Wrap Text
Unaudited condensed interim results for the six months ended 31 December 2016
EPE CAPITAL PARTNERS LTD ("ETHOS CAPITAL" OR "THE COMPANY")
INCORPORATED IN THE REPUBLIC OF MAURITIUS
REGISTRATION NUMBER: C138883 C1/GBL
ISIN: MU0522S00005
SHARE CODE: EPE
UNAUDITED CONDENSED INTERIM RESULTS FOR THE SIX MONTHS
ENDED 31 DECEMBER 2016
EPE Capital Partners Ltd ("Ethos Capital" or "the Company") is registered and incorporated in Mauritius as a private
company under the Mauritian Companies Act. The Company holds a Category One Business License under the laws of
Mauritius. On 5 August 2016, Ethos Capital listed its A Ordinary shares on the JSE, giving public shareholders access to
private equity investments. Ethos Capital offers shareholders long-term capital appreciation by indirectly investing in a
diversified portfolio of unlisted private equity type investments that are managed by Ethos Private Equity Pty Ltd ("Ethos").
KEY DEVELOPMENTS
In the period, Ethos Capital made a R550m commitment (will increase to R900m at final close) to Ethos Mid Market Fund I
and acquired a R138m commitment in Ethos Fund VI through a secondary transaction. There is currently an active pipeline
of new and follow-on transactions in both of these Funds. In addition, at the March 2017 Board meeting, the Board
approved potential Direct Investments totalling R500m; however, there can be no certainty that these transactions will be
completed.
The Ethos Capital Board is committed to a policy of enhancing long-term shareholder value and, as part of this strategy, the
Board has taken a decision that it may elect to repurchase Ethos Capital shares should the volume weighted price per share
trade at a larger than 10% discount to the prevailing total NAV per share for a reasonably sustained period of time. This
does not represent a commitment by the Company to acquire shares but provides clarity on the principles that the Board
will adopt towards share repurchases. Any repurchase strategy will take into account Ethos Capital's liquidity requirements
and fund commitments and will only initially be implemented until Ethos Capital has invested 75% of the proceeds raised in
the IPO.
INVESTMENTS MADE INTO ETHOS FUNDS (R'000)
Fund Name Vintage Commitment Valuation
Ethos Mid Market Fund I ("MMF1") 2016 550,000 292,142
Ethos Fund VI ("Fund VI") 2011 138,000 48,033
688,000 340,175
ANALYSIS OF VALUATION, DEBT MULTIPLES AND GROWTH OF PORTFOLIO COMPANIES
6-months growth in aggregate Sales* 5.2%
6-months growth in aggregate EBITDA* 6.6%
Average debt multiple 2.8x
Average EBITDA valuation multiple** 6.9x
*Based on last-twelve-months ("LTM") results as at June 2016 and Dec 2016
**6.0x excluding Eaton Towers
OPERATIONAL
HIGHLIGHTS
R1.8bn raised on 5th
August 2016
R9.97 NAVPS net of listing
expenses, at 31
December 2016
R688 million in commitments
(38% of NAV) to Ethos Funds
R344 million invested during
(19% of NAV) the period
THE ADVISOR: ETHOS
Ethos acts as Ethos Capital's Investment Advisor. In
addition, Ethos is the Manager of the Funds that
Ethos Capital invests in. Ethos is an investment firm
that manages investments in private equity and credit
strategies in South Africa and in sub-Saharan Africa.
Ethos has a 32 year history and an unparalleled
record of successful, sustainable investing across
economic and political cycles that delivered 94
realised investments at a 36.8% gross IRR and a 3.0x
multiple of cost.
Currently, Ethos comprises two primary investment
strategies: private equity; and mezzanine and credit
funding. The core private equity business is divided
into large-sized and mid-market strategies.
Ethos has a proven investment strategy, including:
- positioning itself as the lead investor on
transactions with control or joint control stakes in
the majority of its deals;
- having an understanding of, and focus on, sub-
Saharan Africa, predominantly driven through
expansion of its investee companies;
- implementing a theme-led approach with
thorough evaluation of economic drivers and
industry fundamentals; and
- significant hands-on involvement in portfolio
companies, leveraging its Value Add capability to
optimise financial and operational performance of
its investment companies.
