14 March
2024
Strategic Equity Capital plc (‘SEC’)
Half Year Report and Financial Statements for the six
months ended 31 December
2023
The Board
of Strategic Equity Capital plc, the specialist alternative equity
investment trust investing in high-quality, dynamic, UK smaller
companies, is pleased to announce the Company’s results for the
half-year ended 31 December
2023.
Highlights
for the six months ended 31 December
2023
-
NAV per
share up 1.7%, despite challenging UK equity market
conditions
-
Portfolio
remains highly focused with 18 holdings and top 10 accounting for
84% of NAV
-
Fully
invested, with around 1% of NAV held in cash at period
end
-
2022
measures to address share price discount now well established and
successful:
- Discount
has tightened from 8.3% (before measures announced), to 7.3% at
period end, versus average sector1
discount
which stands at 12.7%
- Ongoing
commitment to share buyback from divestment proceeds, including
£15.4 million contribution from takeover of Medica Group plc in
July 2023
- Over 2.6
million shares repurchased during 2023 calendar year
- Gresham
House commitment to invest £5 million in SEC shares now complete
investment manager now has an 11.1% equity stake
- Successful
co-ordinated bookbuild in September
2023 to diversify SEC’s shareholder register
- Ongoing
investment manager fee reinvestment where share price discount
exceeds 5%
-
Performance
contributors during the period include:
-
XPS
Pensions Group, which delivered expectation-beating results and
divested a non-core business at a significantly accretive valuation
multiple to the wider group
-
Fintel, a
regulatory technology service provider, which has made several
strategic acquisitions to increase capabilities and
scale
-
Education
service provider Tribal delivered strong performance and bid
interest at a 42% premium from a US-based, private equity-owned,
education business, although this takeover offer subsequently
lapsed
-
Ten
Entertainment, a leading UK tenpin bowling operator, received a
recommended cash offer from Trive Capital at a 33% premium to share
price, completing post period end
-
Wilmington,
the business information and training provider, delivered strong
results and signalled expectations of continued strong organic
growth
William Barlow, SEC’s Chairman,
commented:
“Macroeconomic
uncertainty, geopolitical volatility and weak equity fund flow
dynamics have continued to act as a drag on UK equity market
performance, with over 30 consecutive months of outflows. Against
this backdrop, the Board is pleased with SEC’s performance as we
approach the fourth anniversary of Gresham House’s
appointment.
A benefit
of these weaker equity markets, particularly in UK smaller
companies, is that private equity and trade buyers are seeking to
take advantage of the valuation discount at which
publicly
listed companies
trade. We
have seen this advantage manifest itself in SEC’s concentrated
portfolio benefiting from several takeover approaches over the
period.
UK
Smaller Company Investment Trust sector
SEC’s
resilient positioning should enable it to continue to outperform in
the current challenging environment and deliver attractive
long-term capital growth when markets stabilise. The enhanced
marketing programme and ongoing share buybacks should support the
Company’s ability to maintain a structurally narrower share price
discount to NAV over the coming years.”
Ken Wotton, MD of Public Equity at Gresham House and SEC’s
Fund Manager, said:
“Although
SEC lagged its peer group during the reporting period this followed
a strong period of outperformance in the prior year. Absolute
returns remained comfortably positive with the majority of
portfolio companies seeing values increase during the period,
despite volatile market conditions.
The
portfolio remains high-conviction and highly concentrated, invested
in quality businesses which trade on attractive valuations that
have the potential to be strategically valuable.
Takeover
bids for portfolio companies are evidence to support our valuation
thesis. We saw this with the successful bid for Medica in the first
half of 2023 and continue to see it with recommended bids for
Tribal and Ten Entertainment in the second half. As we saw with
Tribal, even bids at a significant premium recommended by company
boards won’t always lead to a takeover being supported by all
shareholders. This reinforces the wide disparity between public and
private investors’ views of appropriate valuations.
Across
SEC’s small cap universe, valuations remain significantly
undervalued relative to history, global equity indices and private
M&A transaction multiples. However, the challenging
macroeconomic backdrop further fuels the need for careful
assessment of the bottom-up characteristics of each
company.
In the
long run, we expect that disparity to narrow. In the meantime, in
conjunction with strong underlying fundamentals across the
portfolio, this valuation dynamic adds to the margin of safety
around prospective equity returns.”
FINANCIAL SUMMARY
Capital
Return
|
As at 31
Dec
2023
|
As at 30
June 2023
|
As at 31
Dec 2022
|
Six months
% change to 31 Dec 2023
|
Net asset
value (“NAV”) per shareǂ
|
345.83p
|
342.47p
|
293.08p
|
1.0%
|
Ordinary
share price
|
320.50p
|
309.00p
|
275.00p
|
3.7%
|
Comparative
index*
|
5,353.66
|
4,970.43
|
5,026.45
|
7.7%
|
Discount1
of
Ordinary share price to NAV
|
(7.3)%
|
(9.8)%
|
(6.2)%
|
|
Average
discount of Ordinary share price to NAV for the
period1
|
(8.0)%
|
(7.4)%
|
(7.8)%
|
|
Total
assets (£’000)
|
169,447
|
170,784
|
151,033
|
(0.8)%
|
Equity
shareholders’ funds (£’000)
|
168,512
|
170,223
|
150,550
|
(1.0)%
|
Ordinary
shares in issue with voting rights
|
48,726,211
|
49,704,711
|
51,368,273
|
|
ǂ Net asset
value or NAV, the value of total assets less current liabilities.
The net asset value divided by the number of shares in issue
produces the net asset value per share.
* FTSE
SmallCap (ex Investment Trusts) Index.
Performance
|
Six month
period to 31 Dec
2023
|
Year
ended
30
June
2023
|
Six month
period to 31 Dec 2022
|
NAV total
return for the period1
|
1.7%
|
9.2%
|
(6.7)%
|
Share
price total return for the period1
|
4.6%
|
11.2%
|
(1.0)%
|
Comparative
index*
total
return for the period
|
9.6%
|
(0.4)%
|
(1.1)%
|
Ongoing
charges1
-
annualised
|
1.19%
|
1.22%
|
1.21%
|
Ongoing
charges1
(including
performance fee) - annualised
|
1.43%
|
1.22%
|
1.21%
|
Revenue
return per Ordinary share
|
2.74p
|
3.53p
|
2.16p
|
Dividend
yield
|
n/a
|
0.81%
|
n/a
|
Proposed
final dividend for the period
|
n/a
|
2.50p
|
n/a
|
Alternative
Performance Measures
1 Please
refer to pages 25 and 26 of the Half-Year Report for definitions
and reconciliations of the Alternative Performance Measures for the
Half-Year results.
Interim
period’s Highs/Lows
|
High
|
Low
|
NAV per
Ordinary share
|
346.8p
|
317.9p
|
Ordinary
share price
|
323.5p
|
290.0p
|
The full
Half Yearly Report and Financial Statements can be accessed via the
Company’s website at:
www.strategicequitycapital.com or by
contacting the Company Secretary as below.
Copies of
the announcement, annual reports, quarterly update presentations
and other corporate information can be found on the Company’s
website at:
www.strategicequitycapital.com
For further information, please
contact:
Strategic
Equity Capital plc
William
Barlow (Chairman)
|
(via
Juniper Partners)
+44 (0)131
378 0500
|
Liberum
Capital Limited (Corporate Broker)
Chris
Clarke
Darren
Vickers
Owen
Matthews
|
+44 (0)20
3100 2000
|
Juniper
Partners Limited (Company Secretary)
Steven
Davidson
|
+44 (0)131
378 0500
|
KL
Communications (PR Adviser)
Charles
Gorman
Adam
Westall
Charlotte
Francis
|
gh@kl-communications.com
+44 (0)20 3995 6673
|
About
Strategic Equity Capital plc
SEC is a
specialist alternative equity trust.
Actively
managed, it maintains a highly-concentrated portfolio of 15-25
high-quality, dynamic, UK smaller companies, each operating in a
niche market offering structural growth opportunities.
SEC aims
to achieve investment growth over a medium-term period, principally
through capital growth. The team looks to find companies with the
potential to double shareholder value every five years.
SEC’s
investment manager is Gresham House Asset
Management.
About
Gresham House Asset Management
Gresham
House Asset Management is the FCA authorised operating business of
Gresham House Ltd, a specialist alternative asset manager. Gresham
House is committed to operating responsibly and sustainably, taking
the long view in delivering sustainable investment
solutions.
Further
information on SEC plc is available at
www.strategicequitycapital.com, and further information on Gresham
House is available at www.greshamhouse.com
CHAIRMAN’S
STATEMENT
The six-month period to the end of December followed similar themes
to the prior period, namely macroeconomic uncertainty, geopolitical
volatility and weak equity fund flow dynamics, all of which acted
as a drag on equity market performance. Ongoing uncertainty will
continue to throw up more challenges as the current financial year
progresses, but will also present opportunities for your Manager to
uncover attractive long term investment opportunities.
