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RNS
RIT Capital Partners PLC  -  RCP   

Half-year Report

Released 07:00 14-Aug-2017

RNS Number : 8425N
RIT Capital Partners PLC
14 August 2017
 

 

Please click here to view the Company's Half-Yearly Financial Report:

 

http://www.rns-pdf.londonstockexchange.com/rns/8425N_1-2017-8-11.pdf 

 

14 August 2017

 

RIT Capital Partners plc

 

Results for the half year ended 30 June 2017

 

RIT Capital Partners plc today published its results for the half year ended 30 June 2017.

 

Financial Highlights:

·      Total net assets at 30 June 2017 reached £2.8 billion

·      Growth in net assets of £104 million (before distributions) for the period

·      Net asset value (NAV) total return of 4.0% for the period

·      NAV per share 1,784 pence at 30 June 2017

·      Average premium over the period was 6.1%

 

Performance Highlights:

·      Defensive portfolio positioning with an emphasis on capital preservation

·      Returns achieved with prudent net quoted equity exposure, averaging 43% over the period

·      Strong performance of the quoted equity portfolio comprising individual stocks and external managers

·      Continued steady returns from Absolute Return and Credit portfolio

·      Significant new investment with Social Capital, one of Silicon Valley's leading technology investment firms

 

Dividends:

·      Dividend paid in April of 16 pence per share

·      The Board has declared a dividend of 16 pence per share for October

·      This represents an increase of 3.2% over the previous year's dividend

 

Summary:

·      Over the last three years, net assets have grown by £740 million (before dividends)

·      Over the same three-year period, the share price total return was 53%

·      Since inception, RIT has now participated in 75% of market upside but only 39% of market declines

·      Over the same period, total shareholder return has compounded at 12.7% per annum compared to the MSCI ACWI of 6.8%

·      £1,000 invested in RIT at inception in 1988 would be worth in excess of £30,000 today compared to the same amount invested in the MSCI ACWI which would be worth approximately £6,700

 

Commenting, Lord Rothschild, Chairman of RIT Capital Partners plc, said:

 

"Your Company's net asset value at the end of June had risen to 1,784 pence per share, representing a total return, including the 16 pence interim dividend, of 4.0% for the half year.  Over the last three years, the NAV return stands at 34.9%, with shareholder returns of 52.9%... 

 

We do not believe this is an appropriate time to add to risk.  Share prices have in many cases risen to unprecedented levels at a time when economic growth is by no means assured.  The S&P is selling at 25 times trailing 12 months' earnings, compared to a long-term average of 15, while the adjusted Shiller price earnings ratio, which averages profits over 10 years, is approximately 30 times.  The period of monetary accommodation may well be coming to an end.  Geopolitical problems remain widespread and are proving increasingly difficult to resolve.  We therefore retain a moderate exposure to equity markets and have diversified our asset allocation towards equity investments where value creation is driven by some identifiable catalyst or which are exposed to longer-term positive structural trends.  We have a particular interest in investments which will benefit from the impact of new technologies, and Far Eastern markets, influenced by the growing demand from Asian consumers.

 

As the 'Fourth Industrial Revolution' develops, it becomes increasingly important for your Company to be able to assess investment opportunities in the innovation-driven changes which are affecting almost every business sector.  With this in mind, we have entered into a partnership with Social Capital, one of Silicon Valley's leading technology investment firms…"

 

ENQUIRIES:

Brunswick Group LLP:

Tom Burns / Rowan Brown 020 7404 5959

 

About RIT Capital Partners plc:

RIT Capital Partners plc is an investment company listed on the London Stock Exchange.  Its net assets have grown from £280 million on listing to £2.8 billion today.   It is chaired by Lord Rothschild, whose family interests retain a significant holding. www.ritcap.com

 

THE FOLLOWING IS EXTRACTED FROM THE COMPANY'S HALF-YEARLY FINANCIAL REPORT

 

FINANCIAL SUMMARY




30 June 2017

31 December 2016

Change

Net assets



£2,771m

£2,692m

£79m

NAV per share1



1,784p

1,730p

54p

Share price



1,901p

1,885p

16p

Premium



6.6%

9.0%

(2.4%)

First interim dividend paid



16.0p

15.5p

3.2%

Second interim dividend declared/paid



16.0p

15.5p

3.2%

Total dividend



32.0p

31.0p

3.2%

Gearing



10.2%

14.7%

(4.5%)

