LMS Capital plc
Annual Report 2018

Plain-text annual report

LMS CAPITAL PLC REPORT & ACCOUNTS For the year ended 31 December 2018 IN THIS REPORT Overview Highlights Chairman’s statement Strategic report 1 2 4 8 9 Manager’s review 17 About the Manager Governance 18 Board of Directors Investment portfolio – principal holdings 43 Statement of Changes in Equity Financial Statements 40 Income Statement 41 Statement of Other Comprehensive Income 42 Statement of Financial Position 44 Cash Flow Statement 45 Financial statements and notes Other Information 60 Notice of Annual General Meeting 19 Corporate governance report 64 Corporate information 23 Audit Committee report 27 Remuneration report 30 Directors’ remuneration policy 31 Directors’ report 33 Statement of Directors’ responsibilities 34 Independent auditor’s report 11 HIGHLIGHTS (cid:2) The net asset value at 31 December 2018 was £60.3 million, 74.7p per share (31 December 2017: £64.5 million, 79.9p per share); (cid:2) The portfolio showed an overall net reduction in value on the year of £2.3 million (2017: net gain £10.5 million); (cid:2) The loss for the year was £4.2 million (2017: profit £7.6 million); (cid:2) Overhead costs, including those incurred by subsidiaries, showed a further reduction to £1.5 million (2017: £2.7 million) following the the Company’s transition to completion of external management with Gresham House; (cid:2) Continued successful realisations in the year totalled £17.6 million (2017: £21.7 million); (cid:2) At the year end 29.3% (2017: 6.2%) of the NAV was in cash and a further 9.6% (2017: 13.4%) in quoted stocks; and (cid:2) There are currently sale discussions underway on assets which could result in further significant realisation proceeds being received. The deployment of the cash in the group of some £17 million at the year end, plus any further realisation active consideration by the Board and Gresham House, the Manager. proceeds under is O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 22 CHAIRMAN’S STATEMENT The results of the Company for the year ended 31 December 2018 show a reduction in net asset value, which is disappointing, but continued progress from the Manager in realising assets, has led to healthy cash balances. The cash position of the Company and its subsidiaries has improved from £4.0 million at 31 December 2017 to £17.7 million at 31 December 2018, reflecting continued progress with realisations. NET ASSET VALUE share at value per Net asset 31 December 2018 was 74.7p. This was a reduction from 79.9p per share at 31 December 2017. Overall portfolio net losses for the year, both realised and unrealised were £2.3 million (2017: Gains £10.5 million). This net result is stated after the impact of realised and unrealised exchange gains of £1.8 million (2017: exchange losses £3.2 million). MARTIN KNIGHT CHAIRMAN LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 33 CHAIRMAN’S STATEMENT Despite the overall net reduction, a number of the portfolio assets, as noted below, have performed in line or ahead of our expectations. The reductions in value, before the impact of exchange gains, arose principally on: • Assets managed by San Francisco Equity Partners (“SFEP”) which reduced by net £2.8 million. This includes a write down of the estimated amount of consideration still to be received following the exit from Penguin Computing in June 2018. At the time of the sale, SFEP indicated that initial consideration plus payments from earn outs and escrow releases, should produce final proceeds close to pre-sale carrying value. This now appears unlikely and estimates have been revised downwards; • Shares in Gresham House showed a gain over the year of £0.5 million. Other movements in net asset value were a net reduction of £1.9 million and include overhead costs of £1.5 million (2017: £2.7 million) and other movements amounting to a net reduction of £0.4 million. increased to £17.7 million CASH BALANCES Cash balances during the year, including cash in subsidiaries, have following continued realisations. Total proceeds were £17.6 million including £9.0 million initial consideration from Penguin, £3.1 million from the sale of Brockton Capital and £3.6 million from NEP. The remaining unquoted and funds portfolio, excluding SFEP, generated £1.9 million of proceeds. O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N • IDE Group, a quoted investment, which reduced by £2.6 million; • Weatherford, a quoted investment, which reduced by £1.5 million; and CONCLUSION AND OUTLOOK GHAM continues to manage the existing portfolio to optimise value and, where appropriate take advantage of opportunities to realise assets. to • Other net portfolio reductions were £1.3 million. Portfolio gains, before the impact of exchange gains, arose principally on: • Entuity, part of the directly held UK portfolio has repaid loans during the year, and together with a valuation uplift is showing an overall gain of £1.7 million; Since the year end, sale discussions have commenced on some other assets that could result in realisation proceeds that would further increase cash balances. The deployment of the Company’s cash is under active consideration by the Board and Gresham House, as Manager. We will keep shareholders informed of its deployment as appropriate. • The sale of NEP in December 2018, which realised a gain of £0.6 million; • The sale of Brockton Capital LLP in March 2018, which realised a gain of £0.6 million; MARTIN KNIGHT CHAIRMAN 22 March 2019 • The funds portfolio (excluding SFEP) which produced gains of £0.7 million; and LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 44 STRATEGIC REPORT LMS Capital plc is an investment company whose shares are traded on the Main Market of the London Stock Exchange. INVESTMENT OBJECTIVE AND STRATEGY Until 16 August 2016 the Directors of the Company were conducting an orderly realisation of the assets of the Company. At a general meeting on 16 August 2016 shareholders voted to change the Company’s investment policy from the realisation strategy to a new policy focused predominantly on private equity investment. At the same time Gresham House Asset Management Limited (“GHAM” or “the Manager”) was appointed by the Board to manage the Company’s assets. The Company’s investment objective is to achieve total returns over the medium to longer term, principally through capital gains and supplemented with the generation of a longer term income yield. The Company is targeting a return on equity, after running costs, of between 12% and 15% per annum over the long term on new capital invested. The investment strategy is now focused predominantly on private equity investment and alternative, specialist asset classes using the experience of the GHAM team in asset management, private equity and public markets: • • • • The Manager will invest in profitable and cash generative businesses and investments, targeting an annual return on equity of 12% -15% net of costs over the long term; The focus will primarily be on smaller private investment opportunities below £50 million value where the Manager believes there to be significant market inefficiencies which create opportunities for superior long term returns and to leverage the experience of the investment team; Investments may include alternative, specialist asset classes which target long term, illiquid strategies both through co-investment and fund opportunities on preferred terms; and The focus is also on optimising the value of existing holdings and, where growth prospects are clear, to preserve and support longer term value creation. No investment in any single company will (at the time of investment) represent more than 15% of the Company’s net assets. Any investment in securities of a single company or investment fund, which represents more than 10% of the Company’s net assets at the time the investment is made, requires the Board’s approval. The Company may invest in public or private securities; investments may be made in the form of, inter alia, equity, equity-related instruments, derivatives and indebtedness. The Company may hold controlling or non-controlling positions and may invest directly or indirectly. The Company may also invest in Gresham House plc, to benefit from the potential growth of GHAM. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 The Company is not restricted to specific sectors; its assets are and will continue to be predominantly invested in the United Kingdom, Europe and North America, with an increasing focus on the United Kingdom. Indebtedness of the Company will not exceed 25% of net assets measured at the time of drawdown. The Company had no indebtedness at 31 December 2018 or at the date of this report. PORTFOLIO MANAGEMENT GHAM manages the Company’s assets and investments in accordance with guidelines determined by the Directors and as specified in a formal portfolio management agreement. Further information about GHAM can be found in the Manager’s Review on pages 9 to 16. In order to comply with the requirements of the Alternative Investment Fund Managers Directive 2011, the Company is required to appoint an alternative investment fund manager (“AIFM”). With effect from 1 May 2018, following the variation of its permissions under Part 4A of the Financial Services and Markets Act 2000 to enable it to act as a full-scope UK AIFM, GHAM was appointed AIFM. Prior to 1 May 2018, for an initial period, before GHAM had obtained the required permission, the Company appointed G10 Capital Limited (“G10 Capital”), a specialist provider of regulated services, as its initial AIFM and G10 Capital delegated certain functions in relation to the portfolio management of the Company’s assets to GHAM. During the year the Company appointed INDOS Financial Limited as its depository, replacing Ipes Depository (UK) Limited. The fees and principal terms of GHAM’s appointment as AIFM remain unchanged from its previous management agreement. Under the AIFM and portfolio management agreement, the Manager is entitled to an annual management fee as follows: a) 1.50% of the net asset value of the Company, to the extent that the Company’s net assets under management are £100 million or less; b) 1.25% of the net asset value of the Company, to the extent that the Company’s net assets under management exceed £100 million but are £150 million or less; and c) 1.00% of the net asset value of the Company to the extent that Company’s net assets under management exceed £150 million. The Manager is also entitled to a performance fee on new investments which is designed to align the interests of GHAM, as portfolio manager, with those of the Company. If certain hurdle return requirements are satisfied, GHAM earns a performance fee of 15% of the gain in the net asset value of new investments made after 16 August 2016. No performance fee will be payable in respect of investments held at the date of GHAM’s appointment. O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N 55 STRATEGIC REPORT GHAM is the regulated subsidiary of Gresham House plc, the specialist asset manager quoted on the Alternative Investment Market of the London Stock Exchange. Its investment team has a successful track record, underpinned by proven operating and technical expertise. GHAM adopts a differentiated and rigorous approach to private and public equity investments through its specialist asset management strategies which are focused on capitalising on the growth in demand for alternative investment strategies, illiquid assets and for discretionary co-investments. A dedicated investment committee of GHAM is responsible for the Company’s portfolio and oversees the investment appraisal process in relation to investments made in respect of the Company’s portfolio. The Company has the right to nominate a member to this committee and as at the date of this report has exercised that right. The committee assesses existing assets and new investment opportunities and is also responsible for approving due diligence costs, abort costs exposure, capital allocation and appropriate risk management. related. GHAM may also have specific and market representatives on the boards of portfolio investee companies. DISTRIBUTION POLICY In future the Company intends to return in the region of 30% of annual cash realised profits from new investments and in so doing, to generate a dividend yield over the longer term. PERFORMANCE The following are the key performance indicators (“KPIs”) considered by the Board and the Manager in assessing the Company’s performance against its objectives. These KPIs are: Return on equity over the long term The Company’s objective is to achieve a return on equity, on new investments made under its investment policy adopted in August 2016 of between 12% and 15% per annum over the long term. There is currently one new investment. Information on performance against this measure will be reported as the portfolio of new investment increases. All investment opportunities are appraised by the investment team and a short list of deals progresses for review by the investment committee. The investment committee assist in due diligence, investment appraisal and the team can leverage their extensive network as required. The members of this committee are set out on page 17. Representatives of GHAM are available to attend all meetings of the Board and provide regular reports on the investment portfolio and the affairs of the Company generally. The performance of each underlying investment is monitored regularly with commentary on trends and risks both company NAV per ordinary share total return and share price total return The Company’s net asset value per share total return was minus 6.6% and its share price total return was positive 5.6% for the year ended 31 December 2018. These measures compare to the FTSE All Share Index which showed a return of minus 9.5% for the year to 31 December 2018. Further information on the Company’s performance is given in the Manager’s Review on pages 9 to 16. PERSONNEL The average number of Directors and staff was as follows: Directors Other employees Male 4 –* 4 2018 Female – – – Total Male 4 –* 4 4 1 5 2017 Female – 1 1 Total 4 2 6 * There were no employees in the Company after the 28 February 2018. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 66 STRATEGIC REPORT ENVIRONMENT The Company has a limited direct impact upon the environment and there are few environmental risks associated with the Company’s activities. Information on greenhouse gas emissions are set out in the Directors’ Report on pages 31 to 32. RISK MANAGEMENT AND PRINCIPAL RISKS AND UNCERTAINTIES The Company appointed Gresham House Asset Management Limited (GHAM), an independent investment manager, to succeed G10 Capital, as its Alternative Investment Fund Manager (‘AIFM’) on 1 May 2018 to act in accordance with the Company’s investment objective and the AIFMD rules. This includes portfolio management and risk management services. GHAM also performs day-to-day portfolio management services. GHAM is responsible for the ongoing process of identifying, evaluating, monitoring and managing the risks facing the Company. The Board keeps the AIFM’s performance in all areas under review as part of its overall responsibility for ensuring that the Company has an effective risk management and internal control framework. On behalf of the Board, the Audit Committee has responsibility for ensuring that the Company has an effective process to identify, document and assess those risks, which might impact the Company’s performance and its achievement of its strategy. Throughout the year ended 31 December 2018, the Board has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. A summary of the principal risks and uncertainties that could have a material adverse effect on the Company’s strategy, performance and financial condition is set out below. PRINCIPAL RISKS CONSEQUENCES COMPANY PROCEDURES Market risk Economic instability, political uncertainty, low growth in the markets where the Company’s investments operate and lack of liquidity in capital markets. The uncertainty caused by Brexit negotiations is noted by the Board. Volatility in listed equity prices, foreign currency rates and interest rates. Investment risk The Company may not be able to implement the strategy approved by shareholders in August 2016 if it has insufficient available funds or is unable to find suitable deals. Investments fail to perform in line with original expectations or management’s plans. Investment performance may be impacted by competition, regulatory changes or other market developments. Where the Company has only minority stakes in investments it may not be able to influence performance initiatives or exit strategy. Uncertain market factors may adversely impact the value of the Company’s investment portfolio. Such a negative impact on performance and growth rates may result in lower individual company valuations resulting in a decline of the Company’s NAV and its failure to meet its return targets and investment objective. At 31 December 2018, 57% of the Company’s investment portfolio was denominated in US dollars. Movements in the USD/GBP exchange rate have a significant impact on the Company’s NAV. The Company may not be able to meet the strategic objectives in its investment strategy resulting in a decline in its NAV and share price. its by investment performance Poor portfolio companies may result in the Company not meeting return objectives or its realisation and cash distribution plans. This could impact the NAV and the market’s view of the Company’s a consequent negative impact on its share price. prospects, with The Board has retained the services of an experienced external investment manager to monitor and make recommendations in relation to the portfolio. The Board receives regular reports from the manager on the flows and prospects trading, cash (including exit opportunities) of the investment portfolio to identify the impact on individual investments and on the Company’s strategy. The Board regularly receives reports on the Company’s foreign currency exposure in its investment portfolio. The Company does not currently hedge its underlying non-sterling investments. The Board has retained the services of an experienced investment manager to source and execute deals to meet the Company’s strategic objectives. The investment manager will also assist the Board in seeking opportunities to scale the business and ensure the necessary funds for investment are available. Regular reporting by the manager on the trading of individual companies in the investment portfolio as well as of the Company’s overall investment performance. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 77 STRATEGIC REPORT PRINCIPAL RISKS CONSEQUENCES COMPANY PROCEDURES future to meet financial Failure obligations (including capital calls to funds) could expose the Company to potential legal action and/or loss of value (to a fund investment). Financial risk Many of the Company’s investments produce little or no recurring income and the timing of realisations to provide working capital cannot be ascertained with certainty. The Company has made investments in private equity funds under the terms of which it may be obliged to make further the capital future maximum amount of commitment is known, the timing of such capital contributions cannot be predicted with certainty. contributions. Whilst the Operational risk the Company’s Failure of internal processes and systems to ensure that it complies with all legal, regulatory and financial reporting obligations. Reputational damage and/or financial loss. Working capital requirements (including exposure to uncalled fund commitments) are reported on regularly by the manager to the Board. The Board has appointed GHAM as its AIFM, which includes the responsibility to ensure regulatory and compliance requirements are met. The Audit Committee, on behalf of the Board, regularly reviews the systems in respect of the principal operational risks, as well as reports on the Company’s related risk management procedures. O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N VIABILITY STATEMENT The Directors have assessed the Company’s current position and prospects as described in the Chairman’s Statement and the Manager’s Review, as well as the principal risks and uncertainties set out above. The Directors concluded that the appropriate period for this assessment should be the three years commencing 1 January 2019 since this timeframe reflects the Company’s internal planning horizon as well as that of most of the companies in which it is invested. Given the illiquid nature of much of its investment portfolio, investment/divestment decisions tend to reflect a time period which can be up to three years or more. In performing their assessment, the Directors considered principally: 1. The Company’s liquidity forecast for the three years from 1 January 2019; and 2. The Manager’s latest report on the investment portfolio which includes (for every Board meeting) an assessment of operational issues as well as broader market factors and each asset’s cash needs (if any) and likely future cash generation (amount and timing). The Directors’ consideration of these reports was made against the background of the following: • • • The Board has reviewed the liquidity of the Company and considered commitments to private equity investments, long term cash flow projections and the potential availability of gearing. It has also satisfied itself that assumptions inflows are reasonable; future cash regarding The Board has also considered likely downside risk in the value of marketable securities where realisations of these form part of the liquidity forecast. This risk typically includes factors impacting the price of the security and the exchange rate against sterling of the currency in which it is denominated; and In making its assessment, the Board has taken into account the threats to the Company’s solvency or liquidity incorporated in the principal risks and uncertainties and satisfied itself that they are being addressed as outlined above. Taking account of the above factors, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of this assessment. For and on behalf of the Board. • Many of the Company’s investments are in private companies for which the timing and amount of income and/or realisation is uncertain; MARTIN KNIGHT CHAIRMAN 22 March 2019 LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 88 INVESTMENT PORTFOLIO – PRINCIPAL HOLDINGS Carrying value – £8.3 million % of NAV – 13.7% Domicile – USA Medhost provides technology services to the healthcare sector in the US (source: company website). It is a co- investment with one of the Company’s fund interests, Primus Capital, which is the lead investment manager. Carrying value – £4.5 million % of NAV – 7.4% Domicile – UK Gresham House is an AIM listed specialist alternative asset manager which provides investments across a range of differentiated alternative strategies. Gresham House Asset Management (GHAM), its wholly owned subsidiary, is the investment manager of LMS Capital. Carrying value – £9.3 million* Carrying value – £1.6 million % of NAV – 15.4% Domicile – USA % of NAV – 2.6% Domicile – UK YesTo develops and sells beauty and personal care products (source: company website). * includes the interest held by San Francisco Equity Partners and the Company’s direct interest. Elateral’s products enable marketing departments to source content that can be customised in any size, shape, layout and language to produce market-ready materials for distribution, both online and offline (source: company website). Carrying value – £4.9 million Carrying value – £4.9 million % of NAV – 8.2% Domicile – UK % of NAV – 8.2% Domicile – UK Entuity has developed and sells an enterprise class network management solution, with target market being businesses with medium to large enterprise networks (source: company website). its The remaining asset in this Brockton Capital Fund is a “super prime” residential development site in Mayfair (source: company website). LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 99 MANAGER’S REVIEW INTRODUCTION Gresham House Asset Management (“GHAM”) was appointed investment manager in August 2016. The objectives for the first 12 to 18 month period following appointment were to transition the Company to being externally managed and to fulfil the Company’s commitment made in July 2016, to return a maximum of a further £11.0 million of capital to shareholders, alongside targeting annual cost savings. These objectives were fully achieved, ahead of expectations. Clear shareholder benefits are evident, annual costs in 2018 were £1.5 million compared to £2.7 million in 2017, a year of transition, from internal to external management. 2018 has been a year of building cash resources available to re start the Company’s active investment plans. Cash in the group has grown from £4.0 million at the start of the year to £17.7 million at 31 December 2018, following realisations. The remaining assets continue to be managed to optimise value and support long term shareholder value creation. The Manager is actively engaged on a number of investment opportunities which fulfil its investment policy and are in line with the resources within Gresham House, now including Baronsmead VCT investment team. INVESTMENT APPROACH The investment approach is now focused predominantly on private equity investment and alternative, specialist asset classes using the experience of the GHAM team in asset management, private equity and public markets: The Manager will invest in profitable and cash generative businesses and investments to create value, targeting an annual return on equity of 12% -15% net of costs over the long term; The focus will primarily be on smaller private investment opportunities below £50 million value where the Manager believes there to be significant market inefficiencies which create opportunities for superior long term returns and to leverage the experience of the investment team; Investments may include alternative, specialist asset classes which target long term, illiquid strategies both through co-investment and fund opportunities on preferred terms; and • • • • year. It was an unnerving and at times volatile end to the year for global equity markets. An emerging global recessionary narrative coupled with Brexit negotiations in the UK, drove most equity indices into bear market territory – the UK AIM and Small-cap indices for example ended the year 22.5% and 14.4% respectively off their 52-week highs. A number of economic indicators have turned sluggish. On quoted markets declines were initially led by the technology sector, however this has now passed on to consumer discretionary and ultimately across all sectors, highlighting growing investor concerns about the state of the UK economy in the run up to Brexit. This negative outlook may continue during 2019 and investors may face continued market volatility until there is greater clarity around the outcome of UK Brexit negotiations and whether the Federal Reserve’s implied rate-rise path shallows or even ends. This type of investment provides market dislocations and therefore attractive investment opportunities. We continue to believe there are significant inefficiencies at the smaller end of the market, focusing on established smaller private companies below £50 million enterprise value where there can be less competition for deals and valuations are more attractive. This segment of the market tends to be off radar for venture and early stage funding providers and sub- threshold for mid-market private equity investors, creating an opportunity to generate superior long term returns. PERFORMANCE REVIEW The movement in Net Asset Value during the year was as follows: Opening Net Asset Value (Loss)/return on investments Overheads, and other net movements Tender offer, including costs 2018 £’000 64,488 (2,482) (1,731) 60,275 – 2017 £’000 68,116 10,411 (2,811) 75,716 (11,228) Closing Net Asset Value 60,275 64,488 Cash realisations from the portfolio in 2018 were as follows: O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N The focus is also on optimising the value of existing holdings and, where growth prospects are clear, to preserve and support longer term value creation. Sales of investments Distributions from funds and loan repayments MARKET BACKGROUND 2018 saw a bullish start to the year, notably in US markets, followed by a correction and return of volatility in February as markets reacted to rising inflation, the prospect of rising interest rates and the threat of increased tariffs. The domestic environment has been dominated by Brexit throughout the Total – gross New and follow-on investments Fund calls Carried interest payments Total – net Year ended 31 December 2018 £’000 2017 £’000 6,819 6,812 10,815 14,902 17,634 21,714 (1,405) (219) – (550) (68) (417) 16,010 20,679 LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 1100 MANAGER’S REVIEW Realisations in 2018 include: • • • • • Proceeds of £9.0 million following the sale of Penguin of which £7.2 million was received as a distribution from SFEP and £1.8 million was received by the Company for its direct interest in Penguin; £3.1 million of proceeds from the sale of the Company’s interest in Brockton Capital LLP; £3.6 million from the sale by the Company of its remaining debt interest in Nationwide Energy Partners; Loan repayments totalling £0.4 million by Entuity; Net cash of £0.1 million from the exercise by the Company of its Gresham House plc warrants; and • Other fund distributions of £1.4 million. The follow-on investments are in respect of working capital for Elateral, a UK direct investment, and participation in a short- term loan note issued by Medhost, a US co-investment, as part of an arrangement to facilitate the refinancing of that company’s debt. Part of the Medhost loan note has been repaid, with interest in September 2018. In addition, the Company invested £0.3 million in the IDE Group refinancing in July 2018. The new investment is a £600,000 investment in Northbridge Industrial Services PLC (“Northbridge”) an AIM quoted Company that hires and sells specialist industrial equipment to utilities, public sector and oil and gas industries. The investment is via an unquoted 8% yielding convertible loan note and after the Gresham House plc investment, is the Company’s first investment under the new investment committee, other than follow on investments, since the conclusion of its realisation strategy and adoption of its new investment policy in August 2016. Below is a summary of the investment portfolio of the Company and its subsidiaries: Asset type Quoted Unquoted Funds UK £’000 4,814 7,223 7,375 2018 US £’000 947 11,101 13,423 31 December Total £’000 5,761 18,324 20,798 UK £’000 6,874 8,400 7,806 2017 US £’000 1,770 14,504 24,464 Total £’000 8,644 22,904 32,270 19,412 25,471 44,883 23,080 40,738 63,818 The principal investments at 31 December 2018 comprising 60.7% of the net asset value shown below (81.5% of the remaining portfolio) are: Name Geography Sector Book value 31 December % of Net asset value Quoted investments Gresham House plc Unquoted investments Medhost Inc Entuity Elateral Fund investments YesTo, Inc* Others Brockton Capital Opus Capital Venture Partners UK US UK UK US UK US Financial Technology Technology Technology Consumer Property Technology 2018 £’000 4,469 8,276 4,925 1,610 9,265 4,922 3,115 2017 £’000 31 December 2018 4,123 8,183 3,600 2,300 9,437 4,603 3,671 7.4% 13.7% 8.2% 2.6% 15.4% 8.2% 5.2% * includes holdings by SFEP and co-investments held by the Company Basis of valuation: • Quoted investments – bid price of security quoted on relevant securities exchange; • • Unquoted investments – generally, unless an alternative method is more appropriate, multiple of revenues or earnings of comparable quoted companies with appropriate discounts for marketability; and Fund interests – based on amounts reported by the general partner unless the reported value is not in line with the Company’s valuation policy. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 1111 MANAGER’S REVIEW PERFORMANCE OF THE INVESTMENT PORTFOLIO The return on investments for the year ended 31 December 2018 was as follows: Year ended 31 December 2018 2017 Asset type Quoted Unquoted Funds Charge for incentive plans Operating and similar expenses of subsidiaries Realised Unrealised gains/ (losses) £’000 gains/ (losses) £’000 (4,009) 1,912 (2,441) 43 1,930 242 2,215 Total £’000 (3,966) 3,842 (2,199) (4,538) (2,323) (159) (2,482) (862) (3,344) Realised Unrealised gains/ (losses) £’000 gains/ (losses) £’000 Total £’000 190 2,488 3,595 6,273 787 (3,077) 6,472 977 (589) 10,067 4,182 10,455 (44) 10,411 (513) 9,898 The charge for incentive plans includes £159,000 (2017: charge of £44,000) for carried interest and other incentives relating to historic arrangements. GHAM was appointed manager in August 2016 and is not entitled to performance fees or incentives on any of the investments in the portfolio prior to that date. Approximately 57% of the portfolio at 31 December 2018 is denominated in US dollars (31 December 2017: 64%) and the above table includes the impact of currency movements. In the year ended 31 December 2018, the strengthening of the US dollar against sterling over the year as a whole resulted in an unrealised foreign currency gain of £1,792,000 (2017: unrealised loss £3,248,000) as is common practice in private equity investment, it is the Board’s current policy not to hedge the Company’s underlying non-sterling investments. O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S QUOTED INVESTMENTS Company Gresham House plc IDE Group Holdings (formerly Coretx Holdings) Weatherford International Others Sector UK financial UK technology US energy – 31 December 2018 £’000 4,469 345 236 711 5,761 2017 £’000 4,123 2,751 1,669 101 8,644 O T H E R I N F O R M A T I O N LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 1122 MANAGER’S REVIEW The net gain on the quoted portfolio arose as follows: Gains/(losses), net Realised Solaredge Weatherford International Gresham House plc Unrealised Gresham House plc IDE Group Holdings Weatherford International Other quoted holdings Unrealised foreign currency gains/(losses) Total net (loss)/gain Gresham House plc Year ended 31 December 2018 £’000 2017 £’000 – – 43 43 411 (2,615) (1,470) (421) 86 (4,009) (3,966) 155 35 – 190 1,642 (344) (331) 24 (204) 787 977 The Gresham House share price rose from 412p at 31 December 2017 to 454p at 31 December 2018, following a year of substantial growth for the group in which assets under management grew to £2.3 billion and it became the largest UK forestry asset manager and took on the Baronsmead Private Equity Investment team and funds. At 31 December 2018 the Company held 984,329 shares in Gresham House plc (31 December 2017: 801,985 shares and 909,908 warrants to acquire shares). In May 2018 the Company exercised its 909,908 warrants to acquire shares in Gresham House plc at a price of 323.27p per share. At the time of exercise of the warrants, the Gresham House plc share price was 443p per share. The Company retained 182,344 of the shares acquired and sold 727,564 shares. The shares retained, in conjunction with shares it already owned, leave the Company with a holding of 984,329 shares, approximately 4% in Gresham House plc. The 909,908 warrants had a carrying value of £0.8 million at 31 December 2017 and cost of exercise was £2.94 million. Proceeds from the sale of 727,564 shares were £3.05 million and the value of the 182,344 shares retained at 30 June was £0.8 million. The net gain to the Company from the exercise of the warrants, based on its carrying value at 31 December 2017 was £0.09 million. The warrants had been acquired by the Company in October 2016, at a price of 28p per warrant, as part of the arrangements put in place to promote alignment between the Company and its new manager, when it appointed GHAM as manager of its portfolio in August 2016. Based on the acquisition cost of the warrants, the gain to the Company from the warrant exercise has been £0.65 million. IDE Group The performance of IDE Group has been disappointing and the share price fell substantially, following a number of announcements in the first half of the year. On 31 July 2018 IDE Group announced an underwritten rescue financing package. Following this announcement the share price fell further. The Company invested £0.3 million in the July 2018 refinancing in a combination of equity and convertible loan notes, this being its pro rata share, in the knowledge that the major shareholders, represented on the Board, were planning to invest significant amounts in the refinancing. Shortly after year end, IDE announced a further rescue financing following a request from its bankers to repay its outstanding bank facilities. The financing, totalling £10 million in secured loan notes was provided in two tranches subscribed for /underwritten by two of IDE’s largest shareholders. The second tranche of the rescue funding, totalling £4.7 million was made available to all shareholders through an open offer. The Company elected not to participate in this refinancing. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N 1133 MANAGER’S REVIEW Weatherford The Company significantly reduced its holding in Weatherford during 2016 and 2017. The unrealised losses in the year reflect the continuing pressure on the share price due to uncertainties around Weatherford’s ability to meet its debt obligations. Other quoted During the year the Company received distributions of shares in Solaredge Inc, from its fund investment, Opus Capital Venture Partners. These shares had a carrying value at 31 December 2018 of £658,000 and are included above within “Other” above. UNQUOTED INVESTMENTS Company Medhost Inc Entuity Elateral ICU Eyewear* Yes To* Penguin Computing* Other interests Sold in year Nationwide Energy Partners Brockton Capital LLP * These are co-investments with SFEP Sector US technology UK technology UK technology US consumer US consumer US technology – US energy UK Property The net gains/(losses) on the unquoted portfolio arose as follows: Gains/(losses), net Realised 365ITMS YesTo Penguin Computing Brockton Capital LLP Nationwide Energy Partners Others Unrealised Medhost Brockton Capital LLP Elateral ICU Eyewear Entuity Penguin Computing YesTo Others Unrealised foreign currency gains/(losses) Sold in year Nationwide Energy Partners Total net gain/(loss) 31 December 2018 £’000 8,276 4,925 1,610 1,568 927 329 689 – – 2017 £’000 8,183 3,600 2,300 740 874 1,747 – 2,960 2,500 18,324 22,904 Year ended 31 December 2018 £’000 2017 £’000 – – 153 617 633 527 1,930 (552) – (890) 784 1,711 300 1 – 558 1,932 556 – – – – 2,488 (2,969) 2,403 (2,275) 740 671 441 445 (266) (1,482) – (785) 1,912 3,842 (3,077) (589) LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 1144 MANAGER’S REVIEW Valuations are sensitive to changes in the following two inputs: • • The operating performance of the individual businesses within the portfolio; and Changes in the revenue and profitability multiples and transaction prices of comparable businesses, which are used in the underlying calculations. Comments on individual companies are set out below. Medhost Medhost is a co-investment with funds of Primus Capital, in which the Company has previously had investments. Medhost’s financial performance has been satisfactory in 2018 showing growth in profitability and cash generation. Brockton Capital LLP The sale of Brockton Capital LLP was completed in March 2018. The Company received total proceeds of £3.1 million for its minority shareholding plus its share of excess cash in Brockton Capital LLP at the time of sale. The Company had originally acquired its minority holding in 2006 when, together with 3 other cornerstone investors, it backed the establishment of Brockton Capital LLP, a private equity real estate investment adviser, and became an investor in Brockton Capital Fund I LP (“the Fund”, a real estate investment fund. The investment in Brockton Capital LLP gave the Company the right to participate in entities that would receive a share of any carried interest in relation to the performance of the Fund and subsequent Brockton-advised funds. The Company still retains its interest in Brockton Capital Fund I LP. ICU Eyewear This investment, which was loss making had been written off in 2016, was restructured and refinanced with new investors in 2017 and as a result the Company recognised a small positive carrying value at 31 December 2017. During 2018 the company has continued to demonstrate its ability to trade profitably. The valuation has been increased from $1.0 million to $2.0 million. Nationwide Energy Partners (“NEP”) This investment comprised an interest bearing loan note, repayable over 4 years and issued in December 2017 as part of the consideration in a transaction whereby the Company sold its equity interest in NEP back to the founder. The carrying value of the investment at 31 December 2017 was £3.0 million, reflecting an underlying US dollar value of $4.0 million. This was below its face value of $5.0 million, reflecting the Company’s estimate of amounts receivable from the loan note. NEP defaulted on the first three instalments due under the note in 2018. Following the detailed negotiations between the Manager and the shareholder partner, an agreement was reached November 2018 with the founder of NEP to sell back the loan note for $4.6m. The transaction was completed in December 2018 and realised £3.6 million, a premium of £0.6 million to the 31 December 2017 carrying value. Entuity The company has performed well in 2018, increasing its recurring revenues, streamlining its cost base and diversifying its mix of clients. Operating cash flows were sufficiently strong to enable the company to repay £0.4 million in part repayment of its shareholder loans. The manager has a representative on the Board to influence and support the value plan for the company. Elateral Gresham House has had significant focus on this investment due to its long-term issues. The new team at Elateral has now largely completed the process of re-engineering and upgrading its technology platform. It has secured additional multinational “household” names as clients during the second half of the year. It has also reduced its cost base and is positioned to grow in 2019. The company is a relatively small organisation dealing with large multinational clients and has a long sales cycle. The write down reflects the likely need to provide additional working capital in the first half of 2019 whilst the company builds its sales pipeline. This company remains under review regularly, and the manager has been heavily engaged with the Board. Penguin Computing The Company’s total interests are held through its investment in SFEP and directly through a co-investment with SFEP. The amounts shown above relate to the directly held co-investment. As explained below, the business was sold in June 2018 and initial consideration has been received. The carrying value represents the estimated further proceeds that may be received. As explained below, the estimate initially made following the sale in June has been reduced based on latest information received. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N 1155 MANAGER’S REVIEW FUND INTERESTS General partner Sector San Francisco Equity Partners Brockton Capital Fund 1 Opus Capital Venture Partners Eden Ventures Weber Capital Partners Other interests US consumer & technology UK property US venture capital UK venture capital US micro-cap quoted stocks – 31 December 2018 £’000 9,534 4,922 3,115 1,100 687 1,440 2017 £’000 20,048 4,603 3,671 1,883 599 1,466 20,798 32,270 Losses and gains on the Company’s funds portfolio for the year ended 31 December 2018 were as follows: (Losses)/gains, net Realised San Francisco Equity Partners (partial sale to Yes To) Other funds Unrealised San Francisco Equity Partners Eden Ventures Brockton Capital Simmons Parallel Energy Opus Capital Venture Partners Weber Capital Others (net) Unrealised foreign currency gains/(losses) Total net (loss)/gains Year ended 31 December 2018 £’000 2017 £’000 – 242 242 (4,072) 421 319 8 154 – (419) 1,148 3,576 19 3,595 8,748 (1,128) 362 (180) 315 30 (113) (1,562) (2,441) 6,472 (2,199) 10,067 LMS Capital is the majority investor in SFEP (as opposed to the other fund interests where the Company has only a minority stake). SFEP has two remaining investments, YesTo and an interest in the further proceeds expected to be received following the sale of Penguin Computing (“Penguin”). The sale of Penguin has enabled the general partner of SFEP to meet performance thresholds and become entitled to carried interest payments in accordance with the SFEP 1 fund agreement. An estimate of these payments has been included in arriving at the carrying values for the SFEP 1 fund interests in YesTo and Penguin below: • Penguin – fund carrying value £1,176,000 (31 December 2017: £11,148,000). This investment was sold in June 2018, and an initial payment of consideration received. The carrying value at 31 December 2018 relates to amounts of sale consideration estimated still to be receivable from payments under an earn out arrangement and the release of amounts retained in escrow. At 30 June 2018, shortly after the sale, an estimate of further proceeds was made based on discussions with SFEP. The latest information from SFEP indicates that the likely amount of any future proceeds will be substantially lower than originally anticipated, principally due to the earn out targets not being achieved. Accordingly, in its year end valuation the Company has reduced its estimates of further proceeds. In addition to the fund investments noted above the Company has a co-investment in Penguin of £329,000 (31 December 2017: £1,747,000). The Penguin co-investment has been valued on a consistent basis with the Fund interest to reflect estimated further proceeds. There is no carried interest payable in relation to the co-investment. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 1166 MANAGER’S REVIEW The Company’s total investment in Penguin at 31 December 2018, via its SFEP fund interest and its co-investment is £1,505,000 (31 December 2017: £12,895,000). • YesTo – fund carrying value £8,338,000 (31 December 2017: £8,563,000) continues to show year on year sales growth. The Investment was revalued upwards in 2017 reflecting the valuation achieved at the time of the partial exit in June 2017 and the continued performance of the business. As noted above, the valuation reflects an estimate of additional amounts of carried interest that may become payable to the general partner of SFEP. In addition to the fund investments noted above the Company has a directly held co investment in YesTo of £927,000 (31 December 2017: £874,000). The Company’s total investment in YesTo at 31 December June 2018, via its SFEP fund interest and its co-investment is £9,265,000 (31 December 2017: £9,437,000). Other fund interests • • Eden Ventures – Eden realised two of the fund’s larger assets in Q4 2018, at a surplus to the carrying value. The company received a distribution of £1.2 million which has significantly reduced its net investment in this fund. Notwithstanding the recent asset sales the fund has performed below expectations over its life. The Company has valued its remaining interest at a discount to the fund net asset value published by the general partner; Brockton Capital –The Company’s discounted cash flow valuation methodology for this investment results in a small uplift for its interest as the discount is unwound; and • Opus Capital, a US venture fund, made stock distributions in kind during the year of £822,087. OVERHEAD COSTS The manager has continued to focus on the objective of reducing costs. Overhead costs for the year (including amounts incurred by subsidiaries) were £1,549,000 – significantly lower than last year (2017: £2,731,000). Overheads in 2017 included costs of approximately £1.0 million associated with the historic self managed arrangements. TAXATION The Group tax charge for the year, all of which arose in the subsidiaries, is £0.3 million (2017: £0.2 million). FINANCIAL RESOURCES AND COMMITMENTS At 31 December 2018 cash holdings, including cash in subsidiaries, were £17,680,000 (31 December 2017: £3,960,000) and neither the Company or any of its subsidiaries had any debt (2017: nil debt). At 31 December 2018 subsidiary Companies had commitments of £3,123,000 (31 December 2017: £3,133,000) to meet outstanding capital calls from fund interests. OUTLOOK GHAM is focused on progressing the existing portfolio through realisations for value, that clearly require input to preserve or maximise value. GHAM has substantial private equity resources to support the disciplined investment process in place, and the experienced Investment Committee decision-making forum. Whilst in many cases exits are under the control of third party managers, GHAM maintains a close dialogue and seeks to influence outcomes to the extent it can. GHAM sees a reasonable prospect of further realisations in 2019. Approximately 39% of the net asset value is held in cash and quoted stocks (29.3% cash; 9.6% quoted stocks). This positions the Company well to restart its investment activities following the investment policy and processes previously described to shareholders, and focusing on areas of undervalued opportunity. A number of opportunities are currently under review from a pipeline of potential opportunities that is being developed. GHAM is focused on shareholder value and would expect new investments to be made in 2019 in line with the investment policy and investment return objectives. GRESHAM HOUSE ASSET MANAGEMENT LIMITED 22 March 2019 LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 1177 ABOUT THE MANAGER TIM FARAZMAND Tim has a strong background in UK mid-market private equity with over 30 years in the industry working with a broad variety of companies such as LDC, 3i, RBS PE and Catalyst Fund Management during that time. Most recently Tim was a MD at LDC, the private equity subsidiary of Lloyds Bank plc. GRAHAM BIRD Graham leads the Strategic Equity division of GHAM. He was previously Director of Strategic Investments at SVGIM. Graham has considerable experience as a fund manager and an adviser to quoted companies having previously been a director within the corporate finance department at JP Morgan Cazenove. More recently Graham held senior positions in industry including Paypoint plc as Strategic Planning, Corporate Development Director, PayByPhone President and executive Chairman managing a growing technology business. TONY DALWOOD Tony is CEO of Gresham House plc and Chairman of the Investment Committee having led the management buy-in in 2014. He developed the Strategic Public Equity process with a strong investment record and has substantial private equity experience.. Prior to Gresham House he launched established SVGIM and Strategic Equity Capital plc and the Strategic Recovery Funds. Tony is the former CEO of SVG Advisers (Schroder Ventures London), former Active Chairman Management Investment Committee and a member of the UK Investment Committee at PDFM. He is currently a non-executive director of JPEL plc. Downing of O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S Robert Rayne is the Company’s nominated member on the Investment Committee. His biographical details are on page 18. O T H E R I N F O R M A T I O N transactions and global PARDIP KHROUD Pardip Investment Director at is Gresham House. She shares fund management responsibilities with Tony Dalwood and Graham Bird. She has 13 years’ experience in audit, private equity tax restructuring at KPMG, as a Senior Manager at Lloyds Banking Group and most Investment Manager at Lloyds Development Capital where numerous investments and was also appointed to the Board of portfolio companies uSwitch and Bluestone. recently as an she managed LAURENCE HULSE Laurence joined Gresham House after graduating in Politics and Political Economy from Warwick University. He supports the investment team with quantitative analysis and due diligence. Prior to Gresham House he interned with the M&A team at Rothschild and on the Equities trading floor at Barclays Capital. NICK FRIEDLOS Nick joined LMS Capital in 2012 to oversee the realisation strategy and was instrumental in structuring the Company’s new arrangements with GHAM. Nick is a chartered accountant and was a partner at PricewaterhouseCoopers. For the last 20 years Nick has worked as a consultant to and as CFO and CEO in alternative asset investment businesses including real estate, private equity and renewable energy. Nick ceased to be an employee and director of LMS Capital on 16 August 2016, when he joined GHAM. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 1188 BOARD OF DIRECTORS MARTIN KNIGHT NON-EXECUTIVE CHAIRMAN Directorships Chairman of Cambridge Mechatronics Limited, Chrysalis VCT plc and Merrycroft Limited. Experience Martin was previously a director of Morgan Grenfell & Co Limited and subsequently became the principal adviser to South Audley Street Investments. He is a Fellow of Imperial College, of which he was a governor and council member from 1992 to 2010. ROD BIRKETT NON-EXECUTIVE DIRECTOR Directorships Trustee and Investment Committee Chairman of Royal Navy Royal Marines Charity; Investment Committee Member of British Heart Foundation; non-executive director of Infiniti China Opportunities Fund. Experience Rod is a former investment manager and investment company specialist with over 30 years investment experience, including equity long only and hedge fund management. Since 2006, he has developed a portfolio of non-executive and consultancy roles. His experience includes managing JPMorgan Fleming’s investment company business and he is a former director of the Association of Investment Companies. NEIL LERNER NON-EXECUTIVE DIRECTOR Directorships Vice-President of the RNLI. Experience Neil retired in September 2006 as Risk Management partner for KPMG where he had responsibility for managing all aspects of professional risk and reputation. Until September 2009 he was Special Advisor to KPMG International’s captive insurer. ROBERT RAYNE NON-EXECUTIVE DIRECTOR Directorships Non-executive Chairman of Derwent London plc; Chairman of The Rayne Foundation and a non-executive director/trustee of a number of charitable trusts and foundations. Experience Robbie has expertise in a wide range of sectors, including real estate, media, consumer, technology and energy. He established the Company’s investment activities in the early 1980s as Investment Director and later Managing Director and Chief Executive Officer of London Merchant Securities. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N 1199 CORPORATE GOVERNANCE REPORT The Board of LMS Capital plc is committed to maintaining high standards of corporate governance and business ethics. This report is made under the UK Corporate Governance Code published by the Financial Reporting Council in April 2016 (‘the Code’). Copies of the Code are available from the Financial Reporting Council’s website at www.frc.org.uk. This report sets out how the Company has applied the principles in the Code and the extent to which it has complied with the detailed provisions of the Code. The Board considers that the Company has complied with all of the provisions of the Code throughout the year ended 31 December 2018, except as follows: • • Robert Rayne was previously Chief Executive Officer of the Company. As an Executive Director, he was entitled to participate in the Company’s long term incentive plans, including the Performance Share Plan and the carried interest plans. Details of these arrangements are set out in the Remuneration Report. The Board has not appointed a Senior Independent Director, as explained below. As the Board is wholly non-executive and has no employees as at year end, the Board has reviewed the committee structure and concluded that a Remuneration Committee is not required. Detailed information on the remuneration arrangements for the Directors can be found in the Remuneration Report on pages 27 to 29. BOARD OF DIRECTORS The Board is responsible to the Company’s shareholders for the performance of the Company and for its overall strategic direction, its values and its governance. It provides the leadership necessary to enable the Company’s business objectives to be met within the framework of the internal controls detailed below. COMPOSITION The Board currently comprises four non-executive Directors. Brief biographies of the Directors appear on page 18. The Board considers that it has an appropriate balance of skills, knowledge and experience available to it. Martin Knight is the Chairman and he is responsible for the effective running of the Board, including setting the Board’s agenda and ensuring that all matters relating to performance and strategy are fully addressed. He is also responsible for ensuring that that Board’s effectiveness is regularly evaluated (see further comments on this below). The role description of the Chairman is documented and has been approved by the Board. NON-EXECUTIVE DIRECTORS Each non-executive Director is appointed for an initial term of three years. Subject to agreement, satisfactory performance and re-election by shareholders, their appointments may be renewed for further terms of three years. DIRECTOR INDEPENDENCE AND COMMITMENT In the opinion of the Board, Martin Knight, Rod Birkett and Neil Lerner are each considered to be independent in character and judgement and there are no relationships or circumstances which are likely to affect (or could appear to affect) their judgement. In addition, Martin Knight was independent upon his appointment as Chairman on 20 May 2013. Robert Rayne is not considered to be independent as he previously served as an executive director and is a major shareholder in LMS Capital plc. DIRECTORS’ CONFLICTS OF INTERESTS The Company’s Articles of Association allow the Directors to authorise conflicts of interest and a register has been set up to record all actual and potential conflict situations which have been declared. All declared conflicts have been approved by the Board. The Company has instituted procedures to ensure that Directors’ outside interests do not give rise to conflicts with its operations and strategy. The Board is of the view that the Chairman and each of the non-executive Directors who held office during 2018 committed sufficient time to fulfilling their duties as members of the Board. SENIOR INDEPENDENT DIRECTOR No Senior Independent Director has been appointed since January 2012. The Directors consider that the independent non-executive Directors are able to ensure significant engagement with shareholders. DIRECTOR RE-ELECTION In order to comply with the Code, all Directors will offer themselves for re-election by shareholders at each AGM. BOARD SUPPORT There are agreed procedures for the Directors to take independent professional advice, if necessary, at the Company’s expense. All Directors have access to the advice and services of the Company Secretary. In addition, newly appointed Directors are provided with comprehensive information about the Company and its investee Companies as part of their induction process. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 2200 CORPORATE GOVERNANCE REPORT formal structured continuing professional While no development programme has been established for the non- executive Directors, every effort is made to ensure that they are fully briefed before Board meetings on the Company’s business and its investments. In addition, they receive updates from time to time from the Manager on specific topics affecting the Company and from the Company Secretary on recent developments in corporate governance and compliance. Each of the non-executive Directors independently ensures that they update their skills and knowledge sufficiently to enable them to fulfil their duties appropriately. The Board has adopted a schedule of matters reserved to it for approval. These include the approval of financial statements, strategic plans and annual budgets, as well as acquisitions and disposals and major capital and operating expenditure proposals above pre-determined limits agreed with the Manager. The Board delegates specific responsibilities to its Committees, which operate within written terms of reference approved by the Board. These Committees report regularly to the Board. BOARD EFFECTIVENESS The Board carries out an annual board performance evaluation. It was conducted by the Chairman, supported by the Company Secretary in November 2018. The process involved the completion of a questionnaire by each Director and the responses were analysed. A report was made to the Board and following discussions, a number of proposed recommendations were made and the Board agreed to take them forward for further discussion and implementation. BOARD MEETINGS Four scheduled Board meetings were held in 2018. At each scheduled meeting, the Board considers a report on current operations and significant business issues, such as major investment or divestment proposals and strategy, as well as a financial report. Papers for each scheduled Board meeting are usually provided during the week before the meeting. ATTENDANCE AT BOARD MEETINGS The following were Directors of the Company during 2018. They attended the following number of scheduled meetings of the Board and (where they were members) its Committees during the year: Meetings held Martin Knight Neil Lerner Robert Rayne Rod Birkett Board Audit Nomination 4 4 4 4 4 3 3 3 – 3 1 1 1 1 1 In addition to the scheduled Board meetings noted above, the Board held nine ad-hoc meetings during 2018. BOARD COMMITTEES The Board has an Audit Committee and a Nomination Committee. The Board has considered the recommendations of the AIC Code on Corporate Governance (the ‘AIC Code’) and decided that the Audit Committee should also undertake the duties and responsibilities of a Management Engagement Committee. As the Board is wholly non-executive and has no employees, the Remuneration Committee has been disbanded. Each Board committee has established terms of reference detailing its responsibilities and powers. These are available in the Investor Relations section of the Company’s website at www.lmscapital.com. AUDIT COMMITTEE The Audit Committee comprises: Neil Lerner (Committee Chairman), Rod Birkett and Martin Knight. Neil Lerner is considered by the Board to have recent and relevant financial experience and the Committee as a whole has competence relevant to the sector in which the Company operates. The Chairman of the Committee may invite non-members to attend Committee meetings and these typically include a representative of the Company’s external auditor and representatives of the Manager and other Directors. A report on the activities of the Audit Committee is set out on pages 23 to 26. The terms of reference for the Committee take into account the requirements of the Code and the AIC Code and are available on the Company’s website at www.lmscapital.com. The role of the Committee is to assist the Board with the discharge of its responsibilities in relation to the Company’s financial statements in the areas set out below. The Audit Committee may request and receive reports from the Manager to enable it to fulfil its duties under its terms of reference. The Committee Chairman reports to the full Board at each scheduled Board meeting immediately following a Committee meeting. Corporate reporting The Committee monitors the integrity of the financial statements of the Company and any formal announcements relating to the Company’s financial performance, with particular emphasis on reviewing significant financial reporting judgements contained in them. It reviews the draft annual financial statements and half year results statement prior to discussion and approval by the Board and reviews the external auditor’s detailed reports on these. It then reports to the Board any matters which it considers the Board should take into account in ensuring that published financial reports provide a fair, balanced and understandable LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N 2211 CORPORATE GOVERNANCE REPORT assessment of the Company’s position and prospects. In identifying any such matters, the Committee also takes into account the findings reported to it from the external audit process. External audit The Audit Committee reviews the conduct of the external audit, including its effectiveness and independence on an annual basis and makes recommendations to the Board regarding the re-appointment or removal of the external auditor, their terms of engagement and the level of their remuneration. The Committee also reviews the process which is in place to ensure the independence and objectivity of the external auditor. During the year the Committee monitors the external audit as it proceeds. At its November meeting the Committee reviews, discusses and approves the external audit plan for the current financial year; the Committee then meets with the external auditor prior to the Board’s consideration of the full year and half year results to consider their findings. importance of maintaining A policy regarding the engagement of the external auditor to supply non-audit services is in place. The policy recognises the the objectivity and independence of the external auditor by carefully monitoring their involvement in projects of a non-audit nature. It is, however, also acknowledged that, due to their detailed understanding of the Company’s business, it may sometimes be necessary or desirable to involve the external auditor in non-audit related work to the extent permitted. Internal control and risk management GHAM was appointed by the Company in May 2018 as its AIFM to provide risk management, portfolio management, and other services to the Company. Operational matters and the responsibility for the day-to-day management of the business are delegated to the Manager. Management arrangements between the Company and GHAM are set out in a portfolio management agreement which sets out the matters for which GHAM is responsible and over which it has authority. At the Board’s scheduled meetings, GHAM reports on matters such as progress with the investment strategy, investment portfolio performance, and communication with shareholders. The Board also monitors the performance of the Manager in the context of the provisions of the portfolio management agreement. the Company’s day-to-day The Company appointed Augentius (UK) Limited in 2017 to financial and manage administrative functions, acting within delegated authority limits and in accordance with clearly defined systems of control. Augentius Corporate Services Limited were also appointed in 2017 as Company Secretary and supports the Board in the delivery of governance procedures, in particular the planning of agendas for the annual cycle of Board and Committee meetings. Although the board has overall responsibly for monitoring, it seeks advice from the Audit committee on the issue of AIFM performance. Risk management and internal controls is a standing agenda item for each Audit Committee meeting. The Committee reviews the effectiveness of the internal controls throughout the year and will take any necessary actions should any significant failings or weaknesses be identified. More information on the results of these reviews during 2018 are set out in the Audit Committee Report on pages 23 to 26. Details of the principal risks and uncertainties potentially facing the Company can be found in the Strategic Report on pages 4 to 7. The Company has no internal audit function. Following the appointment of Augentius (UK) Limited to manage the Company’s day-to-day financial and administrative functions, the Board relies on third party reports to gain comfort on internal controls operated by Augentius. NOMINATION COMMITTEE All Directors are members of the Nomination Committee, which is chaired by Martin Knight. The Committee is responsible for assisting the Board in determining the composition and make-up of the Board. It is also responsible for periodically reviewing the Board’s structure and identifying potential candidates to be appointed as Directors, as the need arises. The selection process is, in the Board’s view, both rigorous and transparent in order to ensure that appointments are made on merit and against objective criteria set by the Committee. In reviewing potential candidates, the Committee takes into account the need to consider the benefits of diversity on the Board, while ensuring that appointments are made based on merit and relevant experience. When considering succession planning, the Committee looks at the balance, structure and composition of the Board and takes into account the future challenges and opportunities facing the Company. The Nomination Committee meets as required, but at least once each year. SHAREHOLDER COMMUNICATIONS The Company communicates regularly with its major institutional shareholders and ensures that all the Directors have an understanding of the views and concerns of investors about the Company. This is achieved by the Directors or the Manager maintaining contact from time to time with representatives of institutional shareholders to discuss LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 2222 CORPORATE GOVERNANCE REPORT matters of mutual interest relating to the Company and reporting back to the Board. Shareholders have the opportunity to meet any of the Directors of the Company should they so wish. Additionally, the Board uses the AGM as an occasion to communicate with all shareholders, including private investors, who are provided with the opportunity to ask questions. At the AGM the level of proxy votes lodged on each resolution is made available, both at the meeting and subsequently on the Company’s website. Each substantially separate issue is presented as a separate resolution. The Committee Chairmen are available to answer questions from shareholders. FINANCIAL REPORTING The Directors have acknowledged, in the Statement of Directors’ Responsibilities set out on page 33, their responsibility for preparing the financial statements of the Company. The external auditor has the Independent Auditor’s Report set out on pages 34 to 39, a statement about its reporting responsibilities. included, in The Directors are also responsible for the publication of a half year report for the Company, which provides a balanced and fair assessment of the Company’s financial position for the first six months of each accounting period. The interim and annual results of the Company, along with all other press releases, are posted on the Company’s website, www.lmscapital.com, as soon as possible after they have been announced to the market. The website also contains an archive of all documents sent to shareholders, as well as details on the Company’s investments, strategy and share price. MARTIN KNIGHT CHAIRMAN 22 March 2019 LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 2233 AUDIT COMMITTEE REPORT INTRODUCTION FROM THE CHAIRMAN OF THE AUDIT COMMITTEE I am pleased to present the report of the Audit Committee for 2018 which provides shareholders with an overview of the activities of the Committee during the year. These activities are focused on the following: The Audit Committee had three scheduled meetings during 2018; each meeting was attended by representatives of the Manager and the external auditor. The Committee also met without the Manager but with the external auditor in attendance. In addition, the Committee met on 12 March 2019 to consider the 2018 results and Annual Report. • • • The integrity of the Company’s financial reporting; The quality and effectiveness of the external audit process, including the independence and objectivity of the external auditor; and Risk management and internal control. In the prior year the day to day accounting responsibilities were transferred from the Company’s own team to a third-party service provider, Augentius (UK) Limited. The Committee was also responsible for reviewing the Company’s arrangements on whistleblowing, ensuring that appropriate arrangements were in place for employees to be able to raise, in confidence, matters of possible impropriety, with suitable subsequent follow-up action. The transfer of the Company’s administrative functions to third party service providers completed in 2017 and the Company now has no employees. Consequently, these arrangements are no longer required. I report to the full Board at each scheduled Board meeting immediately following a Committee meeting. its A summary of how responsibilities during 2018 as well as the more significant issues it addressed is set out in the report. the Committee carried out NEIL LERNER CHAIRMAN, AUDIT COMMITTEE 22 March 2019 O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 2244 AUDIT COMMITTEE REPORT CORPORATE REPORTING Since the publication of the 2017 Annual Report the Committee has reviewed the following: • • • • • The 2018 half year report; The preliminary announcement of 2018 results; The 2018 Annual Report; The report from BDO LLP (“BDO”) on the results of their review of the half year report for 2018; and Reports from BDO LLP (“BDO”) on the planning and results of their audit for the year ended 31 December 2018. ANNUAL REPORT 2018 The Committee advises the Board on whether it believes that the 2018 Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy. A report confirming this to be the case was presented to the Board at the meeting where it considered the full year results and annual report. Investment portfolio valuation The principal focus for the Committee is the investment portfolio valuation; a full valuation is prepared and reported to the Committee at least twice a year and used for the preparation of the Company’s half-year and full year financial reports. As part of its review of each valuation report the Committee receives comments on the valuation from the external auditor – based on their review of the 30 June (half-year) valuation and audit of the 31 December (full year) valuation. The following areas were of particular focus for the Committee in its consideration of the approach to investment valuation in 2018: • • • Ensuring that the valuation methodology complied with the International Private Equity and Venture Capital Valuation Guidelines (December 2015 edition) and the Company’s stated accounting policy, and that the Guidelines had been applied on a consistent basis; The availability of third party information to corroborate valuation results at individual investment level, including; Reports from general partners for the Company’s fund interests; In formulating its report to the Board, the matters considered by the Committee included the following: • Market prices for its quoted investments; and • • The roles of GHAM and Augentius in the reporting process; • The nature and reason for any adjustments made to third party information for the Company’s valuation purposes. The process underlying the preparation of financial and narrative information which is reported to the Board at each of its meetings; The valuation of unquoted investments inevitably requires the exercise of judgement and the Committee studied in detail the variables underpinning the valuation of each unquoted investment, in particular: • Whether the information in the Strategic Report and the Manager’s Review is consistent with that reported to the Board throughout the year; • • Ensuring that positive and negative factors affecting the Company’s performance are given equal prominence; and The appropriateness of the key performance indicators and comments on them. SIGNIFICANT ACCOUNTING JUDGEMENTS During the year, the Committee considered the key accounting matters and judgements in respect of the financial statements and these are described below. As part of this review, the Committee received papers from the Manager setting out the assumptions used and conclusions reached, which were subject to challenge by the Committee as it considered appropriate in the circumstances. • • • • • LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 Consideration of current trading and future prospects in determining the appropriate revenues or earnings base for valuation purposes; Consistency of approach in the valuation, satisfying itself that any change made was appropriate; Ensuring companies were appropriate and up to date; that metrics from comparable quoted For co-investments, comparing the Company’s carrying value with (where available) the valuation used by the lead investor and ensuring that there were proper explanations for any differences; and Confirming that the valuation takes account of the Company’s divestment plans, where appropriate. O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N 2255 AUDIT COMMITTEE REPORT At its meeting to consider the full year results, the Committee considered a detailed report from the Manager on the year end investment valuation and concluded that the valuation process had been properly carried out and that the valuation was appropriate in aggregate. In reaching this conclusion the Committee took into account the findings of the external auditor. Going concern The financial statements are prepared on a going concern basis and the Committee considered this and concluded that the use of the going concern basis continued to be appropriate. As part of this review the Committee also satisfied itself that the Viability Statement in the Strategic Report and the statement on going concern under “Basis of preparation” in note 1 to the financial information were appropriate. External audit findings The auditor also reported to the Committee the misstatements they had found during the course of their work, which were insignificant, and confirmed that in their opinion there were no material items remaining unadjusted in the 2018 financial statements. INTERNAL CONTROL AND RISK MANAGEMENT Risk management and internal controls were reviewed by the Committee at each of its scheduled meetings during the year and the Committee is of the view that: • • Risks have been properly identified; The systems were operating satisfactorily during 2018 and up to the date of this report; and • Mitigation of the risks identified is satisfactory and appropriate to the Company’s circumstances. The Committee also reviewed in detail the disclosures in relation to risks and longer-term viability in the Strategic Report to ensure that these are consistent with the findings of its own work on risk management during the year. During 2017 the finance and administration functions were outsourced to a third party provider. The Committee received a report from the Manager concerning the transfer of responsibilities which included consideration of the controls operated by the third party provider (which are the subject of a separate report by a third party). The Committee was satisfied that the transfer of responsibility for finance and administration had not impacted the reliability or integrity of the Company’s current and previous year and periodic reporting. EXTERNAL AUDIT It is the responsibility of the Committee to review and monitor the external auditor’s independence and objectivity and the effectiveness of the external audit process. The Committee also ensures that the Company complies with the EU audit reform as now implemented in the UK. Reports presented to the Committee by BDO during 2018 and to the date of this report covered: • • • • The results of their audit of the 2017 financial statements and annual report; The results of their review of the 2018 half year report; Their plans and proposed audit scope for 2018; and The results of their audit of the 2018 financial statements and annual report. In addition BDO reported to the Committee their procedures to ensure their independence and objectivity and confirmed the compliance of the partners and staff assigned to the Company’s audit with those procedures. The Committee conducts a written assessment of the external audit process each year which includes members of the Committee and certain representatives of the Manager providing their comments and evaluation to the Chairman of the Committee on areas including: • • • • The procedures adopted by the external auditor to ensure their independence and objectivity; The appropriateness of risk identification in determining the external audit plan; Their conduct of the audit process, including the extent of challenge of judgement areas; and The nature and content of reports presented to the Committee. During the year, the Committee also reviewed the 2018 Audit Quality Inspections Annual Report and the Public Report on BDO by the FRC’s Audit Quality Review Team. For 2018 the Committee was satisfied with the effectiveness and quality of the external audit process as provided by the firm. The Company has a formal policy governing the engagement of the external auditor to provide non-audit services, which includes procedures designed to limit such services to areas which would comply with relevant legislation and not result in potential conflict with the objectivity and independence of the external audit process. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 2266 AUDIT COMMITTEE REPORT During the year the amount of fees paid for non-audit services provided by BDO was £10,000 (2017: £10,000). These permissible audit related services are in respect of the interim review for the 6 months to June. AUDIT COMMITTEE EFFECTIVENESS The annual Board evaluation described on page 20 included the work of the Committee and concluded that it was working satisfactorily. NEIL LERNER CHAIRMAN, AUDIT COMMITTEE 22 March 2019 LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 2277 REMUNERATION REPORT INTRODUCTION FROM THE CHAIRMAN I am pleased to present our report on Directors’ remuneration for 2018, which includes amounts actually paid to Directors in 2018, on which shareholders will be asked to vote in an advisory manner at the AGM in June 2019. It includes information subject to audit. The Board’s policy is to set Directors’ remuneration at a level commensurate with the skills and experience necessary for the effective stewardship of the Company and the expected contribution of the Board as a whole in continuing to achieve the investment objectives. The Company’s remuneration policy was approved by shareholders at the AGM in April 2017 and that policy has remained unchanged for the year ended 31 December 2018. The Company is only permitted to make a payment to a Director if that payment is in line with the policy. A copy of the policy can be found on page 30. MARTIN KNIGHT CHAIRMAN 22 March 2019 O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 2288 REMUNERATION REPORT REMUNERATION FOR THE YEAR ENDED 31 DECEMBER 2018 The tables below (which have been subject to audit) set out amounts paid to each Director during the financial years ended 31 December 2018: 2018 Annual Fees £’000 Taxable Benefits £’000 Carried Consulting Fees Interest £’000 £’000 Bonus £’000 M Knight R Birkett N Lerner R Rayne 60 40 45 40 185 – – – 26(1) 26 (1) Amounts included for taxable benefits are insurance premiums for private healthcare. – – – – – – – – – – – – – – – 2017 M Knight R Birkett N Lerner R Rayne Annual Fees £’000 Taxable Benefits £’000 Carried Consulting Fees Interest £’000 £’000 Bonus £’000 60 40 45 40 185 – – – 18(2) 18 – – – 119 119 – – – – – – – – – – Total £’000 60 40 45 66 211 Total £’000 60 40 45 177 322 (2) Amounts included for taxable benefits are insurance premiums for private healthcare and income protection. CARRIED INTEREST Robert Rayne participated in the carried interest arrangements in place for staff involved in the management and development of the investment portfolio. There were no amounts paid in 2018 in accordance with these arrangements. At 31 December 2018, there were no amounts earned but unpaid. If the Company’s investment portfolio was realised at its valuation at 31 December 2018, under these arrangements he would be entitled to further carried interest of £469,000. PERFORMANCE GRAPH The Committee considers the FTSE All-Share Index a relevant index for Total Shareholder Return and comparison disclosure as it represents a broad equity market index of which the Company is a member. The performance graph below shows the Company’s Total Shareholder Return performance for the five-year period ended 31 December 2018 compared with that of the FTSE All-Share Index. 160 140 120 100 80 60 40 20 0 Jan/2014 Jan/2015 Jan/2016 Jan/2017 Jan/2018 Jan/2019 LMS FTSE All Share Index LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N 2299 REMUNERATION REPORT DIRECTORS’ LETTERS OF APPOINTMENT The following table provides details of the non-executive Directors’ letters of appointment: Name M Knight R Birkett N Lerner R Rayne Date of Appointment Date of expiry of current term 4 January 2012 16 June 2016 4 January 2012 6 April 2006 27 April 2021 16 June 2019 27 April 2021 30 September 2019 DIRECTORS’ INTERESTS IN SHARES The beneficial interests of the Directors in the ordinary shares of the Company are set out below: M Knight R Birkett N Lerner R Rayne 31 December 2018 2017 36,828 47,652 30,748 2,670,124 36,828 47,652 30,748 3,076,866 In addition, Robert Rayne holds a non-beneficial interest in 6,549,473 ordinary shares held in trust. Except as stated above: • • There have been no changes in the above Directors’ interests between 31 December 2018 and the date of this report; and The Company is not aware of any other interests of any Director in the ordinary share capital of the Company. There are no requirements or guidelines concerning share ownership by Directors. 2018 ANNUAL GENERAL MEETING At the AGM held on 27 April 2018 shareholders voted to approve the Remuneration Committee Report in an advisory capacity as follows: votes in favour were 88.57%, against 10.37%; 125,780 votes were withheld. This report has been approved by the Board. MARTIN KNIGHT CHAIRMAN 22 March 2019 LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 3300 REMUNERATION POLICY DIRECTORS’ REMUNERATION POLICY At the AGM held on 25 May 2017, shareholders voted to approve the Company’s remuneration policy for the three years commencing 1 January 2017 (as set out below) as follows: votes in favour were 99.77%, against 0.23%; 1,570,457 votes were withheld. REMUNERATION POLICY The Board is composed solely of non-executive Directors none of whom has a service contract with the Company. The Board has therefore concluded that there is no need for a remuneration committee. There for compensation upon early termination of appointment. The Directors’ letters of appointment are available on request at the Company’s registered office during business hours and will be available at the AGM from 15 minutes before the start of the meeting until its conclusion. is no provision The Directors’ fees are reviewed annually and are set out in the table below. Any alterations will reflect market changes from current levels Name M Knight R Birkett N Lerner R Rayne Annual fee £ 60,000 40,000 45,000 40,000 Robert Rayne also has a consultancy agreement with the Manager for the provision of advice in relation to the portfolio of investments and potential investments. He is entitled to a fee of £60,000 per annum under the consultancy agreement. There are no pension arrangements for Directors. Robert Rayne participated in the Company’s carried interest plans, under which payments could still arise in relation to unrealised historic investments, and is covered under the Company’s health insurance policy. None of the other Directors receives any other benefits from the Company. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 3311 DIRECTORS’ REPORT LMS Capital plc is an international investment company whose shares are traded on the London Stock Exchange. Details of the Company’s strategy, risk management and performance in 2018 are included in the Strategic Report on pages 4 to 7 and the Manager’s Review on pages 9 to 16. DIRECTORS The names and biographical details of the current Directors of the Company are given on page 18. In addition, further information about the Board is set out in the Corporate Governance Report on pages 19 to 22. Details of the current Directors’ letters of appointment, together with their interests in the Company’s shares, are shown in the Remuneration Report on pages 27 to 29. Directors’ and officers’ liability insurance is maintained by the Company. The Directors may exercise all the powers of the Company subject to the provisions of relevant legislation and the Company’s Articles of Association. CORPORATE SOCIAL RESPONSIBILITY Environment LMS Capital has a limited direct impact upon the environment and there are few environmental risks associated with its activities. From the end of March 2018, the Company no longer occupied any office space as all of its operations were outsourced. The below table includes greenhouse gas emissions by scope for 2017 and for the period up to 31 March 2018, when the Company ceased to occupy any office space: O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N Greenhouse gas emissions by scope: Total emissions Scope Scope 1 Scope 2 Total Source Emissions from combustion of fuel Process or fugitive emissions Emissions from electricity, heat, steam and cooling purchased for own use using location-based method Intensity – emissions per unit floor area Per square foot Per square metre Year ended 31 December 2018 (tonnes CO2e) 2017 (tonnes CO2e) 4.5 0.0 10.6 17.8 0.0 42.3 15.1 60.1 kgCO2e kgCO2e 8.2 88.3 8.2 88.3 Note: To meet the requirements of the GHG Protocol Scope 2 Guidance, the Company accounts for its Scope 2 emissions using a market-based method as well as a location-based method. The 2018 results represent three months of emissions data, which has been assessed by prorating the 2017 annual data as an appropriate proxy given the office is no longer occupied. The Company has reported on all the emissions sources required under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. These sources fall within the financial statements. The Company has no responsibility for any emissions sources which are not included in the financial statements. The Company has used the GHG Protocol Corporate Accounting and Reporting Standard and the GHG Protocol Scope 2 Guidance, data gathered from its operations, emission factors from UK Government’s Conversion Factors for Company Reporting 2017 and emission factors relating to electricity supply and the UK grid mix. CHARITABLE DONATIONS The Company did not make any charitable contributions during 2018 (2017: £305,000). POLITICAL DONATIONS The Company did not make any political donations during 2018 (2017: £nil). LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 3322 DIRECTORS’ REPORT GOING CONCERN The Company’s business activities, together with the factors likely to affect its future development, performance and financial position, are set out in the Strategic Report on pages 4 to 7 and the Manager’s Review on pages 9 to 16. The Directors have considered these factors for a period not less than twelve months from the date of this report. The Directors have adopted the going concern basis of accounting in preparing the financial statements. The Viability Statement of the Company is in the Strategic Report on page 7. CONTRACTUAL ARRANGEMENTS Details of the Company’s contractual arrangements are given in the Strategic Report on pages 9 to 16. There are no other contracts or arrangements with third parties which the Board deems essential to the operation of the Company, or which take effect, alter or terminate on a change of control of the Company following a takeover bid. RELATED PARTY TRANSACTIONS Details of related party transactions are set out in note 16 to the financial statements. DIVIDENDS The Board does not recommend the payment of a dividend in respect of the year ended 31 December 2018 (2017: £nil). SUBSEQUENT EVENTS There have been no events subsequent to 31 December 2018 that would materially affect the interpretation of the financial statements included in this Annual Report. SHARE CAPITAL At 31 December 2018, the Company’s issued share capital remains at 80,727,450 ordinary shares of 10p each. Each share carries one vote. No shares are currently held in treasury. There are no restrictions on the transfer of shares. There has been no change in the issued share capital between the year-end and the date of this report. SUBSTANTIAL SHAREHOLDINGS As at 22 March 2019, the Company was aware of the following significant direct and indirect interests in the issued share capital of the Company. Name of shareholder Robert Rayne1,2 Trustees of Lord Rayne’s Will Trust Lady Jane Rayne1 Charles Stanley & Co Limited Armstrong Investment Management LLP Rath Dhu Limited Schroders plc Percentage of issued share capital 14.44 13.40 11.57 10.74 5.88 5.33 3.56 Notes: (1) There are common interests in certain of these shares, which are held within charitable trusts. (2) Robert Rayne holds a non-beneficial interest in 8,984,260 ordinary shares held in trust and a personal interest in 2,670,124 ordinary shares. ANNUAL GENERAL MEETING The Company’s AGM will be held at the offices of Travers Smith LLP, 10 Snow Hill, London, EC1A 2AL at 3.00 pm on 3 June 2019. The notice of meeting, which includes explanatory notes and provides full details of the resolutions being proposed at the AGM, is included at the end of this document and is also available to view on the Company’s website at www.lmscapital.com. AUDITORS The auditors, BDO LLP, have indicated their willingness to continue in office and a resolution will be proposed at the AGM for their reappointment and to authorise the Directors to fix their remuneration. The Directors who held office at the date of approval of this report each confirm that, so far as they are aware, there is no relevant audit information (as defined by Section 418 (3) of the Companies Act 2006) of which the Company’s auditor is unaware; and each Director has taken all the steps that ought to have been taken as a Director to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. By order of the Board. AUGENTIUS CORPORATE SERVICES LIMITED COMPANY SECRETARY 22 March 2019 LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N 3333 STATEMENT OF DIRECTORS’ RESPONSBILITIES the year ended The Directors who served during 31 December 2018 and to the date of this Annual Report are as set out on page 18. The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they are required to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing the financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • • • state whether they have been prepared in accordance with IFRSs as adopted by the EU, subject to any material departures disclosed and explained in the financial statements; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; and prepare a Directors’ Report, Strategic Report and Directors’ Remuneration Report, which comply with the requirements of the Companies Act 2006. for keeping adequate The Directors are responsible accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the company’s website. The directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. We confirm that to the best of our knowledge: • • the financial statements, prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company taken as a whole; and the Annual Report includes a fair review of the development and performance of the business and the position of the Company taken as a whole, together with a description of the principal risks and uncertainties that they face. For and on behalf of the Board. MARTIN KNIGHT CHAIRMAN 22 March 2019 LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 3344 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF LMS CAPITAL PLC CONCLUSIONS RELATING TO PRINCIPAL RISKS, GOING CONCERN AND VIABILITY STATEMENT We have nothing to report in respect of the following information in the annual report, in relation to which the ISAs (UK) require us to report to you whether we have anything material to add or draw attention to: • • • • • the disclosures in the annual report that describe the principal risks and explain how they are being managed or mitigated; the directors’ confirmation set out on page 7 in the annual report that they have carried out a robust assessment of the principal risks facing the Company, including those future that would performance, solvency or liquidity; its business model, threaten the directors’ statement set out on page 33 in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors’ identification of any material uncertainties to the Company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; whether the directors’ statement relating to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or the directors’ explanation set out on page 7 in the annual report as to how they have assessed the prospects of the Company, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. OPINION We have audited the financial statements of LMS Capital Plc (the ‘Company’) for the year ended 31 December 2018 which comprise the Income Statement, Statement of Other Comprehensive Income, Statement of Financial Position, Statement of Changes in Equity, Cash Flow Statement and Notes to the Financial Statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is International Financial Reporting applicable Standards (IFRSs) as adopted by the European Union. law and In our opinion the financial statements: • • • give a true and fair view of the state of the Company’s affairs as at 31 December 2018 and of its loss for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; and have been properly prepared in accordance with the provisions of the Companies Act 2006; BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N 3355 INDEPENDENT AUDITOR’S REPORT KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Matter Audit response Valuation of Investments Quoted Investments area We consider the valuation of investments to be the most as audit significant investments represent the most the significant balance financial and underpin the principal activity of the entity. statements in there The valuation of investments can be a highly subjective accounting estimate where is an inherent risk of management override arising the investment valuations being initially the prepared Investment Manager, who is remunerated based on the net asset value of the company. from by In respect of 100% of the quoted investment valuations we: • Confirmed the bid price has been used, by obtaining the year end bid prices from independent third party sources and undertaking a recalculation of the valuations. • Confirmed there were no contra indicators, such as liquidity considerations, to suggest bid price is not the most appropriate indication of fair value. Unquoted Investments Our testing was stratified according to risk, having regard to the subjectivity of the inputs to the valuations. For the investments sampled our procedures included, inter alia: • Where appropriate, agreeing valuations through to a third party valuation report or third party data. • Challenging whether the valuation methodology was the most appropriate in the circumstances under the International Private Equity and Venture Capital Valuation (“IPEV”) Guidelines and IFRSs. • Re-performing the calculation of the investment valuations, having regard to the application of enterprise value across the capital structures of the investee companies. • Verifying and benchmarking key inputs and estimates to independent information and our own research. • Challenging the investment manager regarding significant judgements made and obtaining corroborating evidence where available. • Where appropriate, performing sensitivity analysis on the valuation calculations where there is sufficient evidence to suggest reasonable alternative inputs might exist. • Where appropriate, considering the economic environment in which the investment operates to identify factors that could impact the investment valuation. The remainder of the portfolio was subject to analytical procedures, such as confirming whether a nil value was appropriate. Fund Investments Our testing was stratified according to risk. For the fund investments sampled our procedures included, inter alia: • Reviewing the underlying fund manager report and assessing the quality and reliability of the information. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 3366 INDEPENDENT AUDITOR’S REPORT Matter Audit response • Challenging the appropriateness of any adjustments made by the investment manager to the value of the investment holding (for instance where reports available were not at the same year-end date or more relevant information suggested an adjustment to the valuation). • Where appropriate, assessing the performance of the underlying investments using the steps noted under the unquoted investments above. • Where necessary we considered the appropriateness of the key assumptions in the valuation models and whether alternative reasonable assumptions could have been applied. We considered each assumption in isolation as well as in conjunction with other assumptions and the valuation as a whole. • Where appropriate, we sensitised the valuations where other reasonable alternative assumptions could have been applied. We also considered the completeness and clarity of disclosures regarding the valuation of investments in the financial statements. OUR APPLICATION OF MATERIALITY We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. For planning, we consider materiality to be the magnitude by which misstatements, including omissions, could reasonably influence the economic decisions of users that are taken on the basis of the financial statements. The application of these key considerations gives rise to Financial Statement Materiality and Performance Materiality; the quantum and purpose of which are tabulated below. In setting materiality, we had regard to the nature and disposition of the investment portfolio. Materiality Measure Financial Statement Materiality Performance Materiality Purpose Assessing whether the financial statements as a whole give a true and fair view. Basis and key considerations Based on 1.5% of the underlying investment portfolio considering the nature of the investment portfolio and the level of judgement inherent in the valuation. In performing the audit we apply a lower Based on 75% of materiality. level of materiality in order to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds financial statement materiality. Quantum YE 2018 (£) Quantum YE 2017 (£) 670,000 955,000 500,000 717,000 We agreed with the Audit Committee that we would report to the committee all individual audit differences in excess of £13,000 (2017: £17,000). LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N 3377 INDEPENDENT AUDITOR’S REPORT AN OVERVIEW OF THE SCOPE OF OUR AUDIT Our audit approach was developed by obtaining an understanding of the Company’s activities, the key functions undertaken by the Board and the overall control environment. Based on this understanding we assessed those aspects of the Company’s transactions and balances which were most likely to give rise to a material misstatement. We obtained an understanding of the legal and regulatory framework applicable to the entity which includes but is not limited to the Companies Act 2006, the UK Listing rules, the DTR rules, IFRS accounting standards, VAT and other taxes. We considered compliance with this framework through discussions