The Company’s investment portfolio remains highly concentrated with
almost 84% of the Company’s Net Asset Value (“NAV”) made up of the
top ten holdings as at the end of December
2023. The Manager has undertaken a detailed review of the
valuations of these key assets including benchmarking them against
the valuations applied to private market transactions for
comparable businesses. This analysis indicates a substantial margin
of safety currently underpinning the potential for long term
investment returns which provides the Board with confidence
notwithstanding the uncertain environment.
Weaker equity markets, particularly in the area of UK smaller
companies, have increasingly been attracting the attention of
private equity and trade buyers seeking to take advantage of the
relative valuation discount being applied to publicly listed
companies compared to prevailing private market transaction
valuation multiples. The Company’s portfolio has been a beneficiary
with takeover approaches for a number of companies over the period,
most recently involving Ten Entertainment Group, which received a
recommended cash takeover offer from US private equity firm Trive
Capital (the transaction completed post period end in February 2024); and Tribal
Group1,
which received a recommended cash takeover offer from Ellucian (a
trade competitor backed by Blackstone and Vista Equity
Partners).
The Company is positioned as a high conviction concentrated
portfolio of high quality businesses on attractive valuations that
have the potential to be strategically valuable. As such it remains
susceptible to further approaches while valuation multiples remain
depressed. This, together with the underlying financial health of
the portfolio, provides the Board with confidence that our
investment management team will be able to generate good long term
returns for shareholders in the Company.
Performance
During the six months to 31 December
2023, the Company’s NAV per share (on a total return basis)
increased by 1.7%. The FTSE Small Cap (ex Investment Trusts) Total
Return Index (“FTSE Small Cap Index”), which we use for comparison
purposes only, increased by 9.6%. Over the same period, the share
price of the Company increased by 4.6% on a total return basis. It
is worthwhile to remind shareholders that the Manager’s strategy
includes the avoidance of certain more cyclical sectors, instead
focussing the portfolio on relatively defensive businesses with
compelling structural tailwinds. In particular, consumer
discretionary stocks were large positive contributors to benchmark
performance over this period, and represent a materially greater
weight in the index relative to the Company. Whilst these sectors
often demonstrate short periods of outperformance when sentiment
inflects positively, they are similarly prone to periods of sharp
drawdown when macroeconomic conditions and/or sentiment weaken. The
Manager and Board believe that over the long term, the avoidance of
these areas of the market will not be detrimental to performance
but will rather reduce volatility and improve the consistency of
investment returns.
1 The
recommended offer for Tribal Group lapsed following certain
shareholder feedback, notwithstanding the 42% spot premium implied
by the offer price.
Whilst positive, NAV performance during the period lagged the
relevant index, although remains significantly ahead of the
benchmark index over the three year period to 31 December 2023. Encouragingly, the total return
of the Company’s shares over the six month period tracked
relatively closer to the index than the NAV performance, reflecting
the discount reduction mechanisms put in place by the Board in
recent years, including most recently a co-ordinated bookbuild to
diversify the Company’s shareholder register. With regards to
portfolio construction, the Manager believes that continuing to
prioritise companies with resilient business fundamentals and
strong balance sheets should enable the Company to outperform over
the medium to long term. Performance is discussed more fully in the
Investment Manager’s Report on page 7 of the Half-Year
Report.
Development
of the Company
Ken Wotton (Managing Director,
Public Equity at Gresham House) has been Lead Manager of the
Company since September 2020. Since
then Ken and his team have gradually repositioned the portfolio
into a high conviction set of businesses, in many of which the
Company now holds strategic and influential equity stakes which
form a platform to implement the Manager’s highly differentiated
and engaged Strategic Public Equity strategy (summarised in the
Investment Manager’s Report on page 7 of the Half-Year
Report).
Gresham House plc purchased 123,166 shares in the Company during
the period ended 31 December 2023,
resulting in a combined direct and indirect equity stake of 11.1%
in the Company.
The Board is pleased with the progress made by Gresham House since
September 2020, and notes the strong
outperformance against the benchmark over that period. Whilst
performance in the six months ended 31
December 2023 lagged the benchmark index, the Board believes
that the Manager’s investment approach should continue to deliver
outperformance over the medium to longer term. The Board also notes
that Gresham House has undergone a change in ownership during the
period, pursuant to the Recommended Cash Offer from Searchlight
Capital (“Searchlight”) which completed in December 2023. As such, Gresham House is no
longer a publicly quoted company, but a portfolio company of
Searchlight, a leading transatlantic private equity investor. The
valuation multiple implied by this transaction was at a significant
premium to the valuation ascribed to Gresham House by the public
markets, which is part of a wider theme of public vs private market
undervaluation that this Company seeks to capitalise on in its
investment approach (with several recent examples within the
Company’s investment portfolio). The Board sought and received
assurances that Searchlight is supportive of Gresham House’s
incumbent strategy, and is comfortable that there are no direct
implications for the investment team managing this
Company.
Discount
and Discount Management
The average discount to NAV of the Company’s shares during the
period was 8.0%, compared to the equivalent 7.5% figure from the
prior year. The discount range was 11.6% to 4.6%.
Many of the measures implemented in Q1 2022 to address the
persistent share price discount to NAV are now complete. These
included a 10 per cent. tender offer; the implementation of a share
buyback programme with 2,642,062 shares repurchased during the 2023
calendar year; and a commitment by Gresham House to use £5 million
of its cash resources to purchase shares in the Company. Gresham
House now has a 11.1% equity stake in the Company. These have been
successful, resulting in the discount narrowing from 9.8% at the
beginning of the period to 7.3% at the end of the period. For
comparison, over the same period the average UK Smaller Company
Investment Trust discount decreased from 12.7% to 10.0%.
Other measures, also implemented in Q1 2022, remain ongoing. These
include: a buy back policy to return 50 per cent. of proceeds from
profitable realisations, at greater than a 5 per cent. discount on
an ongoing basis, in each financial year; an ongoing commitment by
Gresham House Asset Management to reinvest 50 per cent. of its
management fee per quarter in shares if the Company’s shares trade
at an average discount of greater than 5 per cent. for the quarter;
and the deferral of an annual continuation resolution and
cancellation of the 2024 contingent tender offer in favour of the
implementation of a 100 per cent. realisation opportunity for
shareholders in 2025.
Gearing
and Cash Management
The Company has maintained its policy of operating without a
banking loan facility. This policy is periodically reviewed by the
Board in conjunction with the Manager and remains under
review.
Dividend
The Directors continue to expect that returns for shareholders will
derive primarily from the capital appreciation of the shares rather
than from dividends. In line with previous years, the Board does
not intend to propose an interim dividend.
Outlook
The global macroeconomic and geopolitical environment continues to
drive uncertainty, although evidence of disinflation and growing
consumer confidence should support both corporate earnings and
equity valuations.
UK equity markets, particularly across the small cap universe,
remain significantly undervalued relative to history, global equity
indices, and private M&A transaction multiples. In conjunction
with strong underlying fundamentals across the portfolio, this
valuation dynamic adds to the margin of safety around prospective
equity returns.
The resilient positioning of the Company’s portfolio should enable
it to outperform in the current challenging environment and deliver
attractive long-term capital growth when markets stabilise. The
enhanced marketing programme and ongoing share buybacks should
support the Company’s ability to maintain a structurally narrower
share price discount to NAV over the coming year.
The Board, once again, thanks you for your continued
support.
William Barlow
Chairman
13 March 2024
INvestment Manager’s report
Investment
Strategy
In the
following section, we remind shareholders of our strategy and
investment process.
Our
Strategic Public Equity strategy
The
appointment of Gresham House as Manager in May 2020 and the subsequent appointment of
Ken Wotton as Lead Fund Manager in
September 2020 resulted in a refocus
of the investment strategy, ensuring that it is strictly applied
and is able to effectively leverage the experienced resource of the
Gresham House Strategic Equity team, the wider Group platform and
its extensive network. We set out this strategy in detail in the
Company’s 2023 Annual Report which we summarise again
below.
Investment
focus
Our
investment focus is to invest into high quality, publicly listed
companies which we believe can materially increase their value over
the medium to long term through strategic, operational or
management change. To select suitable investments and to assist in
this process we apply our proprietary Strategic Public Equity
(“SPE”) investment strategy. This includes a much higher level of
engagement with management than most investment managers adopt and
is closer, in this respect, to a private equity approach to
investing in public markets companies. Our path to achieving this
involves constructing a high conviction, concentrated portfolio;
focusing on quality business fundamentals; undertaking deep due
diligence including engaging our proprietary network of experts and
assessing ESG risks and opportunities through the completion of the
ESG decision tool; and maintaining active stewardship of our
investments. Through constructive, active engagement with the
management teams and boards of directors, we seek to ensure
alignment with shareholder objectives and to provide support and
access to other resource and expertise to augment a company’s value
creation strategy.
We are
long-term investors and typically aim to hold companies for
three-to-five years to back a thesis that includes an entry and
exit strategy and a clearly identified route to value creation. We
have clear parameters for what we will invest in and areas which we
will deliberately avoid.