NAV per share total return





4.0%

Share price total return





1.7%

RPI2 plus 3.0% per annum





3.2%

MSCI All Country World Index3





7.4%







Performance History

6 Months

1 Year

3 Years

5 Years

10 Years

NAV per share total return

4.0%

12.6%

34.9%

66.4%

83.0%

Share price total return

1.7%

17.6%

52.9%

67.4%

112.8%

RPI plus 3.0% per annum

  3.2%

6.5%

15.9%

30.1%

75.2%

MSCI All Country World Index

7.4%

20.2%

38.1%

89.5%

87.2%

1 Diluted net asset value per share with debt held at fair value.

2 Retail Price Index.

3 The MSCI All Country World Index (ACWI) we have adopted is a total return index and is based on 50% of the ACWI measured in Sterling and 50% measured in local currencies.

 

CHAIRMAN'S STATEMENT

 

Your Company's net asset value at the end of June had risen to 1,784 pence per share, representing a total return, including the 16 pence interim dividend, of 4.0% for the half year. Over the last three years, the NAV return stands at 34.9%, with shareholder returns of 52.9%.

 

Results for the half year reflect the performance of your Company's quoted equity portfolio, both from individual stocks and external managers, while an increased allocation to Absolute Return & Credit contributed. The private investment portfolio has benefitted from a number of cash distributions from external managers, together with underlying growth in the value of some of our directly held investments. Offsetting these results in Sterling terms, has been the effect of our diversified currency holdings at a time when Sterling appreciated against the US Dollar, following its decline after the Brexit vote. As of now, our currency holdings are spread mainly between Sterling, the Dollar and the Euro.

 

We do not believe this is an appropriate time to add to risk. Share prices have in many cases risen to unprecedented levels at a time when economic growth is by no means assured. The S&P is selling at 25 times trailing 12 months' earnings, compared to a long-term average of 15, while the adjusted Shiller price earnings ratio, which averages profits over 10 years, is approximately 30 times. The period of monetary accommodation may well be coming to an end. Geopolitical problems remain widespread and are proving increasingly difficult to resolve. We therefore retain a moderate exposure to equity markets and have diversified our asset allocation towards equity investments where value creation is driven by some identifiable catalyst or which are exposed to longer-term positive structural trends. We have a particular interest in investments which will benefit from the impact of new technologies, and Far Eastern markets, influenced by the growing demand from Asian consumers.

 

As the 'Fourth Industrial Revolution' develops, it becomes increasingly important for your Company to be able to assess investment opportunities in the innovation-driven changes which are affecting almost every business sector. With this in mind, we have entered into a partnership with Social Capital, one of Silicon Valley's leading technology investment firms, led by Chamath Palihapitiya. We will invest in a range of their funds to benefit from Social Capital's data-driven approach and expertise in this area, as well as looking at specific opportunities. The relationship will be strengthened by Francesco Goedhuis, the Chief Executive of J. Rothschild Capital Management, joining the Advisory Board of Social Capital, and Social Capital will open an office in St. James's Place, where your Company is situated.

 

Your Company's Board

 

As we announced towards the end of July, your Board has been strengthened by the appointment of Philippe Costeletos as a non-executive Director. Philippe has over 25 years' experience in private equity investments, having held senior management roles in TPG Capital and Colony Northstar.

 

Dividend

 

Following the first interim dividend of 16 pence per share paid in April, we have declared a second interim dividend of the same amount. This will be paid on 31 October to shareholders registered on 6 October, and will provide shareholders with a total dividend of 32 pence, a 3.2% increase over 2016.

 

Rothschild
11 August 2017

 

ASSET ALLOCATION AND PORTFOLIO CONTRIBUTION, 6 MONTHS TO 30 JUNE 2017


30 June 2017

Contribution

Asset Category

% NAV

%

Quoted Equities

55.1%

5.0%

Private Investments

22.2%

0.9%

Absolute Return & Credit

23.0%

0.8%

Real Assets

3.2%

0.5%

Government Bonds & Rates

0.2%

0.1%

Currency

0.8%

(2.5%)1

Total Investments

104.5%

4.8%

Liquidity, Borrowings & Other

(4.5%)

(0.8%)2

Total

100.0%

4.0%

Average Net Quoted Equity Exposure3


43%

1  Currency exposure is managed centrally on an overlay basis with the translation impact and the results of the currency hedging and overlay activity included in this category.

2 This category includes interest, mark-to-market movements on the fixed interest notes and expenses.

3 Exposure reflects notional exposure through derivatives and adjustments for derivatives and/or liquidity held by managers.

