December 2022, the Company had 34 portfolio holdings, including 9 public equity holdings and 25 private equity holdings (excluding 12 holdings with no value). All the Company's quoted holdings were valued using unadjusted quoted prices, except BenevolentAI which was fair value priced due to a lack of liquidity in its listed shares. For the Company's private equity holdings, a full valuation review was conducted to determine the fair value of the portfolio as of 31 December 2022.
Financial performance
|
|
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| Net |
|
|
| Attribution | Public | Private | (debt)/ |
|
|
| analysis (£m) | equity | equity | cash | Other | NAV |
| Value as at 31.12.21 | 243.3 | 197.6 | (2.9) | (1.1) | 436.9 |
| + Investments | - | 17.4 | (17.4) | - | - |
| - Realisations at value | (20.9) | (19.2) | 40.1 | - | - |
| +/- Fair value gains/(losses) | (138.3) | (37.4) | - | - | (175.7) |
| +/- Reclassified holdings | 11.5 | (11.5) | - | - | - |
| +/- Costs and other movements | - | - | (3.7) | 0.4 | (3.3) |
| Value as at 31.12.22 | 95.6 | 146.9 | 16.1 | (0.7) | 257.9 |
Source: HSBC, as of 31 December 2022. Fair value gains/(losses) include foreign exchange gains/(losses).
The NAV as of 31 December 2022 was £257.9 million, a decrease of 41.0% compared with the NAV (£436.9 million) as of 31 December 2021.
The full year NAV decrease of 41.0% comprised:
- Public equity holdings: -31.7%
- Private equity holdings: -8.6%
- Costs and other movements: -0.8%
The Company's public equity holdings saw a decrease in value of 56.8% contributing 31.7% to the full year decrease in NAV. This was predominantly driven by the portfolio's largest holding, Oxford Nanopore ("ONT"), whose share price fell 64.6% over the year, resulting in a loss of £105.1 million. Stock performance disappointed over the period reflecting changes in the market backdrop - including a rotation out of growth, an aversion to negative free cashflow businesses, and weaker operating performance reported at peers. During the year, the Company's weighting in ONT declined from 36.9% to 23.3% of total investments as of 31 December 2022.
As mentioned in the half year report and accounts, Rutherford Health was fully written off in June 2022 following news that the company's Board had resolved to wind-up the company and appoint the official receiver as liquidator. The revaluation resulted in a loss of £23.6 million. The company was reported as an unquoted holding following withdrawal of its shares from trading on the AQSE Growth Market on 24 January 2022. Further details of the engagement undertaken by the investment team can be found in the dedicated Sustainability section of this report.
Furthermore, the share price of IDEX Biometrics, the Norwegian developer of biometric cards, declined by 68.3% over the period, representing a loss of £8.0 million. IDEX has continued to deliver on its commercial plans with 9 commercial launches of bank cards utilising its biosensor technology over the course of the year, including a full-scale launch by First Bank Abu Dhabi, which generated the largest single order for IDEX biosensors to date. The mass roll out of biometric payments cards looks to be approaching, and in 2022 IDEX expanded the number of card manufacturers preparing card launches incorporating the IDEX sensors substantially. However, while revenue growth of 44% year-on-year was encouraging, the revenue arising from commercialisation has been slower than anticipated, meaning the company remains unprofitable, and needed to raise further capital in Q4, which put pressure on the share price.
In April 2022, BenevolentAI, the healthcare technology company applying artificial intelligence for drug discovery and development, completed its Business Combination with Odyssey Acquisition S.A. ("Odyssey"), a Euronext Amsterdam-listed investment company. Disappointingly, however, given the lack of a full price discovery process and the majority of shareholders being locked up until mid-October, its quoted share price declined 64.7% over the period to 31 December 2022. As at the valuation date (31 December 2022), the Company's AIFM also opted to perform an additional fair value assessment in order to reflect a lack of liquidity in the shares. The fair value concluded represents a price of £2.51 per share reflecting a 19% discount to the quoted price (£3.11 per share) as of the valuation date.
On the positive side, the share price of Immunocore, the pioneering T cell receptor biotechnology company, increased 67.4% over the period. The company received FDA and European Commission approval for the first treatment developed on its TCR immunotherapy platform, KIMMETRAK, and successfully started to commercialise the treatment over the course of the year. This was an important proof point for the company's platform, and a number of other therapies continue to be developed on it. A private placement in July, coupled with an improvement in the rate of cash burn as product revenues started to come through from KIMMETRAK, has extended the company's cash runway until at least 2026, over which time further treatments developed on the platform are expected to be brought through the approval process.
The Company's private equity holdings saw a decrease in value of 18.9%, contributing 8.6% to the full year decrease in NAV.
UK app-only challenger bank, Atom Bank, was revalued down to reflect a continued deterioration in the valuation of public market comparables and a more prudent approach adopted by the Company's new AIFM. The valuation adjustment resulted in a fair value loss of £14.5 million over the period, despite which Atom Bank remains the Company's largest private holding representing 13.1% of total investments. We are encouraged with the operational progress at Atom Bank. The business continues to scale up and is now profitable. Any new capital that the bank raises is therefore supporting further growth through increased scale and new product launches, which has the potential to deliver shareholder value over the medium term notwithstanding the current volatile environment surrounding valuations of listed players in the space.
Foreign exchange
Over the full year period, the fair value of investments denominated in United States Dollar (USD), Euro (EUD), Swiss Franc (CHF) and Norwegian Krone (NOK) benefited from the depreciation in the value of the British pound sterling (GBP).
Cash and debt
At the year ended 31 December 2022, the Company had cash and cash equivalents of £16.1 million. During the year, £22 million was drawn on the £40 million revolving credit facility and this was repaid in full and undrawn at the year end. This facility expired on 31 January 2023. We do not see the use of gearing as a priority at this time and believe the portfolio has sufficient cash and liquidity to efficiently manage the portfolio going forward in line with the Board's recent proposals to shareholders. However, we remain open to utilising a credit facility in the future when appropriate.
Investment activity
Realisations
During the 12 months to 31 December 2022, the Company made realisations totalling £40.1 million. The key transactions are highlighted below:
• £16.7 million was realised from the Company's holding in Immunocore to fund new private investments.
• The Company completed the sale of its holding in Seedrs to a global institutional investment management firm in March receiving cash proceeds of £12.0 million. For further information regarding the transaction, investors can refer to the original announcement made by the Company on the 1st December 2021.
• The Company received £4.0 million from the deferred purchase price release as part of the sale of Kymab to Sanofi which originally completed back in April 2021.
• The Company sold £1.6 million in a secondary transaction as part of Nexeon's $170m funding round.
• The Company received its second distribution of £1.5 million from the HP Environmental Technologies Fund following the acquisition of portfolio company, Driivz, by Vontier Corporation, a global industrial technology company focused on transportation and mobility solutions.
• The Company sold its small remaining public positions in consumer lending company Plenti Group (following the expiry of its lock-up period), stem cell research company ReNeuron and industrial technology firm Xeros Technology.
• The remaining realisations were made from across the public equity holdings, including Oxford Nanopore, Johnson Matthey and Spirent Communications.
New investments
During the 12 months to 31 December 2022, the Company made six new private equity investments totalling £15.1 million. This included one new growth investment and five new life science strategy investments.
We provide an overview of these new investments below, with select United Nations' Sustainable Development Goals ("SDGs") and targets aligned to their businesses.
Back Market - New "growth" investment
Leading online marketplace dedicated to refurbished devices
In January 2022, the Company announced it had invested €12.0 million (£10.0 million) in Back Market (incorporated as Jung S.A.S.), as part of its $510 million Series E funding round. The round was led by Sprints Capital, together with Eurazeo Growth, Aglaé Ventures, General Atlantic, and Generation Investment Management. The Company invested alongside its co- investment partner, Sprints Capital, via a single asset fund, Sprints Capital Ellison LP.
Launched in 2014, Back Market is the leading dedicated renewed technology marketplace. The company brings high-quality professionally refurbished electronic devices and appliances to customers in 16 countries including the United Kingdom, the United States, France, Germany, Italy, Spain, Belgium, Austria, the Netherlands, and more recently, Portugal, Japan, Finland, Ireland, Greece, Slovakia, and Sweden. The Series E round underpins Back Market's ambitious vision and allows the company to build on its position as the leading marketplace exclusively dedicated to the sale of expertly refurbished electronics. Back Market is determined to make circular technology mainstream by delivering an experience even better than buying new.
Select UN SDG(s): 11 Make cities and human settlements inclusive, safe, resilient and sustainable
12 Ensure sustainable consumption and production patterns
13 Take urgent action to combat climate change and its impacts
Select targets: 11.6 By 2030, reduce the adverse per capita environmental impact of the cities
12.4 By 2020, achieve the environmentally sound management of chemicals and all wastes throughout their life cycle
12.5 By 2030, substantially reduce waste generation through prevention, reduction, recycling and reuse
Epsilogen - New "life sciences" investment
Innovative developer of immunoglobulin E antibodies to treat cancer
In March 2022, the Company announced it had made an investment of £1.5 million* into innovative developer of immunoglobulin E antibodies to treat cancer, Epsilogen, as part of its £30.8 million Series B funding round. The round was led by a new investor, Novartis Venture Fund, and joined by other new investors 3B Future Health Fund, British Patient Capital and Caribou Property. The new syndicate joins founding Series A investor Epidarex Capital and Series A investor ALSA Ventures both of whom also committed further capital in the Series B fundraising.
Epsilogen is an innovative developer of immunoglobulin E (IgE) antibodies to treat cancer. IgE's natural function is to provide immunological defence against certain parasites. This functionality makes it an ideal treatment of solid tumours due to its strong potency, enhanced tumour access and long tissue half-life. Epsilogen's lead product candidate, MOv18 IgE, is the first therapeutic IgE antibody to enter the clinic and encouraging data from a phase I trial demonstrated MOv18 IgE to be safe and well tolerated with early signs of clinical activity also seen. Epsilogen is also developing a proprietary IGEGTM antibody platform combining elements from both IgE and IgG antibodies into novel and proprietary antibody molecules with enhanced functionality.
*total commitment of £3.0 million.
Select UN SDG(s): 3 Ensure healthy lives and promote wellbeing for all at all ages
Select targets: 3.4 By 2030, reduce by one-third pre-mature mortality from non-communicable diseases (NCDs) through prevention and treatment, and promote mental health and wellbeing
3.8 Support research, development and universal access to affordable vaccines and medicines
Araris - New "life sciences" investment
Pioneering a novel linker technology for antibody-drug conjugates
In October 2022, the Company announced it had made an investment of CHF 1.5 million (£1.3 million)* into antibody-drug conjugates (ADCs) development company, Araris Biotech AG ("Araris"), as part of its CHF 23.5 million (£21.4 million) financing round. New investors Wille Finance (CH) and Institute for Follicular Lymphoma Innovation (US) as well as existing investors in the company's blue-chip syndicate participated in this financing including Pureos Bioventures, 4BIO Capital, VI Partners, btov Partners and Redalpine.
