I am pleased to report another year of growth at SVG Capital, both
in terms of the performance of the portfolio and the fund
management business, SVG Advisers.
Fully diluted net asset value per share increased by 14.3%1 over the year, with net asset value per share rising to 974.3p (including a 71.8p per share unaudited Directors’ valuation for SVG Advisers) and fully diluted Shareholders’ funds increasing to 902.5p per share.
1 Including the 7.5p dividend paid in May 2007
This strong first half performance has been affected by the deterioration in public markets since the onset of the credit crisis in August, impacting not only the quoted portfolio, but also the public market comparable earnings multiples used to value portfolio companies. Some of this impact has been mitigated by the positive influence of foreign exchange movements.
From an operational standpoint, the majority of the portfolio companies performed well in the year. Apart from realisations, there have also been several positive movements in valuations. Some of these have been prompted by strategic re-focus and increased earnings, such as Jet Aviation and debitel; and others, like TDC or Maxeda, by the sale of non-core assets and restructuring. There have also been negative movements in valuations, some of which are due to specific company performance, like Freescale; others were more heavily influenced by the sharp decline in comparable public market earnings multiples, such as Gala Coral and
ProSiebenSat.1 Media.
Both investment and realisation activity in the portfolio were robust during the year, albeit weighted towards the first half. New investments were dominated by Permira IV, which was 35% called and 47% committed at the year end. We expect the level of future investment and divestment to be slow, as pricing of new transactions adjusts to reflect economic uncertainty and the lack of liquidity in the debt markets, and holding periods to lengthen.
Two of the new commitments are to structured private equity funds of funds: €60.0 million to SVG Diamond III and €40.0 million to Vintage I. The third commitment is a US$50.0 million commitment to seed a new investment fund, SVG India, which invests in quoted mid-sized Indian companies across a variety of sectors.
In December, the Company also committed €33.2 million to the equity of two Collateralised Loan Obligation funds, investing in diversified portfolios of loans sponsored by private equity-backed companies.
Finally, SVG Capital has committed €10.0 million to the SVG European Focus Fund, an open-ended investment company investing in quoted Continental European companies and managed by SVG Investment Managers.
The Company owns 100% of SVG Advisers and at 31 December 2007 the Board placed an unaudited Directors’ valuation on the business of £106.4 million (71.8p per share). As in previous years, the Board will review the value of the business again in December 2008.
More detail on SVG Advisers is contained in the Chief Executive’s review.
to an expected below trend growth – and then back again.
Private equity has a reasonably established pattern in this cycle. First, the level of new investments tends to slow markedly as vendors and buyers cannot agree on price. This is the pattern we are seeing now, today compounded by the lack of availability of debt. Given the normal range of about a year for this ‘quiet period’, we might expect to see some increase in private equity activity in the fourth quarter of this year.
Second, on valuations, the public markets tend to anticipate a lower rate of increase in corporate profits. The result of this is that earnings multiples fall, which in turn impacts portfolio valuations. SVG Capital values its portfolio in accordance with the IPEVC Guidelines and therefore marks its portfolio to market, using public market comparable earnings multiples for its unquoted valuations. These have now dropped, and accordingly we have seen some valuations decline in the underlying portfolio, alongside falls in the value of our quoted holdings. However, on this occasion these declines in valuation have been, to a large extent, cushioned by currency movements and by the growth in value of SVG Advisers.
Third, historically the public markets have tended to de-rate private equity fairly early in the cycle and listed private equity funds tend to move from premia to substantial discounts. This has happened again, and will in turn reverse when markets start to look through the cycle and sentiment changes once more.
2 Including SVG Capital's commitments to SVG Advisers' funds
Fully diluted net asset value per share increased by 14.3%1 over the year, with net asset value per share rising to 974.3p (including a 71.8p per share unaudited Directors’ valuation for SVG Advisers) and fully diluted Shareholders’ funds increasing to 902.5p per share.
1 Including the 7.5p dividend paid in May 2007
Private equity portfolio performance
Performance over the year was driven largely by the significant realisation activity in the first half, as Permira and our other managers took advantage of favourable markets to realise several portfolio companies.This strong first half performance has been affected by the deterioration in public markets since the onset of the credit crisis in August, impacting not only the quoted portfolio, but also the public market comparable earnings multiples used to value portfolio companies. Some of this impact has been mitigated by the positive influence of foreign exchange movements.