WHY ETHOS?
Ethos was instrumental in establishing the private
equity asset class in the region, concluding the first
buyout (1984); first public-to-private deal (1992);
first BEE deal (1994); and, first international fund
raising (1996).
Ethos is currently investing Ethos Fund VI with
c.R8.6bn in commitments; one of the largest pools of
third-party capital in Africa.
The firm specialises in control and joint-control
acquisitions and expansion capital, in medium-to-
large businesses. To date, Ethos has made 104
investments, investing over R10.5 billion over this
period and exited 94.
Ethos seeks to leverage its understanding of the
South African and sub-Saharan African markets to target
companies best positioned to benefit from the region's
unique growth dynamics. As an active investor, it
capitalises on its experience of owning businesses
across a variety of investment, economic and political
cycles to maximise value post-investment and generate
superior returns.
Being independently owned and managed by its
investment professionals, Ethos' interests are aligned
with stakeholders. The Ethos partnership group has a
combined 200 years of private equity experience, of
which 177 have been at Ethos.
Growth is a central principle of Ethos' strategy: value
is added by actively transforming the strategy,
operations and finances of investee businesses,
making them "best-in-class". Through pioneering
thought leadership, creativity, and innovation, Ethos
has developed a long track record of sustainable,
superior investor return.
MACRO ECONOMIC FACTORS
South Africa's economic growth rate has deteriorated
in recent years, primarily due to sluggish consumer
spending (rising interest rates, muted employment
growth, high indebtedness and depressed confidence
levels), a weak performance from mining and
manufacturing and a prolonged drought.
However, the outlook has improved in recent months
and GDP growth expectations have started to
increase. The South African Reserve Bank is
forecasting a recovery to 1.1% in 2017 and 1.6% in
2018, driven by better contributions from agriculture,
mining and household consumption. The end of the
drought, combined with rand strength in the last 12
months, is likely to have a meaningful downward
impact on food inflation with positive implications for
interest rates and consumers' spending power.
There is still a risk of a South African country credit
rating downgrade to sub-investment grade later this
year, which would result in higher borrowing costs,
capital outflows and pressure on the exchange rate
and economic activity. The major rating agencies
remain concerned about policy uncertainty and
whether the government will deliver on its public
statements about implementing structural reforms to
stimulate growth and encouraging greater private
sector participation in sectors dominated by state-
owned enterprises.
The rating agencies acknowledged that last month's
budget speech by the Finance Minister was
progressive in emphasising transformation
imperatives while demonstrating ongoing
commitment to fiscal consolidation and stabilising
government debt.
Prospects for global growth have remained steady
over the last quarter. The IMF's GDP growth forecasts
of 3.4% in 2017 and 3.7% in 2018 have not changed.
The outlook is more subdued for advanced economies
than emerging markets as the consequences of both
Brexit and Donald Trump's victory in the US
presidential election are heightened uncertainty
about long-term trade agreements and more
inwardly-focused policies, both of which are likely to
weigh on confidence and investment for some time.
The outlook for sub-Saharan Africa has also been
stable since the last quarter – the IMF is forecasting
GDP growth of 2.8% in 2017 and 3.7% in 2018.
UNAUDITED CONDENSED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2016
Notes R'000
ASSETS
Non-current assets 340,175
Unlisted investments at fair value 3 340,175
Current assets 1,456,295
Trade and other receivables 4 24,156
Money market investments at fair value 5 1,421,383
Cash and cash equivalents 10,756
TOTAL ASSETS 1,796,470
EQUITY AND LIABILITIES
Ordinary shareholders' equity 1,794,230
Share capital 6 1,765,359
Retained earnings 28,871
Total Equity 1,794,230
Current liabilities 2,240
Trade and other payables 7 2,240
Total Liabilities 2,240
TOTAL EQUITY AND LIABILITIES 1,796,470
NET ASSET VALUE 1,794,230
Net Asset Value per share (rand) 14 9,97
Attributable shares in issue at end of period ('000) 14 180,000
No comparative financial information as at 30 June 2016 has been presented as the
amounts are Rnil, given the current presentation format which has been rounded to the
nearest thousand - refer note 18 of the Notes to the Condensed Financial Statements.