Araris is pioneering the development of a novel antibody-drug conjugate (ADC)-linker technology to enable efficient and precise production of ADCs. Its linker platform enables the attachment of any drug payload to 'off the shelf' antibodies, without the need for prior antibody engineering. The resulting ADCs have shown very high activity at low doses and an improved therapeutic index compared to FDA-approved ADCs. Araris is a spin-off company from the Paul Scherrer Institute (PSI) and ETH Zurich.
On completion of the transaction, the Company invested £1.3 million of its total commitment with the balance expected to be invested at the milestone closing at some point in the second quarter of 2023.
*total commitment of CHF 3 million (£2.7 million).
Select UN SDG(s): 3 Ensure healthy lives and promote wellbeing for all at all ages
Select targets: 3.4 By 2030, reduce by one-third pre-mature mortality from non-communicable diseases (NCDs) through prevention and treatment, and promote mental health and wellbeing
3.8 Support research, development and universal access to affordable vaccines and medicines
iOnctura - New "life sciences" investment
Dedicated to delivering innovative cancer treatments
In November 2022, the Company announced it had made an investment of €0.8 million (£0.7 million)* into clinical stage oncology company, iOnctura SA ("iOnctura"), as part of a convertible loan. All of the existing blue chip investor syndicate including M Ventures, INKEF Capital, VI Partners, and 3B Future Health participated in this financing.
iOnctura is a clinical-stage biotech with a portfolio of programs that each simultaneously target multiple core mechanisms involved in cancer resistance and survival. iOnctura's pioneering approach to drug development is expected to offer significant clinical benefits over the traditional approach of targeting a single pathway alone. iOnctura has progressed two therapeutic candidates into mid-stage clinical development: IOA-244, a highly selective allosteric inhibitor of PI3Kδ to treat Treg-driven tumours; and IOA-289, a highly selective, non-competitive autotaxin (ATX) inhibitor to treat cancer associated fibroblast (CAF) driven tumours.
*total commitment of €1.3 million (£1.2 million).
Select UN SDG(s): 3 Ensure healthy lives and promote wellbeing for all at all ages
Select targets: 3.4 By 2030, reduce by one-third pre-mature mortality from non-communicable diseases (NCDs) through prevention and treatment, and promote mental health and wellbeing
3.8 Support research, development and universal access to affordable vaccines and medicines
A2 Bio - New "life sciences" investment
Focused on the next frontier in cell therapy: solid tumors
In November 2022, the Company announced it had made an investment of $1.2 million (£1.0 million) into T-cell development company, A2 Biotherapeutics ("A2 Bio"), as part of its $50 million (£42 million) financing round. A2 Bio is backed by investors that include The Column Group, Vida Ventures, Samsara BioCapital, Nextech Invest, Casdin Capital, Euclidean Capital, UC Investments (Office of the Chief Investment Officer of the Regents), Hartford HealthCare Endowment, StepStone Group, Section 32 and Merck.
A2 Bio is using its next-generation cell therapy Tmod platform to revolutionize the treatment of solid tumour cancers. The company engineers T cells that target the loss of genetic material in tumours, enabling the selective killing of tumour cells while leaving normal cells unharmed.
Select UN SDG(s): 3 Ensure healthy lives and promote wellbeing for all at all ages
Select targets: 3.4 By 2030, reduce by one-third pre-mature mortality from non-communicable diseases (NCDs) through prevention and treatment, and promote mental health and wellbeing
3.8 Support research, development and universal access to affordable vaccines and medicines
Anthos - New "life sciences" investment
Developing innovative therapies to advance care for people living with cardiovascular and metabolic diseases
In December 2022, the Company announced it had made an investment of $0.7 million (£0.6 million)* into US-based, clinical- stage biopharmaceutical company, Anthos Therapeutics LLC ("Anthos"), in its Series B financing round.
Anthos' mission is to develop innovative therapies to advance care for people living with cardiovascular and metabolic diseases. Their most advanced program is focused on developing abelacimab, an investigational monoclonal antibody that inhibits coagulation Factor XI and its activated form, Factor XIa. Abelacimab is an experimental, next-generation anticoagulant with the potential to provide 'hemostasis-sparing anticoagulation': protection from arterial and venous thromboembolic events with a reduced risk of clinically-significant bleeding.
*total commitment of $2.8 million (£2.3 million)
Select UN SDG(s): 3 Ensure healthy lives and promote wellbeing for all at all ages
Select targets: 3.4 By 2030, reduce by one-third pre-mature mortality from non-communicable diseases (NCDs) through prevention and treatment, and promote mental health and wellbeing
3.8 Support research, development and universal access to affordable vaccines and medicine
Follow-on investments
During the period, the Company made two small follow-on investments in its existing private equity holdings, totalling £2.4 million.
The Company invested £2.3 million in Rutherford Health to extend its runway while in the process of trying to secure long- term funding. This investment formed part of a restructuring plan which included the recruitment of a new leadership team to preserve some value of the significant historical investment made by the Company into Rutherford over the preceding years. While the new leadership team vigorously pursued multiple options over the last months to save the business, it could ultimately not correct the inherited severe underlying challenges.
In January 2022, the Company invested £0.1 million in Freevolt Group Limited ("Freevolt") as part of an internal funding round designed to extend runway to the point that commercial revenues begin to build.
Recent developments
Since the year end, the Company has put its global investment universe to good use and made its first transaction in Asia with an investment of $8.0 million (~£6.6 million) in AgroStar (Ulink Agritech Pvt. Ltd.), one of India's foremost agricultural technology (AgTech) start-ups. This investment forms part of the $25 million (~£20.6 million) total investment by Schroders Capital that led the $40 million (~£33.0 million) financing round. The round also saw participation from other existing investors including Accel, Chiratae Ventures, Evolvence, Aavishkaar Capital, Bertelsmann India Investments, Hero Enterprise, Rabo Frontier Ventures, British International Investments and IFC.
Founded in 2013, AgroStar uses technology, data and agronomy knowledge to help Indian farmers. It provides an end-to-end solution that is solving three major problems for Indian farmers: limited access to good quality agricultural inputs, a knowledge gap (even among the most experienced farmers) and a lack of access to the global markets to sell their produce. The company serves millions of farmers across multiple Indian states via an omnichannel approach, having built a highly engaged digital farmer network on the AgroStar app, with over 7.5 million users, and a rapidly expanding retail network of over 5,000 stores. Through the recent acquisition of INI Farms, India's largest exporter of fruits and vegetables, AgroStar is quickly scaling its business into domestic and international food supply chains.
Outlook
Within the context of a challenging backdrop of higher interest rates, inflation and volatile markets, as well as a continued overhang of inherited holdings, we are not complacent about the challenges that lie ahead. As outlined above, while we have made significant progress in transforming the portfolio into one which is gradually reflecting the opportunity set we see, it would be wrong to suggest that the job is anywhere near complete. It is a work in progress. We know significant further efforts will be required to fully capture the opportunity, to make further realisations, and to fully restore the reputation of the Company in the eyes of the investing public.
Nevertheless, the Company is now on a path that the broader Schroders Capital business has been following successfully for twenty-five years, with the Company's extended geographical focus allowing us to capitalise on our global network and invest in the most innovative venture, growth and life science opportunities, when viewed on a risk return basis, no matter where they are in the world. The below figures serve to illustrate the return profiles we are seeking in our investments, with an indication of their relative risk level, which we believe should allow the Company to achieve long-term capital growth for shareholders.
We are supportive of the Board's proposals described in the Chair's Statement, including the introduction of a continuation vote at the 2025 Annual General Meeting, giving shareholders the opportunity to review our performance over the five years since we took over management. We believe the Company is well placed to deliver on these proposals and generate long-term capital growth by making new and follow-on investments with more than £16.1 million in cash and £83.7 million in public equity investments as at 31 December 2022, supported by a healthy pipeline of global venture/growth stage companies.
We know where it is the path is heading, and we are confident that the journey represents a compelling long-term growth opportunity. Now it is time for us to deliver that opportunity.
Schroder Investment Management Limited
14 April 2023
Investment Portfolio
as at 31 December 2022
The 20 largest investments account for 93.4% of total investments by value (31 December 2021: 93.6%).
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| Total |
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| Fair value | investments |
| Holding | Quoted/unquoted | Industry Sector | £'000 | % |
| Oxford Nanopore1 | Quoted | Health Care | 56,529 | 23.3 |
| Atom Bank1 | Unquoted | Financials | 31,686 | 13.1 |
| AMO Pharma1 | Unquoted | Health Care | 16,408 | 6.8 |
| Reaction Engines1 | Unquoted | Industrials | 12,500 | 5.2 |
| BenevolentAl1,2 | Quoted | Health Care | 11,935 | 4.9 |
| Federated Wireless1 | Unquoted | Technology | 11,227 | 4.6 |
| HP Environmental Technologies Fund1 | Unquoted | Industrials | 10,700 | 4.4 |
| Genomics1 | Unquoted | Health Care | 8,854 | 3.7 |
| Immunocore1 | Quoted | Health Care | 7,855 | 3.3 |
| Back Market3 | Unquoted | Consumer | 7,329 | 3.0 |
| Ada Health | Unquoted | Health Care | 7,122 | 2.9 |
| Nexeon1 | Unquoted | Industrials | 6,505 | 2.7 |
| Cequr1 | Unquoted | Health Care | 6,112 | 2.5 |
| Revolut LLP | Unquoted | Financials | 5,436 | 2.3 |
| Spirent Communications | Quoted | Technology | 5,146 | 2.1 |
| OcuTerra1 | Unquoted | Health Care | 5,047 | 2.1 |
| Johnson Matthey | Quoted | Industrials | 4,215 | 1.7 |
| Attest Technologies | Unquoted | Business Services | 4,085 | 1.7 |
| Tessian | Unquoted | Technology | 3,928 | 1.6 |
| IDEX Biometrics ASA1 | Quoted | Technology | 3,781 | 1.5 |
| Petershill Partners | Quoted | Financials | 3,439 | 1.4 |
| Autolus Therapeutics1 | Quoted | Health Care | 2,642 | 1.1 |
| Industrial Heat1 | Unquoted | Industrials | 2,214 | 0.9 |
| Kymab1 | Unquoted | Health Care | 1,831 | 0.8 |
| Epsilogen | Unquoted | Health Care | 1,465 | 0.6 |
| Araris Biotech | Unquoted | Health Care | 1,348 | 0.6 |
| A2 Biotherapeutics | Unquoted | Health Care | 969 | 0.4 |
| iOnctura | Unquoted | Health Care | 697 | 0.3 |
| Anthos Therapeutics | Unquoted | Health Care | 582 | 0.2 |
| Novabiotics1 | Unquoted | Health Care | 457 | 0.2 |
| American Financial Exchange1 | Unquoted | Financials | 213 | 0.1 |
| ARC Group1 | Quoted | Business Services | 104 | - |
| Freevolt (formerly Drayson)1 | Unquoted | Technology | 85 | - |
| Econic1 | Unquoted | Industrials | 58 | - |
| Metaboards1 | Unquoted | Technology | - | - |
| Rutherford Health1 | Unquoted | Health Care | - | - |
| Mafic1 | Unquoted | Industrials | - | - |
| Bodle Technologies1 | Unquoted | Technology | - | - |
| Origin1 | Unquoted | Health Care | - | - |
| Spin Memory1 | Unquoted | Technology | - | - |
| Lignia Wood1 | Unquoted | Industrials | - | - |
| Mereo BioPharma Group1 | Quoted | Health Care | - | - |
| EVOFEM Biosciences1 | Unquoted | Health Care | - | - |
| Halosource1 | Unquoted | Industrials | - | - |
| Kind Consumer1 | Unquoted | Consumer Staples | - | - |
| Oxsybio1 | Unquoted | Health Care | - | - |
| Total investments4 |
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| 242,504 | 100.0 |
1Legacy Assets
These are "Legacy Assets", being assets acquired by the Company prior to Schroder Investment Management taking over management responsibilities in December 2019.