 

NET ASSET VALUE BY ASSET CATEGORY (%)

Asset Category

30 June 2017

% NAV

31 December 2016

% NAV

Quoted Equities

55%

56%

Private Investments

22%

24%

Absolute Return & Credit

23%

23%

Real Assets

3%

3%

Government Bonds & Rates

0%

0%

Currency

1%

0%

Liquidity, Borrowings, Other

-4%

-6%

Net Assets

100%

100%

  Note: This table excludes exposure from derivatives.

 

NET ASSET VALUE BY CURRENCY (%)

Asset Category

30 June 2017

% NAV

31 December 2016

% NAV

US Dollar

37%

62%

Sterling

38%

24%

Euro

16%

4%

Japanese Yen

0%

3%

Other

9%

7%

Net Assets

100%

100%

Note: This table excludes exposure from currency options

 

CONSOLIDATED INCOME STATEMENT AND CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

 

CONSOLIDATED INCOME STATEMENT

For the six months ended 30 June




2017



2016

£ million

Notes

Revenue

Capital

Total

Revenue

Capital

Total

Income and Gains








Investment income


12.3

-

12.3

15.5

-

15.5

Other income


6.3

-

6.3

3.0

-

3.0

Gains/(losses) on fair value investments


-

119.3

119.3

-

131.1

131.1

Gains/(losses) on monetary items and borrowings


-

(7.3)

(7.3)

-

(41.6)

(41.6)



18.6

112.0

130.6

18.5

89.5

108.0

Expenses








Operating expenses


(11.1)

(2.5)

(13.6)

(10.6)

(2.0)

(12.6)

Profit/(loss) before finance costs and tax

2

7.5

109.5

117.0

7.9

87.5

95.4

Finance costs


(5.9)

-

(5.9)

(5.8)

-

(5.8)

Profit/(loss) before tax


1.6

109.5

111.1

2.1

87.5

89.6

Taxation


(0.5)

-

(0.5)

0.2

-

0.2

Profit/(loss) for the period

3

1.1

109.5

110.6

2.3

87.5

89.8

Earnings per ordinary share - basic

3

0.7p

71.0p

71.7p

1.5p

56.6p

58.1p

Earnings per ordinary share - diluted

3

0.7p

70.7p

71.4p

1.5p

56.5p

58.0p

 

The total column of this statement represents the Group's Consolidated Income Statement, prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations.

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months ended 30 June



2017



2016

£ million

Revenue

Capital

Total

Revenue

Profit/(loss) for the period

1.1

109.5

110.6

2.3

87.5

89.8

Other comprehensive income/(expense)







that will not be subsequently reclassified to profit or loss:







Revaluation gain/(loss) on property, plant and equipment

-

0.2

0.2

-

0.1

0.1

Actuarial gain/(loss) in defined benefit pension plan

1.0

-

1.0

(3.5)

-

(3.5)

Deferred tax (charge)/credit allocated to actuarial loss

(0.3)

-

(0.3)

0.6

Total comprehensive income/(expense) for the period

1.8

109.7

111.5

(0.6)

87.6

87.0



CONSOLIDATED BALANCE SHEET (UNAUDITED)



30 June

31 December

£ million

Notes

2017

2016

Non-current assets




Investments held at fair value


2,826.6

2,938.8

Investment property


36.0

35.5

Property, plant and equipment


28.7

28.8

Deferred tax asset


3.4

3.7

Derivative financial instruments


6.3

6.1



2,901.0

3,012.9

Current assets




Derivative financial instruments


33.5

35.0

Other receivables


121.8

178.6

Amounts owed by group undertakings


5.4

0.9

Tax receivable


0.1

0.1

Cash at bank


203.8

131.2



364.6

345.8

Total assets


3,265.6

3,358.7

Current liabilities




Borrowings


(275.0)

(275.0)

Derivative financial instruments


(13.5)

(35.6)

Provisions


-

(0.9)

Other payables


(40.7)

(61.2)

Amounts owed to group undertakings


-

(128.5)



(329.2)

(501.2)

Net current assets/(liabilities)


35.4

(155.4)

Total assets less current liabilities


2,936.4

2,857.5

Non-current liabilities




Borrowings


(161.4)

(156.4)

Derivative financial instruments


(0.5)

(4.0)

Provisions


(2.6)

(2.7)

Finance lease liability


(0.5)

(0.5)

Retirement benefit liability


(0.3)

(1.8)



(165.3)

(165.4)

Net assets


2,771.1

2,692.1

Equity attributable to owners of the Company




Share capital


155.4

155.4

Share premium


17.3

17.3

Capital redemption reserve


36.3

36.3

Own shares reserve


(19.0)