Smaller
company focus
We believe
that UK Smaller Companies represent a structurally attractive part
of the public markets. Academic research demonstrates that smaller
companies in the UK have delivered substantial outperformance over
the long term (see Figure 1 on page 7 of the Half-Year Report).
This is partially because there is a large number of
under-researched and under-owned businesses that typically trade at
a valuation discount to larger companies (see Figure 2 on page 8 of
the Half-Year Report) and relative to their prospects. A highly
selective investor with the resources and experience to navigate
successfully this part of the market can find exceptional long-term
investment opportunities.
The key
attractions of smaller companies are:
Inefficient
markets – Smaller
companies remain under-researched and below the radar for most
investors thus creating an opportunity for those willing to devote
time and resource to this area.
A
large universe – Most UK
listed companies are in the smaller companies category and are
listed on the main market or AIM. Two-thirds of UK listed companies
have a market capitalisation below £500m, offering a large
opportunity set for smaller company specialists.
Valuation
discounts – Such
discounts, arising for whatever reason, present attractive entry
points at which the intrinsic worth of a company’s long-term
prospects are undervalued.
M&A
activity – Smaller
companies often offer strategic opportunities within their niche
markets and can become attractive, bolt-on acquisitions to both
trade and private equity buyers. These buyers provide an additional
source of liquidity and realisation of value for smaller company
investors.
Portfolio
construction
We will
maintain a concentrated portfolio of 15-25 high conviction holdings
with prospects for attractive absolute returns over our investment
holding period. The majority of portfolio value is likely to be
concentrated in the top 10-15 holdings with other positions
representing potential “springboard” investments where we are still
undertaking due diligence or awaiting a catalyst to increase our
stake to an influential, strategic level.
Bottom-up
stock picking determines SEC’s sector weightings which are not
explicitly managed relative to a target benchmark weighting. The
absence of certain sectors such as Oil & Gas, Mining and Banks,
as well as limited exposure to overtly cyclical parts of the
market, and the absence of early stage or pre-profit businesses
typically result in a portfolio weighted towards, but not
exclusively, profitable cash generative service sector businesses
particularly in Technology, Healthcare, Financial Services and
Industrial Goods & Services. The underlying value drivers are
typically company specific and exhibit limited correlation even
within the same broad sectors. Figure 3 on page 8 of the Half-Year
Report sets out the sector exposure of the Company as at
31 December 2023.
Our
smaller company focus and specialist expertise leads us to
prioritise companies with a market capitalisation between £100m and
£300m at the point of investment. This focus, in combination with
the size of the Company and its concentrated portfolio approach,
provides the potential to build a strategic and influential stake
in the highest conviction holdings. In turn this provides a
platform to maximise the likelihood that our constructive active
engagement approach will be effective and ultimately successfully
contribute to shareholder value creation.
Once
purchased there is no upper limit restriction on the market
capitalisation of an individual investment. We will run active
positions regardless of market capitalisation provided they
continue to deliver the expected contribution to overall portfolio
returns and subject to exposure limits and portfolio construction
considerations.
The
weighted average market capitalisation of portfolio holdings
increased to £276m as at 31 December
2023 compared to £252m as at 30 June
2023, largely reflecting share price growth across the
portfolio, particularly in the case of the largest holding (XPS
Pensions Group), which was a top performer throughout the period
with a market capitalisation greater than the portfolio average as
at 31 December 2023. This level of
average market capitalisation supports the Manager’s strategy of
focusing on smaller market capitalisation companies where SEC has
the potential to take a meaningful equity stake as a platform to
effectively apply its active engagement strategy.
We set out
a description of the Top 10 holdings as at 31 December 2023 on page 11 of the Half-Year
Report together with a high level summary of the investment case
and recent developments for each position.
Constructive
Active Engagement Approach
As far as
possible, SEC aims to build consensus with other stakeholders. We
want to unlock value for shareholders, but also create stronger
businesses over the long term. The objective is to develop a
dialogue with management so that the Gresham House Asset Management
(‘GHAM’) team and its network are seen as trusted
advisors.
Operating
with a highly-focused portfolio, SEC’s management team can build
and maintain a deep understanding of its portfolio companies and
their potential. The team engages with company management teams and
boards in a number of areas including:
Strategy
– Working
with boards to ensure that business strategy and operations are
effectively aligned with long term value creation and focused on
building strategic value within a company’s market.
Corporate
activity – Support
for acquisition and divestment activity through advice, network
introductions and the provision of cornerstone capital.
Capital
allocation – Seeking
to work with boards to optimise capital allocation by prioritising
the highest return and value added projects and areas of focus for
investment of both capital and resource.
Board
composition – Ensuring
that boards are appropriately balanced between executive and
non-executive directors and contain the right balance of skills and
experience; we actively use our talent network to introduce high
quality candidates to enhance the quality of investee company
boards as appropriate.
Management
incentivisation – Ensuring
that key management are appropriately retained and incentivised to
deliver long term shareholder value with schemes that fit with
GHAM’s principles and are well aligned to our objectives as
shareholders.
ESG
–
Leveraging the GHAM sustainable investing framework and central
resource to help to identify, understand and monitor key ESG risks
and opportunities as well as seeking to drive enhancements to a
company’s approach where there are critical material issues with a
particular focus on corporate governance.
Investor
Relations – Helping
management teams to hone their equity story, select appropriate
advisors and target their investor relations activities in the most
effective way to ensure that value creation activity is understood
and reflected by the market.
Engagement
is undertaken privately, as far as possible. The team will also
work to leverage its extensive network to the benefit of portfolio
companies. We seek to make introductions to our network in as
collaborative way as appropriate where we believe there is an
opportunity to support initiatives to create shareholder
value.
In
summary, we follow a practice of constructive corporate engagement
and aim to work with management teams in order to support and
enhance shareholder value creation. We attempt to build a consensus
with other stakeholders and prefer to work collaboratively
alongside like minded co-investors.
Portfolio
review for the six months to 31 December
2023
Over the
course of the six months to 31 December
2023 we continued to evolve the portfolio at a more
normalised pace than in the previous two financial years:
purchasing 4 new holdings which represented 6.5% of NAV at the end
of the period, and fully exiting 2 positions which represented
20.6% at the start of the period. As of 31
December 2023, the number of influential equity stakes where
GHAM funds, in aggregate, hold a 5% or more equity stake stood at
14, and represented 83% of the portfolio by value at 31 December 2023.
Market
Background
Over the
six months to the end of December, the FTSE Small Cap (ex
Investment Trusts) Index (“the index”) increased by 9.6% on a total
return basis outperforming both the FTSE All Share (+5.1%) and the
FTSE AIM (+2.3%). The first half of the period saw value outperform
growth (as evidenced by the relative performance of the MSCI UK
Growth and Value indices), in part as concerns over persistent
inflation (and an additional base rate increase) fuelled longer
term yields. However, the latter three months of the period saw a
reversal of this trend as signs of disinflation (and hopes of rate
cuts) emerged, with the MSCI UK Value Index performing neutrally
over the period versus a notable recovery for its Growth
counterpart. Aside from macroeconomic uncertainty, geopolitical
developments continued to drive volatility and weigh on risk
sentiment, resulting in falling share prices particularly in
smaller companies.
The UK
equity market continued to be out of favour with asset allocators,
reaching 30 consecutive months of outflows by December 20231.
This continued selling pressure from UK equities has weighed on
valuations, with the UK at multi-decade lows relative to other
developed markets, particularly the US, despite the drawdowns
experienced last year.
Whilst
this demonstrates the value opportunities in the UK market, we
believe that the challenging macroeconomic backdrop further fuels
the need for careful assessment of the bottom up characteristics of
each company. This suits the private equity approach taken by the
Manager to investing on behalf of the Company.
Source:
Peel Hunt UK M&A: accelerating pace of exits – January 2024.
Performance
Review
The net
asset value (“NAV”) increased 1.7%, on a total return basis, over
the six months to the end of December
2023, closing at 345.83p per share. This increase in NAV
reflected the positive returns delivered by the majority of
portfolio companies throughout the period, despite volatile equity
market conditions as geopolitical and macroeconomic concerns
weighed on investor sentiment.
The
Company underperformed its benchmark during the period, as the FTSE
Small Cap (ex Investment Trusts) Index increased by 9.6%. This
reflected the relatively defensive positioning of the portfolio
compared to the wider market – focused on high quality businesses
in less cyclical parts of the market and with resilient business
models and robust balance sheets. In particular, consumer
discretionary businesses contributed strongly to index
outperformance in the period, and represent a materially greater
weight in the index relative to the Company.
Despite
the market volatility experienced over the year, we remain
confident about the resilient underlying fundamentals of the
portfolio companies and their ability to withstand the
macroeconomic headwinds that look set to persist through the
current financial year.