2BenevolentAI is quoted, but the market is inactive. Thus its valuation has been determined in accordance with the process followed for unquoted assets.
3Back Market
Held via the Company's holding in Sprints Capital Ellison LP, a single asset fund.
4Total investments comprise:
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| £'000 | % |
| Unquoted | 146,858 | 60.6 |
| Listed on the London Stock Exchange | 69,329 | 28.6 |
| Listed on a recognised stock exchange overseas | 26,317 | 10.8 |
| Total | 242,504 | 100.0 |
Additional details of unquoteds, including investments quoted in inactive markets, in the top ten holdings
| Holding | Description of business | Cost £'000 | Fair value £'000 | Turnover for the latest audited financial year £'000 | Pre-tax losses for the latest audited financial year £'000 | Net assets/ (liabilities) at the latest audited balance sheet date £'000 |
| Atom Bank | Leading UK app-only challenger bank | 75,165 | 31,686 | 76,844 | (14,466) | 249,595 |
| AMO Pharma | Developer of drugs to treat rare or orphan diseases | 7,020 | 16,408 | - | (8,696) | (12,162) |
| Reaction Engines | Developer of engine technologies to enable space and hypersonic travel | 10,000 | 12,500 | 7,159 | (21,626) | 15,185 |
| BenevolentAl | Drug discovery using artificial intelligence | 84,882 | 11,935 | 10,560 | (179,852) | 153,999 |
| Federated Wireless | Provider of a spectrum access controller for wireless communications | 12,587 | 11,227 | 11,021 | (27,668) | (2,182) |
| HP Environmental Technologies | Portfolio of venture and Fund growth-stage industrial companies | 4,046 | 10,700 | N/a1 | N/a1 | N/a1 |
| Genomics | Developer of precision healthcare tools that use large-scale genetic information | 6,512 | 8,854 | 2,542 | (14,437) | 30,335 |
| Back Market | Expert refurbishment of electronic devices | 10,032 | 7,329 | N/a1 | N/a1 | N/a1 |
1Information not publicly available.
Principal risks and uncertainties
The Board, through its delegation to the Audit, Risk and Valuation Committee, is responsible for the Company's system of risk management and internal control and for reviewing its effectiveness. The Board has adopted a detailed matrix of principal risks affecting the Company's business as an investment trust and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the Audit, Risk and Valuation Committee on an ongoing basis. This system assists the Board in determining the nature and extent of the risks it is willing to take in achieving the Company's strategic objectives. Both the principal risks and uncertainties and the monitoring system are also subject to robust assessment at least annually. The last assessment took place in March 2023.
During the year, the Board also discussed and monitored a number of risks that could potentially impact the Company's ability to meet its strategic objectives. The Board receives updates from the Manager, Company Secretary and other service providers on emerging risks that could affect the Company. The Board was mindful of the following emerging risks during the year; the ongoing conflict in Ukraine, rising inflation, the threat of a global recession and increasing energy prices although they are not factors which explicitly impacted the Company's performance. These risks are also not seen as new principal or emerging risks but those that exacerbate existing risks and have been incorporated in the economic and market risk section in the table below.
A significant control failing or weakness relating to the production of the daily NAV was identified from the Audit, Risk and Valuation Committee's ongoing risk assessment which has been in place throughout the financial year and up to the date of this report. However, the Committee is confident that with the change of AIFM, Depositary and Administrator these failings have been robustly addressed and mitigated. The Board is therefore satisfied that it has undertaken a detailed review of the risks facing the Company.
Climate change risk includes how climate change could affect the Company's investments, and potentially shareholder returns. The Board has determined that this risk was not sufficiently material to be categorised as an independent principal risk and it continues to monitor developments in this area. The Board notes the Manager integrates ESG considerations, including climate change, into the investment process and felt that due to the nature of ESG risk in private investee companies, that this be added to the principal risks table below. The Manager has provided new and enhanced ESG reporting this year which includes case studies of engagement with a sample of the Company's portfolio companies.
Although the Board believes that it has a robust framework of internal control in place this can provide only reasonable, and not absolute, assurance against material financial misstatement or loss and is designed to manage, not eliminate, risk. Actions taken by the Board and, where appropriate, its Committees, to manage and mitigate the Company's emerging and principal risks and uncertainties are set out in the table below.
The "Change" column on the right highlights at a glance the Board's assessment of any increases or decreases in risk during the year after mitigation and management. The arrows show the risks as increased, decreased or unchanged.
| Risk | Mitigation | Change |
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| Economic and market risk
The portfolio will normally be fairly fully invested and as such will therefore inevitably be exposed to economic and market risk. Changes in general economic and market conditions, such as currency exchange rates, interest rates, inflation rates, industry conditions, tax laws, political events and trends can substantially and adversely affect the value of investments. Market risk includes the potential impact of events which are outside the Company's control, such as pandemics, civil unrest and wars.
The Company invests in public and private equity companies with an expectation of a an allocation to public:private of 25:75 per cent of companies held in the portfolio over time. Most public company holdings will likely be a consequence of private holdings which have listed following an IPO. Private equity companies generally have greater valuation uncertainties and liquidity risks than public equity holdings.
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There are inherent risks involved in stock selection. The Manager is experienced and has a long track record in successfully investing in public and private equity holdings. Significant progress has been made on transitioning the portfolio towards a more balanced and differentiated spread of exposures across healthcare, technology, financials, industrials, consumer and business services. Investment risk is spread by investing in high quality companies at various stages of their development. Having the flexibility to continue to hold these investments as they transition to public entities taps into the growth potential of businesses throughout their life cycle. The change to a global mandate also allows the Manager to diversify the portfolio geographically and also potentially across a wider range of technologies and thus mitigate against challenging economic conditions of a single market or sector.
The Manager will not normally hedge against foreign currency movements, but does take into account the risk when making investment decisions. Further details on financial risks and risk mitigation are detailed in note 20 to the accounts.
| Increased
The increased risk reflects continuing geopolitical concerns following the ongoing war in Ukraine as well as higher inflation, interest rate rises and the ongoing economic impact of these. Foreign currency risk exposure has also increased. The Board continues to monitor these events on a regular basis.
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Strategy risk
Notwithstanding the Manager's very experienced team and successful long-term track record in this asset class, this trust and other similar trusts across the sector are all trading at very wide discounts. While this may reflect in part uncertainty about valuations and/or current market circumstances, it may be that some investors begin to lose interest in listed closed end private equity as an asset class.
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The Board receives regular reports on the Company's investment performance against its stated objectives and peer group along with reports from discussions with its brokers and major shareholders. The Board also receives regular reports on marketing activity including how the Manager is promoting the asset class and its opportunities, the profile of the Manager and its track record and the need for a longer term investment perspective.
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Increased
The increased risk reflects the discount widening in 2022. Following agreement with its major shareholder, the Board intends, subject to cancellation of the Company's share premium account, to make an amount equating to 25% of all net cash realisations from the portfolio inherited from the previous portfolio manager* received between now and the 2025 Annual General Meeting available to be redeployed to make share repurchases by the Company. A continuation vote will be held at the 2025 AGM which will provide shareholders with the opportunity to vote on whether the Company should continue in its present form.
The Board acknowledges that it is not possible to accurately forecast realisations between now and 2025. In order to ensure that the Company remains active in buying back its stock, the Board intends, subject to cancellation of the Company's share premium account, to purchase shares equal to at least 5% of the Company's issued share capital in each of the calendar years 2023 and 2024. Further details can be found in the Chair's Statement on pages 4 to 6 of the 2022 Annual Report and Accounts.
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Valuation risk
The valuation of private equity early stage companies is inherently difficult. Valuation at a fixed point in time may not be representative of the medium or longer term. Particular events at a company or particular funding rounds may have a significant impact. Information may not be as widely available as with public companies and these companies may not yet have meaningful revenues or profits. Considerable uncertainty may exist around the eventual feasibility and value of a particular technology or its commercialisation.
Where other portfolio managers seek to make disposals of securities held in portfolios they manage and these securities are also held by the Company, the valuation of these securities may thereby be affected. Equally, market anticipation of these disposals may also impact valuations.
Listed, but thinly traded, shares may also be subject to significant and abrupt volatility.
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The Manager, under delegated authority from the Board, has responsibility for the valuation of the assets in the portfolio. The Manager, in turn, uses extensive research and input from its own valuation specialist provider, IHSMarkit (part of S&P Global). IHSMarkit conducts a regular rolling review of the valuation of all portfolio assets and also review their valuations in the event of any significant triggers at individual investee companies. They follow the widely respected and widely followed IPEVCV guidelines in executing these valuations; these processes are explained in Note 1b in the notes to the Accounts.
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Increased
During periods of higher interest rate volatility, valuations risk can rise.
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Operational risk
The Company has no employees and the Directors have been appointed on a nonexecutive basis. The Company is reliant upon the performance of third-party service providers for its executive function. The AIFM, the Manager, the Depositary, the Company Secretary and the Administrator will be performing services that are integral to the operation of the Company. Failure of any of its third-party service providers to perform in accordance with the terms of its appointment could have a material detrimental impact on the operation of the Company. Furthermore, any of the Company's service providers could terminate their contract.
Equally, the Company's reputation could be affected by shortcomings at one of its providers in respect of dealing with the providers' other clients or regulatory failings
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Experienced third party service providers are employed by the Company under appropriate terms and conditions and with agreed service level specifications. Service level agreements include clauses which set out the notice periods for terminations.
The Board receives regular reports from its service providers and the Management Engagement Committee will review the performance of key service providers at least annually. The AIFM, Depositary and Administrator have changed during the year, as described in more detail in the Directors' Report. The Board believes the new arrangements should ensure an integrated support structure and mitigate operational risks.
The Audit, Risk and Valuation Committee reviews reports on the external audits of the internal controls operated by certain of the key service providers.
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Unchanged
As part of the change of the AIFM, Depositary and Administrator, the Board have seen a significant improvement in the processes and procedures in place. The Board will continue to monitor the performance of the new service providers during the course of this year and expects the level of this risk to decrease significantly once the new providers have been in place for a period of time.
As noted in the Chair's Statement on page 5 of the 2022 Annual Report and Accounts, although the Company had a share premium account of £891 million at the time of the 2022 and 2023 share buybacks, as that had not been cancelled at the time, the Company did not have sufficient distributable profits and so those buybacks did not comply with the requirements of the Companies Act 2006. The Board has been working with its service providers to determine how this technical issue arose and to implement the necessary steps to remediate the position.
