RNS Number : 7350J
Schiehallion Fund Limited (The)
08 April 2024
 

The Schiehallion Fund Limited

 

Legal Entity Identifier:  213800NQOLJA1JCWXQ56

 

Regulated Information Classification: Annual Financial and Audit Reports

 

Annual Report and Financial Statements

 

Further to the preliminary statement of audited annual results announced to the Stock Exchange on 4 April 2024, The Schiehallion Fund Limited ("Schiehallion" or "the Company") announces that the Company's Annual Report and Financial Statements for the year ended 31 January 2024, including the Notice of Annual General Meeting, has today been posted to shareholders and submitted electronically to the National Storage Mechanism where it will shortly be available for inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism.

It is also available on the Schiehallion page of the Baillie Gifford website at: schiehallionfund.com (as is the preliminary statement of audited annual results announced by the Company on 4 April 2024).

 

Proposed Amendment to Articles of Incorporation

 

A special resolution is being proposed at the AGM, Resolution 13, which seeks shareholder approval for the

adoption of new Articles of Incorporation (the 'New Articles'). The proposed amendments being introduced in the New Articles relate to (i) clarifying the Company's general authority to acquire its own shares and (ii) increasing the cap on the aggregate fees paid to Directors from £360,000 per annum to £430,000 per annum.

 

A copy of the existing Articles and the proposed amended Articles are available on the Company page of the Baillie Gifford website at:

Schiehallion Fund | Baillie Gifford | Institutional Investors | Baillie Gifford

 

The Company's Annual General Meeting (AGM) is being convened at 3pm on Friday, 10 May, at the offices of at the offices Herbert Smith Freehills, Exchange House, Primrose Street, London EC2A 2EG.

 

The Board encourages all shareholders to submit proxy voting forms, appointing the chairperson of the AGM, as soon as possible and, in any event, by no later than 3pm on 8 May 2024.

 

We would encourage shareholders to monitor the Company's website at schiehallionfund.com. Should shareholders have questions for the Board or the Investment Manager or any queries as to how to vote, they are welcome as always to submit them by email to adgg-aafa-f@alterdomus.com or call Alter Domus (Guernsey) Limited on +44 (0) 1481 742 250.

 

Alter Domus (Guernsey) Limited may record your call.

 

If you or, if appointed, your proxy wish to attend the Annual General Meeting electronically you, or your proxy, will have the same right to attend, be counted in the quorum, participate in the business of the Annual General Meeting, speak and vote as if you, or your proxy, had attended the meeting in person. Details of how to attend the Annual General Meeting electronically can be obtained from Alter Domus (Guernsey) Limited on the contact details provided above.

 

 

Responsibility Statement of the Schiehallion Directors in respect of the Annual Report and Financial Statements

The Schiehallion Fund Limited Directors confirm that, to the best of their knowledge:

¾  the Financial Statements set out in the Annual Report and Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

¾  the Strategic Report set out in the Annual Report and Financial Statements includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties they face.

The Directors consider the Annual Report and Financial Statements, 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.

 

Principal and Emerging Risks relating to the Company

 

As explained on pages 64 and 65 of the Annual Report and Financial Statements, there is a process for identifying, evaluating and managing the risks, including emerging risks, faced by the Company on a regular basis. The Directors have carried out a robust assessment of the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. A description of these risks and how they are being managed or mitigated is set out in the table below.

 

The Board considers the ongoing coronavirus (Covid-19) pandemic to be a factor which continues to exacerbate existing risks, and its impact is considered within the relevant risks.

 

 

 

                                       What is the risk?

How the risk is managed?

Current assessment of risk

Investment and Strategic Risk

Liquidity of Investments

The Company's investments are

predominantly in private investee companies or companies which have recently completed an IPO. Such investments may not be

liquid or may have restrictions on sale or transfer of shares. This may limit the Company's ability to realise investments at short notice or at all.

By diversification of the portfolio, in accordance with the Company's investment limits and risk diversification policies.

Stable: The Company has

not seen any significant

impact on underlying liquidity

of investments, however,

the economic climate, in

a continuation of trends

observed in the previous

year, has continued to

depress IPO activity.

Market, Economic, Political and Environmental Risks

From time to time a large

proportion of the total value of

the Company's portfolio could

be concentrated in a limited

number of investee companies,

which could be adversely

affected by an unexpected

change in their markets, by

governmental intervention or

by a reputational issue. This

could have a material impact

on the overall value of the

Company's portfolio and

consequential adverse effects

on the Company's share price.

The Board assesses this risk

by considering, at each meeting, metrics which have contributed to performance as well as discussion with the portfolio managers on specific conditions which the underlying investee companies face. This risk is also managed by the Company's investment diversification policy.