Top
Five Absolute Contributors to Performance
The top
five absolute contributors to the Company’s NAV performance in the
six months to 31 December 2023
are: XPS
Pensions Group a pensions
consulting, advisory and administration services provider, which
delivered results in excess of market expectations, resulting in
analyst upgrades, and divested a non-core business at a
significantly accretive valuation multiple to the wider
group; Fintel,
a provider of tech-enabled regulatory services, following a number
of strategic acquisitions which will significantly increase the
capabilities, scale and IP of the organisation; Tribal2,
a provider of technology products and services to the education,
learning and training markets, following strong interim results
with double digit EBITDA growth and strong performance from both
divisions, along with the announcement of a recommended offer in
early October at a 42% spot premium; Wilmington,
a provider of business information and training solutions,
following strong results and strong early trading in line with
expectations of strong continued organic growth; and
Ten
Entertainment, a
leading UK tenpin bowling operator, following a recommended cash
offer from Trive Capital at a 33% premium to spot price.
2 The
shareholder vote for Tribal Group’s Recommended Cash Offer was
narrowly defeated in December 2023,
resulting in the Company no longer being in an Offer Period. This
caused the company’s share price to retreat in December and January
to similar levels as Summer 2023, before the offer had been
announced.
Bottom
Five Absolute Contributors to Performance
In
challenging equity market conditions certain portfolio holdings
suffered from share price weakness during the period, typically in
response to short term developments that, we believe, do not
fundamentally change the long term values of the holdings. The
largest detractors included R&Q
Insurance Holdings, a
provider of core services of legacy acquisitions and program
management, following the proposed sale of the company’s Program
Management business at a valuation materially below market
expectations; Inspired
Energy, an
energy procurement and ESG consultancy, despite strong current
trading and limited newsflow; Ricardo,
an engineering, environmental and strategic consultancy, following
the release of an in-line full year 2023 trading update, which
indicated some downward pressure on outer year forecasts due to
higher interest costs; Iomart,
a datacentre and cloud services provider, on no specific news flow;
and
Brooks Macdonald, a wealth
manager, on the back of broader market concerns around potential
sector-wide outflows, despite the release of FY23 results slightly
ahead of consensus expectations.
Portfolio
Review
The
portfolio remained highly focused with a total of 18 holdings, of
which the top 10 accounted for almost 84% of the NAV at the end of
the period. Around 1% of the NAV was held in cash at period
end.
Over the
period positions in Medica (IRR[1]
of 25% /
12%) and Carr’s Group (IRR[2]
of 17%)
were exited.
The
Company currently has a number of key holdings that we believe
trade at material valuation discounts to comparable private market
transaction values, which provides a strong margin of safety
underpinning the long term upside potential of the
portfolio.
Changes in
sector weightings have seen exposure to Healthcare decrease from
21.6% to 3.5%, with exposure to Financial Services decreasing from
32.6% to 27.0%, and exposure to Technology increasing from 10.9% to
16.7%.
Top
10 Investee Company Review
Company
|
Investment
Thesis
|
Developments
|
XPS
Pensions
|
-
Leading
‘challenger’ brand in the pensions administration and advice market
with organic market share opportunity following industry
consolidation
-
Highly
defensive – high degree of revenue visibility and largely
non-discretionary, regulation driven client activity with inflation
protected contracts
-
Trades at a
material discount to comparable M&A transactions despite
competitive positioning, operational delivery
|
-
Divested a
non-core business at a significantly accretive valuation multiple
to the broader group
-
Strong
visibility of regulatory changes driving sector demand
-
Strong
pipeline of opportunities as the current yield environment
encourages corporates to explore pension risk transfer
solutions
-
Strong
cash generation supporting growing dividend
|
Fintel
|
-
Leading UK
provider of technology
enabled
regulatory solutions and services to IFAs, financial institutions
and other intermediaries
-
Strategically
valuable technology platform with opportunity to drive material
growth in revenues and margins through supporting customers’
digitisation journeys
|
-
New LTIP
scheme implemented which strongly aligns to absolute equity value
creation
-
Execution
of several small, strategic bolt-on acquisitions
-
Cash
generation strong resulting in significant balance sheet
de-gearing
|
Iomart
|
-
Datacentre
and cloud services provider
-
Structurally
growing market with particular demand for hybrid cloud
-
Exceptional
quality of earnings with >90% recurring revenue
|
-
HY24
results demonstrating 18% YoY revenue growth
-
New CEO
with a strong pedigree in IT services (incl. BT,
Equiniti)
|
Brooks
Macdonald
|
-
UK focused
wealth management platform; structural growth given continuing
transition to self-investment
-
Opportunity
to leverage operational investments to grow margin and continue
strong cash flow generation
-
A
consolidating market; opportunity for Brooks as both predator and
prey
|
-
Improvement
in net fund flows despite market weakness
-
Strategic
technology partnership with SS&C underpins future
scalability
-
Continued
sector M&A activity (e.g. 7IM / September 2023) at significant
valuation premia to Brooks Macdonald’s rating
|
Ricardo
|
-
Global
strategic, environmental and engineering consultancy
-
Ongoing
strategic transformation to refocus and prioritise the business
towards higher growth, higher margin and less capital intensive
activities
-
Strong
market position underpinned by significant sector
expertise
|
-
Successfully
extended its McLaren relationship (now in its fourth generation)
demonstrating the stickiness of Ricardo’s customer
relationships
-
Strong
FY23 results with a record orderbook and particularly high growth
in its Environmental & Energy Transition divisions, in line
with the strategic ambition
|
Wilmington
|
-
International
provider of B2B data and training in the compliance, insurance,
financial and healthcare sectors
-
New top
team have reshaped the strategy and portfolio of
businesses
-
Operational
momentum driving revenue and margin growth with potential for a
valuation re-rating
|
-
Profit and
cash generation ahead of expectations driving forecast
upgrades
-
Recovery
in live events underpinning growth and margin recovery
-
Sector
consolidation underlines valuation opportunity
|
Tribal
|
-
International
provider of student administration software with market leading
positions in the UK, Australia and NZ
-
Strong
defensive characteristics with high visibility of
earnings
-
Transition
to cloud-based platform has potential to drive growth, margins and
rating
-
Low
valuation relative to software sector averages and sector
transaction multiples
|
-
Recommended
Cash Offer announced from Ellucian (Blackstone / Vista backed
competitor) at a 42% spot premium – N.B.
the offer subsequently lapsed following lack of support from
Tribal’s shareholders
|
Hostelworld
|
-
Leading
online travel agent serving the global niche segment of
hostelling
-
Business
rationalised and optimised during Covid with enhanced customer
value proposition
-
Recovery
from Covid market dynamics well advanced with strong margin
recovery potential
|
-
Revenues
have recovered to pre- Covid levels with further volume recovery
still to come
-
Average
order value and customer lifetime values improving
-
Technology
and app investment starting to deliver a positive
impact
|
LSL
Property Services
|
-
Leading
provider of services to the UK residential property sector with
activities spanning mortgage broking, surveying and real estate
agencies
-
Significant
opportunity to reallocate capital to the Financial Services
division which is strategically valuable, high growth and
underappreciated by the market
-
Potential
for a material re-rating as business mix shifts to higher quality
less cyclical divisions
|
-
Depressed
UK residential housing transaction volumes have provided a
challenging backdrop, particularly for LSL’s surveying
business
-
Successful
transition of LSL’s estate agency business from owned to
franchised
-
Significant
open market share buying (December 2023) by LSL’s Chair
|
Inspired
Energy
|
-
UK B2B
corporate energy services and procurement specialist with strong
ESG credentials
-
Leading
player in a fragmented industry; significant opportunity to gain
market share through client wins, proposition extension and
M&A
-
Valued at a
substantial discount to comparable private market transaction
multiples
|
-
High
energy costs have driven accelerated growth in optimisation
services
-
ESG
revenues accelerating from a low base
|
Outlook
The
Manager’s core planning assumption is that continued geopolitical
and macroeconomic uncertainty will drive market volatility
throughout 2024. However, signs of disinflation and warming
consumer confidence provide a helpful tailwind for business
performance entering into 2024. As in prior periods, it is likely
that increasing focus on company fundamentals and valuation
discipline will be required to outperform in this environment,
which plays to the strengths of the Company’s investment strategy
and the Manager’s approach.
The
Manager does not seek to make major macroeconomic predictions or to
tilt portfolio construction materially in any direction to mitigate
or benefit from macro trends. Rather the core focus remains
building a portfolio bottom up by investing in high-quality,
resilient companies exposed to structural growth, key competitive
advantages or self-help opportunities and maintain valuation
discipline such that they could drive attractive investment returns
over the medium-to-long term regardless of the economic environment
and where the Manager’s constructive active engagement approach can
help to support or unlock that potential.
The
Manager continues to believe that stock-level volatility across the
market, while creating some challenges, will provide an attractive
environment for investors to back quality companies with attractive
long-term structural capital growth at reasonable valuations across
the market cap spectrum. The economic environment and market
discontinuity will provide agile smaller businesses with strong
management teams the opportunity to take market share and build
strong, enduring franchises.