UNAUDITED CONDENSED STATEMENT OF COMPREHENSIVE INCOME FOR THE SIX
MONTHS ENDED 31 DECEMBER 2016
Notes R'000
Income
Investment income 8 50,627
Net fair value losses 9 (8,971)
Total income 41,656
Expenses
Investment services, management and administration fees 10 (1,693)
Legal and consultancy fees 10 (5,938)
Other operating expenses 10 (3,803)
Total expenses (11,434)
Profit before taxation 30,222
Taxation 11 (1,351)
Profit for the period 28,871
Other comprehensive income for the period -
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD 28,871
Earnings per share (rand) 14
Basic and diluted earnings per share 0,16
Basic and diluted headline earnings per share 0,16
No comparative financial information as at 30 June 2016 has been presented as the Company
didn't have any trading results in the prior financial period.
UNAUDITED CONDENSED STATEMENT OF CHANGES IN EQUITY FOR THE SIX
MONTHS ENDED 31 DECEMBER 2016
Notes R'000
Proceeds from shares issued 6 1,800,075
Capitalisation of share issue expenses 6 (34,716)
Total comprehensive income for the period 28,871
BALANCE AS AT END OF PERIOD 1,794,230
No comparative financial information as at 30 June 2016 has been presented as no
Statement of Changes in Equity was presented in the 30 June 2016 financial statements.
UNAUDITED CONDENSED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS
ENDED 31 DECEMBER 2016
Notes R'000
Cash generated from operating activities before
investment transactions 13 565
Net cash utilised in investments (1,755,168)
Cash utilised in operating activities (1,754,603)
Net cash generated from financing activities 1,765,359
Net increase in cash and cash equivalents 10,756
Cash and cash equivalents at the beginning of the period -
TOTAL CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 10,756
No comparative financial information as at 30 June 2016 has been presented as the amounts
are Rnil, given the current presentation format which has been rounded to the nearest
thousand - refer note 18 of the Notes to the Condensed Financial Statements.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS FOR
THE SIX MONTHS ENDED 31 DECEMBER 2016
1. BASIS OF PREPARATION
These Condensed Financial Statements have been prepared in accordance
with: the recognition and measurement principles of International Financial
Reporting Standards ("IFRS") as issued by the International Accounting Standards
Board, including IAS 34 Interim Financial Reporting; the SAICA Financial Reporting
Guides, as issued by the Accounting Practices Committee; the Financial Reporting
Pronouncements, as issued by the Financial Reporting Standards Council; the Listings
Requirements of the JSE; and the requirements of the Mauritius Companies Act 2001
in so far as applicable to Category 1 Global Business Licensed companies.
The accounting policies applied in the preparation of these Condensed Financial
Statements are, where applicable to the prior financial year, consistent in all
material respects with those used in the prior financial year, except for changes
required by the mandatory adoption of new and revised IFRS. None of the new
accounting standards which became effective in the current financial period had a
significant impact on the Company's results.
The Condensed Financial Statements have been prepared under the historical cost basis
except for financial instruments and investments which are measured at fair value.
These Condensed Financial Statements were compiled under the supervision of the
Chief Financial Officer, Mr Craig Dreyer, CA (SA), and were not reviewed or audited
by the group's external auditor, Deloitte & Touche. They were approved by the Board
on 15 March 2017.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Investment strategy and structure
The Company obtains exposure to and has indirect interests in a diversified pool of
unquoted investments ("Portfolio Companies") by investing into Fund Limited
Partnerships ("Funds"), managed by Ethos Private Equity Pty Ltd ("Ethos"), that
typically have a ten-year life-cycle. The Company becomes a Limited Partner of the
Fund and the investments are made through commitments into the Funds.
The investments are categorised as follows:
- Primary - initial commitments made into Funds during a fund-raising process.
