Strategic Equity Capital plc · LSE:SEC
Strategic Equity Capital — Q3 2010 Earnings Presentation
40 slides from Strategic Equity Capital's earnings presentation, October 2010
Slide 1: Strategic Equity Capital plc Q3 Update including Continuation Vote Proposals
Strategic Equity Capital plc Q3 Update including Continuation Vote Proposals October 2010
Slide 2: Disclaimer
Disclaimer 2 The information in this presentation is issued by SVG Investment Managers Limited (“SVGIM”), whose registered office is at 61 Aldwych, London, WC2B 4AE. SVGIM is registered in England: No. 4493500 and is authorised and regulated by the UK Financial Services Authority. The information co
Slide 3: Contents
Contents 3 Page number Introduction 4 Q3 Update – Performance analysis 6 – Portfolio analysis 10 – Conclusion 17 Continuation Vote proposals 19 – Investment Case 20 – SEC Board proposal 33 Appendix 36
Slide 4: Introduction
Investment Managers
Slide 5: 3Q 2010 highlights
Introduction 3Q 2010 highlights 5 Investment highlights: • Net assets per share increased by 20.0% in Q3, outperforming the smaller companies index by 8.4% • Net assets increased by 27.1% over last 12 months vs. smaller companies index down 0.6% • Top holdings continued to perform well; reporting st
Slide 6: Performance Analysis
Performance Analysis
Slide 7: Performance analysis - SEC NAV performance against comparator
Performance analysis - unaudited Improving relative trend since 2008 7 SEC NAV performance against comparator September 2010 120% 98.2% 100% 78.4% 80% Performance (NAV)% 60% 40% 27.1% 27% 20.0% 25% 20% 11.6% 15.2% 5.7% 0% -0.6% -20% -22% -23% -40% 3 months 6 months 1 year 18 months 2 years 3 years S
Slide 8: Performance characteristics
Performance characteristics Improved performance with lower risk and lower volatility 8 NAV characteristics vs. FTSE Small Cap (Ex IT) 5 Year 3 Year 1 Year Alpha -3.80 -2.20 +25.60 Beta 0.74 0.75 0.73 Correlation 0.75 0.78 0.74 Sharpe ratio -0.39 -0.46 1.82 Improved risk controls and investment proc
Slide 9: Recent performance analysis
Recent performance analysis Performance attribution – 3Q 2010 9 Total return Contribution to return Company Comment Since 30 June 2010 (%) (b.p) Positive attribution (Top 5) E2V Technologies 77.2% +651 Trading statement confirms restructuring on track Mecom Group 53.2% +271 Positive interim results.
Slide 10: Portfolio Analysis
Investment Managers
Slide 11: Portfolio summary & monitoring
Portfolio summary & monitoring* Typically market leaders with a high SVG FCF yield; generally in good health 11 Company Vintage Sector SVGIM % of Upside to share Progress vs SVGIM 12 month catalyst Market leader** company price thesis FCF yield SRFII 2009 Unlisted n/a High In line n/a End of investm
Slide 12: Portfolio activity
Portfolio activity New Investments & Disposals 12 No new investments in period – selective topping up of existing immature holdings Completed exits • Intec Telecom Systems – Thesis played out. Majority of position exited in late 2009. Disposal of stub following bid approach – Strong investment for 2
Slide 13: Portfolio analysis: sector and size exposures
Portfolio analysis Sector and size exposures as at 30 September 2010 13 Sector 4 9 1 1 Unlisted investments 16.0% 1 Size analysis 8 2 Electronics 16.0% 3 1 < £50m 30.5% 7 3 Industrials 13.4% 2 £50m - £100m 27.2% 2 4 Support services 12.8% 3 £100m - £300m 42.3% 6 5 Media 11.3% 4 > £300m 0.0% 6 Techno
Slide 14: Portfolio analysis: key valuation and risk metrics
Portfolio analysis Key valuation and risk metrics as at 30th September 2010 14 Weighted average Weighted median FTSE UK Small Cap x IT Number of securities 19 19 163 Market Capitalisation (£m) 158 123 167 Consensus EV/EBITDA FY1 6.0X 5.2X 6.1x Consensus Price Earnings Hist 19.8X 20.2X 12.3X Consensu
Slide 15: Engagement initiatives with portfolio companies during Q3
Portfolio analysis Engagement initiatives with portfolio companies during Q3 15 • Discussions on new incentive scheme to align management and shareholder interests for top 6 holding • Working with company advisors to upgrade non-Executive Board of a portfolio company • Introduced specialist cost sav
Slide 16: Portfolio Outlook
Portfolio Outlook Outlook for UK Market 16 All four drivers of equity returns present in 2010: • Earnings being upgraded at fastest rate in 5 years • Low growth environment leads to enforced degearing • Cash flow yield of fund implies significant room for re-rating and degearing • Weak Sterling and
Slide 17: Conclusion
Investment Managers
Slide 18: Conclusion
Conclusion Q2 shows continuing improving performance trend Net assets per share decreased by 3.2%, outperforming the smaller companies index by 2.1%*. 18 • Q3 shows continuing improving performance trend • Net assets per share increased by 20.0%, outperforming the smaller companies index by 8.4%* •
Slide 19: Continuation Vote proposals
Continuation Vote proposals
Slide 20: Investment Case
Investment Case Continuation Vote
Slide 21: Executive Summary
Executive Summary 21 • The current market environment is the most favourable for the SEC since inception • Process refined in early 2009; absolute and relative performance consistently strong thereafter • Portfolio remains significantly undervalued both on an absolute and a relative basis • Liquidat
Slide 22: Key factors considered by SEC Board
Key factors considered by SEC Board 22 • Strength of investment case – Current market environment is most favourable for SEC since its inception – SEC's portfolio remains significantly undervalued, both on absolute and relative bases – SVGIM is seeing significant numbers of attractive new investment
Slide 23: Market environment is highly favourable for SEC