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Portfolio concentration risk
Some of the Company's investments have demonstrated relatively more success and/or required more funding than others, which has led to those investments representing larger proportions of the portfolio than might be expected. The risk linked to any portfolio concentration might be compounded due to the nature of some of the businesses and the risks associated with both commercial and technical milestones.
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The Board and the Manager feel that undue concentration is not desirable in the longer term and continuously explore options to reduce this over time. However, the Board's view is in the shorter term, portfolio concentration can be acceptable. The Manager has an extensive track record of managing diversified portfolios, both from sector and geographic perspectives, and the work to rebalance the portfolio continues. The Board also considers increased specific risk that may arise from increased concentration, as the result of the relative success of certain investee companies. The Board discusses this risk with the Manager on a regular basis.
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Decreased
Significant progress has been made on transitioning the portfolio towards a more balanced spread of exposures across healthcare, technology, financials, industrials, consumer and business services. At the year end the spread across these sectors was healthcare (53.5%), financials (16.8%), industrials (15.0%), technology (10.0%), consumer (3.0%) and business services (1.7%).
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Performance risk
There is always, for any investment portfolio, the generic risk of poor performance arising as a result of poor decisions in stock selection made by the Manager. In addition, given the long-term nature of this investment strategy (up to 10 years) and the absence of a clear benchmark, it is not necessarily easy to make an evaluation of the Manager based simply on returns over shorter periods.
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This risk is mitigated by the Board monitoring the performance of the portfolio and the decisions made by the Manager through detailed reporting at each Board meeting.
The Audit, Risk and Valuation Committee reviews all private equity investments on a quarterly basis and challenges methodologies used by the Manager.
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Unchanged
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Liquidity risk
Following the expiry of the loan facility in January 2023, liquidity risk, ie that the Company may not be able to liquidate its investments to meet its short-term financial demands.
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The Company's assets include readily realisable securities which can be sold to meet ongoing funding requirements. The Manager manages its liquid investments to ensure that sufficient cash is available to meet contractual commitments. A cash buffer is also held to meet other short-term needs. The Company had cash of 16.1 million (2021: 19.1 million) as at 31 December 2022.
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Unchanged
The loan was repaid and not replaced.
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Investee company specific risk
The Company invests in a variety of biopharma and technology businesses, many of them relatively early stage, where the technology is not yet fully proven or commercialised. This can offer very significant financial success when the technology delivers but also carries downside risks particular to the companies concerned. The eventual outcome for some of these companies may be somewhat binary in as much as either the technology works, or it does not, resulting in the company concerned becoming worth significantly less. Failure may materialise, for instance, in the case of clinical trials for a biotechnology business, in the case of scaling up or commercialisation of an engineering business or in terms of the appearance of a new, previously unknown competitor for a software company. Leading edge commercial scientific development in many fields is by its nature risky.
Short term liquidity issues can become compounded by market events.
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The private equity strategy is comprised of three sub-strategies of which the Life Sciences portfolio is limited to approximately 10% of total investments. Within the portfolio, the Manager works towards a balanced and differentiated spread of exposures across Diagnostics, Services and Therapeutics.
The Manager conducts regular reviews of these businesses through engaging regularly with all investee companies to monitor progress and ensure milestones are adequately met. The Manager also carries out due diligence on the relevant technologies and obtain regular updates. The Manager uses its own proprietary analytics to assess the prospects for investee companies and may also seek expert third party opinions regarding the likely success of the technology. The Manager works with other shareholders of a particular investee company to assist with financial support where required.
Short term liquidity issues are mitigated over time when such companies deliver on their milestones and value is recognised.
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Unchanged
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Information technology and information security risk
Each of the Company's service providers is at risk of cyber attack, data theft, service disruption, etc. While the risk of financial loss by the Company is probably small, the risk of reputational damage and the risk of loss of control of sensitive information is more significant, for instance a GDPR breach. Many of the Company's service providers and the Board often have sensitive information regarding transactions or pricing and information regarded as inside information in regulatory terms. Data theft or data corruption per se is regarded as a lower order risk as relevant data is held in multiple locations.
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The Board receives controls reports from its service providers which describe the protective measures they take as well as their business recovery plans. In addition, the Board received presentations from the Manager on cyber risk.
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Unchanged
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Key Person Dependency risk
The Manager operates a team approach to portfolio management and decision making so the risk arising from the departure of one or more of the Manager's key investment professionals should not necessarily prevent the Company from achieving its investment objective.
The Manager's resources could become stretched through the launch of new products or team departures leading to a lack of focus on the Company's portfolio.
The Manager could terminate its contract with the Company. This event would have an impact on the management of the portfolio and would constitute a technical default on the debt facility, requiring renegotiation or substitution, likely on less favourable terms.
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The Manager has a compensation and incentive scheme to recruit and retain key staff including the Portfolio Managers, and has developed a suitable succession planning programme, which seeks to ease the impact that additional workload and/or the loss of a key investment professional may have on the Company's performance. The Manager will notify any change in its key professionals to the Board at the earliest possible opportunity and the Board will be made aware of all efforts made to fill a vacancy.
Furthermore, investment decisions are made by a team of professionals, mitigating the impact of the loss of any key professional within the Manager's organisation on the Company's performance.
The AIFM agreement includes clauses which set out the notice periods for termination from either party as detailed in the Directors' Report on page 47 of the 2022 Annual Report and Accounts.
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Unchanged
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Environmental, Social and Governance (ESG) risk
Failure by the Manager to identify potential future ESG matters in an investee company, given their private nature, could lead to the Company's shares being less attractive to investors as well as potential valuation issues in the underlying investee company.
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The Manager has an application process integrated into the investment process. The approach to conducting ESG-related analysis of private companies is complemented with a standard exclusions list, more bespoke assessments, dedicated ESG reference calls, and by integrating several external tools and data sources, including RepRisk, World-Check, the ESG Data Convergence Project and eFront's ESG Outreach module to further assess ESG risks and opportunities. This includes the risk inherent in climate change.
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Unchanged
The Manager has provided new and enhanced ESG reporting which includes its approach to ESG and case studies of engagement with a sample of the Company's portfolio companies.
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Risk assessment and internal controls review by the Board
Risk assessment includes consideration of the scope and quality of the systems of internal control operating within key service providers, and ensures regular communication of the results of monitoring by such providers to the Audit, Risk and Valuation Committee, including the incidence of significant control failings or weaknesses that have been identified at any time and the extent to which they have resulted in unforeseen outcomes or contingencies that may have a material impact on the Company's performance or condition.
Going Concern
The Board has considered the Company's principal risks and uncertainties (including whether there are any emerging risks); has scrutinised the detailed cash flow forecast prepared by the Manager; and considered their assessment of the likelihood and quantum of funds which could be raised from sales of investments. The Manager has also performed a range of stress tests, and demonstrated to the Board that even in an adverse scenario of depressed markets and restrictions on sales in the private equity market, the Company could still generate sufficient funds from sales of investments to meet its liabilities over the next twelve months. As a result, the Board is comfortable that the Company will have sufficient liquid funds to pay operating expenses.
The Company's £40 million loan facility with The Northern Trust Company terminated on 30 January 2023 and was not renewed. The facility was undrawn at that date.
On this basis, the Board considers it appropriate to adopt the going concern basis of accounting in the Company's accounts, and has not identified any material uncertainties to the Company's ability to continue as a going concern over a period of at least twelve months from the date of approval of these annual report and accounts.
Viability Statement
The Board has assessed the prospects of the Company over the five-year period ending 31 December 2027. The Board considers a five-year period to be appropriate because it is the minimum holding period that it would recommend to a prospective investor considering purchasing shares in the Company.
The Board has considered the principal risks set out on pages 37 to 43 of the 2022 Annual Report and Accounts and detailed cash flow forecasts prepared by the Manager and stress case scenarios.
The Board believes that the portfolio will provide shareholders with satisfactory returns from the investment portfolio over a five-year period and, notwithstanding the Strategy risks mentioned in the principal risks and uncertainties section, there should be continued demand for the Company's shares.
The continuation of the Company will be subject to the approval of shareholders at the 2025 AGM. The Board intends to make, subject to cancellation of the Company's share premium account, an amount equating to 25% of all net cash realisations from the portfolio inherited from the previous portfolio manager received between now and the 2025 Annual General Meeting available to be redeployed to make share repurchases by the Company. The Board acknowledges that it is not possible to accurately forecast realisations between now and 2025. In order to ensure that the Company remains active in buying back its stock, the Company intends in any event, subject to cancellation of the Company's share premium account, to purchase shares equal to at least 5% of the Company's issued share capital in each of the calendar years 2023 and 2024. The Board believes the Manager is well placed to deliver on these proposals, generate long-term capital growth and have no reason to believe that the continuation vote will not be approved in 2025.
Having considered all of the Company's resources, strategy, risks and probabilities, the Board has a reasonable expectation that the Company will continue to operate and meet its liabilities as they fall due, during the five year period to 31 December 2027.
By order of the Board
Schroder Investment Management Limited
Company Secretary
14 April 2023
Statement of Directors' Responsibilities
The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland" and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the return or loss of the Company for that period. In preparing these financial statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgements and accounting estimates that are reasonable and prudent;
- state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
- prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Manager is responsible for the maintenance and integrity of the webpage dedicated to the Company. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the Directors, whose names and functions are listed on pages 44 and 45 of the 2022 Annual Report and Accounts, confirm that to the best of their knowledge:
- the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and net return of the Company;
- the annual report and accounts includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces; and
- the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
On behalf of the Board
Tim Edwards
Chair of the Board
14 April 2023
Income Statement
for the year ended 31 December 2022
| | | 2022 | 2021 | ||||
| | | Revenue | Capital | Total | Revenue | Capital | Total |
| | Note | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| (Losses)/gains on investments held at fair value through profit or loss | | - | (175,669) | (175,669) | - | 124,583 | 124,583 |
| Gains/(losses) on foreign exchange | | - | 583 | 583 | - | (466) | (466) |
| Income from investments | 2 | 479 | - | 479 | 112 | - | 112 |
| Gross return/(loss) | | 479 | (175,086) | (174,607) | 112 | 124,117 | 124,229 |
| Management fee | 3 | (1,989) | - | (1,989) | (3,019) | - | (3,019) |
| Administrative expenses | 4 | (1,237) | - | (1,237) | (1,448) | - | (1,448) |
| Net (loss)/return before finance costs and taxation | | (2,747) | (175,086) | (177,833) | (4,355) | 124,117 | 119,762 |
| Finance costs | 5 | (304) | - | (304) | (960) | - | (960) |
| Net (loss)/return before taxation | | (3,051) | (175,086) | (178,137) | (5,315) | 124,117 | 118,802 |
| Taxation | 6 | - | - | - | - | - | - |
| Net (loss)/return after taxation | | (3,051) | (175,086) | (178,137) | (5,315) | 124,117 | 118,802 |
| Basic and diluted (loss)/earnings per share | 8 | (0.34)p | (19.30)p | (19.64)p | (0.58)p | 13.66p | 13.08p |
The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no other items of other comprehensive income, and therefore the net (loss)/return after taxation is also the total comprehensive income for the year, therefore no separate Statement of Comprehensive Income has been prepared.