(14.4)

Share-based payment reserve


4.3

7.5

Capital reserve


2,556.4

2,471.6

Revenue reserve


2.9

1.1

Revaluation reserve


17.2

17.0

Other reserves


0.3

0.3

Total equity


2,771.1

2,692.1

Net asset value per ordinary share - basic

4

1,792p

1,739p

Net asset value per ordinary share - diluted

4

1,784p

1,730p



CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)






Share-









Capital

Own

based






Period ended 30 June 2017

Share

Share

redemption

shares

payment

Capital

Revenue

Revaluation

Other

Total

£ million

capital

premium

reserve

reserve

reserve

reserve

reserve

reserve

reserves

equity

Balance at 1 January 2017

155.4

17.3

36.3

(14.4)

7.5

2,471.6

1.1

17.0

0.3

2,692.1

Profit/(loss) for the period

-

-

-

-

-

109.5

1.1

-

-

110.6

Revaluation gain on property, plant











and equipment

-

-

-

-

-

-

-

0.2

-

0.2

Actuarial gain/(loss) in defined











benefit plan

-

-

-

-

-

-

1.0

-

-

1.0

Deferred tax (charge)/credit











relating to pension plan

-

-

-

-

-

-

(0.3)

-

-

(0.3)

Total comprehensive











income/(expense) for the period

-

-

-

-

-

109.5

1.8

0.2

-

111.5

Dividends paid (note 5)

-

-

-

-

-

(24.7)

-

-

-

(24.7)

Movement in Own shares reserve

-

-

-

(4.6)

-

-

-

-

-

(4.6)

Movement in Share-based











payment reserve

-

-

-

-

(3.2)

-

-

-

-

(3.2)

Movement in Other reserves

-

-

-

-

-

-

-

-

-

-

Balance at 30 June 2017

155.4

17.3

36.3

(19.0)

4.3

2,556.4

2.9

17.2

0.3

2,771.1

















Share-









Capital

Own

based






Period ended 30 June 2016

Share

Share

redemption

shares

payment

Capital

Revenue

Revaluation

Other

Total

£ million

capital

premium

reserve

reserve

reserve

reserve

reserve

reserve

reserves

equity

Balance at 1 January 2016

155.4

17.3

36.3

(13.0)

6.2

2,216.3

5.1

17.4

0.3

2,441.3

Profit/(loss) for the period

-

-

-

-

-

89.0

0.8

-

-

89.8

Revaluation gain on property, plant











and equipment

-

-

-

-

-

-

-

0.1

-

0.1

Actuarial gain/(loss) in defined











benefit pension plan

-

-

-

-

-

-

(3.5)

-

-

(3.5)

Deferred tax (charge)/credit











relating to pension plan

-

-

-

-

-

-

0.6

-

-

0.6

Reallocation of segregated account











fees

-

-

-

-

-

(1.5)

1.5

-

-

-

Total comprehensive











income/(expense) for the period

-

-

-

-

-

87.5

(0.6)

0.1

-

87.0

Dividends paid (note 5)

-

-

-

-

-

(23.9)

-

-

-

(23.9)

Movement in Own shares reserve

-

-

-

(0.5)

-

-

-

-

-

(0.5)

Movement in Share-based











payment reserve

-

-

-

-

1.4

-

-

-

-

1.4

Movement in Other reserves

-

-

-

-

-

-

-

-

-

-

Balance at 30 June 2016

155.4

17.3

36.3

(13.5)

7.6

2,279.9

4.5

17.5

0.3

2,505.3

 

CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)



Six months

Six months



ended

ended



30 June

30 June

£ million


2017

2016

Cash flows from operating activities:




Cash inflow/(outflow) before interest


75.1

27.6

Interest paid


(5.9)

(5.7)

Net cash inflow/(outflow) from operating activities


69.2

21.9

Cash flows from investing activities:




Purchase of property, plant and equipment


-

-

Net cash inflow/(outflow) from investing activities


-

-

Cash flows from financing activities:




Purchase of ordinary shares by Employee Benefit Trust1


(10.9)

(2.9)

Equity dividend paid


(24.7)

(23.9)

Net cash inflow/(outflow) from financing activities


(35.6)

(26.8)

Increase/(decrease) in cash and cash equivalents in the period

33.6

(4.9)

Cash and cash equivalents at the start of the period

170.5

134.8

Effect of foreign exchange rate changes on cash and cash equivalents

(0.3)

(13.4)

Cash and cash equivalents at the period end


203.8

116.5

Reconciliation:




Cash at bank


203.8

82.4

Money market funds (included in portfolio investments)

-

34.1

Cash and cash equivalents at the period end


203.8

116.5

1 Shares are disclosed in 'Own shares reserve' on the Consolidated Balance Sheet.

 

NOTES TO THE FINANCIAL STATEMENTS

 

1. Basis of Accounting

 

These condensed financial statements are the half-yearly consolidated financial statements of RIT Capital Partners plc (the Company) and its subsidiaries (together, the Group) for the six months ended 30 June 2017. They are prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority, and with International Accounting Standard (IAS) 34, Interim Financial Reporting, as adopted by the European Union, and were approved on 11 August 2017. These half-yearly consolidated financial statements should be read in conjunction with the Report and Accounts for the year ended 31 December 2016, which were prepared in accordance with IFRSs, as adopted by the European Union, as they provide an update of previously reported information.

 

The half-yearly consolidated financial statements have been prepared in accordance with the accounting policies set out in the notes to the consolidated financial statements for the year ended 31 December 2016. The Income Statement comparative figures reflect the treatment of segregated account fees adopted in the consolidated financial statements at 31 December 2016.

 

 

Critical Accounting Assumptions and Judgements

 

As further described in the Report and Accounts for the year ended 31 December 2016, areas requiring a higher degree of judgment or complexity and areas where assumptions and estimates are significant to the consolidated financial statements, are in relation to:

 

·      The valuation of property;

·      Share-based payments; and

·      The valuation of private investments.

 

Direct private investments are valued at management's best estimate of fair value in accordance with IFRSs, having regard to International Private Equity and Venture Capital Valuation Guidelines as recommended by the British Venture Capital Association. The inputs into the valuation methodologies adopted include observable historical data such as earnings or cash flow as well as more subjective data such as earnings forecasts or discount rates. As a result of this, the determination of fair value requires significant management judgement.

 

2. Business and Geographical Segments

 

For both the six months ended 30 June 2017 and the six months ended 30 June 2016, the Group is considered to have four principal operating segments as follows:

 



AUM


Segment

Business

£ million1

Employees1

RIT

Investment trust

-

-

JRCM2

Asset manager/administration

2,771

44

GVQ3

Asset manager

709

10

 SHL 4

Events/premises management

-

13

1 At 30 June 2017.

2 J. Rothschild Capital Management Limited.

3 GVQ Investment Management Limited.

4 Spencer House Limited.

 

The Group's operations are all based in the UK.

 

Key financial information for the six months ending 30 June is as follows:

 


2017

2016


Income/

Operating


Income/

Operating


£ million

Gains1

Expenses1

Profit2

Gains1

Expenses1

Profit2

RIT

126.2

(17.9)

108.3

105.1

(15.9)

89.2

JRCM

15.7

(9.0)

6.7

14.2

(8.7)

5.5

GVQ

4.4

(2.7)

1.7

1.9

(1.4)

0.5

SHL

1.8

(1.5)

0.3

1.7

(1.5)

0.2

Adjustments3

(17.5)

17.5

-

(14.9)

14.9

-

Total

130.6

(13.6)

117.0

108.0

(12.6)

95.4

1 Includes intra-group income and expenses.

2 Profit before finance costs and tax.

3 Consolidation adjustments in accordance with IFRS 10 'Consolidated Financial Statements'.

 

3. Earnings Per Ordinary Share - Basic and Diluted

 

The basic earnings per ordinary share for the six months ended 30 June 2017 is based on the net profit of £110.6 million (six months ended 30 June 2016: net profit of £89.8 million) and the weighted average number of ordinary shares for the purposes of earnings per share (EPS) during the period of 154.2 million (six months ended 30 June 2016: 154.4 million) as shown below:

 


Six months

Six months


ended

ended

million

30 June 2017

30 June 2016

Weighted average number of shares for the purposes of basic EPS

154.2

154.4

Weighted average effect of share-based payment awards

0.7

0.5

Total shares for the purposes of diluted EPS

154.9

154.9

 

The basic earnings per ordinary share figure can be further analysed between revenue and capital as set out below:

 


Six months

Six months


ended

ended

£ million

30 June 2017

30 June 2016

Net revenue profit/(loss)

1.1

2.3

Net capital profit/(loss)

109.5

87.5

Net profit/(loss)

110.6

89.8





Six months

Six months


ended

ended

Pence per share

30 June 2017

30 June 2016

Revenue earnings/(loss) per ordinary share - basic

0.7

1.5

Capital earnings/(loss) per ordinary share - basic

71.0

56.6

Earnings per ordinary share - basic

71.7

58.1

 