Continuing
the theme from the first half of the calendar year, levels of
takeover activity within the UK equity space continue to play out.
17 firm offers were announced during the six months ended
31 December 2023, with a relatively
even balance between private equity and strategic bidders. Takeover
activity was disproportionately concentrated in the small cap
universe, reflecting the relative undervaluation against large cap
equities, and comparable M&A transaction multiples; across the
2023 calendar year the combined equity value of firm offers was
£19bn vs. £41bn in 2022, despite the number of firm offers having
risen from 48 to 59 year on year. The investment process and
private equity lens across public markets enables the
identification of investment opportunities with potential strategic
value, that could be attractive acquisitions for both corporate and
financial buyers.
We
continue to believe that our fundamental focused investment style
has the potential to outperform over the long term. We see
significant opportunities for long term investors to back quality
growth companies at attractive valuations in an environment where
agile smaller businesses with strong management teams can take
market share and build strong long-term franchises. We will
maintain our focus on building a high conviction portfolio of less
cyclical, high quality, strategically valuable businesses which we
believe can deliver strong returns through the market cycle
regardless of the performance of the wider economy.
Ken Wotton
Gresham
House Asset Management
13 March 2024
Portfolio
as at 31 December
2023
Company
|
Sector
Classification
|
Date
of first investment
|
Cost
£’000
|
Valuation
£’000
|
%
of invested portfolio at 31 December 2023
|
%
of invested portfolio at 30 June 2023
|
%
of net assets
|
XPS
Pensions Group
|
Business
Services
|
Jul
2019
|
16,851
|
33,994
|
20.4
|
15.0
|
20.2
|
Fintel
|
Financial
Services
|
Oct
2020
|
13,771
|
18,182
|
10.9
|
6.4
|
10.8
|
Iomart
|
Technology
|
Mar
2022
|
16,272
|
15,226
|
9.2
|
5.4
|
9.0
|
Brooks
Macdonald
|
Financial
Services
|
Jun
2016
|
15,302
|
14,750
|
8.9
|
7.0
|
8.8
|
Ricardo
|
Business
Serivices
|
Sep
2021
|
13,579
|
13,946
|
8.4
|
6.8
|
8.3
|
Wilmington
|
Media
|
Oct
2010
|
6,818
|
11,490
|
6.9
|
5.6
|
6.8
|
Tribal
|
Technology
|
Dec
2014
|
11,742
|
9,110
|
5.5
|
3.9
|
5.4
|
Hostelworld
|
Travel
& Leisure
|
Oct
2019
|
6,505
|
8,826
|
5.3
|
4.8
|
5.2
|
LSL
Property Services
|
Financial
Services
|
Mar
2021
|
13,256
|
7,935
|
4.8
|
5.1
|
4.7
|
Inspired
Energy
|
Business
Services
|
Jul
2020
|
13,754
|
7,318
|
4.4
|
6.1
|
4.3
|
Benchmark
|
Healthcare
|
Jun
2019
|
6,734
|
5,837
|
3.5
|
3.6
|
3.5
|
Netcall
|
Technology
|
Mar
2023
|
4,367
|
3,848
|
2.3
|
1.8
|
2.3
|
Ten
Entertainment
|
Travel
& Leisure
|
Oct
2020
|
1,592
|
3,745
|
2.2
|
3.3
|
2.2
|
Trufin
|
Financial
Services
|
Jul
2023
|
4,111
|
3,253
|
2.0
|
-
|
1.9
|
Property
Franchise
|
Real
Estate
|
Oct
2023
|
3,000
|
3,205
|
1.9
|
-
|
1.9
|
Belvoir
Group
|
Real
Estate
|
Oct
2023
|
2,499
|
2,830
|
1.7
|
-
|
1.7
|
Team
17
|
Media
|
Dec
2023
|
1,487
|
1,492
|
0.9
|
-
|
0.9
|
R&Q
Insurance Holdings
|
Financial
Services
|
Jun
2022
|
10,308
|
1,406
|
0.8
|
4.3
|
0.8
|
|
|
|
|
|
|
|
|
Total
investments
|
|
|
|
166,393
|
|
|
98.7
|
Cash
|
|
|
|
2,979
|
|
|
1.8
|
Net
current liabilities
|
|
|
|
(860)
|
|
|
(0.5)
|
Total
shareholders'
equity
|
|
|
|
168,512
|
|
|
100.0
|
Statement
of Directors’ Responsibilities, Going Concern, Principal Risks and
Uncertainties
Statement
of Directors’ Responsibilities
The
Directors confirm that to the best of their knowledge:
-
the
condensed set of financial statements contained within the
Half-Yearly Report has been prepared in accordance with IAS 34,
‘Interim Financial Reporting’, and give a true and fair view of the
assets, liabilities, financial position and profit of the Company
as required by Disclosure Guidance and Transparency Rules (“DTR”)
4.2.4R;
-
the
Half-Yearly Report includes a fair review of the information
required by:
(a) DTR
4.2.7 of the Disclosure Guidance and Transparency Rules, being 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; and a description of the principal
risks and uncertainties for the remaining six months of the year;
and
(b) DTR
4.2.8 of the Disclosure Guidance and Transparency Rules, being
related party transactions that have taken place in the first six
months of the current financial year and that have materially
affected the financial position or performance of the Company
during that period; and any changes in the related party
transactions described in the last Annual Report that could do
so.
This
Half-Yearly Report was approved by the Board of Directors on
13 March 2024 and the above
responsibility statement was signed on its behalf by William Barlow, Chairman.
Going
Concern
The
Company has adequate financial resources to meet its investment
commitments and, as a consequence, the Directors believe that the
Company is well placed to manage its business risks. After making
appropriate enquiries and due consideration of the Company’s cash
balances, the liquidity of the Company’s investment portfolio and
the cost base of the Company, the Directors have a reasonable
expectation that the Company has adequate available financial
resources to continue in operational existence for the foreseeable
future and accordingly have concluded that it is appropriate to
continue to adopt the going concern basis in preparing the
Half-Yearly Report, consistent with previous periods.
Principal
Risks and Uncertainties
The
overriding risks and uncertainties to an investor relate to the
markets on which are traded the Company’s shares and the shares of
the companies in which the Company invests.
The
principal risks and uncertainties are set out on pages 17 and 18 of
the Annual Report for the year ended 30 June
2023, which is available at
www.strategicequitycapital.com.
The
Company’s principal risks and uncertainties have not changed since
the date of the Annual Report and are not expected to change for
the remaining six months of the Company’s financial
year.
Statement
of Comprehensive Income
for the
six month period to 31 December
2023
|
|
Six
month period ended
31
December 2023
unaudited
|
Year
ended
30 June
2023
audited
|
Six month
period to
31
December 2022
unaudited
|
|
Note
|
Revenue
return
£'000
|
Capital
return
£'000
|
Total
£'000
|
Revenue
return
£’000
|
Capital
return
£’000
|
Total
£’000
|
Revenue
return
£'000
|
Capital
return
£'000
|
Total
£'000
|
Investments
|
|
|
|
|
|
|
|
|
|
|
Gains/(losses)
on investments held at fair value through profit or loss
|
6
|
-
|
1,573
|
1,573
|
-
|
10,602
|
10,602
|
-
|
(13,459)
|
(13,459)
|
|
|
-
|
1,573
|
1,573
|
-
|
10,602
|
10,602
|
-
|
(13,459)
|
(13,459)
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
2
|
2,344
|
-
|
2,344
|
3,782
|
-
|
3,782
|
2,124
|
-
|
2,124
|
Interest
|
2
|
31
|
-
|
31
|
78
|
-
|
78
|
35
|
-
|
35
|
Total
income
|
|
2,375
|
-
|
2,375
|
3,860
|
-
|
3,860
|
2,159
|
-
|
2,159
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
Investment
Manager’s fee
|
8
|
(616)
|
-
|
(616)
|
(1,228)
|
-
|
(1,228)
|
(603)
|
-
|
(603)
|
Performance
fee
|
9
|
-
|
(369)
|
(369)
|
-
|
-
|
-
|
-
|
-
|
-
|
Other
expenses
|
3
|
(408)
|
-
|
(408)
|
(803)
|
-
|
(803)
|
(397)
|
-
|
(397)
|
Total
expenses
|
|
(1,024)
|
(369)
|
(1,393)
|
(2,031)
|
-
|
(2,031)
|
(1,000)
|
-
|
(1,000)
|
|
|
|
|
|
|
|
|
|
|
|
Net
return before taxation
|
|
1,351
|
1,204
|
2,555
|
(1,829)
|
10,602
|
12,431
|
1,159
|
(13,459)
|
(12,300)
|
Taxation
|
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Net
return and total comprehensive income for the
period
|
|
1,351
|
1,204
|
2,555
|
(1,829)
|
10,602
|
12,431
|
1,159
|
(13,459)
|
(12,300)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pence
|
pence
|
pence
|
pence
|
pence
|
pence
|
pence
|
pence
|
pence
|
Return
per Ordinary share
|
5
|
2.74
|
2.44
|
5.18
|
3.53
|
20.44
|
23.97
|
2.16
|
(25.08)
|
(22.92)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total
column of this statement represents the Statement of Comprehensive
Income. The supplementary revenue and capital columns are both
prepared under guidance published by the AIC.