- Secondary - subsequent acquisitions of existing commitments from a Limited
Partner.
- Direct - acquisition of interests in underlying Portfolio Companies alongside the
relevant Funds where the Funds require co-investors. These will be in addition to
the Funds' participation via the Limited Partners' commitments and the
Company's participation might also be structured as an investment into a Fund,
which will then invest directly into the Portfolio Company.
In addition to the above investment strategy, cash that is surplus to investments and
working capital needs, is invested in a portfolio of low-risk and liquid debt
instruments, categorised as Temporary Investments. These Temporary Investments
are held at fair value and any discount / premium to the par value, is amortised over
the residual hold period of the investment and included as interest income in the
Statement of Comprehensive Income.
As noted above, the Company's core unlisted investments are made via commitments
into Funds. This commitment is not funded upfront when the commitment is made,
but is drawn-down via cash funding request ("capital calls") over the life of the Fund.
The Fund has an investment period which typically expires five years after the final
Fund closing date, or earlier if a successor Fund commences its investment period.
The purpose of the capital calls during the investment period is to fund new and
follow-on investments into Portfolio Companies, and to cover any operating expenses
of the Fund. After the investment period ("Realisation period"), capital calls will be
requested to fund follow-on investments into existing Portfolio Companies, operating
expenses of the Fund and any other potential obligations of the Fund. Portfolio
Companies could be realised, partially or in full, during either of the above periods
which will result in cash receipts by the Company. Depending on the nature of the
realisation proceeds, the receipts will classified as capital distributions and/or
income distributions.
As per note 2(c) below, the Company determines the fair value of the Funds, based
on the Net Asset Value ("NAV") of each Fund, and will recognise the unrealised
appreciation/depreciation in the financial statements. The NAV is derived from, in
addition to the impact of the capital calls and capital and/or income distributions,
the fair value assessment of the Portfolio Companies, cash resources and income
(accrued or undistributed) and expenditure (incurred or accrued) of the Fund.
The Company's policies in respect of the treatment of the investment in the Funds
through capital calls, the fair value movements on the Funds' NAV and the
distributions are as follows:
Investment capital calls - amount is included in the cost of unlisted investments at
fair value.
Expenses capital calls - amount is included within expenses and, to the extent that
information is available, allocated to the specific expense category.
Capital distributions - the amount relating to a return of cost of investment is
credited to the cost of unlisted investments at fair value and the amount relating to
gains or losses is recognised as such in the Statement of Comprehensive Income.
Income distributions - amount is recognised as investment income in the Statement of
Comprehensive Income, per the below revenue recognition policy.
Unrealised fair value appreciation/depreciation - any amount that relates to income or
expenses of the Fund, to the extent that information is available to determine the
classification, will be treated as such in the Statement of Comprehensive Income and
recognised as accrued income (see revenue recognition policy below) or expenditure
on the Statement of Financial Position; any other amount, or where the
classification of the movements is not available, will be treated as a capital
unrealised fair value adjustment in the Statement of Comprehensive Income and
included within unlisted investments at fair value on the Statement of Financial
Position.
(b) Revenue recognition
Interest income is recognised on a time proportion basis, net of any anticipated
impairments, and is included as investment income in the Statement of
Comprehensive Income. Any discount to par achieved on money market instruments
is amortised to cost over the maturity period of the investment and recognised as
interest income, whereas any premium paid to par on such investments is amortised
against the cost of the investment over its residual hold period and recognised as a
charge against interest income.
Dividend income is recognised when the right to receive payment is established and
is included as investment income in the Statement of Comprehensive Income.
(c) Critical judgement and accounting estimates: valuation of investments
The basis of valuation of all investments is fair value. Fair value is determined as of
the end of each quarter. All investments are valued in accordance with the
International Private Equity and Venture Capital ("IPEV") Valuation Guidelines.
As stated above, the Company's investments comprise commitments into Funds,
which in turn invests in Portfolio Companies in which the Company has an indirect
interest.
The General Partners of these Funds provide quarterly NAV statements as calculated
from the Investment Advisor's valuations, which the Directors of the Company use to
determine the fair value of a Fund. The valuations of the Investment Advisor is
audited every six months by their auditors.