Market environment is highly favourable for SEC 23 • SEC remains a small fish in a big pond – In target space*, SEC and other SVGIM products account for <3% of companies and <0.2% by value • Smaller companies starved of financing – Credit availability still restricted – Equity fundraisings hard to a
Slide 24: Investment process has been improved
Investment process has been improved…. Increased emphasis on risk management 24 • 4 investments made in 2006 had a disproportionately negative impact on SEC performance • Complete review of risk management and investment process in early 2009 clearly indentified what went wrong: – Over confidence in
Slide 25: As has investment focus
….as has investment focus Strict criteria for inclusion in the portfolio 25 Qualitative - Niche market leaders Quality of underlying asset - Orderly end markets, with some growth “A” “B” “C” - Sound business model/uniqueness - Above average Board and governance - Overseas earnings Overvalued - High
Slide 26: Refined investment process delivering strong returns
Refined investment process delivering strong returns New holdings have typically performed well 26 Initial Value on IRR Company Cost Uplift Outperformance since purchase Comment purchase 30/9/10 % FY sales growth +15% organic Wins largest ever deal beating Allocate Software Dec-09 55p 73p 1.3x 41% +
Slide 27: Investment pipeline remains strong
Investment pipeline remains strong We are considering 5-6 new investment ideas per week – can be selective 27 Secondary fundraisings Market purchases Primary fundraisings Corporate Growth Recovery engagement IPO Cash shell capital finance campaigns - Strong, getting - Good business, - Follow/work wi
Slide 28: Portfolio characteristics improved in parallel with NAV growth
…and have improved in parallel with NAV growth Reasonably priced cashflow combined with earnings growth 28 SEC Characteristics SEC Characteristics 22 2.5 20 2 18 16 1.5 14 12 1 10 0.5 8 6 0 Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul 10 Aug Sep Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul 10 Aug Sep
Slide 29: Upside to SEC NAV remains significant
We believe upside to SEC NAV remains significant 29 • Based on our private equity valuation methodologies and broker target prices, the existing portfolio is undervalued 1.40 1.25 1.20 1.00 0.99 Earnings growth and de-gearing of 0.80 investments will continue to grow 0.80 the portfolio value from cu
Slide 30: Portfolio maturity augurs well for realisations
Portfolio maturity augurs well for realisations 30 SEC portfolio by vintage Pence per share of current value* •Typical 3 year hold in “normal” markets -> c.33% portfolio churn p.a. 35 •Credit crunch has lengthened this in 30 some cases 25 20 •Hard work and riskiest stages of the investment thesis ar
Slide 31: Outlook for smaller companies investing is attractive
Outlook for smaller companies investing is attractive 31 Smaller companies index - Rolling 3 year returns 140% 120% 100% Despite the recent rally, 80% 60% smaller company returns 40% remain substantially below 20% 0% historic levels and are likely -20% to increase -40% -60% Jan 89 Oct 89 Jan 92 Oct
Slide 32: Conclusion
Conclusion 32 • The current market environment is the most favourable for the SEC since inception • Process refined in early 2009; Absolute and relative performance consistently strong thereafter • Portfolio remains significantly undervalued both on an absolute and a relative basis • Liquidating the
Slide 33: SEC Board's proposals
SEC Board’s proposals
Slide 34: Continuation of SEC with SVGIM on revised fee arrangements
Continuation of SEC with SVGIM as investment manager, but on revised fee arrangements 34 Proposal • Management fee - to become lower of – Current basis (1% p.a. of NAV less aggregate value of SRF2 investment and undrawn commitment) – 1% p.a. market cap • Performance fee - current fee absolute based
Slide 35: Introduction of annual continuation votes
Introduction of annual continuation votes 35 • Proposal – Ordinary resolution to be proposed at each AGM – "Business as usual" prior to each vote – No compensation payable to SVGIM on termination if voted down • Benefits – Regular and frequent opportunities for shareholders to assess SEC's future –
Slide 36: Appendix
Investment Managers
Slide 37: Investment Team
Investment Team – average of 18 years direct investment experience 37 Adam Steiner Stuart Widdowson Jonathan Morgan CEO, Strategic Investment Committee Investment Manager, member & Director, SVGIM SVGIM SVGIM Previous Experience – Previous Experience – Previous Experience – Director, UBS Global Asso
Slide 38: Why use private equity techniques?
Why use private equity techniques? We focus on all of the four key drivers of shareholder value creation 38 Main focus of most Main focus of most private Public equity investors equity investors Earnings Corporate Growth activity De- Re-rating gearing We aim to combine the best elements of public an
Slide 39: How we use Private Equity techniques in public markets
How we use Private Equity techniques in public markets SVGIM’s investment process is clearly differentiated ….Continued 39 Traditional Fund Managers SVGIM Private Equity •Investment objective • Outperform an index • Positive IRR >15% • Positive IRR >25% •Investment Horizon • Typically quarterly • Ty
Slide 40: How we use Private Equity techniques in public markets (continued)
How we use Private Equity techniques in public markets ….Continued 40 Traditional Fund Managers SVGIM Private Equity Portfolio construction • Diversified • Concentrated • Concentrated • Based around an index • Unconstrained by sector • Unconstrained by sector Shareholder responsibility • Seen as cos
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