All items
in the above statement derive from continuing operations. No
operations were acquired or discontinued in the period.
The notes
form an integral part of these Half-Yearly financial
statements.
Statement
of Changes in Equity
for the
six month period to 31 December
2023
|
Note
|
Share
capital
£'000
|
Share
premium
account
£'000
|
Special
reserve
£'000
|
Capital
reserve
£'000
|
Capital
redemption
reserve
£’000
|
Revenue
reserve
£'000
|
Total
£'000
|
For
the six month period to 31 December
2023 unaudited
|
|
|
|
|
|
|
|
|
1 July
2023
|
|
6,353
|
11,300
|
3,590
|
142,952
|
2,897
|
3,131
|
170,223
|
Net return
and total comprehensive income for the period
|
|
-
|
-
|
-
|
1,204
|
-
|
1,351
|
2,555
|
Dividend
paid
|
4
|
-
|
-
|
-
|
-
|
-
|
(1,231)
|
(1,231)
|
Share
buy-backs
|
|
-
|
-
|
(3,035)
|
-
|
-
|
-
|
(3,035)
|
31
December 2023
|
|
6,353
|
11,300
|
555
|
144,156
|
2,897
|
3,251
|
168,512
|
|
|
|
|
|
|
|
|
|
For
the year to 30 June 2023 audited
|
|
|
|
|
|
|
|
|
1 July
2022
|
|
6,353
|
11,300
|
19,767
|
132,350
|
2,897
|
2,363
|
175,030
|
Net return
and total comprehensive income for the
year
|
|
-
|
-
|
-
|
10,602
|
-
|
1,829
|
12,431
|
Dividend
paid
|
4
|
-
|
-
|
-
|
-
|
-
|
(1,061)
|
(1,061)
|
Share
buy-backs
|
|
-
|
-
|
(16,177)
|
-
|
-
|
-
|
(16,177)
|
30 June
2023
|
|
6,353
|
11,300
|
3,590
|
142,952
|
2,897
|
3,131
|
170,223
|
|
|
|
|
|
|
|
|
|
For
the six month period to 31 December
2022 unaudited
|
|
|
|
|
|
|
|
|
1 July
2022
|
|
6,353
|
11,300
|
19,767
|
132,350
|
2,897
|
2,363
|
175,030
|
Net return
and total comprehensive income for the period
|
|
-
|
-
|
-
|
(13,459)
|
-
|
1,159
|
(12,300)
|
Dividend
paid
|
4
|
-
|
-
|
-
|
-
|
-
|
(1,061)
|
(1,061)
|
Share
buy-backs
|
|
-
|
-
|
(11,119)
|
-
|
-
|
-
|
(11,119)
|
31
December 2022
|
|
6,353
|
11,300
|
8,648
|
118,891
|
2,897
|
2,461
|
150,550
|
The notes
form an integral part of these Half-Yearly financial
statements.
Balance
Sheet
as
at 31 December
2023
|
Note
|
As
at
31
December
2023
unaudited
£'000
|
As
at
30
June
2023
audited
£'000
|
As
at
31
December
2022
unaudited
£'000
|
Non-current
assets
|
|
|
|
|
Investments
held at fair value through profit or loss
|
6
|
166,393
|
169,274
|
140,283
|
|
|
|
|
|
Current
assets
|
|
|
|
|
Trade and
other receivables
|
|
75
|
268
|
27
|
Cash and
cash equivalents
|
|
2,979
|
1,242
|
10,723
|
|
|
3,054
|
1,510
|
10,750
|
|
|
|
|
|
Total
assets
|
|
169,447
|
170,784
|
151,033
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
Trade and
other payables
|
|
(935)
|
(561)
|
(483)
|
Net
assets
|
|
168,512
|
170,223
|
150,550
|
|
|
|
|
|
|
|
|
|
|
Capital
and reserves
|
|
|
|
|
Share
capital
|
7
|
6,353
|
6,353
|
6,353
|
Share
premium account
|
|
11,300
|
11,300
|
11,300
|
Special
reserve
|
|
555
|
3,590
|
8,648
|
Capital
reserve
|
|
144,156
|
142,952
|
118,891
|
Capital
redemption reserve
|
|
2,897
|
2,897
|
2,897
|
Revenue
reserve
|
|
3,251
|
3,131
|
2,461
|
Total
shareholders’ equity
|
|
168,512
|
170,223
|
150,550
|
|
|
|
|
|
|
|
pence
|
pence
|
pence
|
Net
asset value per share
|
|
345.83
|
342.47
|
293.08
|
|
|
|
|
|
|
|
number
|
number
|
number
|
Ordinary
shares in issue
|
7
|
48,726,211
|
49,704,711
|
51,368,273
|
The notes
form an integral part of these Half-Yearly financial
statements.
Statement
of Cash Flows
for
the six month period to 31 December
2023
|
Six
month
period
to
31
December
2023
unaudited
£'000
|
Year
ended
30
June
2023
audited
£’000
|
Six
month
period
to
31
December
2022
unaudited
£'000
|
Operating
activities
|
|
|
|
Net return
before taxation
|
2,555
|
12,431
|
(12,300)
|
Adjustment
for (gains)/losses on investments
|
(1,573)
|
(10,602)
|
13,459
|
|
|
|
|
Operating
cash flows before movements in working capital
|
982
|
1,829
|
1,159
|
Decrease
in receivables
|
321
|
374
|
615
|
Increase/(decrease)
in payables
|
209
|
22
|
(101)
|
Purchases
of portfolio investments
|
(32,988)
|
(30,473)
|
(8,264)
|
Sales of
portfolio investments
|
37,479
|
30,463
|
13,229
|
Net
cash flow from operating activities
|
6,003
|
2,215
|
6,638
|
|
|
|
|
Financing
activities
|
|
|
|
Equity
dividend paid
|
(1,231)
|
(1,061)
|
(1,061)
|
Shares
bought back in the period
|
(3,035)
|
(16,275)
|
(11,217)
|
Net
cash flow from financing activities
|
(4,266)
|
(17,336)
|
(12,278)
|
|
|
|
|
Increase/(decrease)
in cash and cash equivalents for period
|
1,737
|
(15,121)
|
(5,640)
|
Cash and
cash equivalents at start of period
|
1,242
|
16,363
|
16,363
|
Cash
and cash equivalents at 31 December
|
2,979
|
1,242
|
10,723
|
The notes
form an integral part of these Half-Yearly financial
statements.
Notes
to the Financial Statements
1.1
Corporate information
Strategic
Equity Capital plc is a public limited company incorporated and
domiciled in the United Kingdom,
registered in England and
Wales under the Companies Act 2006
whose shares are publicly traded. The Company is an investment
company as defined by Section 833 of the Companies Act
2006.
The
Company carries on business as an investment trust within the
meaning of Sections 1158/1159 of the Corporation Tax Act
2010.
1.2
Basis of preparation/statement of compliance
The
condensed Half-Yearly financial statements of the Company have been
prepared on a going concern basis and in accordance with
international accounting standards in conformity with the
requirements of the Companies Act 2006. They do not include all the
information required for a full report and financial statements and
should be read in conjunction with the report and financial
statements of the Company for the year ended 30 June 2023, which have been prepared in
accordance with IFRS. Where presentational guidance set out in the
Statement of Recommended Practice (“SORP”) for investment trust
companies and venture capital trusts issued by the AIC is
consistent with the requirements of IFRS, the Directors have sought
to prepare financial statements on a basis compliant with the
recommendations of the SORP.
The
condensed Half-Yearly financial statements do not comprise
statutory accounts within the meaning of Section 434 of the
Companies Act 2006. The financial statements for the six month
periods to 31 December 2023 and
31 December 2022 have not been either
audited or reviewed by the Company’s Auditor. Information for the
year ended 30 June 2023 has been
extracted from the latest published Annual Report and financial
statements, which have been filed with the Registrar of Companies.
The report of the Auditor on those financial statements was
unqualified, did not contain an emphasis of matter paragraph and
did not contain any statement under Section 498 of the Companies
Act 2006.
Convention
The
financial statements are presented in Sterling, being the currency
of the Primary Economic Environment in which the Company operates,
rounded to the nearest thousand.
Segmental
reporting
The
Directors are of the opinion that the Company is engaged in a
single segment of business, being investment business.
1.3
Accounting policies
The
accounting policies, presentation and method of computation used in
these condensed financial statements are consistent with those used
in the preparation of the financial statements for the year ended
30 June 2023.
1.4
New standards and interpretations not applied
Implementation
of changes and accounting standards in the financial period, as
outlined in the financial statements for the year ended
30 June 2023, had no significant
effect on the accounting or reporting of the Company.