The Investment Advisor determines the individual fair value of each Fund's underlying
Portfolio Companies at the end of each quarter and is approved by its Board of
Advisors twice per year. The policy of the Investment Advisor to determine the fair
value of the Portfolio Companies, which is in accordance with the IPEV Valuation
Guidelines, is noted below.
Initially, and for a limited period after the acquisition date of an investment, the
'Price of Recent Investment' methodology is generally used. At each reporting date
after the initial acquisition date, an assessment is made as to whether subsequent
changes or events necessitate a change in the fair value of the investment. If so, an
'Earnings multiple' methodology is generally applied.
In terms of the 'Earnings multiple' methodology, an appropriate and reasonable
valuation multiple is applied to the maintainable earnings of the investment. For
each investment an 'Earnings before interest tax depreciation amortisation'
("EBITDA") or an 'Earnings before interest after tax' ("EBIAT") multiple is generally
considered appropriate to determine the enterprise value for the investment. In
deriving a reasonable valuation multiple, the Investment Advisor develops a
benchmark multiple, generally with reference to the multiples of comparable
publicly traded companies adjusted for finance costs (i.e. multiples have been de-
geared). The benchmark multiple is further adjusted for points of difference
relating to risk profile (geographic, operational, financial, and liquidity risk factors)
and growth prospects.
Maintainable earnings are typically based on historical earnings figures that are
considered to be appropriate and relevant. Once an enterprise value has been
determined, it is adjusted for surplus assets, excess liabilities, and financial
instruments ranking ahead of the Fund's investments. The resultant attributable
enterprise value is then apportioned to all investors, included in the Fund's
investments, based on their respective participation in each underlying security of
the investment.
Although the best judgement is used in determining the fair value of these
investments, there are inherent limitations in any valuation technique involving
securities of the type in which the Funds invests. Therefore, the fair values
presented herein may not be indicative of the amount which the Funds could realise
in a current transaction.
(d) Foreign currency transactions
Functional and presentation currency
Items included in the financial statements of the Company are measured using the
currency of the primary economic environment in which the entity operates
("functional currency"). The Condensed Financial Statements are presented in
ZAR, the Company's functional currency.
Transactions and balances
Foreign currency transactions are translated into the measurement currency using
the exchange rates prevailing at the dates of the transactions. Foreign exchange
gains and losses resulting from the settlement of such transactions and from the
translation of monetary assets and liabilities outstanding at reporting period are
recognised in profit or loss.
Monetary assets and liabilities expressed in foreign currencies at the end of the
reporting period are translated into ZAR at the closing rate ruling at that date.
3. UNLISTED INVESTMENTS AT FAIR VALUE
R'000
Investments held at fair value through profit and loss:
Unlisted investment in Ethos Mid Market Fund I (B) Limited
Partnership 292,142
Unlisted investment in Ethos VI (Jersey), L.P. 48,033
340,175
At 31 December 2016:
At cost 344,272
Unrealised capital appreciation (4,294)
Accrued income 197
340,175
On 17 November 2016, the Company made a R550 million commitment to the Ethos
Mid Market Fund, and the first investment was made early in December 2016. The
Company also acquired a R138 million commitment in Ethos Fund VI on 21 November
2016 through a secondary transaction.
Reconciliation of movements:
Capital Accrued
Cost appreciation income Total
R'000 R'000 R'000 R'000
Acquisitions 349,160 - - 349,160
Proceeds on realisations (4,888) - - (4,888)
Revaluation - (4,294) 197 (4,097)
Balance as at 31 December
2016 344,272 (4,294) 197 340,175
4. TRADE AND OTHER RECEIVABLES
R'000
Accrued income on money market investments 22,569
Prepayments 660
Other receivables 927
24,156
The carrying amount of trade and other receivables approximates its fair value.