From an operational standpoint, the majority of the portfolio companies performed well in the year. Apart from realisations, there have also been several positive movements in valuations. Some of these have been prompted by strategic re-focus and increased earnings, such as Jet Aviation and debitel; and others, like TDC or Maxeda, by the sale of non-core assets and restructuring. There have also been negative movements in valuations, some of which are due to specific company performance, like Freescale; others were more heavily influenced by the sharp decline in comparable public market earnings multiples, such as Gala Coral and
ProSiebenSat.1 Media.
Both investment and realisation activity in the portfolio were robust during the year, albeit weighted towards the first half. New investments were dominated by Permira IV, which was 35% called and 47% committed at the year end. We expect the level of future investment and divestment to be slow, as pricing of new transactions adjusts to reflect economic uncertainty and the lack of liquidity in the debt markets, and holding periods to lengthen.
New commitments
During the course of the year, SVG Capital made six new commitments, totalling £130.3 million.Two of the new commitments are to structured private equity funds of funds: €60.0 million to SVG Diamond III and €40.0 million to Vintage I. The third commitment is a US$50.0 million commitment to seed a new investment fund, SVG India, which invests in quoted mid-sized Indian companies across a variety of sectors.
In December, the Company also committed €33.2 million to the equity of two Collateralised Loan Obligation funds, investing in diversified portfolios of loans sponsored by private equity-backed companies.
Finally, SVG Capital has committed €10.0 million to the SVG European Focus Fund, an open-ended investment company investing in quoted Continental European companies and managed by SVG Investment Managers.
SVG Advisers
SVG Advisers has continued to make strong progress, growing assets and commitments under management by 33% in the year to €4.4 billion2. Importantly, external income from investment advisory services increased by 46% to £29.7 million, and profit before tax for the year was £17.6 million, an increase of 89% on the previous year. This is an excellent business in which we will continue to invest for growth.The Company owns 100% of SVG Advisers and at 31 December 2007 the Board placed an unaudited Directors’ valuation on the business of £106.4 million (71.8p per share). As in previous years, the Board will review the value of the business again in December 2008.
More detail on SVG Advisers is contained in the Chief Executive’s review.
Board
The Board worked well together during 2007, and a full review of the Board’s activities can be found in the Report of the Directors.Dividend
The Company’s investment objective is one of capital growth and it is anticipated that returns for shareholders will derive primarily from capital gains. During the 12 months, the Company received approximately £17.1 million of income from its investment portfolio. Accordingly, in order to maintain Investment Trust status, the Board is recommending that the Company should declare a dividend of 6.5p per share.Annual General Meeting
The Annual General Meeting will be held at 12 noon on Wednesday 7 May 2008 at 111 Strand, London WC2R 0AG. As in previous years it will include a presentation on the activities of the Company.Market commentary
Clearly there has been a change in sentiment in the last six months. Such changes have different origins and in this case it has been prompted by the over extension of credit. Regardless of origin, they have a similar pattern: an expected above trend growth in GDP and corporate profits movesto an expected below trend growth – and then back again.
Private equity has a reasonably established pattern in this cycle. First, the level of new investments tends to slow markedly as vendors and buyers cannot agree on price. This is the pattern we are seeing now, today compounded by the lack of availability of debt. Given the normal range of about a year for this ‘quiet period’, we might expect to see some increase in private equity activity in the fourth quarter of this year.
Second, on valuations, the public markets tend to anticipate a lower rate of increase in corporate profits. The result of this is that earnings multiples fall, which in turn impacts portfolio valuations. SVG Capital values its portfolio in accordance with the IPEVC Guidelines and therefore marks its portfolio to market, using public market comparable earnings multiples for its unquoted valuations. These have now dropped, and accordingly we have seen some valuations decline in the underlying portfolio, alongside falls in the value of our quoted holdings. However, on this occasion these declines in valuation have been, to a large extent, cushioned by currency movements and by the growth in value of SVG Advisers.
Third, historically the public markets have tended to de-rate private equity fairly early in the cycle and listed private equity funds tend to move from premia to substantial discounts. This has happened again, and will in turn reverse when markets start to look through the cycle and sentiment changes once more.
2 Including SVG Capital's commitments to SVG Advisers' funds