2.
Income
|
Six
month period to 31 December 2023
unaudited
|
Year ended
30 June 2023
audited
|
Six month
period to 31 December 2022
unaudited
|
|
£'000
|
£'000
|
£'000
|
Income
from investments
|
|
|
|
UK
dividend income
|
2,344
|
3,782
|
2,124
|
Other
operating income
|
|
|
|
Liquidity
interest
|
31
|
78
|
35
|
Total
income
|
2,375
|
3,860
|
2,159
|
3.
Other expenses
|
Six
month period to 31 December 2023 unaudited
|
Year ended
30 June 2023 audited
|
Six month
period to 31 December 2022 unaudited
|
|
£'000
|
£'000
|
£'000
|
Secretarial
services
|
92
|
171
|
85
|
Auditor’s
remuneration for:
|
|
|
|
Audit
services
|
39
|
65
|
36
|
Directors’
remuneration
|
92
|
161
|
74
|
Other
expenses
|
185
|
406
|
202
|
|
405
|
803
|
397
|
4.
Dividend
The
Company paid a final dividend of 2.50p in respect of the year ended
30 June 2023 (30 June 2022: 2.00p) per Ordinary share on
49,233,260 (30 June 2022: 53,027,547)
shares, amounting to £1,230,832 (30 June
2022: £1,060,551). The dividend was paid on 10 November 2023 to Shareholders on the register
at 13 October 2023. In line with
previous years, the Board does not intend to propose an interim
dividend.
5.
Return per Ordinary share
|
Six
month period to
31
December 2023
|
Year
ended
30 June
2023
|
Six month
period to
31
December 2022
|
|
|
Revenue
return
pence
|
Capital
return
pence
|
Total
pence
|
Revenue
return
pence
|
Capital
return
pence
|
Total
pence
|
Revenue
return
pence
|
Capital
return
pence
|
Total
pence
|
Return per
Ordinary share
|
2.74
|
2.44
|
5.18
|
3.53
|
20.44
|
23.97
|
2.16
|
(25.08)
|
(22.92)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns
per Ordinary share are calculated based on 49,290,313 (30 June 2023: 51,853,838 and 31 December 2022: 53,653,477) being the weighted
average number of Ordinary shares, excluding shares held in
treasury, in issue throughout the period.
6.
Investments
|
31
December 2023
£’000
|
Quoted
investments at fair value through profit or loss
|
166,393
|
The
Company is required to classify its investments using a fair value
hierarchy that reflects the subjectivity of the inputs used in
measuring the fair value of each asset. The fair value hierarchy
has the following levels:
Investments
whose values are based on quoted market prices in active markets
are classified within level 1 and include active listed equities.
The Company does not adjust the quoted price for these
instruments.
The
definition of level 1 inputs refers to ‘active market’ which is a
market in which transactions take place with sufficient frequency
and volume for pricing information to be provided on an ongoing
basis. Due to the liquidity levels of the markets in which the
Company trades, whether transactions take place with sufficient
frequency and volume is a matter of judgement, and depends on the
specific facts and circumstances. The Investment Manager has
analysed trading volumes and frequency of the Company’s portfolio
and has determined these investments as level 1 of the
hierarchy.
Financial
instruments that trade in markets that are not considered to be
active but are valued based on quoted market prices, dealer
quotations or alternative pricing sources supported by observable
inputs are classified within level 2. As level 2 investments
include positions that are not traded in active markets and/or are
subject to transfer restrictions, valuations may be adjusted to
reflect illiquidity and/or non-transferability, which are generally
based on available market information.
Level 3
instruments include private equity, as observable prices are not
available for these securities the Company has used valuation
techniques to derive the fair value. In respect of unquoted
instruments, or where the market for a financial instrument is not
active, fair value is established by using recognised valuation
methodologies, in accordance with International Private Equity and
Venture Capital (“IPEV”) Valuation Guidelines.
The level
in the fair value hierarchy within which the fair value measurement
is categorised is determined on the basis of the lowest level input
that is significant to the fair value of the investment.
Financial
instruments at fair value through profit or loss as at 31 December 2023
|
Level
1
£’000
|
Level
2
£’000
|
Level
3
£’000
|
Total
£’000
|
Equity
investments
|
166,393
|
-
|
-
|
166,393
|
Liquidity
funds
|
-
|
1
|
-
|
1
|
Total
|
166,393
|
1
|
-
|
166,394
|
A list of
the portfolio holdings is given in the Investment Manager’s report
above.
|
31
December 2023
Total
£’000
|
Analysis
of capital gains(losses):
|
|
Gains on
sale of investments
|
12,901
|
Movement
in investment holding gains
|
(11,328)
|
|
1,573
|
7.
Share capital
|
Number
|
31
December
2023
£’000
|
Allotted,
called up and fully paid Ordinary shares of 10p each:
|
|
|
Ordinary
shares in circulation at 30 June 2023
|
63,529,206
|
6,353
|
Shares
held in treasury at 30 June 2023
|
(13,824,495)
|
(818)
|
Ordinary
shares in issue per Balance Sheet at 30 June 2023
|
49,704,711
|
5,535
|
Shares
bought back during the period to be held in treasury
|
(978,500)
|
(98)
|
Ordinary
shares in issue per Balance Sheet at 31 December 2023
|
48,726,211
|
5,437
|
Shares
held in treasury at 31 December 2023
|
14,802,995
|
916
|
Ordinary
shares in circulation at 31 December 2023
|
63,529,206
|
6,353
|
8.
Investment Manager’s fee
A basic
management fee is payable to the Investment Manager at the annual
rate of 0.75% of the NAV of the Company. The basic management fee
accrues daily and is payable quarterly in arrears.
The
Investment Manager is also entitled to a performance fee, details
of which are set out below.
9.
Performance fee arrangements
The
Company’s performance is measured over rolling three-year periods
ending on 30 June each year, by comparing the NAV total return per
share over a performance period against the total return
performance of the FTSE Small Cap (ex Investment Companies) Index.
A performance fee is payable if the NAV total return per share
(calculated before any accrual for any performance fee to be paid
in respect of the relevant performance period) at the end of the
relevant performance period exceeds both:
(i) the
NAV per share at the beginning of the relevant performance period
as adjusted by the aggregate amount of (a) the total return on the
FTSE Small Cap (ex Investment Companies) Index (expressed as a
percentage) and (b) 2.0% per annum over the relevant performance
period (“Benchmark NAV”); and
(ii) the
high watermark (which is the highest NAV per share by reference to
which a performance fee was previously paid).
The
Investment Manager is entitled to 10% of any excess of the NAV
total return over the higher of the Benchmark NAV per share and the
high watermark. The aggregate amount of the Management Fee and the
Performance Fee in respect of each financial year of the Company
shall not exceed an amount equal to 1.4% per annum of the NAV of
the Company as at the end of the relevant financial
period.
A
performance fee of £369,000 has been accrued in respect of the six
months ended 31 December 2023
(30 June 2023: £nil; 31 December 2022: £nil).
10.
Taxation
The tax
charge for the half year is £nil (30 June
2023: £nil; 31 December 2022:
£nil). The estimated effective corporation tax rate for the year
ended 30 June 2024 is 0%. This is
because investment gains are exempt from tax owing to the Company’s
status as an investment company and there is expected to be an
excess of management expenses over taxable income.
Alternative
Performance Measures
Alternative
Performance Measures are numerical measures of the Company’s
current, historical or future performance, financial position or
cash flows, other than financial measures defined or specified in
the applicable financial framework. The Company’s applicable
financial framework includes IFRS and the AIC SORP. The Directors
assess the Company’s performance against a range of criteria which
are viewed as particularly relevant for closed-end investment
companies. The Alternative Performance Measures chosen are widely
used in the investment trust sector and thus provide information
for users of the accounts to compare the results with other
closed-end investment companies.