5. MONEY MARKET INVESTMENTS
R'000
Investments held at fair value through profit and loss:
Floating rate notes 552,433
Negotiable certificates of deposit 383,368
Treasury bills 426,858
Cash and call accounts 58,724
1,421,383
At 31 December 2016:
At cost 1,420,851
Unrealised appreciation 532
1,421,383
The money market investments, or Temporary Investments as noted above, are
managed by Ashburton Fund Managers Proprietary Limited ("Ashburton") under a
discretionary investment management agreement dated 28 July 2016. These
investments are currently invested in money market instruments that consist of a
combination of floating rate notes, negotiable certificates of deposit ("NCD") and
treasury bills.
Capital
Reconciliation of movements: Cost appreciation Total
R'000 R'000 R'000
Acquisitions 2,194,807 - 2,194,807
Realisations and maturities (788,786) - (788,786)
Proceeds from realisations and
maturities (788,797) - (788,797)
Profit on realisations 11 - 11
Revaluation - 532 532
Amortisation of net discount (refer
to note 2(b)) 14,830 - 14,830
Balance as at 31 December 2016 1,420,851 532 1,421,383
6. SHARE CAPITAL
Number R'000
Authorised
A Ordinary shares 187,500 000
B Ordinary shares 10,000
187,510,000
Issued
A Ordinary shares issued at R10.00 per share 180,000,000 1,800,000
A Ordinary shares issued at R0.01 per share 7,500,000 75
B Ordinary shares issued at R0.01 per share 10,000 -
Less: Share issue expenses (34,716)
Total issued share capital 187,510 000 1,765,359
On 5 August 2016, 180,000,000 and 7,500,000 A Ordinary shares, ranking pari passu,
were issued at an issue price per share of R10.00 and R0.01 respectively. The A
Ordinary shares were admitted to listing and trading on the Johannesburg Stock
Exchange ("JSE") at that date. Each A Ordinary shares entitles the holder to,
including other rights as stated in the Company's constitution, participate
proportionately in any distribution made by the Company in respect of the A Ordinary
shares and to receive a proportion of the total net assets of the Company remaining
upon its liquidation.
Incremental costs that are directly attributable to the issue of all shares, amounting
to R34,716,000, were capitalised and recognised as a deduction from share capital.
At the same time, 10,000 B shares were issued to the Trustees of the Ethos Private
Equity Allocation Trust ("the EPE Trust"), at an issue price of R0.01 per share; these
shares were not admitted to the JSE for listing and trading. The B Shares are a
mechanism to effect payment of the Annual Performance Participation to the EPE
Trust in the form of a cash dividend on the B Shares, following the Notional
Encumbrance Termination Date. The B shares therefore entitles the holders to,
including other rights as stated in the Company's constitution, participate
proportionately in any distribution made by the Company in respect of the B shares
and, upon the A Ordinary shares issued to the EPE Trust ceasing to be encumbered,
to receive out of the profits of the Company an annual dividend that collectively
represents the Annual Performance Participation.
The EPE Trust also subscribed to the 7,500,000 A Ordinary shares mentioned above;
as per the subscription agreement (see note 16), these shares are notionally
encumbered until released from such notional encumbrance. Whilst encumbered,
the EPE Trust granted the Company the irrevocable right and option to acquire the
notionally encumbered A Ordinary shares at a repurchase price of R0.01 per share,
being each share's fair value. The final repurchase date to exercise this right is 30
June 2022.
The Annual Notional Performance Participation that the EPE Trust will notionally
participate in, will be calculated annually based on the Growth in Invested NAV. To
the extent that the Growth in Invested NAV exceeds the performance hurdle of 10%
and based on the growth achieved and the current share price, a number of the
encumbered A Ordinary shares will be released from the notional encumbrance at
the end of each financial year until all encumbered shares have been released ("the
Notional Encumbrance Termination Date"). If any encumbered shares remain at the
repurchase date of 30 June 2022, the Company will be entitled, upon written notice
to the EPE Trust, to acquire the remaining encumbered shares as noted above and an
application will be made to the JSE for the delisting of the repurchased shares once
they have been repurchased.
7. TRADE AND OTHER PAYABLES
R'000
Administration fee payable 587
Trade payables 302
Provision for income tax 1,351
2,240
The carrying amount of trade and other payables approximates its fair value.