All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.
The notes on pages 74 to 88 of the 2022 Annual Report and Accounts form an integral part of these accounts.
Statement of Changes in Equity
for the year ended 31 December 2022
| | | Called-up | | | | | |
| | | share | Share | Capital | Capital | Revenue | |
| | Note | capital | premium | redemption | reserves | reserve | Total |
| At 31 December 2020 | | 9,086 | 891,017 | - | (563,222) | (18,812) | 318,069 |
| Net return/(loss) after taxation | | - | - | - | 124,117 | (5,315) | 118,802 |
| At 31 December 2021 | 13/14 | 9,086 | 891,017 | - | (439,105) | (24,127) | 436,871 |
| Purchase of shares for cancellation | | (44) | - | 44 | (812) | - | (812) |
| Net loss after taxation | | - | - | - | (175,086) | (3,051) | (178,137) |
| At 31 December 2022 | 13/14 | 9,042 | 891,017 | 44 | (615,003) | (27,178) | 257,922 |
The notes on pages 74 to 88 of the 2022 Annual Report and Accounts form an integral part of these accounts.
Statement of Financial Position
at 31 December 2022
| | | 2022 | 2021 |
| | Note | £'000 | £'000 |
| Fixed assets | | | |
| Investments held at fair value through profit or loss | 9 | 242,504 | 440,899 |
| Current assets | | | |
| Debtors | 10 | 160 | 171 |
| Cash at bank and in hand | 10 | 16,122 | 19,077 |
| | | 16,282 | 19,248 |
| Current liabilities | | | |
| Creditors: amounts falling due within one year | 11 | (864) | (1,276) |
| Net current assets | | 15,418 | 17,972 |
| Total assets less current liabilities | | 257,922 | 458,871 |
| Creditors: amounts falling due after more than one year | 12 | - | (22,000) |
| Net assets | | 257,922 | 436,871 |
| Capital and reserves | | | |
| Called-up share capital | 13 | 9,042 | 9,086 |
| Share premium | 14 | 891,017 | 891,017 |
| Capital redemption reserve | 14 | 44 | - |
| Capital reserves | 14 | (615,003) | (439,105) |
| Revenue reserve | 14 | (27,178) | (24,127) |
| Total equity shareholders' funds | | 257,922 | 436,871 |
| Net asset value per share | 15 | 28.52p | 48.08p |
These accounts were approved and authorised for issue by the board of directors on 14 April 2023 and signed on its behalf by:
Tim Edwards
Chair
The notes on pages 74 to 88 of the 2022 Annual Report and Accounts form an integral part of these accounts.
Cash Flow Statement
for the year ended 31 December 2022
| | 2022 | 2021 |
| | £'000 | £'000 |
| Cash flows from operating activities | | |
| (Loss)/return before finance costs and taxation | (177,833) | 119,762 |
| Adjustments for: | | |
| Losses/(gains) on investments held at fair value through profit or loss | 175,669 | (124,583) |
| Decrease/(increase) in debtors | 11 | (145) |
| Decrease in creditors | (316) | (1,231) |
| Net cash flow from operating activities | (2,469) | (6,197) |
| Cash flows from investment activities | | |
| Purchases of investments | (17,422) | (61,199) |
| Proceeds from sales of investments | 40,148 | 166,035 |
| Net cash flow from investment activities | 22,726 | 104,836 |
| Cash flows from financing activities | | |
| Purchase of shares for cancellation | (812) | - |
| Finance costs | (400) | (909) |
| Bank loan drawn down | - | 22,000 |
| Bank loan repaid | (22,000) | (107,032) |
| Net cash flow from financing activities | (23,212) | (85,941) |
| Change in cash and cash equivalents | (2,955) | 12,698 |
| Cash and cash equivalents at the beginning of the year | 19,077 | 6,379 |
| Cash and cash equivalents at the end of the year | 16,122 | 19,077 |
The notes on pages 74 to 88 of the 2022 Annual Report and Accounts form an integral part of these accounts.
Notes to the Accounts
1. Accounting Policies
(a) Basis of accounting
Schroder UK Public Private Trust plc ("the Company") is registered in England and Wales as a public company limited by shares. The Company's registered office is 1 London Wall Place, London EC2Y 5AU.
The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP"), in particular in accordance with Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (the "SORP") issued by the Association of Investment Companies in July 2022. All of the Company's operations are of a continuing nature.
The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments and derivative financial instruments held at fair value through profit or loss. The directors believe that the Company has adequate resources to continue operating for at least 12 months from the date of approval of these accounts. In forming this opinion, the directors have taken into consideration: the controls and monitoring processes in place; the Company's level of debt and other payables; the level of operating expenses, comprising largely variable costs which would reduce pro rata in the event of a market downturn; the Company's cash flow forecasts and the liquidity of the Company's investments. In forming this opinion, the directors have also considered the impact of climate change on the Company. Further details of directors' considerations regarding this are given in the Chair's Statement, Investment Managers' Review, Going Concern Statement, Viability Statement and under Principal Risks and Uncertainties. The accounts have been prepared on the assumption that approval as an investment trust will continue to be granted.
In preparing these accounts the Directors have considered the impact of climate change on the value of the Company's investments. The Board has concluded that, for investments which are valued using quoted bid prices in active markets, the fair value reflects market participants' view of climate change risk. Unquoted investments are valued in accordance with the policy detailed below, using techniques which also reflect each investment's exposure to climate change risk.
The Company has adopted the provisions of Sections 11 and 12 of FRS 102 for measuring and disclosing its financial instruments.
The accounts are presented in sterling and amounts have been rounded to the nearest thousand.
The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 31 December 2021.
Significant estimates and assumptions have been required in valuing the Company's investments and these are detailed below.
(b) Valuation of investments
Investments that are quoted on an exchange are valued using closing bid prices. If there has been no material trading in an investment, it will be valued using the process for unquoted investments, described below.
Investments in shares that are not quoted on any Stock Exchange (unquoted investments) represent a significant part of the Company's portfolio. Such investments are held at fair value, which requires significant estimation in concluding on their fair value. While there is a robust and consistent valuation process undertaken by the AIFM, it is recognised that in stating these assets at fair value there is a significant element of estimation uncertainty. Central to this uncertainty is the assumption that such assets will continue to progress in line with their stated business plan and will be held for the longer term until exit, generally where either the company is sold to an interested party or lists on an appropriate exchange. The core to that significant estimate is the potential failure of any individual unquoted investment to progress in accordance with their business plan and such failure could result in a material change to the fair valuation of that company. The assumptions and estimates made in determining the fair value of each unquoted investment are considered at least each six months or sooner if there is a triggering event. An example of where a valuation would be considered out of the six-month cycle is the failure of a drug under development to meet an anticipated outcome of its trial, or other performance against tangible development milestones.
A full valuation review is undertaken by the Manager in June and December, with a review undertaken in March and September. In the event of a triggering event being identified intra the valuation review process, an ad hoc valuation will be undertaken.
Significant estimates of fair value are considered on an ongoing basis including considering impact of events in the wider market. In making these estimates, appropriate care is taken to consider the nature and inherent uncertainties of market events and their impact on the fair value of unquoted assets.
While there may be market speculation about potential transaction activity in portfolio companies, such matters are not taken into account in the valuation process until the information is public and can be considered as an observable market transaction.
The Manager has determined the fair value of the unquoted investments and investments quoted in inactive markets, in accordance with the following principles, which are consistent with IPEVCV guidelines:
1. The following factors will be considered in determining the fair value of an asset:
(i) The price of a recent investment, whilst an indicator of fair value, is not a default that would preclude re-estimating the valuation at the valuation date. However, if the price of recent investment is determined to be fair value then it is used to calibrate inputs to the valuation model(s); or
(ii) Where a value is indicated by a recent material arms-length transaction by an independent third party in the shares of a company, and after it is established that this is fair then this value will be used, unless the rights attributable to the shares impact the overall capital structure and rights of existing investors; or
(iii) In the absence of (i) and (ii), and depending upon both the subsequent trading performance and investment structure of an investee company, the valuation basis will usually move to an earnings multiple basis or, if appropriate, other valuation models such as:
(a) Probability-weighted expected return method (PWERM), which considers on a probability weighted basis the future outcomes for the investment.
(b) Option priced modelling (OPM) is used to value early stage companies where outcomes are uncertain.
(c) Adjusted recent transaction prices (which consider the company's performance against key milestones and the complexity of the capital structure) are also used.
(d) Discounted cash flow model which values a business based on estimates of future cash-flows with an appropriate discount rate.
(iv) If the investment is in a fund, the valuation will be based on the NAV of the fund (which is invariably comprised of early-stage unquoted investments), or on an adjusted basis to recognise the underlying performance of the investments.
Where models are used in valuing an investment, significant judgements are made in estimating the various inputs into the models and recognising the sensitivity of such estimates, especially in early-stage pre-revenue enterprises. Examples of the factors where significant judgement is made include, but are not limited to, the probability assigned to the relative success or failure of an enterprise; the probable future outcome paths; discount rates; growth rates; terminal value; selection of appropriate market comparable companies, the reliability of future revenue and growth forecasts and the likely exit scenarios for the investor company, for example, IPO or trade sale. In making judgements in regard to the probability of an investee outcome, it must be noted that due to the nature of the investee company's activity, its future outcome may, to a greater or lesser extent, be binary, for example, if an investee company is developing one particular drug and that fails its required trials then the outcome may be terminal for that enterprise. It should be noted that the most significant event that will drive valuation change in investee companies are company-specific events that would give rise to a valuation inflexion point (known also as a 'triggering event'). An example of a material inflexion point in a bio-pharma company would be the successful completion of a drug trial or its approval by a regulatory authority.
These valuation methods may lead to a company being valued on a suitable price-earnings ratio to that company's historic, current or forecast post-tax earnings before interest and amortisation. The ratio used will be based on a comparable sector but the resulting value will be adjusted to reflect points of difference identified when compared to the market sector (in which the investment would reside if it were it listed) including, inter alia, a lack of marketability.
At 31 December 2022, 14.5% (2021: 24.2%) of the NAV was valued in accordance with 1(i); nil% (2021: 9.1%) was valued in accordance with 1(ii); 37.9% (2021: 14.4%) in accordance with 1(iii); and 9.1% (2021: 2.4%) in accordance with 1(iv).
(c) Accounting for reserves
Capital reserve
The capital reserve reflects any:
- gains and losses on disposals of investments;
- exchange differences of a capital nature;
- increase and decreases in the fair value of investments which have been recognised in the capital column of the Income Statement;
- expenses which are capital in nature; and
- the cost of repurchasing shares, including the related stamp duty and transactions costs.
Any gains in the fair value of investments that are not readily convertible to cash are treated as unrealised gains in the capital reserve.
Revenue reserve
The revenue reserve reflects all income and expenditure recognised in the revenue column of the Income Statement and any surplus is distributable by way of dividend.