with the Audit Committee and the in-house legal counsel at the Investment Manager and performed audit procedures on these areas as considered necessary. We gained an understanding of the legal and regulatory framework applicable to the group and the industry in which it operates, and considered the risk of acts by the group which were contrary to applicable laws and regulations, including fraud. Our audit procedures were designed to respond to risks of material misstatement in the financial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion. There are inherent limitations in an audit of financial statements and the further removed noncompliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. As in all of our audits we also addressed the risk of management override of internal controls, including testing journals and evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. OTHER INFORMATION The other information comprises the information included in the annual report other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. the other information In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. We have nothing to report in this regard. In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions: • • • Fair, balanced and understandable set out on page 7 – the statement given by the directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or Audit committee reporting set out on page 23 – the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or Directors’ statement of compliance with the UK Corporate Governance Code set out on page 19 – the parts of the directors’ statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 3388 INDEPENDENT AUDITOR’S REPORT • • • • the financial statements and the part of the directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit; or a corporate governance statement has not been prepared by the Company. RESPONSIBILITIES OF DIRECTORS As explained more fully in the directors’ responsibilities statement set out on page 33, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006 In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: • • • the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements and those reports have been prepared legal requirements; in accordance with applicable information about internal control and the risk management systems in relation to financial reporting processes and about share capital structures, given in compliance with rules 7.2.5 and 7.2.6 in the Disclosure Guidance and Transparency Rules sourcebook made by the Financial Conduct Authority (the FCA Rules), is consistent with the financial statements and has been legal prepared requirements; and in accordance with applicable information about the Company’s corporate governance code and practices and about its administrative, their management and supervisory bodies and committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the FCA Rules. MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified material misstatements in: • • the strategic report or the directors’ report; or information about the risk management systems in relation to financial reporting processes and about share capital structures, given in compliance with rules 7.2.5 and 7.2.6 of the FCA Rules. internal control and We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 3399 INDEPENDENT AUDITOR’S REPORT OTHER MATTERS WHICH WE ARE REQUIRED TO ADDRESS Following the recommendation of the audit committee, we were appointed by The Board of Directors in November 2016 to audit the financial statements for the year ending 31 December 2016 and subsequent financial periods. We were reappointed by the members of the Company at the Annual General Meeting held on 27 May 2017 and 27 April 2018. The period of total uninterrupted engagement is 3 years, covering the years ending 31 December 2016 to 31 December 2018. USE OF OUR REPORT This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Company and we remain independent of the Company in conducting our audit. NEIL FUNG-ON (SENIOR STATUTORY AUDITOR) FOR AND ON BEHALF OF BDO LLP, STATUTORY AUDITOR LONDON, UK O V E R V I E W G O V E R N A N C E Our audit opinion is consistent with the additional report to the audit committee. 22 March 2019 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 4400 INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2018 Net (losses)/gains on investments Interest income Total income Operating expenses (Loss)/profit before tax Taxation (Loss)/profit for the year Attributable to: Equity shareholders (Loss)/earnings per ordinary share – basic (Loss)/earnings per ordinary share – diluted The notes on pages 45 to 59 form part of these financial statements. Year ended 31 December 2018 £’000 (3,344) 86 (3,258) (955) (4,213) – (4,213) 2017 £’000 9,898 66 9,964 (2,364) 7,600 – 7,600 (4,213) 7,600 (5.2)p (5.2)p 8.4p 8.4p Notes 2 3 4 6 7 7 LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 4411 STATEMENT OF OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018 (Loss)/profit for the year Other comprehensive income Total comprehensive (loss)/profit for the year Attributable to: Equity shareholders The notes on pages 45 to 59 form part of these financial statements. Year ended 31 December 2018 £’000 (4,213) – (4,213) 2017 £’000 7,600 – 7,600 (4,213) 7,600 O V E R V I E W G O V E R N A N C E I F I N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 4422 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2018 Non-current assets Investments Current assets Operating and other receivables Cash and cash equivalents Current assets Total assets Current liabilities Operating and other payables Amounts payable to subsidiaries Current liabilities Total liabilities Net assets Equity Share capital Share premium Capital redemption reserve Retained earnings Total equity shareholders’ funds Year ended 31 December Notes 2018 £’000 2017 £’000 8 135,092 141,964 9 10 11 12 40 15,440 15,480 281 2,283 2,564 150,572 144,528 (465) (89,832) (90,297) (1,292) (78,748) (80,040) (90,297) (80,040) 60,275 64,488 8,073 508 24,949 26,745 60,275 8,073 508 24,949 30,958 64,488 The financial statements on pages 40 to 44 were approved by the Board on 22 March 2019 and were signed on its behalf by: MARTIN KNIGHT DIRECTOR The notes on pages 45 to 59 form part of these financial statements. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 4433 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2018 Balance at 1 January 2017 Total comprehensive income for the year Profit for the year Transactions with owners, recorded directly in equity Repurchase of shares Balance at 31 December 2017 Total comprehensive income for the year Loss for the year Balance at 31 December 2018 Share capital £’000 9,644 Share premium £’000 Capital redemption reserve £’000 Retained earnings £’000 Total equity £’000 508 23,378 34,586 68,116 – – – 7,600 7,600 (1,571) 8,073 – 8,073 – 508 – 508 1,571 (11,228) (11,228) 24,949 30,958 64,488 – 24,949 (4,213) 26,745 (4,213) 60,275 The notes on pages 45 to 59 form part of these financial statements. O V E R V I E W G O V E R N A N C E I F I N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 4444 CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2018 Cash flows from operating activities (Loss)/profit for the year Adjustments for: Depreciation Losses/(gains) on investments Interest income Change in operating and other receivables Change in operating and other payables Change in amounts payable to subsidiaries Net cash from operating activities Cash flows from Investing activities Interest received Purchase of investments Proceeds from sale of investments Net cash (used in)/from investing activities Cash flows from financing activities Repurchase of own shares Transaction costs relating to tender offer Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year The notes on pages 45 to 59 form part of these financial statements. Year ended 31 December Notes 2018 £’000 2017 £’000 (4,213) 7,600 2 3 – 3,344 (86) (955) 204 (827) 15,102 13,524 124 (3,541) 3,050 (367) 32 (9,898) (66) (2,332) (33) (3,690) 18,296 12,241 21 – – 21 – – – (11,000) (228) (11,228) 13,157 2,283 15,440 1,034 1,249 2,283 LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 4455 NOTES TO THE FINANCIAL STATEMENTS 1. PRINCIPAL ACCOUNTING POLICIES Reporting entity LMS Capital plc (“the Company”) is domiciled in the United Kingdom. These financial statements are presented in pounds sterling because that is the currency of the principal economic environment of the Company’s operations. The Company was formed on 17 March 2006 and commenced operations on 9 June 2006 when it received the demerged investment division of London Merchant Securities. Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards as adopted for use in the European Union (“Adopted IFRSs”). These financial statements were authorised for issue by the Directors on 22 March 2019. The financial statements have been prepared on the historical cost basis except for investments which are measured at fair value, with changes in fair value recognised in the income statement. The Company’s business activities and financial position are set out in the Strategic Report on pages 4 to 7 and in the Manager’s Review on pages 9 to 16. In addition, note 13 to the financial information includes a summary of the Company’s financial risk management processes, details of its financial instruments and its exposure to credit risk and liquidity risk. Taking account of the financial resources available to it, the Directors believe that the Company is well placed to manage its business risks successfully. After making enquiries the Directors have a reasonable expectation that the Company has adequate resources for the foreseeable future. Accounting for subsidiaries The Directors have concluded that the Group has all the elements of control as prescribed by IFRS 10 “Consolidated Financial Statements” in relation to all its subsidiaries and that the Company continues to satisfy the three essential criteria to be regarded as an investment entity as defined in IFRS 10, IFRS 12 “Disclosure of Interests in Other Entities” and IAS 27 “Consolidated and Separate Financial Statements”. The three essential criteria are such that the entity must: • Obtain funds from one or more investors for the purpose of providing these investors with professional investment management services; • Commit to its investors that its business purpose is to invest its funds solely for returns from capital appreciation, investment income or both; and • Measure and evaluate the performance of substantially all of its investments on a fair value basis. In satisfying the second essential criteria, the notion of an investment time frame is critical. An investment entity should not hold its investments indefinitely but should have an exit strategy for their realisation. Although the Company has invested in equity interests that have an indefinite life, it invests typically for a period of up to ten years. In some cases, the period may be longer depending on the circumstances of the investment, however investments are not made with intention of indefinite hold. This is a common approach in the private equity industry. Subsidiaries are therefore measured at fair value through profit or loss, in accordance with IFRS 13 “Fair Value Measurement” and IFRS 9 “Financial Instruments”. The Company’s subsidiaries, which are wholly-owned and over which it exercises control, are listed in note 18. New standards effective in the year IFRS 9 “Financial instruments” is effective on or after accounting periods beginning on 1 January 2018. The new standard requires the Directors to evaluate the classification, measurement and recognition of financial assets and financial liabilities. O V E R V I E W G O V E R N A N C E I F I N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 4466 NOTES TO THE FINANCIAL STATEMENTS 1. PRINCIPAL ACCOUNTING POLICIES continued The company has adopted IFRS 9 with effect from 1 January 2018, which has the following impact: • • The company has adopted IFRS 9 with effect from 1 January 2018, which has the following impact: No effect on the classification and measurement of its financial assets, as these are held at fair value through profit or loss and will continue to be measured on the same basis under IFRS 9; and No impact on the accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss. The Company has no such financial liabilities. IFRS 15 “Revenue from contracts with customers” is effective on or after accounting periods beginning on 1 January 2018. The core principle of the new standard is for entities to recognise revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the Company expects to be entitled in exchange for those goods or services. The Company is not exposed to IFRS 15 given its business model and therefore this has no impact on the Company. New standards and interpretations not yet applied IFRS 16 “Leases” will not become effective until accounting periods beginning on or after 1 January 2019. The adoption of the above standard does not have an impact on the Company’s reported net assets. Use of estimates and judgements The preparation of condensed financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis; revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Investments in subsidiaries The Company’s investments in subsidiaries are stated at fair value which is considered to be the carrying value of the net assets of each subsidiary. On disposal of such investments the difference between net disposal proceeds and the corresponding carrying amount is recognised in the income statement. Valuation of investments The Company and its subsidiaries manage their investments with a view to profit from the receipt of dividends and changes in fair value of equity investments. Therefore all quoted, unquoted and managed fund investments are designated at fair value through profit and loss and carried in the Statement of Financial Position at fair value. Fair values have been determined in accordance with the International Private Equity and Venture Capital Valuation Guidelines. These guidelines require the valuer to make judgments as to the most appropriate valuation method to be used and the results of the valuations. Each investment is reviewed individually with regard to the stage, nature and circumstances of the investment and the most appropriate valuation method selected. The valuation results are then reviewed and any amendment to the carrying value of investments is made as considered appropriate. Where the value of an investment is considered to be impaired, it is written down to its expected recoverable amount as part of the determination of its fair value. Quoted investments Quoted investments for which an active market exists are valued at the closing bid price at the reporting date. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 4477 NOTES TO THE FINANCIAL STATEMENTS O V E R V I E W G O V E R N A N C E I F I N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N 1. PRINCIPAL ACCOUNTING POLICIES continued Unquoted direct investments Unquoted direct investments for which there is no ready market are valued using the most appropriate valuation technique with regard to the stage and nature of the investment.Valuation methods that may be used include: • • • • • Investments in which there has been a recent funding round involving significant financing from external investors are valued at the price of the recent funding, discounted if an external investor is motivated by strategic considerations. The Company has chosen not to early adopt the IPEV guidelines which are effective from 1 January 2019. The core principles of the new guidelines are: (a) Price of a recent investment removed as a valuation technique; and (b) Valuing debt investment is expanded. The Company is still in the process of accessing the full impact of the IPEV guidelines and will adopt the amendment when it becomes effective; Investments in an established business are valued using revenue or earnings multiples depending on the stage of development of the business and the extent to which it is generating sustainable revenue or positive cash flows; Investments in a business the value of which is derived mainly from its underlying net assets rather than its earnings are valued on the basis of net asset valuation; Investments in an established business which is generating sustainable revenue or positive cash flows but for which other valuation methods are not appropriate are valued by calculating the discounted cash flow of future cash flows or earnings; and Investments in early stage businesses not generating sustainable revenue or positive cash flows and for which there has not been any recent independent funding are valued by calculating the discounted cash flow of the investment to the investors. Funds Investments in managed funds are valued at fair value. The general partners of the funds will provide periodic valuations on a fair value basis, the latest available of which the Company will adopt provided it is satisfied that the valuation methods used by the funds are not materially different from the Company’s valuation methods. Impairment of financial assets Loans and receivables are considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of loans and receivables measured at amortised cost is calculated as the difference between their carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Individually significant loans and receivables are tested for impairment on an individual basis. The remaining loans and receivables are assessed collectively in groups that share similar credit risk characteristics. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. Foreign currencies Transactions in foreign currencies are recorded at the rate of exchange at the date of transaction. Monetary assets and monetary liabilities denominated in foreign currencies at the reporting date are reported at the rates of exchange prevailing at that date and exchange differences are included in the income statement. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 4488 NOTES TO THE FINANCIAL STATEMENTS 1. PRINCIPAL ACCOUNTING POLICIES continued Operating and other receivables Operating and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment losses. The assets held at amortised cost are immaterial. Cash and cash equivalents Cash, for the purpose of the cash flow statement, comprises cash in hand and cash equivalents, less overdrafts payable on demand. Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Financial liabilities The Company’s financial liabilities include operating and other payables. They are measured at cost which is the fair value of the consideration to be paid in the future for goods and services received. Provisions A provision is recognised if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the liability. Income Gains and losses on investments Realised and unrealised gains and losses on investments are recognised in the income statement in the period in which they arise. Interest income Interest income is recognised as it accrues using the effective interest method. Expenditure Employee benefits With effect from 31 March 2018 following the completion to being externally managed, the company has no employees. Income tax expense Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity as other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised using the balance sheet liability approach, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which temporary differences can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 O V E R V I E W G O V E R N A N C E I F I N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N 4499 NOTES TO THE FINANCIAL STATEMENTS 2. NET (LOSSES)/GAINS ON INVESTMENTS Losses and gains on investments were as follows: Investment portfolio of the Company Asset type Quoted Unquoted Funds Investments portfolio of subsidiaries Asset type Quoted Unquoted Funds Total Charge for incentive plans Operating and similar expenses of subsidiaries* Year ended 31 December 2018 Realised Unrealised £’000 £’000 43 – – 43 411 – – 411 Total £’000 454 – – 454 2017 Realised Unrealised £’000 £’000 – – – – 1,642 – – 1,642 Total £’000 1,642 – – 1,642 – 1,930 242 (4,420) 1,912 (2,441) (4,420) 3,842 (2,199) 2,172 (4,949) (2,777) 2,215 (4,538) (2,323) 190 2,488 3,595 6,273 6,273 (855) (3,077) 6,472 (665) (589) 10,067 2,540 8,813 4,182 10,455 (159) (2,482) (862) (3,344) (44) 10,411 (513) 9,898 * Includes operating and legal costs and taxation charges of subsidiaries. 3. INTEREST INCOME Interest income comprises interest receivable on bank deposits and interest on loans. 