8. INVESTMENT INCOME
R'000
Ethos Funds 811
Money market investments 33,656
Cash and cash equivalents 1,330
35,797
Amortisation of net discount (see note 2(b)) 14,830
14,830
Total Investment income 50,627
Consisting of:
Mauritian interest 90
Foreign interest 49,777
Foreign dividends 760
50,627
9. NET FAIR VALUE GAINS/(LOSSES)
R'000
Unrealised
Fair value adjustments on unlisted investments (4,294)
Fair value adjustments on money market instruments 532
(3,762)
Realised
Profit on realisation of money market instruments 11
Foreign exchange loss on conversion of cash and cash equivalents (5,220)
(5,209)
Net fair value losses (8,971)
10. TOTAL EXPENSES
10.1 Investment services, management and administration
fees
Recurring
fees
R'000
Administration fee - Ethos 736
Administration fee - Ashburton 957
1,693
Refer to note 16 for information on how the fees are calculated.
10.2 Legal and consultancy fees
Non-recurring Recurring
fees fees Total
R'000 R'000 R'000
Legal and consultancy fees 4,001 506 4,507
Fund formation fees 1,431 - 1,431
5,432 506 5,938
10.3 Other operating expenses
Non-
recurring Recurring
fees fees Total
R'000 R'000 R'000
Company secretarial and other
administration fees (refer to note
16) 344 456 800
Directors' fees - 1,526 1,526
Auditor's fees - 473 473
Insurance costs - 191 191
Sponsor fees - 81 81
Other expenses - 732 732
344 3,459 3,803
11. TAXATION
R'000
Mauritius income tax
- Current year tax charge 1,351
1,351
The Company holds a Category 1 Global Business Licence, for the purpose of the
Financial Services Act 2007. It was registered in Mauritius as a private company
limited by shares on 26 May 2016 and is liable to income tax at a rate of 15%.
However, the Company is entitled to a tax credit equivalent to the higher of the
actual foreign tax withheld and 80% of the Mauritian tax on its foreign source
income, thus leaving an effective tax rate of 3%. The tax credit amount is limited to
80% of the net income tax payable pre the tax credit.
Reconciliation of effective tax rate:
R'000
Profit before taxation 30 222
Mauritian standard tax rate at 15% 4,533
Adjusted for:
Non-taxable local interest income (14)
Non-recurring disallowed expenditure in relation to the
formation of the Company 652
- Legal and consultancy fees 600
- Other expenses 52
Non-recurring disallowed fund formation fees 215
Disallowed foreign exchange losses 25
Non-taxable realised fair value losses 781
Non-taxable unrealised fair value losses 564
80% tax credit on foreign investment income (5,405)
Total adjustments (3,182)
Current year tax charge 1,351
12. CAPITAL COMMITMENTS AND CONTINGENT LIABILITIES
Capital commitments Original Outstanding
R'000 R'000
Unlisted investment in Ethos Mid Market Fund I
(B) Partnership 550,000 255,442
Unlisted investment in Ethos Fund VI (Jersey),
L.P. 138,000 81,815
688,000 337,257
Contingent liabilities
FirstRand Bank Limited (acting through its Rand Merchant Bank
division) 106,369
106,369
Total Commitments and Contingent Liabilities 443,626
On 17 November 2016, the first closing date of the Ethos Mid Market Fund, the
Company made a R550 million commitment to the above Fund. The Fund has a term
of ten years from the final close date, which is expected to be in mid 2017 and its
investment period will expire on the fifth anniversary of such final closing date.
The Company acquired a R138 million commitment in Ethos Fund VI on 21 November
2016 through a secondary transaction into the above Fund. This Fund has an end-
date of December 2022 and its investment period is due to expire in December 2017.
Included in the current outstanding commitments are unfunded guarantees made by
the Fund on behalf of the Company totalling R21,657,000.
The Company has guaranteed and provided its investments as security against a R105
million five-year non-recourse loan facility issued by FirstRand Bank Limited to Black
Hawk Private Equity Proprietary Limited ("Black Hawk"), expiring on 29 July 2021.