(d) Income
Dividends receivable are included in revenue on an ex-dividend basis except where, in the opinion of the board, the dividend is capital in nature, in which case it is included in capital.
Overseas dividends are included gross of any withholding tax.
Deposit interest outstanding at the year end is calculated and accrued on a time apportionment basis using market rates of interest.
(e) Expenses
All expenses are accounted for on an accruals basis. Expenses are allocated wholly to revenue, except that:
- Any performance fee is charged wholly to capital.
- Expenses incidental to the purchase or sale of an investment are charged to capital. These expenses are commonly referred to as transaction costs and mainly comprise brokerage commission. Details of transaction costs are given in note 9 on page 79 of the 2022 Annual Report and Accounts.
(f) Finance costs
Finance costs, comprising loan and overdraft interest, are charged wholly to revenue.
(g) Financial instruments
Cash at bank and in hand may comprise cash and demand deposits which are readily convertible to a known amount of cash and are subject to insignificant risk of changes in value. Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method. Bank overdrafts and loans are included in current liabilities, or creditors falling due after more than one year, depending on the terms of the facility agreement.
Other debtors and creditors do not carry any interest, are short-term in nature and are accordingly stated at nominal value, with debtors reduced by appropriate allowances for estimated irrecoverable amounts.
Any derivative financial instruments held at the year end, including forward foreign currency contracts, are included in current assets or current liabilities in the Statement of Financial Position at fair value, using market prices. Forward foreign currency contracts are valued at the gain or loss if the contracts had been closed out at the accounting date, at prevailing market rates.
Gains or losses on derivative financial instruments are treated as capital or revenue depending on the motive and circumstances of the transaction. Where positions are undertaken to protect or enhance capital, the returns are capital and where they are generating or protecting revenue, the returns are revenue.
(h) Taxation
The tax charge for the year includes a provision for all amounts expected to be received or paid. Deferred tax is provided on all timing differences that have originated but not reversed by the accounting date. Deferred tax liabilities are recognised for all taxable timing differences but deferred tax assets are only recognised to the extent that it is probable that taxable profits will be available against which those timing differences can be utilised. Deferred tax is measured at the tax rate which is expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates that have been enacted or substantively enacted at the balance sheet date and is measured on an undiscounted basis.
(i) Value added tax ("VAT")
Expenses are disclosed inclusive of any related irrecoverable VAT.
(j) Foreign currency
In accordance with FRS 102, the Company is required to determine the functional currency, being the currency in which the Company predominantly operates. The board, having regard to the currency of the Company's share capital and the predominant currency in which its shareholders operate, has determined that sterling is the functional currency and the currency in which the accounts are presented.
Transactions denominated in foreign currencies are converted at actual exchange rates as at the date of the transaction.
(k) Share issues
Shares issued are recognised based on the proceeds or fair value received, with the excess of the amount received over their nominal value being credited to the share premium account. Direct issue costs are deducted from share premium.
(l) Repurchases of shares for cancellation
The cost of repurchasing the Company's own shares including the related stamp duty and transactions costs is charged to "Capital reserves", and dealt with in the Statement of Changes in Equity. Share repurchase transactions are accounted for on a trade date basis. The nominal value of share capital repurchased and cancelled is transferred out of "Called-up share capital" and into "Capital redemption reserve".
2. Income
| | 2022 | 2021 |
| | £'000 | £'000 |
| Income from investments: | | |
| UK dividends | 425 | 112 |
| Interest from debt securities | 20 | - |
| Bank interest | 34 | - |
| | 479 | 112 |
3. Management fee
| | 2022 | 2021 |
| | £'000 | £'000 |
| Management fee | 1,989 | 3,019 |
| | 1,989 | 3,019 |
Under the terms of the management agreement, the Manager is entitled to a management fee and a performance fee, subject to achieving performance targets. Details of these calculations are set out in the Directors' Report on pages 47 and 48 of the 2022 Annual Report and Accounts. No performance fee is payable for the current or prior year and no provision is required at 31 December 2022.
Details of all transactions with the current and previous Managers are given in note 17 on page 82 of the 2022 Annual Report and Accounts.
4. Other administrative expenses
| | 2022 | 2021 |
| | £'000 | £'000 |
| Other administration expenses | 596 | 818 |
| Valuation fees | 275 | 303 |
| Directors' fees1 | 186 | 189 |
| Auditor's remuneration for the audit of the Company's annual accounts2 | 180 | 138 |
| | 1,237 | 1,448 |
1Full details are given in the remuneration report on pages 57 to 59 of the 2022 Annual Report and Accounts.
2Includes VAT amounting to £30,000 (2021: £23,000).
5. Finance costs
| | 2022 | 2021 |
| | £'000 | £'000 |
| Bank loan/overdraft fees and interest | 304 | 960 |
| | 304 | 960 |
6. Taxation
(a) Analysis of tax charge for the year
| | 2022 | 2021 | ||||
| | Revenue | Capital | Total | Revenue | Capital | Total |
| | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| Taxation on ordinary activities | - | - | - | - | - | - |
The Company has no corporation tax liability for the year ended 31 December 2022 (2021: nil).
(b) Factors affecting tax charge for the year
| | 2022 | 2021 | ||||
| | Revenue | Capital | Total | Revenue | Capital | Total |
| | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| | | | | | | |
| Net (loss)/gain on ordinary activities before taxation | (3,051) | (175,086) | (178,137) | (5,315) | 124,117 | 118,802 |
| Net (loss)/gain on ordinary activities before taxation multiplied by the Company's applicable rate of corporation tax for the year of 19.0% (2021: 19.0%) | (580) | (33,266) | (33,846) | (1,010) | 23,582 | 22,572 |
| Effects of: | | | | | | |
| Capital loss/(return) on investments | - | 33,266 | 33,266 | - | (23,582) | (23,582) |
| UK dividends which are not taxable | (81) | - | (81) | (21) | - | (21) |
| Disallowed expenses | 24 | - | 24 | - | - | - |
| Unrelieved loan relationship deficit | 48 | - | 48 | 182 | - | 182 |
| Unrelieved management expenses | 589 | - | 589 | 849 | - | 849 |
| Taxation on ordinary activities | - | - | - | - | - | - |
(c) Deferred taxation
Given the Company's intention to meet the conditions required to retain its status as an Investment Trust Company, no provision has been made for deferred tax on any capital gains or losses arising on the revaluation or disposal of investments.
The Company has an unrecognised deferred tax asset £7,529,000 (2021: £6,027,000) arising from unutilised tax losses of £30,117,000 (2021: £24,106,000) based on a prospective corporation tax rate of 25.0% (2021: 25%). In its 2021 budget, the government announced that the main rate of corporation tax would increase to 25% for the fiscal year beginning on 1 April 2023.This deferred tax asset has arisen due to the cumulative excess of deductible expenses over taxable income. Given the composition of the Company's portfolio, it is not likely that this asset will be utilised in the foreseeable future and therefore no asset has been recognised in the accounts.
7. Dividends
No dividends have been paid or proposed in respect of the year ended 31 December 2022 (2021: nil).
8. Basic and diluted (loss)/earnings per share
| | 2022 | 2021 |
| | £'000 | £'000 |
| Revenue loss | (3,051) | (5,315) |
| Capital (loss)/return | (175,086) | 124,117 |
| Total (loss)/return | (178,137) | 118,802 |
| Weighted average number of shares in issue during the year | 907,291,950 | 908,639,238 |
| Revenue loss per share | (0.34)p | (0.58)p |
| Capital (loss)/return per share | (19.30)p | 13.66p |
| Total basic and diluted (loss)/return per share | (19.64)p | 13.08p |
| | | |
The basic and diluted (loss)/return per share are the same because there are no dilutive instruments in issue.
9. Investments held at fair value through profit or loss
(a) Movement in investments
| | 2022 | 2021 |
| | £'000 | £'000 |
| Opening book cost | 622,857 | 759,715 |
| Opening investment holding losses | (181,958) | (338,563) |
| Opening fair value | 440,899 | 421,152 |
| Purchases at cost | 17,422 | 88,680 |
| Sales proceeds | (40,148) | (193,516) |
| (Losses)/gains on investments held at fair value through profit or loss | (175,669) | 124,583 |
| Closing fair value | 242,504 | 440,899 |
| Closing book cost | 581,253 | 622,857 |
| Closing investment holding losses | (338,749) | (181,958) |
| Closing fair value | 242,504 | 440,899 |
The Company received £40,148,000 (2021: £193,516,000) from investments sold in the year. The book cost of the investments when they were purchased was £59,026,000 (2021: £225,538,000). These investments have been revalued overtime and, until they were sold, any unrealised gains/losses were included in the fair value of the investments.
Purchases and sales include non-cash transactions in relation to HP Environmental Technologies Fund (2021: Athenex and Kuur).
(b) Unquoted investments, including investments quoted in inactive markets
Material revaluations of unquoted investments during the year
| | Opening valuation | Valuation | Closing valuation |
| | at 31/12/211 | adjustment | at 31/12/22 |
| | £'000 | £'000 | £'000 |
| Atom Bank | 46,209 | (14,523) | 31,686 |
| AMO Pharma | 11,668 | 4,740 | 16,408 |
| BenevolentAI | 28,484 | (16,549) | 11,935 |
| Revolut LLP | 10,115 | (4,679) | 5,436 |
1Based on the closing holding at opening prices.
Material disposals of unquoted investments during the year
| | Book cost £'000 | Carrying value at 31/12/21 £'000 | Sales Proceeds £'000 | Gain/(loss) based on carrying value at 31/12/21 £'000 |
| Seedrs | 10,470 | 11,272 | 12,000 | 728 |
| Nexeon | 1,059 | 7,788 | 1,552 | (6,236) |
(c) Transaction costs
The following transaction costs, comprising stamp duty and brokerage commission, were incurred in the year:
| | 2022 | 2021 |
| | £'000 | £'000 |
| On acquisitions | - | 78 |
| On disposals | 8 | 397 |
| | 8 | 475 |
| | | |
10. Current assets
|
|
|
|
| | 2022 | 2021 |
| | £'000 | £'000 |
| Debtors | | |
| Accrued income | 94 | 54 |
| Other debtors | 66 | 117 |
| | 160 | 171 |
The Directors consider that the carrying amount of accrued income and debtors approximate to their fair value.
Cash at bank and in hand
The carrying amount of cash, amounting to £16,122,000 (2021: £19,077,000) represents its fair value.
11. Creditors: amounts falling due within one year
| | 2022 | 2021 |
| | £'000 | £'000 |
| Management fee payable | 373 | 765 |
| Other creditors and accruals | 491 | 511 |
| | 864 | 1,276 |
The Company has a £40 million loan facility agreement with The Northern Trust Company, which terminates on 30 January 2023; interest on any drawings accrues daily and is calculated at the aggregate of The Bank of England base rate and a 2% margin. Drawings on the facility are secured on all of the Company's assets. The facility was undrawn at the year end. At the prior year end, the Company had drawn down £22 million on this facility, as stated in note 12 below.
The Directors consider that the carrying amount of creditors falling due within one year approximates to their fair value.