Increasing: This risk is

seen as increasing due

to increased volatility as

a result of the ongoing

Russian invasion of Ukraine

and conflict in Gaza, high

energy prices, inflation and

interest rates, as well as the

global reach of the increased political tensions between the US and China.

 

 

                                       What is the risk?

How the risk is managed?

Current assessment of risk

Investment and Strategic Risk (continued)

Valuation Risk

The Company invests in late

stage private businesses which

are valued in accordance with

International Private Equity

and Venture Capital Valuation

('IPEV') Guidelines using

appropriate valuation methods.

Such methods include an

element of judgement which

may lead to a material

mis-statement of the valuation

and consequently of the

Company's net asset value.

The Investment Manager has a

robust valuation methodology,

which is applied consistently. The Investment Manager's valuation process revalues each of the private company investments every 3 months and additional valuations are carried out in response to trigger events to ensure the investments are carried at fair value. The valuation process is overseen by the Private Companies Valuations Group at Baillie Gifford which is independent from the portfolio

managers and which takes advice from an independent third party (S&P Global). The valuations are subject to review and challenge by the Board every 6 months and are subject to scrutiny annually by the external Auditor.

Stable: This risk is seen as

stable. In periods of market

volatility the Private Company

Valuations Group will perform

a trigger analyses and,

if appropriate, revalue the

affected investments,

as described in the report

on page 28 of the Annual report and Financial Statements.

Investment Strategy Risk

Pursuing an investment strategy

to fulfil the Company's objective

which the market perceives to

be unattractive or inappropriate,

or ineffective implementation

of the Company's investment

strategy, may lead to reduced

returns for shareholders and, as

a result, decreased demand for

the Company's shares. This may

lead to the Company's shares

trading at a widening discount

to their net asset value.

The Board regularly reviews

and monitors the Company's

investment policy and strategy,

the investment portfolio and

its performance, the level of

discount/premium to net asset

value at which the shares trade

and movements in the share

register. A strategy meeting is

also held annually. In addition,

the Investment Manager

keeps in close contact with

key shareholders and provide

regular feedback to the Board.

Increasing: The risk is

seen as increasing as the

market's appetite for direct

or indirect investment in

growth stocks is reduced due

to ongoing macroeconomic

and geopolitical concerns.

Discount Risk

The discount/premium at which

the Company's shares trade

relative to its net asset value

can change. Such an imbalance

can diminish the attractiveness

of the Company's shares to

existing investors and lead

to a lack of liquidity in the

Company's share trading.

The Board monitors the level of

discount/premium at each Board meeting. The Company has authorities in place to buy back or issue shares, when deemed to be in the best interest of the Company and its shareholders.

Increasing: Although the

discount narrowed following

the announcement that the

Company would buy back

shares, the risk is considered

to be increasing as overall

the discount widened

significantly over the year.

Climate and governance risk

Perceived problems on

environmental, social and

governance ('ESG') matters in

an investee company could lead

to that company's shares being

less attractive to investors,

adversely affecting its share

price, in addition to potential

valuation issues arising from

any direct impact of the

failure to address the ESG

weakness on the operations or

management of the investee

company (for example in the

event of an industrial accident

or spillage). Repeated failure

by the Investment Manager

to identify ESG weaknesses

in investee companies could

lead to the Company's own

shares being less attractive to

investors, adversely affecting

its own share price. In addition,

the valuation of investments

could be impacted by climate

change due to climate-related

operational challenges, changes

in end demand or failure to

identify a pathway to Net Zero.

This is mitigated by the

Investment Manager's ESG

stewardship and engagement

policies, which are integrated

into the investment process, as

well as the extensive upfront and ongoing due diligence which the Investment Manager undertakes on each investee company. This includes the risk inherent in climate change (see page 66 of the Annual Report and Financial Statements).

Stable:

The Investment Manager continue to employ strong ESG stewardship and

engagement policies.

External Risks

Political and Associated

Economic Risk

Global political changes result

in policy changes in areas in

which the Company invests

or may invest may have

practical consequences for the

Company and impact financial

performance.

Political developments and

other social trends are closely

monitored by the Board and

are regularly discussed at

Board meetings.

Increasing:

This risk is increasing as governments

and consumers around the world continue to assess the impact of the ongoing Russia-Ukraine war, including

sanctions applied in response, heightened tensions between the US and China, the conflict in Gaza and the impact of high inflation and interest rates.

 

 

 

                                       What is the risk?

How the risk is managed?

Current assessment of risk

External Risks (continued)

Legal and Regulatory Risk

Changes to the regulatory

environment could negatively

impact the Company. Failure to

comply with applicable legal,

regulatory and tax requirements

could lead to suspension of the

Company's Stock Exchange

listing, financial penalties, a

qualified Audit Report or the

Company being subject to tax

on capital gains.