Six months

Six months


ended

ended


30 June

30 June

Pence per share

2017

2016

Revenue earnings/(loss) per ordinary share - diluted

0.7

1.5

Capital earnings/(loss) per ordinary share - diluted

70.7

56.5

Earnings per ordinary share - diluted

71.4

58.0

 

4. Net Asset Value Per Ordinary Share - Basic and Diluted

 

Net asset value per ordinary share is based on the following data:

 


30 June

31 December


2017

2016

Net assets (£ million)

2,771.1

2,692.1

Number of shares in issue (million)

155.4

155.4

Own shares (million)

(0.7)

(0.6)

Basic shares (million)

154.7

154.8

Effect of share-based payment



awards (million)

0.6

0.8

Diluted shares (million)

155.3

155.6





30 June

31 December

Pence per share

2017

2016

Net asset value per ordinary share - basic

1,792

1,739

Net asset value per ordinary share - diluted

1,784

1,730

 

5. Dividends

 


Six months

Six months


ended

ended


30 June

30 June


2017

2016

Dividends (£ million)

24.7

23.9

Dividends (Pence per share)

16.0

15.5

 

The Board of Directors declared an interim dividend of 16.0 pence per ordinary share (£24.7 million) on 27 February 2017. This amount was paid on 28 April 2017. The Board has declared the payment of a second interim dividend of 16.0 pence per ordinary share (£24.7 million) in respect of the year ending 31 December 2017. This will be paid on 31 October 2017 to shareholders on the register on 6 October 2017.

 

A more detailed commentary may be found in the Chairman's Statement in the Report and Accounts for the year ended 31 December 2016.

 

6. Financial Instruments

 

IFRS 13 requires the Group to classify its financial instruments held at fair value using a hierarchy that reflects the significance of the inputs used in the valuation methodologies. These are as follows:

 

●         Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities;

 

●         Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

 

●         Level 3: Inputs for the asset or liability that are not based on observable market data (i.e. unobservable inputs).

 

The vast majority of the Group's financial assets and liabilities and the investment properties are measured at fair value on a recurring basis.

 

The Group's policy is to recognise transfers into and transfers out of fair value hierarchy levels at the end of the reporting period when they are deemed to occur.

 

A description of the valuation techniques used by the Group with regard to investments categorised in each level of the fair value hierarchy is detailed below. Where the Group invests in a fund or a partnership, which is not itself listed on an active market, the categorisation of such investment between levels 2 and 3 is determined by reference to the nature of the underlying investments. If such investments are categorised across different levels, the lowest level that forms a significant proportion of the fund or partnership exposure is used to determine the reporting disclosure.

 

If the proportion of the underlying investments categorised between levels changes during the period, these will be reclassified to the most appropriate level.

 

Level 1

The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. The quoted market price used for financial assets held by the Group is the current bid price or the last traded price depending on the convention of the exchange on which the investment is quoted. Where a market price is available but the market is not considered active, the Group has classified these investments as level 2.

 

Level 2

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques which maximise the use of observable market data where it is available. Specific valuation techniques used to value OTC derivatives include quoted market prices for similar instruments, counterparty quotes and the use of forward exchange rates to estimate the fair value of forward foreign exchange contracts at the balance sheet date. Investments in externally managed funds which themselves invest primarily in listed securities are valued at the price or net asset value released by the investment manager/fund administrator as at the balance sheet date.

 

Level 3

The Group considers all Private Investments, whether direct or funds, as level 3 assets, as the valuations of these assets are not based on observable market data. Where other funds invest into illiquid stocks, these are also considered by the Group to be level 3 assets.

 

For the private fund investments, fair value is deemed to be the capital statement account balance as reported by the General Partner of the investee fund, and which represents the Group's pro-rata proportion of the fund's net asset value. Where such statements are dated prior to the period end, the valuation is adjusted for subsequent investments or distributions. A review is conducted annually in respect of the valuation basis of the investee funds to confirm these are valued in accordance with fair value methodologies.

 

The directly held private investments are valued on a semi-annual basis using techniques including a market approach, cost approach and/or income approach. The valuation process involves the finance and investment functions, with the final valuations being reviewed by the Valuation Committee. The specific techniques used will typically include earnings multiples, discounted cash flow analysis, the value of recent transactions and, where appropriate, industry rules of thumb. The valuations will often reflect a synthesis of a number of distinct approaches in determining the final fair value estimate. The individual approach for each investment will vary depending on relevant factors that a market participant would take into account in pricing the asset. These might include the specific industry dynamics, the company's stage of development, profitability, growth prospects or risk as well as the rights associated with the particular security.