12. Creditors: amounts falling due after more than one year
| | 2022 | 2021 |
| | £'000 | £'000 |
| Bank loan | - | 22,000 |
The bank loan was drawn down on the Company's £40 million loan facility agreement with The Northern Trust Company. Further details of this facility are given in note 11 above.
The Directors consider that the carrying amount of the bank loan approximates to its fair value.
13. Called-up share capital
| | 2022 | 2021 |
| | £'000 | £'000 |
| Ordinary shares allotted, called up and fully paid: | | |
| Ordinary shares of 1p each: | | |
| 908,639,238 ordinary shares of 1p each | 9,086 | 9,086 |
| Repurchase and cancellation of 4,420,000 (2021: nil) shares | (44) | - |
| Closing balance of 904,219,238 (2021: 908,639,238) shares | 9,042 | 9,086 |
During the year, the Company made market purchases of 4,420,000 of its own shares, nominal value £44,200, for cancellation, representing 0.5% of the shares outstanding at the beginning of the year. The total consideration paid for these shares amounted to c.£812,000. The reason for these purchases was to seek to manage the volatility of the share price discount to NAV per share. As noted in the Chair's statement on page 5 of the 2022 Annual Report and Accounts, although the Company had a share premium account of £891 million at the time of the 2022 and 2023 share buybacks, as that had not been cancelled at the time, the Company did not have sufficient distributable profits and so those buybacks did not comply with the requirements of the Companies Act 2006.
14. Reserves
| | Capital reserves | ||||
| | | Capital | Losses on | Investment | |
| | Share | redemption | sales of | holding | Revenue |
| | premium1 | reserve2 | investments3 | losses4 | reserve5 |
| | £'000 | £'000 | £'000 | £'000 | £'000 |
| At 31 December 2021 | 891,017 | - | (256,487) | (182,618) | (24,127) |
| Losses on sales of investments based on historic cost | - | - | (18,878) | - | - |
| Net movement in investment holding gains and losses | - | - | - | (156,791) | - |
| Repurchase and cancellation of shares | - | 44 | (812) | - | - |
| Exchange gains | - | - | 583 | - | - |
| Retained revenue loss for the year | - | - | - | - | (3,051) |
| | | | | | |
| At 31 December 2022 | 891,017 | 44 | (275,594) | (339,409) | (27,178) |
| | | | | | |
| | Capital reserves | ||||
| | | Capital | Losses on | Investment | |
| | Share | redemption | sales of | holding | Revenue |
| | premium1 | reserve2 | investments3 | losses4 | reserve5 |
| | £'000 | £'000 | £'000 | £'000 | £'000 |
| At 31 December 2020 | | | | | |
| Opening balance | 891,017 | - | (224,465) | (338,757) | (18,812) |
| Losses on sales of investments based on historic cost | - | - | (32,022) | - | - |
| Net movement in investment holding gains and losses | - | - | - | 156,605 | - |
| Exchange losses | - | - | - | (466) | - |
| Retained revenue loss for the year | - | - | - | - | (5,315) |
| At 31 December 2021 | 891,017 | - | (256,487) | (182,618) | (24,127) |
The Company's articles of association permit dividend distributions out of realised capital profits.
1The share premium is a non distributable reserve and represents the amount by which the fair value of the consideration received from shares issued exceeds the nominal value of shares issued.
2The capital redemption reserve represents the accumulated nominal value of shares repurchased for cancellation. This reserve is not distributable.
3This is a realised (distributable) capital reserve and a positive balance may be used to repurchase the Company's own shares or distributed as dividends. However, the Company is not currently in a position to make such a distribution as the balance is negative.
4This reserve may include some holding gains on liquid investments (which may be deemed to be realised) and other amounts which are unrealised. An analysis has not been made between those amounts that are realised (and may be distributed as dividends or used to repurchase the Company's own shares) and those that are unrealised. The Company is not currently in a position to make any distributions due to total net negative balances on its distributable reserves.
5A positive balance on the revenue reserve may be distributed as dividends or used to repurchase the Company's own shares.
15. Net asset value per share
| | 2022 | 2021 |
| Net assets attributable to shareholders (£'000) | 257,922 | 436,871 |
| Shares in issue at the year end | 904,219,238 | 908,639,238 |
| Net asset value per share | 28.52p | 48.08p |
16. Uncalled capital commitments
At 31 December 2022, the Company had uncalled capital commitments amounting to £5,121,000 (2021: nil) in respect of follow-on investments, which may be called by investee companies, subject to their achievement of certain milestones and objectives.
17. Transactions with the Manager and Alternative Investment Fund Manager (AIFM)
A management fee amounting to £1,989,000 (2021: £3,019,000) is payable to Schroder Investment Management Limited for the year ended 31 December 2022, of which £373,000 (2021: £765,000) was outstanding at the year end.
Fees amounting to £65,000 (2021: £88,000) were payable to Link Fund Solutions Limited for services as AIFM, of which £nil (2021: £22,000) was outstanding at the year end.
Fees amounting to £41,000 were payable to Schroder Unit Trusts Limited for services as AIFM, following its appointment as AIFM with effect from 1 October 2022, and the whole of this amount was outstanding at the year end.
Under the terms of the Alternative Investment Management Agreement dated 29 September 2022, Schroder Unit Trusts Limited may reclaim from the Company certain expenses which it has paid on behalf of the Company to HSBC in connection with accounting and administrative services provided to the Company. These charges amounted to £17,000 for the 3 months ended 31 December 2022, and the whole of this amount was outstanding at the year end.
No Director of the Company served as a director of any member of the Schroder Group, Link Fund Solutions Limited or its affiliates at any time during the year.
18. Related party transactions
Details of the remuneration payable to directors are given in the Directors' Remuneration Report on page 58 of the 2022 Annual Report and Accounts and details of directors' shareholdings are given in the Directors' Remuneration Report on page 59 of the 2022 Annual Report and Accounts. Details of transactions with the Manager, the AIFM and its associated companies are given in note 17 above. There have been no other transactions with related parties during the year (2021: nil).
19. Disclosures regarding financial instruments measured at fair value
The Company's financial instruments within the scope of FRS 102 that are held at fair value comprise its investment portfolio and derivative financial instruments.
FRS 102 requires that financial instruments held at fair value are categorised into a hierarchy consisting of the three levels below. A fair value measurement is categorised in its entirety on the basis of the lowest level input that is significant to the fair value measurement.
Level 1 - valued using unadjusted quoted prices in active markets for identical assets.
Level 2 - valued using observable inputs other than quoted prices included within Level 1.
Level 3 - valued using inputs that are unobservable.
Details of the Company's policy for valuing investments and derivative instruments are given in note 1(b) on pages 74 and 75 and 1(g) on page 76 of the 2022 Annual Report and Accounts. Level 3 investments have been valued in accordance with note 1(b) (i) - (iv) .
At 31 December, the Company's investment portfolio and any derivative financial instruments were categorised as follows:
| | | 2022 | |||
| | | Level 1 | Level 2 | Level 3 | Total |
| | | £'000 | £'000 | £'000 | £'000 |
| Investments in equities | - quoted | 83,711 | - | 11,935 | 95,646 |
| | - unquoted | - | - | 146,858 | 146,858 |
| Total | | 83,711 | - | 158,793 | 242,504 |
RM2 International £104,000 transferred from Level 3 to Level 1 during the year following the conversion of RM2 International shares into ARC Group Worldwide shares.
| | | 2021 | |||
| | | Level 1 | Level 2 | Level 3 | Total |
| | | £'000 | £'000 | £'000 | £'000 |
| Investments in equities | - quoted | 222,031 | - | 21,312 | 243,343 |
| | - unquoted | - | - | 197,556 | 197,556 |
| Total | | 222,031 | - | 218,868 | 440,899 |
Immunocore £21,044,000 and Oxford Nanopore £162,641,000 transferred from Level 3 to Level 1 during the year following their IPOs on NASDAQ and London Stock Exchange, respectively.
Movements in fair value measurements included in Level 3 during the year are as follows:
| | 2022 £'000 | 2021 £'000 |
| Opening book cost | 482,416 | 663,223 |
| Opening investment holding losses | (263,548) | (274,768) |
| Opening valuation | 218,868 | 388,455 |
| Purchases at cost | 17,422 | 39,437 |
| Sales proceeds | (19,289) | (185,825) |
| Transfer between Level 3 and Level 1 | (19,152) | (66,197) |
| Net movement in investment holding gains and losses | (39,056) | 42,998 |
| Closing valuation | 158,793 | 218,868 |
| Closing book cost | 458,690 | 482,416 |
| Closing investment holding losses | (299,897) | (263,548) |
| Total level 3 investments held at fair value through profit or loss | 158,793 | 218,868 |
The company received £19,289,000 (2021: £185,825,000) from Level 3 investments sold in the year. The book cost of the investments when they were purchased was £20,384,000 (2021: £154,047,000). These investments have been revalued over time and, until they were sold, any unrealised gains/losses were included in the fair value of the investments.
20. Financial instruments' exposure to risk and risk management policies
The investment objective is set out on the inside front cover of this report. In pursuing this objective, the Company is exposed to a variety of financial risks that could result in a reduction in the Company's net assets or a reduction in the profits available for dividends. These financial risks include market risk (comprising currency risk, interest rate risk and market price risk), liquidity risk and credit risk. The directors' policy for managing these risks is set out below. The board coordinates the Company's risk management policy.
The objectives, policies and processes for managing the risks and the methods used to measure the risks that are set out below, have not changed from those applying in the comparative year.
The Company's classes of financial instruments may comprise the following:
- investments in shares of quoted and unquoted companies which are held in accordance with the Company's investment objective;
- short-term debtors, creditors and cash arising directly from its operations;
- a bank loan from Northern Trust Company, the purpose of which is to assist in financing the Company's operations; and
- forward foreign currency contracts, the purpose of which is to manage the currency risk arising from the Company's investment activities.
(a) Market risk
The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements: currency risk, interest rate risk and other price risk. Information to enable an evaluation of the nature and extent of these three elements of market risk is given in parts (i) to (iii) of this note, together with sensitivity analyses where appropriate. The board reviews and agrees policies for managing these risks and these policies have remained unchanged from those applying in the comparative year. The Manager assesses the exposure to market risk when making each investment decision and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis.
(i) Currency risk
Certain of the Company's assets, liabilities and income are denominated in currencies other than sterling, which is the Company's functional currency and the presentational currency of the accounts. As a result, movements in exchange rates will affect the sterling value of those items.
Management of currency risk
The AIFM monitors the Company's exposure to foreign currencies on a daily basis and reports to the board, which meets on at least four occasions each year. The Manager measures the risk to the Company of the foreign currency exposure by considering the effect on the Company's net asset value and income of a movement in the rates of exchange to which the Company's assets, liabilities, income and expenses are exposed.
Income denominated in foreign currencies is converted into sterling on receipt.
It is currently not the Company's policy to hedge against currency risk, but the Manager may, with the board's consent and oversight, hedge against specific currencies, depending on their longer term view.