4. OPERATING EXPENSES Operating expenses comprise administrative expenses and include the following: Depreciation Personnel expenses (note 5) Operating lease expense Management fee Other administrative expenses Foreign currency exchange differences Auditor’s remuneration Fees to Group auditor – parent company – subsidiary companies Year ended 31 December 2018 £’000 – 230 69 915 (109) (220) 2017 £’000 32 421 (22) 1,055 350 420 21 49 32 76 955 2,364 The audit fee comprises £27,000 for LMS Capital plc, £63,000 for the subsidiaries and £10,000 for the interim review, consistent with prior year. The expenses in the table above vary from these numbers due to adjustments for opening and closing accruals. Included within operating expenses are the following non-recurring costs: • Severance costs for Executive Directors and staff of £60,000 (2017: £712,000) LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 5500 NOTES TO THE FINANCIAL STATEMENTS 5. PERSONNEL EXPENSES Wages and salaries Compulsory social security contributions Contribution to defined contribution plans The wages and salaries expense is shown in the income statement as follows: Operating expenses Year ended 31 December 2018 £’000 206 23 1 230 2017 £’000 323 79 19 421 Year ended 31 December 2018 £’000 206 206 2017 £’000 323 323 The Company operates carried interest arrangements in line with normal practice in the private equity industry, calculated on the assumption that the investment portfolio is realised at its year-end carrying amount. As at 31 December 2018, £939,000 has been accrued (2017: £745,000) The average number of Directors and staff was as follows: Asset type Directors Other employees The other employee left on 28 February 2018. 6. TAXATION Current tax expense Current year Total tax expense 31 December 2018 31 December 2017 Male Female Total Male Female Total 4 – 4 – – – 4 – 4 4 1 5 – 1 1 4 2 6 Year ended 31 December 2018 £’000 2017 £’000 – – – – LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 5511 NOTES TO THE FINANCIAL STATEMENTS 6. TAXATION continued Reconciliation of tax expense (Loss)/profit before tax Corporation tax using the Company’s domestic tax rate – 19% (2017: 19.25%) Fair value adjustments not currently taxed Non-deductible expenses Non-taxable income Deferred tax asset not recognised Transfer pricing Group relief Total tax expense Year ended 31 December 2018 £’000 (4,213) (800) 1,056 – (421) – (708) 873 – 2017 £’000 7,600 1,463 516 6 (3,139) 230 – 924 – 7. (LOSS)/EARNINGS PER ORDINARY SHARE The calculation of the basic and diluted earnings per share, in accordance with IAS 33, is based on the following data: (Loss)/earnings (Loss)/earnings for the purposes of (loss)/earnings per share being net (loss)/profit attributable to equity holders of the parent Number of shares Weighted average number of ordinary shares for the purposes of basic (loss)/earnings per share Effect of dilutive potential ordinary shares: Share options and performance shares* Weighted average number of ordinary shares for the purposes of diluted (loss)/earnings per share Earnings per share Basic Diluted * There are no potentially dilutive shares in 2018 since the Company has made a loss. Year ended 31 December 2018 £’000 2017 £’000 (4,213) 7,600 Number Number 80,727,450 90,457,391 – – 80,727,450 90,535,922 Pence Pence (5.2) (5.2) 8.4 8.4 O V E R V I E W G O V E R N A N C E I F I N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 5522 NOTES TO THE FINANCIAL STATEMENTS 8. INVESTMENTS The Company’s investments comprised the following: Total investments These comprise: Investment portfolio of the Company Investment portfolio of subsidiaries Investment portfolio – total Other net assets of subsidiaries The carrying amounts of the Company’s and its subsidiaries’ investment portfolios were as follows: Year ended 31 December 2018 £’000 2017 £’000 135,092 141,964 5,069 39,814 44,883 90,209 4,123 59,695 63,818 78,146 135,092 141,964 Investment portfolio of the Company Asset type Quoted Unquoted direct Funds Investments portfolio of subsidiaries Asset type Quoted Unquoted direct Funds Other net assets of subsidiaries The movements in the investment portfolio were as follows: Carrying value Balance at 1 January 2017 Purchases Disposals Distributions from partnerships Fair value adjustments Balance at 31 December 2017 Balance at 1 January 2018 Purchases Disposals Distributions from partnerships Fair value adjustments Balance at 31 December 2018 LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 31 December 2018 31 December 2017 £’000 £’000 £’000 £’000 4,469 600 – 5,069 4,123 – – 4,123 1,292 17,724 20,798 90,209 4,521 22,905 32,269 78,146 130,023 130,023 137,841 137,841 135,092 141,964 Quoted Unquoted securities £’000 securities £’000 Funds £’000 Total £’000 5,476 3,957 (1,576) – 787 31,371 675 (6,331) – (2,811) 36,585 68 – (11,313) 6,930 73,432 4,700 (7,907) (11,313) 4,906 8,644 22,904 32,270 63,818 8,644 4,133 (3,007) – (4,009) 22,904 1,072 (6,353) – 701 32,270 51 – (8,495) (3,028) 63,818 5,256 (9,360) (8,495) (6,336) 5,761 18,324 20,798 44,883 O V E R V I E W G O V E R N A N C E I F I N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N 5533 NOTES TO THE FINANCIAL STATEMENTS 8. INVESTMENTS continued The following table analyses investments carried at fair value at the end of the year, by the level in the fair value hierarchy into which the fair value measurement is categorised. The different levels have been defined as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets; Level 2: inputs other than quoted prices included within level 1 that are observable for the asset, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3: inputs for the asset that are not based on observable market data (unobservable inputs such as trading comparables and liquidity discounts). Fair value measurements are based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s view of market assumptions in the absence of observable market information (see note 13 – Financial risk management). The Company’s investments are analysed as follows: Level 1 Level 2 Level 3 Year ended 31 December 2018 £’000 2017 £’000 4,469 600 3,304 – 130,023 138,660 135,092 141,964 Level 3 amounts include £39,814,000 (2017: £59,695,000) relating to the investment portfolios of subsidiaries (including quoted investments of £1,292,000 (2017: £4,521,000)) and £90,209,000 (2017: £78,146,000) in relation to the other net assets of subsidiaries. 9. OPERATING AND OTHER RECEIVABLES Trade receivables Other receivables and prepayments 10. CASH AND CASH EQUIVALENTS Bank balances Short-term deposits 31 December 2018 £’000 – 40 40 2017 £’000 35 246 281 31 December 2018 £’000 4,096 11,344 15,440 2017 £’000 40 2,243 2,283 LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 5544 NOTES TO THE FINANCIAL STATEMENTS 11. OPERATING AND OTHER PAYABLES Trade payables Other non-trade payables and accrued expenses 12. CAPITAL AND RESERVES Share capital Ordinary shares Balance at the beginning of the year Repurchase of shares Balance at the end of the year 31 December 2018 £’000 41 424 465 2017 £’000 335 957 1,292 2018 Number 80,727,450 – 80,727,450 2018 £’000 8,073 – 8,073 2017 Number 96,441,735 (15,714,285) 80,727,450 2017 £’000 9,644 (1,571) 8,073 The Company’s ordinary shares have a nominal value of 10p per share and all shares in issue are fully paid up. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. There were no repurchase of shares in the year (2017: £11 million). Share premium account The Company’s share premium account arose on the exercise of share options in prior years. Capital redemption reserve The capital redemption reserve comprises the nominal value of shares purchased by the Company out of its own profits and cancelled. Treasury shares The Company has no shares held in treasury. 13. FINANCIAL RISK MANAGEMENT Financial instruments by category The following tables analyse the Company’s financial assets and financial liabilities in accordance with the categories of financial instruments in IAS 39. Assets and liabilities outside the scope of IAS 39 are not included in the table below: 31 December 2018 2017 Fair Value through profit or Cash and loss receivables £’000 £’000 Total £’000 Fair Value through profit or Cash and loss receivables £’000 £’000 Total £’000 135,092 – – – 135,092 141,964 – 40 – 15,440 40 15,440 – 141,964 281 2,283 281 2,283 135,092 15,480 150,572 141,964 2,564 144,528 Assets Investments Operating and other receivables Cash and cash equivalents Total LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 5555 NOTES TO THE FINANCIAL STATEMENTS O V E R V I E W G O V E R N A N C E I F I N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N 13. FINANCIAL RISK MANAGEMENT continued Liabilities Operating and other payables Provisions and other liabilities Amounts payable to subsidiaries Total 31 December 2018 2017 Fair Value through profit or loss £’000 – – – – Loans and payables £’000 465 – 89,832 Total £’000 465 – 89,832 90,297 90,297 Fair Value through profit or loss £’000 – – – – Loans and payables £’000 1,292 – 78,748 Total £’000 1,292 – 78,748 80,040 80,040 Intercompany payables to subsidiaries are all repayable on demand thus there are no undiscounted contractual cash flows to present. The Company has exposure to the following risks from its use of financial instruments: • • Credit risk; Liquidity risk; and • Market risk. This note presents information about the Company’s exposure to each of the above risks, its policies for measuring and managing risk, and its management of capital. Credit risk Credit risk is the risk of the financial loss to the Company if a counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s receivables and its cash and cash equivalents. Operating and other receivables Cash and cash equivalents 31 December 2018 £’000 40 15,440 15,480 2017 £’000 281 2,283 2,564 The Company limits its credit risk exposure by only depositing funds with highly rated institutions. Cash holdings at 31 December 2018 and 2017 were in funds currently rated A or better by Standard and Poor’s. Given these ratings the Company does not expect any counterparty to fail to meet its obligations and therefore no allowance for impairment is made for bank deposits. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. Its financing requirements are met through a combination of liquidity from the sale of investments and the use of cash resources. Operating and other payables are due within six months or less. In addition certain of the Company’s subsidiaries have uncalled capital commitments to funds of £3,123,000 (31 December 2017: £3,133,000) for which the timing of payment is uncertain (see note 15). LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 5566 NOTES TO THE FINANCIAL STATEMENTS 13. FINANCIAL RISK MANAGEMENT continued Market risk Market risk is the risk that changes in market prices such as foreign exchange rates, interest rates and equity prices will affect the Company’s income or the value of its holdings of financial instruments. The Company aims to manage this risk within acceptable parameters while optimising the return. Currency risk The Company is exposed to currency risk on those of its investments which are denominated in a currency other than the Company’s functional currency which is pounds sterling. The only other significant currency within the investment portfolio is the US dollar; approximately 57% of the investment portfolio is denominated in US dollars. The Company does not hedge the currency exposure related to its investments. The Company regards its exposure to exchange rate changes on the underlying investment as part of its overall investment return, and does not seek to mitigate that risk through the use of financial derivatives. The Company is exposed to translation currency risk on sales and purchases which are denominated in a currency other than the Company’s functional currency. The currency in which these transactions are denominated is principally US dollars. The Company’s exposure to foreign currency risk was as follows: Investments Operating and other receivables Cash and cash equivalents Operating and other payables Gross exposure Forward exchange contracts Net exposure Year ended 31 December GBP £’000 107,579 40 14,668 (90,297) 31,990 – 2018 USD £’000 26,160 – 772 – 26,932 – Other £’000 1,353 – – – 1,353 – GBP £’000 99,205 281 1,995 (80,040) 21,441 – 2017 USD £’000 41,441 – 288 – 41,729 – 31,990 26,932 1,353 21,441 41,729 Other £’000 1,318 – – – 1,318 – 1,318 At 31 December 2018, the rate of exchange was USD 1.28 = £1.00 (31 December 2017: USD 1.35 = £1.00). The average rate for the year ended 31 December 2018 was USD 1.33 = £1.00 (2017: USD 1.32 = £1.00). A 10% strengthening of the US dollar against the pound sterling would have increased equity by £2.8 million at 31 December 2018 (31 December 2017: increase of £4.4 million) and decreased the loss for the year ended 31 December 2018 by £2.8 million (2017: decreased the loss by £4.4 million). This assumes that all other variables, in particular interest rates, remain constant. A weakening of the US dollar against the pound sterling would have decreased equity and increased the loss for the year by the same amounts. This level of change is considered to be reasonable based on observations of current conditions. Interest rate risk At the reporting date the Company’s cash and cash equivalents are exposed to interest rate risk and the sensitivity below is based on these amounts. An increase of 100 basis points in interest rates at the reporting date would have increased equity by £89,000 (31 December 2017: increase of £18,000) and decreased the loss for the year by £89,000 (2017: £18,000). A decrease of 100 basis points would have decreased equity and increased the loss for the year by the same amounts. This level of change is considered to be reasonable based on observations of current conditions. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 5577 NOTES TO THE FINANCIAL STATEMENTS 13. FINANCIAL RISK MANAGEMENT continued Fair values All items not held at fair value in the Statement of Financial Position have fair values that approximate their carrying values. Other market price risk Equity price risk arises from equity securities held as part of the Company’s portfolio of investments. The Company’s management of risk in its investment portfolio focuses on diversification in terms of geography and sector, as well as type and stage of investment. The Company’s investments comprise unquoted investments in its subsidiaries and investments in quoted investments. The subsidiaries’ investment portfolios comprise investments in quoted and unquoted equity and debt instruments. Quoted investments are quoted on the main stock exchanges in London and USA. A proportion of the unquoted investments are held through funds managed by external managers. As is common practice in the venture and development capital industry, the investments in unquoted companies are structured using a variety of instruments including ordinary shares, preference shares and other shares carrying special rights, options and warrants and debt instruments with and without conversion rights. The investments are held for resale with a view to the realisation of capital gains. Generally, the investments do not pay significant income. The significant unobservable inputs used at 31 December 2018 in measuring investments categorised as level 3 in note 8 are considered below: 1. Unquoted securities (carrying value £18.3 million) are valued using the most appropriate valuation technique such as the price of recent investment, an earnings-based approach, or a discounted cash flow approach. In most cases the valuation method uses inputs based on comparable quoted companies for which the key unobservable inputs are: • • • EBITDA multiples in the range 5-9 times dependent on the business of each individual company, its performance and the sector in which it operates; Revenue multiples in the range 0.5–1.5 times, also dependent on attributes at individual investment level; and Discounts applied of up to 65%, to reflect the illiquidity of unquoted companies compared to similar quoted companies. The discount used requires the exercise of judgement taking into account factors specific to individual investments such as size and rate of growth compared to other companies in the sector. 2. Investments in funds (carrying value £20.8 million) are valued using reports from the general partners of the fund interests with adjustments made for calls, distributions and foreign currency movements since the date of the report (if prior to 31 December 2018). The Company also carries out its own review of individual funds and their portfolios to satisfy ourselves that the underlying valuation bases are consistent with our basis of valuation and knowledge of the investments and the sectors in which they operate. However, the degree of detail on valuations varies significantly by fund and, in general, details of unobservable inputs used are not available. The valuation of the investments in subsidiaries makes use of multiple interdependent significant unobservable inputs and it is impractical to sensitise variations of any one input on the value of the investment portfolio as a whole. Estimates and underlying assumptions are reviewed on an ongoing basis however inputs are highly subjective. If the valuation for level 3 category investments declined by 10% from the amount at the reporting date, with all other variables held constant, the loss for the year ended 31 December 2018 would have increased by £13.0 million (2017: loss increased by £13.9 million). An increase in the valuation of level 3 category investments by 10% at the reporting date would have an equal and opposite effect. O V E R V I E W G O V E R N A N C E I F I N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 5588 NOTES TO THE FINANCIAL STATEMENTS 13. FINANCIAL RISK MANAGEMENT continued Capital management The Company’s total capital at 31 December 2018 was £60.3 million (31 December 2017: £64.5 million) comprising equity share capital and reserves. The Company had external borrowings at 31 December 2018 of £nil (31 December 2017: £nil) excluding the amounts payable to subsidiaries. In order to meet the Company’s capital management objectives, the Manager and the Board monitor and review the broad structure of the Company’s capital on an ongoing basis. This review includes: • Working capital requirements and follow-on investment capital for portfolio investments, including calls from funds; • • • Capital available for new investments; The possible timing of returning capital to shareholders in line with the Company’s commitment to further capital returns to shareholders; and The annual dividend policy. The Company’s objectives, policies and processes for managing capital reflect the change in strategy from 16 August 2016. 14. OPERATING LEASES Leases as lessee Non-cancellable operating lease rentals are payable as follows: Less than one year Between one and five years 31 December 2018 £’000 – – – 2017 £’000 139 – 139 The operating lease rentals are significantly reduced, due to the termination of the lease on 24 March 2018 and future payments are expected to be nil. 15. CAPITAL COMMITMENTS Outstanding commitments to funds 31 December 2018 £’000 2017 £’000 3,123 3,133 The outstanding capital commitments to funds comprise unpaid calls in respect of funds where a subsidiary of the Company is a limited partner. 16. RELATED PARTY TRANSACTIONS Gresham House Asset Management Limited was appointed the investment manager of LMS Capital plc on 16 August 2016. Amounts charged by the investment manager in 2018 were £915,000 (2017: £1,055,000). The Directors fee paid for the year was £185,000 (2017:£185,000). With effect from January 2011 the Company entered into a lease agreement with Derwent London plc in respect of the premises comprising its head office and registered office. The lease was formally terminated on 24 March 2018. Under the terms of the lease the Company paid rent of £104,000 (2017: £406,000) to Derwent London plc. Robert Rayne is the Chairman of Derwent London plc. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 5599 NOTES TO THE FINANCIAL STATEMENTS 17. SUBSEQUENT EVENTS There are no subsequent events that would materially affect the interpretation of these financial statements. 