 

Borrowings at 30 June 2017 comprise bank loans and senior loan notes. The bank loans are revolving credit facilities, and are typically drawn in tranches with a duration of three months. The loans are therefore short-term in nature, and their fair value approximates their nominal value. The loan notes were issued in June 2015 with tenors of between 10 and 20 years with a weighted average of 16 years. They are valued on a monthly basis using a discounted cash flow model where the discount rate is derived from the yield of similar tenor UK Government bonds, adjusted for any significant changes in either credit spreads or the perceived credit risk of the Company.

 

The fair value of investments in non-consolidated subsidiaries is considered to be the net asset value of the individual subsidiary as at the balance sheet date. The net asset values typically comprise various assets and liabilities which are fair valued on a recurring basis and are considered to be level 3.

 

On a semi-annual basis, the Group engages external, independent and qualified valuers to determine the fair value of the Group's investment properties and property, plant and equipment held at fair value. These were valued at 30 June 2017 by JLL in accordance with the Appraisal and Valuation Manual of the Royal Institution of Chartered Surveyors on the basis of open market value.

The following table analyses the Group's assets and liabilities within the fair value hierarchy at 30 June 2017:

 

As at 30 June 2017





£ million

Level 1

Level 2

Level 3

Total

Financial assets at fair value through profit or loss:





Portfolio investments

335.0

1,635.0

847.6

2,817.6

Non-consolidated subsidiaries

-

-

9.0

9.0

Investments held at fair value

335.0

1,635.0

856.6

2,826.6

Derivative financial instruments

1.9

37.9

-

39.8

Total financial assets at fair value through profit or loss

336.9

1,672.9

856.6

2,866.4

Non-financial assets measured at fair value:





Investment property

-

-

36.0

36.0

Financial liabilities at fair value through profit or loss:





Borrowings

-

-

(436.4)

(436.4)

Derivative financial instruments

(5.5)

(8.5)

-

(14.0)

Total financial liabilities at fair value through profit or loss

(5.5)

(8.5)

(436.4)

(450.4)

Total net assets measured at fair value

331.4

1,664.4

456.2

2,452.0

 

The realised and unrealised gains and losses shown in the table below for level 3 assets are included in gains/(losses) on fair value investments in the Consolidated Income Statement.

 

Movement in level 3 assets

 


Investments



Period ended 30 June 2017

held at fair

Investment


£ million

value

Property

Total

Opening Balance

977.7

35.5

1,013.2

Purchases

28.7

-

28.7

Sales

(226.3)

-

(226.3)

Realised gains/(losses) through profit or loss

9.4

-

9.4

Unrealised gains (losses) through profit or loss

(9.9)

0.5

(9.4)

Reclassifications

77.0

-

77.0

Closing Balance

856.6

36.0

892.6

 

During the period, investments in funds with a fair value of £77.0 million were reclassified from level 2 to level 3 as a result of new financial information received in respect of the underlying investments of the funds.

 

There were no reclassifications into or out of level 1.

 

Further information in relation to the investment property and directly held private investment portfolio at 30 June 2017 is set out below:

 


Fair Value


Sector

£ million

Valuation methods/inputs

UK Commercial Property

36.0

Sales comparisons (£1,500 - £2,750/ft2);
Discounted expected rental values (£65 - £83/ft2)

Financials

51.6

P/E (17.5x), EV/Sales (3.3x), EV/AUM (1.9%), DCF (20% WACC)

Technology

125.9

EV/EBITDA (12.0x - 13.0x), EV/Sales (7.2x)

Energy

4.1

EV/EBITDA (7.0x - 8.0x)

Other investments
(less than £3 million each)

13.8

Various methods

Total

231.4


 

The remainder of the portfolio was valued using the following primary methods: third party valuations (£78.8 million), option strike price (£14.0 million) and price of recent offer (£3.1 million).

 

Given the range of techniques and inputs used in the valuation process, and the fact that in most cases more than one approach is used, a sensitivity analysis is not considered to be a practical or meaningful disclosure. Shareholders should note however that increases or decreases in any of the inputs listed above in isolation may result in higher or lower fair value measurements.