Foreign currency exposure
The fair value of the Company's monetary and non-monetary items that have foreign currency exposure at 31 December are shown below.
| | | 2022 | ||||
| | | | Norwegian | Swiss | US | |
| | | Euro | Krone | Francs | Dollars | Total |
| | | £'000 | £'000 | £'000 | £'000 | £'000 |
| Cash at bank and in hand | | 6 | - | - | 3,618 | 3,624 |
| Investments held at fair value through profit or loss | | 27,083 | 3,781 | 7,460 | 62,542 | 100,866 |
| Total net foreign currency exposure | | 27,089 | 3,781 | 7,460 | 66,160 | 104,490 |
| | | | | | | |
| | 2021 | |||||
| | Australian | | Norwegian | Swiss | US | |
| | Dollars | Euro | Krone | Francs | Dollars | Total |
| | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| Cash at bank and in hand | - | 10,078 | - | - | 1,167 | 11,245 |
| Investments held at fair value through profit or loss | 996 | 9,905 | 11,823 | 5,513 | 82,198 | 110,435 |
| Total net foreign currency exposure | 996 | 19,983 | 11,823 | 5,513 | 83,365 | 121,680 |
The above year end amounts are broadly representative of the exposure to foreign currency risk during the current and comparative year.
Foreign currency sensitivity
The following tables illustrate the sensitivity of net profit for the year and net assets with regard to the Company's monetary financial assets and financial liabilities and exchange rates. The sensitivity analysis is based on the Company's foreign and non-monetary currency financial instruments held at each accounting date and assumes a 10% (2021: 10%) appreciation or depreciation in sterling against all the currencies to which the Company is exposed, which is considered to be a reasonable illustration based on the volatility of exchange rates during the year.
If sterling had weakened by 10% this would have had the following effect:
| | 2022 | 2021 |
| | £'000 | £'000 |
| Income Statement - return after taxation | | |
| Revenue return | - | - |
| Capital return | 10,449 | 12,168 |
| Total return after taxation | 10,449 | 12,168 |
| Net assets | 10,449 | 12,168 |
Conversely if sterling had strengthened by 10% this would have had the following effect:
| | 2022 | 2021 |
| | £'000 | £'000 |
| Income Statement - return after taxation | | |
| Revenue return | - | - |
| Capital return | (10,449) | (12,168) |
| Total return after taxation | (10,449) | (12,168) |
| Net assets | (10,449) | (12,168) |
In the opinion of the directors, the above sensitivity analysis is broadly representative of the whole of the current and comparative year.
(ii) Interest rate risk
Interest rate movements may affect the level of income receivable on cash balances and the interest payable on the bank overdraft when interest rates are re-set.
Management of interest rate risk
Liquidity and borrowings are managed with the aim of increasing returns to shareholders. The board would not normally expect gearing to exceed 20% where gearing is defined as borrowings used for investment purposes, less cash, expressed as a percentage of net assets.
Interest rate exposure
The exposure of financial assets and financial liabilities to floating interest rates, giving cash flow interest rate risk when rates are re-set, is shown below:
| | 2022 | 2021 |
| | £'000 | £'000 |
| Exposure to floating interest rates: | | |
| Cash at bank and in hand | 16,122 | 19,077 |
| Creditors: amounts falling due after more than one year | | |
| Bank loan | - | (22,000) |
| Net exposure | 16,122 | (2,923) |
Sterling cash deposits at call earn interest at floating rates based on Sterling Overnight Index Average ("SONIA") rates, (2021: LIBOR).
The Company has a £40 million loan facility agreement with The Northern Trust Company, which terminates on 30 January 2023; interest on any drawings accrues daily and is calculated at the aggregate of The Bank of England base rate and a 2% margin. The facility was undrawn at the year end (2021: £22 million).
The above year end amounts are broadly representative of the exposure to interest rates during the year.
Interest rate sensitivity
The following table illustrates the sensitivity of the return after taxation for the year and net assets to a 1.0% (2021: 1.0%) increase or decrease in interest rates in regards to the Company's monetary financial assets and financial liabilities. This level of change is considered to be a reasonable illustration based on observation of current market conditions. The sensitivity analysis is based on the Company's monetary financial instruments which are exposed to interest rate changes held at the accounting date, with all other variables held constant.
| | 2022 | 2021 | ||
| | 1.0% increase in rate £'000 | 1.0% decrease in rate £'000 | 1.0% increase in rate £'000 | 1.0% decrease in rate £'000 |
| Income statement - return after taxation | | | | |
| Revenue return | 161 | (161) | (29) | 29 |
| Capital return | - | - | - | - |
| Total return after taxation | 161 | (161) | (29) | 29 |
| Net assets | 161 | (161) | (29) | 29 |
Given the increase in UK interest rates, the interest rate sensitivity has been updated to 1.0%. The prior year disclosure has been updated to 1.0% to show a direct comparison in the sensitivity. In the prior year report, the sensitivity was calculated using 0.25%, which was representative of the market at 31 December 2021. As disclosed in the prior year annual report and accounts, an increase of 0.25% reduced total return after taxation by £7,308 (a decrease of 0.25% had an equal and opposite effect).
(iii) Market price risk
Market price risk includes changes in market prices, other than those arising from interest rate risk, which may affect the value of investments.
Management of other price risk
The board meets on at least four occasions each year to consider the asset allocation of the portfolio and the risk associated with particular countries and industry sectors. The investment management team has responsibility for monitoring the portfolio, which is selected in accordance with the Company's investment objective and seeks to ensure that individual stocks meet an acceptable risk/reward profile. The board may authorise the Manager to enter derivative transactions for the purpose of protecting the portfolio against falls in market prices.
Market risk exposure
The Company's total exposure to changes in market prices at 31 December comprises the following:
| | 2022 | 2021 |
| | £'000 | £'000 |
| Investments held at fair value through profit or loss | 242,504 | 440,899 |
The above data is broadly representative of the exposure to market price risk during the year.
Concentration of exposure to market price risk
A sector and geographical analysis of the Company's investments is given on page 24 of the 2022 Annual Report and Accounts. This shows a concentration of exposure to economic conditions in the United Kingdom and to the Health Care sector. In addition, it is noted that as the Company's holds five (2021: six) investments amounting to approximately £61.5 million (2021: £91.7 million), representing 23.8% (2021: 20.9%) of NAV, whose valuation is deemed to be potentially volatile, as it is dependent on a number of factors including future funding and meeting of anticipated milestones.
Market price risk sensitivity
The following table illustrates the sensitivity of the return after taxation for the year and net assets to an increase or decrease of 20% (2021: 20%) in the fair values of the Company's investments. This level of change is considered to be a reasonable illustration based on observation of current market conditions.
| | 2022 | 2021 | ||
| | 20% increase | 20% decrease | 20% increase | 20% decrease |
| | in fair value | in fair value | in fair value | in fair value |
| | £'000 | £'000 | £'000 | £'000 |
| Income statement - return after taxation | | | | |
| Revenue return | - | - | - | - |
| Capital return | 48,501 | (48,501) | 88,180 | (88,180) |
| Total return after taxation and net assets | 48,501 | (48,501) | 88,180 | (88,180) |
| Percentage change in net asset value | 18.8% | (18.8%) | 20.2% | (20.2%) |
(b) Liquidity Risk
This is the risk that the Company will encounter difficulty in meeting its obligations associated with financial liabilities that are settled by delivering cash or another financial asset.
Management of the risk
The Company's assets include readily realisable securities amounting to £83,711,000 (2021: £222,031,000), which can be sold to meet ongoing funding requirements. Additionally, the Company has level 3 investments valued at £158,793,000 (2021: £218,868,000) which are illiquid, but could be sold if required.
Liquidity risk exposure
Contractual maturities of financial liabilities, based on the earliest date on which payment can be required are as follows:
| | 2022 | 2021 | ||||||
| | | More than | | | | More than | | |
| | | three | | | | three | | |
| | | months | | | | months | | |
| | Three | but not | More | | Three | but not | More | |
| | months | more than | than | | months | more than | than | |
| | or less | one year | one year | Total | or less | one year | one year | Total |
| | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
| Creditors: amounts falling due within one year | | | | | | | | |
| Bank loan - including interest | - | - | - | - | 274 | 454 | 22,050 | 22,778 |
| Other creditors and accruals | 864 | - | - | 864 | 1,138 | - | - | 1,138 |
| Uncalled capital commitments | - | 1,700 | 3,421 | 5,121 | - | - | - | - |
| | 864 | 1,700 | 3,421 | 5,985 | 1,412 | 454 | 22,050 | 23,916 |
(c) Credit risk
Credit risk is the risk that the failure of the counterparty to a transaction to discharge its obligations under that transaction could result in loss to the Company.
Management of credit risk
This risk is not significant and is managed as follows:
Portfolio dealing
The credit ratings of broker counterparties is monitored by the AIFM and limits are set on exposure to any one broker.
Exposure to the Custodian
The custodian of the Company's assets is HSBC Bank plc which has Long-Term Credit Ratings of AA- with Fitch and Aa3 with Moody's.
The Company's investments are held in accounts which are segregated from the custodian's own trading assets. If the custodian were to become insolvent, the Company's right of ownership of its investments is clear and they are therefore protected. However the Company's cash balances are all deposited with the custodian as banker and held on the custodian's balance sheet. Accordingly, in accordance with usual banking practice, the Company will rank as a general creditor to the custodian in respect of cash balances.
(d) Fair values of financial assets and financial liabilities
All financial assets and liabilities are either carried in the balance sheet at fair value, or the balance sheet amount is a reasonable approximation of fair value.
21. Analysis of changes in net debt
| | At | | At |
| | 31 December | | 31 December |
| | 2021 | Cashflows | 2022 |
| | £'000 | £'000 | £'000 |
| Cash and cash equivalents | | | |
| Cash at bank and in hand | 19,077 | (2,955) | 16,122 |
| Borrowings | | | |
| Debt due after more than one year | (22,000) | 22,000 | - |
| Net debt | (2,923) | 19,045 | 16,122 |
22. Capital management policies and procedures
The Company's objectives, policies and processes for managing capital are unchanged from the preceding year.
The Company's debt and capital structure comprises the following:
| | 2022 | 2021 |
| | £'000 | £'000 |
| Debt | | |
| Bank loan | - | 22,000 |
| Equity | | |
| Called-up share capital | 9,042 | 9,086 |
| Reserves | 248,880 | 427,785 |
| | 257,922 | 436,871 |
| Total debt and equity | 257,922 | 458,871 |
23. Post balance sheet events
The Company's £40 million loan facility agreement with The Northern Trust Company terminated on 30 January 2023 and was not renewed. The facility was undrawn at 31 December 2022.
Status of announcement
2021 Financial Information
The figures and financial information for 2021 are extracted from the published Annual Report and Accounts for the year ended 31 December 2021 and do not constitute the statutory accounts for that year. The 2021 Annual Report and Accounts have been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.
2022 Financial Information
The figures and financial information for 2022 are extracted from the Annual Report and Accounts for the year ended 31 December 2022 and do not constitute the statutory accounts for the year. The 2022 Annual Report and Accounts include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The 2022 Annual Report and Accounts will be delivered to the Registrar of Companies in due course.
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