18. SUBSIDIARIES The Company’s subsidiaries are as follows: Name Country of incorporation Holding % Activity International Oilfield Services Limited LMS Capital (Bermuda) Limited LMS Capital (ECI) Limited LMS Capital (General Partner) Limited LMS Capital (GW) Limited LMS Capital Group Limited LMS Capital Holdings Limited LMS NEP Holdings Inc Lioness Property Investments Limited Lion Property Investments Limited Lion Investments Limited Lion Cub Investments Limited Lion Cub Property Investments Limited Tiger Investments Limited LMS Tiger Investments Limited LMS Tiger Investments (II) Limited Westpool Investment Trust plc Bermuda Bermuda England and Wales Bermuda Bermuda England and Wales England and Wales United States of America England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Investment holding Investment holding Investment holding Investment holding Investment holding Investment holding Investment holding Investment holding Investment holding Investment holding Investment holding Dormant Investment holding Investment holding Investment holding Investment holding Investment holding In addition to the above, certain of the Company’s carried interest arrangements are operated through five limited partnerships (LMS Capital 2007 LP, LMS Capital 2008 LP, LMS Capital 2009 LP, LMS Capital 2010 LP and LMS Capital 2011 LP) which are registered in Bermuda. The registered addresses of the Company’s subsidiaries are as follows: Subsidiaries incorporated in England and Wales: Two London Bridge, London, SE1 9RA. Subsidiaries and partnerships incorporated in Bermuda: Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. Subsidiary incorporated in the United States of America: c/o Two London Bridge, London, SE1 9RA. 19. NET ASSET VALUE PER SHARE The net asset value per ordinary shares in issue are as follows: Net asset value (£’000) Number of ordinary shares in issue Net asset value per share (in pence) 31 December 2018 2017 60,275 80,727,450 74.7p 64,487 80,727,450 79.9p O V E R V I E W G O V E R N A N C E I F I N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 6600 NOTICE OF ANNUAL GENERAL MEETING NOTICE IS GIVEN that the Annual General Meeting of LMS Capital plc (the “Company”) will be held at 3.00 pm on Monday 3 June 2019 at Travers Smith LLP, 10 Snow Hill, London, EC1A 2AL to transact the following business. Resolutions 1 to 9 will be proposed as ordinary resolutions and Resolutions 10 to 12 will be proposed as special resolutions. 1. To receive the Company’s annual report and accounts for the year ended 31 December 2018. 2. To approve the remuneration report set out on pages 27 to 29 of the annual report for the year ended 31 December 2018. 3. To re-elect Rod Birkett as a director. 4. To re-elect Martin Knight as a director. 5. To re-elect Neil Lerner as a director. 6. To re-elect Robert Rayne as a director. 7. To reappoint BDO LLP as auditor of the Company. 8. To authorise the Directors to determine the auditor’s remuneration. 9. That, the Directors be generally and unconditionally authorised in accordance with section 551 of the Companies Act 2006 (the ‘Act’) and in substitution for all existing authorities under that section, to exercise all the powers of the Company to allot shares in the Company or to grant rights to subscribe for, or to convert any security into, shares in the Company (‘Rights’) up to an aggregate nominal amount of £2,690,915 during the period commencing on the date of the passing of this resolution and expiring at the conclusion of the next Annual General Meeting of the Company or on 30 June 2020, whichever is earlier, and provided further that the Company shall be entitled before such expiry to make an offer or agreement which would or might require shares to be allotted or Rights to be granted after such expiry and the Directors shall be entitled to allot shares and grant Rights under such offer or agreement as if this authority had not expired. 10. That, subject to the passing of resolution 9 above, the Directors be empowered under section 570 of the Act to allot equity securities as defined in section 560 of the Act, as if section 561(1) of the Act did not apply to any such allotment, provided that this power shall be limited to the allotment or allotments of equity securities up to a nominal amount or (in the case of any other equity securities) giving the right to subscribe for or convert into relevant shares having a nominal amount, not exceeding in aggregate £403,637 and this power shall expire, unless previously revoked, renewed or varied, at the conclusion of the next Annual General Meeting of the Company or on 30 June 2020, whichever is earlier, except that the Company may before such expiry make offers or agreements which would or might require equity securities to be allotted after such expiry and the Directors may allot securities under such offer or agreement as if this power had not expired. 11. That the Company be generally and unconditionally authorised for the purposes of section 701 of the Act to make market purchases (within the meaning of section 693(4) of the Act) of ordinary shares of 10 pence each in the capital of the Company, provided that: a. b. c. d. the maximum number of shares which may be purchased is 12,109,118; the minimum price (exclusive of expenses) that may be paid for a share is 10 pence; the maximum price, exclusive of expenses, which may be paid for a share shall be an amount equal to 5% above the average market value for the Company’s shares for the five business days immediately preceding the day on which the share is contracted to be purchased; and the authority conferred by this resolution shall, unless previously renewed, expire at the end of the next Annual General Meeting of the Company, or on 30 June 2020, whichever is earlier, save that the Company may, before such expiry, enter into a contract for the purchase of shares which would or might be completed wholly or partly after such expiry and the Company may purchase shares under any such contract as if this authority had not expired. 12. That a general meeting of the Company (other than an annual general meeting) may be called on not less than 14 clear days’ notice. By Order of the Board AUGENTIUS CORPORATE SERVICES LIMITED COMPANY SECRETARY Registered Office Two London Bridge London SE1 9RA 29 April 2019 LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N 6611 NOTICE OF ANNUAL GENERAL MEETING NOTES: Right to attend and vote In accordance with Regulation 41 of the Uncertificated Securities Regulations 2001, only those shareholders entered in the register of members of the Company as at close of business on 30 May 2019 or, if the meeting is adjourned, at close of business two days (excluding non-working days) before the day of any adjourned meeting, shall be entitled to attend or vote at the meeting in respect of the number of shares registered in their name at that time. Changes to entries in the register of members after close of business on 30 May 2019 or, if the meeting is adjourned, after close of business two days (excluding non-working days) before the day of the adjourned meeting, shall be disregarded in determining the rights of any person to attend, speak or vote at the meeting or at any such adjournment. Voting rights At 26 April 2019, (being the latest practicable date prior to the publication of this notice) the issued share capital of the Company consisted of 80,727,450 Ordinary Shares of 10p each in the capital of the Company. Each share carries one vote. The Company held no shares in treasury, therefore the total voting rights in the Company as at 26 April 2019 were 80,727,450. Proxies A member of the Company is entitled to appoint a proxy to attend, speak and vote instead of them. The proxy need not be a member of the Company. A member may appoint more than one proxy provided that each proxy is appointed to exercise the rights attached to different shares. To be effective, the instrument appointing a proxy and any authority under which it is executed (or a copy of such authority notarially certified or certified in some other way approved by the board) must be deposited with the Company’s registrars, Link Asset Services, PXS1, 34 Beckenham Road, Beckenham, Kent BR3 4ZF, not less than 48 hours (excluding non-working days) before the time for holding the meeting or, in the event of an adjournment, not less than 48 hours (excluding non-working days) before the time of the adjournment. A form of proxy and a reply-paid envelope are enclosed. A member can also appoint a proxy online using the service provided on the Company’s full registrars’ website, www.signalshares.com, where instructions are given. In order to register their votes online, members will require their investor code, which can be found on their personalised proxy form. If a shareholder is a CREST member, they can use the electronic proxy service provided by Euroclear (see below). Forms of proxy may not be submitted via the LMS Capital website or via any email address given on the LMS Capital website. The valid appointment of a proxy will not preclude members from attending and voting in person at the meeting or any adjournment of the meeting. CREST CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for the meeting (and any adjournment(s) of the meeting) by using the procedures described in the CREST Manual. CREST personal members or other CREST sponsored members and those CREST members who have appointed a voting service provider(s) should refer to their CREST sponsors or voting service provider(s), who will be able to take the appropriate action on their behalf. In order for a proxy appointment or instruction made by means of CREST to be valid, the appropriate CREST message (a “CREST Proxy Instruction”) must be properly authenticated in accordance with Euroclear UK & Ireland Limited’s specifications and must contain the information required for such instructions, as described in the CREST Manual. The message must be transmitted so as to be received by the Company’s agent, Link Asset Services (CREST participant ID RA10), no later than 48 hours (excluding non-working days) before the time appointed for the meeting. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp applied to the message by the CREST Application Host) from which the Company’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. CREST members and, where applicable, their CREST sponsors or voting service provider(s) should note that Euroclear UK & Ireland Limited does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider(s), to procure that their CREST sponsor or voting service provider(s) take(s) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service provider(s) are referred in particular to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. The Company may treat as invalid a CREST Proxy Instruction in the the circumstances set out Uncertificated Securities Regulations 2001. in Regulation 35(5)(a) of Nominated persons Any person to whom this notice is sent who is a person nominated under section 146 of the Companies Act 2006 (the Act) to enjoy information rights (a “Nominated Person”) may have a right, under an agreement between them and the member by whom they were nominated, to be appointed (or to have someone else appointed) as a proxy for the meeting. If a Nominated Person has no such proxy appointment right or does not wish to exercise it, they may have a right, under such an LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 6622 NOTICE OF ANNUAL GENERAL MEETING The Company may not require the shareholders requesting any such website publication to pay its expenses in complying with either section 527 or 528. Where the Company is required to place a statement on a website under section 527, it must forward the statement to the Company’s auditor not later than the time when it makes the statement available on the website. The business which may be dealt with at the meeting includes any statement that the Company has been required to publish on a website under section 527. Documents available for inspection Copies of the terms of appointment of the non-executive Directors will be available for inspection at the registered office of the Company, Two London Bridge, London, SE1 9RA during normal business hours from the date of this notice until the date of the meeting and also at the meeting for 15 minutes before the meeting until its conclusion. Company’s website A copy of this notice of Annual General Meeting and any other information required by section 311A of the Act can be found in the investor relations section of the Company’s website, www.lmscapital.com. The website also contains a copy of the annual report. agreement, to give instructions to the member as to the exercise of voting rights. The statement of the above rights of the members in relation to the appointment of proxies does not apply to Nominated Persons. Those rights can only be exercised by members of the Company. Corporate representatives Any corporation which is a member may appoint one or more corporate representatives to exercise all of its powers as a member on its behalf, provided that not more than one corporate representative may exercise powers over the same share. Right to ask questions Under section 319A of the Act, shareholders (or their proxies) have the right to ask questions in relation to the business being dealt with at the meeting. However, the Company is not obliged to answer a question raised at the meeting if: (i) to do so would interfere unduly with the preparation for the meeting or involve the disclosure of confidential information; (ii) the answer has already been given on a website in the form of an answer to a question; or (iii) it is undesirable in the interests of the Company or the good order of the meeting that the question be answered. Website publication of audit concerns Under section 527 of the Act shareholders who meet the threshold requirements that are set out in that section have the right to require the Company to publish on a website a statement setting out any matter relating to: (i) the audit of the Company’s accounts (including the auditor’s report and the conduct of the audit) that are to be laid before the meeting; or (ii) any circumstances connected with the auditor of the Company ceasing to hold office since the previous meeting at which the annual report and accounts were laid in accordance with section 437 of the Act. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 O V E R V I E W G O V E R N A N C E I I F N A N C A L S T A T E M E N T S O T H E R I N F O R M A T I O N 6633 NOTICE OF ANNUAL GENERAL MEETING EXPLANATION OF BUSINESS Resolution 1: To receive the annual report and accounts Company law requires the Directors to present the annual report and accounts of the Company to shareholders in respect of each financial year. Resolution 2: To approve the remuneration report The remuneration report is set out on pages 27 to 29 of the annual report. It describes the Group’s policy on remuneration and gives details of Directors’ remuneration for the year ended 31 December 2018. The vote is advisory and does not affect the actual remuneration paid to any individual Director. Resolutions 3 to 6: To re-elect Directors In line with the recommendations set out in the UK Corporate Governance Code, all Directors will be standing down and offering themselves for re-election by shareholders at this year’s AGM. Directors’ biographical details are given on page 18 of the annual report. Resolution 7 and 8: To reappoint the auditor and authorise the Board to determine their remuneration The Company is required to appoint an auditor at each general meeting at which accounts are laid before the members, to hold office until the conclusion of the next such meeting. Resolution 7 is for members to reappoint BDO LLP as auditors of the Company and resolution 8 proposes that shareholders authorise the remuneration of the auditors. In practice, the audit committee will consider the audit fees and recommend them to the Board. to determine the Board Resolution 9: Directors’ authority to allot shares At the 2018 Annual General Meeting, the Directors were given authority to allot shares in the Company and Resolution 9 seeks to renew that authority until the conclusion of the next AGM or 30 June 2020, whichever is earlier. The resolution would give the Directors authority to allot ordinary shares, and grant rights to subscribe for or convert any security into shares in the Company, up to an aggregate nominal value of £2,690,915. This amount represents one-third of the issued ordinary share capital of the Company as at 26 April 2019, the latest practicable date prior to the publication of this document. The Directors have no present intention to allot new shares. Resolution 10: Disapplication of pre-emption rights If Directors of a Company wish to allot shares in the Company, or to sell treasury shares, for cash (other than in connection with an employee share scheme) company law requires that these shares are offered first to shareholders in proportion to their existing holdings. The purpose of Resolution 10 is to authorise the Directors to allot ordinary shares in the Company, or sell treasury shares, for cash (i) in connection with a rights issue; and, otherwise, (ii) up to a nominal value of £403,637, equivalent to 5 per cent of the total issued ordinary share capital of the Company as at 26 April 2019 without the shares first being offered to existing shareholders in proportion to their holdings. Resolution 11: Authority to buy back shares Under company law, the Company requires authorisation from shareholders if it wishes to purchase its own shares. The resolution specifies the maximum number of shares that may be purchased (approximately 15 per cent of the Company’s issued share capital) and the highest and lowest prices at which they may be bought. If the Company buys back its own shares it may cancel them immediately or hold them in treasury. Treasury shares may be sold for cash or cancelled. The Directors believe that it is desirable for the Company to have this choice as it will give flexibility in the management of its capital base. The Directors have no present intention of exercising this authority but will keep under review the Company’s potential to buy back its shares, taking into account other investment and funding opportunities. The authority will only be used if in the opinion of the Directors this would be in the best interests of shareholders generally. No dividends will be paid on, and no voting rights will be exercised in respect of, treasury shares. Resolution 12: Approval for calling of general meetings (other than AGMs) on 14 days’ notice Under company law, the Company is required to give 21 clear days’ notice for a general meeting of the Company unless shareholders approve a shorter notice period, which cannot be less than 14 clear days (AGMs must continue to be held on at least 21 clear days’ notice). Resolution 12 proposes a special resolution, and seeks shareholder approval to enable the Company to call general meetings, other than AGMs, on at least 14 clear days’ notice. The approval will be effective until the Company’s next AGM, when it is intended that a similar resolution will be proposed. The flexibility offered by this resolution will be used where, taking into account the circumstances, the Directors consider to be appropriate in relation to the business to be considered at the meeting in question and where it is thought to be to the advantage of shareholders as a whole. In order to be able to call a general meeting on less than 21 clear days’ notice, the Company must make a means of electronic voting available to all shareholders for that meeting. LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 6644 CORPORATE INFORMATION DIRECTORS Martin Knight Rod Birkett Neil Lerner The Hon Robert Rayne SECRETARY Augentius Corporate Services Limited 2 London Bridge London SE1 9RA INVESTMENT MANAGER AND AIFM Gresham House Asset Management Limited Octagon Point 5 Cheapside London EC2V 6AA Tel: 020 3837 6270 AUDITOR BDO LLP 55 Baker Street London W1U 7EU BROKERS J.P. Morgan Cazenove 25 Bank Street London E14 5JP BANKERS Barclays Bank plc 1 Churchill Place London E14 5HP REGISTRARS Link Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Tel: (UK) 0871 664 0300 (Outside UK) +44 371 664 0300 Email: enquiries@linkgroup.co.uk Calls cost 12p per minute plus your phone company’s access charge. If you are outside the United Kingdom, please call +44 371 664 0300. Calls outside the United Kingdom will be charged at the applicable international rate. Lines are open between 9.00 am and 5.30 pm, Monday to Friday excluding public holidays in England and Wales. SOLICITORS Travers Smith LLP 10 Snow Hill London EC1A 2AL COMPANY WEBSITE The Company’s website provides further information on the Company’s strategy and investments, as well as information for shareholders. www.lmscapital.com REGISTERED OFFICE 2 London Bridge London SE1 9RA Registered number 5746555 FINANCIAL CALENDAR 2019 Annual General Meeting – 22 May Half-year results – July LMS CAPITAL PLC / ANNUAL REPORT AND ACCOUNTS 2018 LMS CAPITAL PLC www.lmscapital.com 

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