To mitigate this risk, Baillie

Gifford's Business Risk,

Internal Audit and Compliance

Departments provide regular

reports to the Audit Committee

on Baillie Gifford's monitoring

programmes. The Administrator

provides regular compliance

reports to the Audit Committee

to confirm the relevant Guernsey submissions are made to protect the legal and tax status of the Company. Major regulatory change could impose disproportionate compliance burdens on the Company. In such circumstances representation is

made to ensure that the special

circumstances of investment

companies are recognised.

Shareholder documents and

announcements, including the

Company's published Interim

and Annual Report and Financial Statements, are subject to stringent review processes and procedures are in place to ensure adherence to the Transparency Directive and the Market Abuse Directive with reference to inside information.

Stable:

All control procedures working effectively. There have been no material regulatory changes that have occurred during the year.

 

Operational Risks

Performance and Reliance on Third Party Service Providers

In common with most other

investment companies the

Company has no direct

employees and relies entirely

for its operations on third party

service providers. Failure of the

Investment Manager's systems

or those of another service

provider, such as the Custodian

and Depositary, could lead to

an inability to accurately report

or lead to a misappropriation

of assets.

The Audit Committee receives

six monthly reports from

the Investment Manager's

Business Risk Department on

their monitoring programme

of internal controls. The Audit

Committee also receives ISAE

3402 or equivalent reports on the Investment Manager and other service providers. These reports are reviewed by Baillie Gifford's Business Risk Department and a summary of the key points is reported to the Audit Committee and any concerns are investigated.


Stable: All control procedures

are deemed to be working

effectively. Portfolio

management and all

regulatory and administrative

tasks have continued

uninterrupted during the year.

Cyber Security Threats

Errors, fraud or control failures

by the Company's key service

providers or loss of data

through increasing cyber

threats or business continuity

interruptions could damage

the Company's reputation or

investors' interests or result

in losses.

The Audit Committee receives

confirmation that key service

providers have appropriate cyber/ IT policies to ensure that controls are in place including business continuity and disaster recovery arrangements.

Increasing: This risk is

seen as increasing due to

recent indications that the

continuation of geopolitical

tensions could lead to more

cyber attacks. Emerging

technologies, including AI,

could potentially increase

information security risks.

In addition, service providers

operate a hybrid approach

of remote and office working,

thereby increasing the

potential of a cyber security

threat.

Key Professionals

Loss of key professionals, particularly in relation to the Investment Manager could impact the Company's ability to implement its investment strategy.

The Board reviews the Investment Manager's performance annually as well as the resources of the Investment Manager for attracting and retaining talent.

Stable:

All procedures are satisfactory.

 

 

Emerging Risks

 

As explained on pages 39 to 43 of the Annual Report and Financial Statements the Board has regular discussions on principal risks and uncertainties, including any risks which are not an immediate threat but could arise in the longer term. The Board

considers that the key emerging risks arise from two areas; the proliferation of AI and the exposure

of the portfolio to further geopolitical and macroeconomic headwinds as described below:

 

                                       What is the risk?

How the risk is managed?

Current assessment of risk

Investment and Strategic Risk (continued)

Emerging risks

The ever-increasing capacity

and wide adoption of AI tools,

in daily life and businesses

globally. The proliferation of this

technology increases the risk

of both its malicious use such

as cyberattacks and fraud as

well as unintentional negative

effects given the novel nature

of these tools. There are also

considerations regarding the

societal effects of AI as it

develops and becomes adopted

more broadly.

The Investment Manager has

established a group to monitor

the risks associated with emerging technologies such as AI. The Audit Committee receives confirmation that key service providers have

appropriate cyber/IT policies to

ensure that controls are in place

including business continuity and disaster recovery arrangements.

Increasing. This risk is seen

as increasing due to the rapid

adoption and development

of AI tools.


 

 

The global reach of the

investment portfolio and its

exposure to external and

emerging threats such as an

escalation of the Russia-Ukraine

war, broadening conflict in the

Middle East and heightened

cyber risk. An escalation in

tensions between the US and

China may lead to sanctions

being imposed on China with

the potential for adversely

affecting the Company's

Chinese investments. Higher

inflation, interest rates and

energy costs could add

pressure to the companies in

the investment portfolio.

 

 

The risks are mitigated by the

Investment Manager's close links to the investee companies and their ability to ask questions on contingency plans. The Investment Manager believes the impact of such events may be to slow growth rather than to invalidate the investment rationale.

 

The Investment Manager monitors the risks emerging in certain geographies and have established a group to manage the response to any future events that might result in heightened levels of market volatility. Regular exercises are carried out to test the Investment Manager's response to various scenarios.


 

 

Increasing. This risk is

seen as increasing due

to escalating geopolitical

tensions globally.

 

 

 

 

Baillie Gifford & Co Limited

08 April 2024

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