Discount
The amount
by which the Ordinary share price is lower than the NAV per
Ordinary share. The discount is normally expressed as a percentage
of the NAV per share.
|
|
|
Six
month
|
|
Six
month
|
|
|
|
period
to
|
Year
ended
|
period
to
|
|
|
|
31
December
|
30
June
|
31
December
|
|
|
|
2023
|
2023
|
2022
|
NAV per
Ordinary share
|
a
|
|
345.83p
|
342.47p
|
293.08p
|
|
|
|
|
|
|
Share
price
|
b
|
|
320.50p
|
309.00p
|
275.00p
|
Discount
|
c
|
c=(b-a)/a
|
7.3%
|
9.8%
|
6.2%
|
Average
discount
The
average discount is calculated by taking the average of each day’s
share price discount to NAV over the course of the period. The
discount range during the six month period to 31 December 2023 was 4.6% to 11.6% (six month
period to 31 December 2022: 3.3% to
12.5% and year to 30 June 2023: 3.3%
to 12.5%) and the average discount was 8.0% (six month period to
31 December 2022: 7.8% and year to
30 June 2023: 7.4%).
NAV
Total return
NAV Total
return is the increase/(decrease) in NAV per Ordinary share plus
dividends paid, which are assumed to be reinvested at the time the
share price is quoted ex-dividend.
|
|
Six
month
|
|
Six
month
|
|
|
period
to
|
Year
ended
|
period
to
|
|
|
31
December
|
30
June
|
31
December
|
|
|
2023
|
2023
|
2022
|
Opening
NAV
|
|
342.47p
|
316.21p
|
316.21p
|
|
|
|
|
|
Increase/(decrease)
in NAV
|
3.36p
|
26.26p
|
(23.13)p
|
per
Ordinary share
|
|
|
|
|
|
|
|
|
|
Closing
NAV
|
|
345.83p
|
342.47p
|
293.08p
|
|
|
|
|
|
%
Increase/(decrease) in NAV
|
1.0%
|
8.3%
|
(7.3)%
|
|
|
|
|
|
Impact of
dividends reinvested
|
0.7%
|
0.9%
|
0.6%
|
NAV total
return
|
|
1.7%
|
9.2%
|
(6.7)%
|
|
|
|
|
|
Share
price total return
Share
price total return is the increase/(decrease) in share price plus
dividends paid, which are assumed to be reinvested at the time the
share price is quoted ex-dividend.
|
|
Six
month
|
|
Six
month
|
|
|
period
to
|
Year
ended
|
period
to
|
|
|
31
December
|
30
June
|
31
December
|
|
|
2023
|
2023
|
2022
|
Opening
share price
|
|
309.00p
|
280.00p
|
280.00p
|
|
|
|
|
|
Increase/(decrease)
in share price
|
11.50p
|
29.00p
|
(5.00)p
|
|
|
|
|
|
Closing
share price
|
|
320.50p
|
309.00p
|
275.00p
|
|
|
|
|
|
%
Increase/(decrease) in share price
|
3.7%
|
10.4%
|
(1.8)%
|
|
|
|
|
|
Impact of
dividends reinvested
|
0.9%
|
0.8%
|
0.8%
|
Share
price total return
|
|
4.6%
|
11.2%
|
(1.0)%
|
|
|
|
|
|
Ongoing
charges - annualised
Ratio of
expenses as a percentage of average daily shareholders’ funds
calculated as per the Association of Investment Companies industry
standard method.
|
|
|
Six
month
period
to
|
Year
ended
|
Six
month
period
to
|
|
|
|
31
December
|
30
June
|
31
December
|
|
|
|
2023
|
2023
|
2022
|
Investment
management fee
|
|
|
1,225
|
1,228
|
1,186
|
Administrative
expenses
|
|
|
731
|
803
|
793
|
|
|
|
|
|
|
Non
recurring costs in
|
|
|
|
|
|
relation
to the recruitment
|
|
|
|
|
|
of
Directors
|
|
|
-
|
(48)
|
(48)
|
|
|
|
|
|
|
Ongoing
charges
|
a
|
|
1,956
|
1,983
|
1,931
|
|
|
|
|
|
|
Average
net assets
|
b
|
|
164,971
|
162,849
|
159,587
|
|
|
|
|
|
|
Ongoing
charges ratio (%)
|
c
|
c=a/b
|
1.19%
|
1.22%
|
1.21%
|
|
|
|
|
|
|
Ongoing
charges
(including
performance fee) - annualised
As per
above, with the addition of the performance fee.
|
|
|
Six
month
|
|
Six
month
|
|
|
|
period
to
|
Year
ended
|
period
to
|
|
|
|
31
December
|
30
June
|
31
December
|
|
|
|
2023
|
2023
|
2022
|
Investment
management fee
|
|
|
1,225
|
1,228
|
1,186
|
|
|
|
|
|
|
Administrative
expenses
|
|
|
762
|
803
|
793
|
|
|
|
|
|
|
Non
recurring costs in
|
|
|
|
|
|
relation
to the recruitment
|
|
|
|
|
|
of
Directors
|
|
|
-
|
(48)
|
(48)
|
|
|
|
|
|
|
Performance
fee
|
|
|
369
|
-
|
-
|
Ongoing
charges (including
|
|
|
|
|
|
performance
fee)
|
a
|
|
2,356
|
1,983
|
1,931
|
|
|
|
|
|
|
Average
net assets
|
b
|
|
164,971
|
162,849
|
159,587
|
|
|
|
|
|
|
Ongoing
charges
|
|
|
|
|
|
ratio
(including
|
|
|
|
|
|
performance
fee) (%)
|
c
|
c=a/b
|
1.43%
|
1.22%
|
1.21%
|
Directors
and Advisors
Directors
William Barlow (Chairman)
Richard Locke (Deputy Chairman)
Annie Coleman
Brigid Sutcliffe
Howard Williams
Auditor
Johnston
Carmichael LLP
7 - 11
Melville Street
Edinburgh EH3 7PE
Broker
Liberum
Capital Limited
Ropemaker
Place
25
Ropemaker Street
London EC2Y 9LY
Custodian
J.P.
Morgan Chase Bank N.A.
25 Bank
Street
Canary
Wharf
London E14 5JP
Depositary
J.P.
Morgan Europe Limited
25 Bank
Street
Canary
Wharf
London E14 5JP
Investment
Manager
Gresham
House Asset Management Limited
80
Cheapside
London EC2V 6EE
Tel: 020
3837 6270
Registrar
Computershare
Investor Services plc
The
Pavilions
Bridgwater
Road
Bristol BS99 6ZY
Tel: 0370
707 1285
Website:
www.computershare.com
Solicitor
Stephenson
Harwood LLP
1 Finsbury
Circus
London EC2M 7SH
Company
Secretary and Administrator
Juniper
Partners Limited
28
Walker Street
Edinburgh EH3 7HR
Tel: 0131
378 0500
Registered
Office
c/o
Stephenson Harwood LLP
1 Finsbury
Circus
London EC2M 7SH
Shareholder
Information
Investment
Policy
The
Company invests primarily in equities quoted on markets operated by
the London Stock Exchange where the Investment Manager believes the
securities are undervalued and could benefit from strategic,
operational or management initiatives. The Company also has the
flexibility to invest up to 20% of the Company’s gross assets at
the time of investment in securities quoted on other recognised
exchanges.
The
Company may invest up to 20% of its gross assets at the time of
investment in unquoted securities, provided that, for the purpose
of calculating this limit, any undrawn commitments which may still
be called shall be deemed to be an unquoted security.
The
maximum investment in any single investee company will be no more
than 15% of the Company’s investments at the time of
investment.
The
Company will not invest more than 10%, in aggregate, of the value
of its total assets at the time the investment is made in other
listed closed-end investment funds.
Other than
as set out above, there are no specific restrictions on
concentration and diversification. The Board does expect the
portfolio to be relatively concentrated, with the majority of the
value of investments typically in the securities of 10 to 15
issuers across a range of industries. There is also no specific
restriction on the market capitalisation of securities into which
the Company will invest, although it is expected that the majority
of the investments by value will be invested in companies too small
to be considered for inclusion in the FTSE 250 Index.
The
Company’s Articles of Association permit the Board to take on
borrowings of up to 25% of the NAV at the time the borrowings are
incurred for investment purposes.
Financial
calendar
Company’s
year-end 30
June
Annual
results announced
September
Annual
General Meeting
November
Company’s
half-year
31
December
Half-yearly
results announced
February/March
Share
price
The
Company’s Ordinary shares are premium listed on the main market of
the London Stock Exchange plc (the “London Stock Exchange”). The
share price is quoted daily in the Financial Times under
‘Investment Companies’.
Share
dealing
Shares can
be traded through your usual stockbroker.
Share
register enquiries
The
register for the Ordinary shares is maintained by Computershare
Investor Services plc (“Registrar”). In the event of queries
regarding your holding, please contact the Registrar, on 0370 707
1285. Changes of name and/or address must be notified in writing to
the Registrar, whose address is shown above.
NAV
The
Company’s NAV is announced daily to the London Stock
Exchange.
Website
Further
information on the Company can be accessed via the Company’s
website:
www.strategicequitycapital.com
An
investment company as defined under Sections 833 of the Companies
Act 2006
REGISTERED
IN ENGLAND AND WALES No 5448627
A member
of the Association of Investment Companies
The Half
Yearly Report will be posted to shareholders shortly. The Report
will also be available for download from the following
website:
www.strategicequitycapital.com or on
request from the Company Secretary.
National
Storage Mechanism
A copy of
the Half Yearly Report will be submitted shortly to the National
Storage Mechanism and will be available for inspection at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
Neither
the contents of the Company's website nor the contents of any
website accessible from hyperlinks on the Company's website (or any
other website) is incorporated into, or forms part of this
announcement.
[1] 12%
reflects the IRR from the Company’s initial investment in Medica in
2017. 25% reflects the IRR since Ken
Wotton became Manager of the Company in September 2020, and actively decided to upweight
the Company’s holding in Medica.
[2] Annualised
figure based on c.6 month holding period.