 

The following table analyses the Group's assets and liabilities within the fair value hierarchy at 31 December 2016:

 

As at 31 December 2016





£ million

Level 1

Level 2

Level 3

Total

Financial assets at fair value through profit or loss:





Portfolio investments

399.6

1,561.5

847.8

2,808.9

Non-consolidated subsidiaries

-

-

129.9

129.9

Investments held at fair value

399.6

1,561.5

977.7

2,938.8

Derivative financial instruments

1.8

39.3

-

41.1

Total financial assets at fair value through profit or loss

401.4

1,600.8

977.7

2,979.9

Non-financial assets measured at fair value:





Investment property

-

-

35.5

35.5

Financial liabilities at fair value through profit or loss:





Borrowings

-

-

(431.4)

(431.4)

Derivative financial instruments

(7.8)

(31.8)

-

(39.6)

Total financial liabilities at fair value through profit or loss

(7.8)

(31.8)

(431.4)

(471.0)

Total net assets measured at fair value

393.6

1,569.0

581.8

2,544.4

 

Movement in level 3 assets

 


Investments



Year ended 31 December 2016

held at fair

Investment


£ million

value

Property

Total

Opening Balance

782.0

33.7

815.7

Purchases

181.8

-

181.8

Sales

(204.1)

-

(204.1)

Realised gains through profit or loss

23.4

-

23.4

Unrealised gains through profit or loss

134.7

1.8

136.5

Reclassifications

59.9

-

59.9

Closing Balance

977.7

35.5

1,013.2

 

Further information in relation to the investment property and directly held private investment portfolio at 31 December 2016 is set out below:

 


Fair Value


Sector

£ million

Valuation methods/inputs

UK Commercial Property

35.5

Sales comparisons (£1,500 - £2,500/ft2); Discounted expected rental values (£65 - £83/ft2)

Financials

51.9

P/E (19.4x), EV/Sales (3.4x), EV/AUM (2.1%), DCF (20% WACC)

Technology

128.0

EV/EBITDA (12.0x - 14.0x), EV/Sales 7.5x

Other investments



(less than £3 million each)

22.4

Various methods

Total

237.8


 

The remainder of the portfolio was valued using the following primary methods: third party valuations (£54.1 million), and cost of recent investments (£47.3 million).

 

7. Comparative Information

 

The financial information contained in this Half-Yearly Financial Report does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The financial information for the half years ended 30 June 2017 and 30 June 2016 has been neither reviewed nor audited.

 

The information for the year ended 31 December 2016 has been extracted from the latest published audited financial statements. The audited financial statements for the year ended 31 December 2016 have been filed with the Registrar of Companies and the report of the auditors on those accounts contained no qualification or statement under section 498(2) or (3) of the Companies Act 2006.

 

REGULATORY DISCLOSURES

 

Statement of Directors' Responsibilities

 

In accordance with the Disclosure and Transparency Rules 4.2.4R, 4.2.7R and 4.2.8R, we confirm that to the best of our knowledge:

 

(a)      The condensed set of financial statements has been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting, as adopted by the European Union, as required by the Disclosure and Transparency Rule 4.2.4R;

 

(b)      The Chairman's Statement includes a fair review of the information required to be disclosed under the Disclosure and Transparency Rule 4.2.7R, interim management report. This includes an indication of important events that have occurred during the first six months of the financial year, and their impact on the condensed set of financial statements presented in the Half-Yearly Financial Report. A description of the principal risks and uncertainties for the remaining six months of the financial year is set out below; and

 

(c)       In addition, in accordance with the disclosures required under the Disclosure and Transparency Rule 4.2.8R, there were no changes in the transactions or arrangements with related parties as described in the Group's Report and Accounts for the year ended 31 December 2016 that would have had a material effect on the financial position or performance of the Group in the first six months of the current financial year.

 

Principal Risks and Uncertainties

 

The principal risks and uncertainties facing the Group for the second half of the financial year are substantially the same as those described in the Report and Accounts for the year ended 31 December 2016. These comprise:

 

●         Investment Strategy Risk;

●         Market Risk;

●         Liquidity Risk;

●         Credit Risk;

●         Key Person Dependency;

●         Legal & Regulatory Risk; and

●         Operational Risk.

 

As with any investment company, the main risk is considered to be market risk.

 

Going Concern

 

The factors likely to affect the Group's ability to continue as a going concern were set out in the Report and Accounts for the year ended 31 December 2016. As at 30 June 2017, there have been no significant changes to these factors. Having reviewed the Company's forecasts and other relevant evidence, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the half-yearly condensed financial statements.

 

Rothschild

11 August 2017

For and on behalf of the Board

 

 

END OF HALF-YEARLY FINANCIAL REPORT EXTRACTS 


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