The proceeds of the facility, signed on 28 July 2016, were used by Black Hawk to
subscribe to R105 million of A Ordinary shares on behalf of the two non-executive
directors that are members of the Company's investment committee. The above
amount represents the current outstanding balance on the facility, including any
accrued interest charges to 31 December 2016.
13. NOTES TO THE CONDENSED STATEMENT OF CASH FLOWS
R'000
Cash generated from operating activities before investment
transactions:
Profit before taxation 30,222
Add: Unrealised fair value movements 3,762
Less: Accrued income on unlisted investments (197)
Profit on realisation of unlisted investments (11)
33,776
Changes in working capital (18,381)
Increase in trade and other receivables (19,270)
Increase in trade and other payables 889
Amortisation of money market investments (14,830)
565
14. EARNINGS AND NET ASSET VALUE PER SHARE
As set out in note 6, the Company issued 187,500,000 A Ordinary shares, 7,500,000 of
which were issued to the EPE Trust and are currently notionally encumbered. Until
these shares are released from their encumbrance, the Company has an irrevocable
right and option to acquire the notionally encumbered A Ordinary shares at a
repurchase price of R0.01 per share, being each share's fair value, and then to apply
for the delisting of such shares acquired. The holder of these shares are therefore
restricted from selling the shares to any other party than the Company, and
obtaining or sharing in any economic benefit derived from the shares, until they are
released from their encumbrance.
Given the restrictions that the encumbered shares place on the holder and the
probability of the shares being delisted unless certain contingent conditions are met,
they are excluded from the calculations to determine the earnings, headline earnings
and net asset value per share respectively. The calculations below therefore reflect
the earnings, headline earnings and net asset value attributable to the unrestricted A
ordinary shareholders.
14.1 Earnings per share
R'000
Total comprehensive income attributable to ordinary shareholders 28,871
'000
Number of shares in issue during the period 187,500
Less: Notionally encumbered shares (7,500)
Number of attributable shares in issue during the period 180,000
Basic and diluted earnings per share (rand) 0,16
Basic and diluted headline earnings per share (rand) 0,16
14.2 Net Asset Value per share
R'000
Net assets 1,794,230
'000
Number of shares in issue at end of period 187,500
Less: Notionally encumbered shares (7,500)
Number of attributable shares in issue at end of period 180,000
Attributable net asset value per share (rand) 9,97
15. FINANCIAL RISK FACTORS AND INSTRUMENTS
15.1 Overview
This note presents information about the Company's exposure to each of the below
mentioned risks, the Company's objectives, policies and processes for measuring
and managing risk and the Company's management of capital.
The Board of Directors has overall responsibility for the establishment and oversight
of the Company's risk management framework. The Company's risk management
policies are established to identify and analyse the risks faced by the Company, to
set appropriate risk limits and controls and to monitor risks and adherence to limits.
Risk management policies and systems are reviewed regularly to reflect changes in
market conditions and the products offered.
Through the Company's activities, it is exposed to a variety of risks that could result
in changes to the net asset value or its performance.
The main risks that the Company is exposed to and that could result in changes to
the net asset value or its performance are: capital risk; valuation risk; market risk
(comprising currency risk, interest rate risk and price risk); credit risk; and liquidity
risk.
15.2 Capital risk management
The Company manages its capital to ensure that it will be able to continue as a going
concern while maximising the return to stakeholders through the optimisation of its
balance sheet.
The capital structure of the Company consists of equity attributable to ordinary
shareholders, comprising of share capital, and retained earnings. The Company
currently does not have a committed bank facility, but the intention is to put a
facility in place to fund its core unlisted investments (if needed) in addition to the
available Temporary Investments.
15.3 Valuation risk
15.3.1 Risk, policies and procedures
The Company's exposure to valuation risk arises from movements in its unquoted
investments into the Funds, whose valuations in turn are derived from the valuations
of the portfolio companies in which they invest. The portfolio companies are valued
in accordance with the IPEV Valuation Guidelines and their valuations are largely
derived from observable inputs. In addition, movements in the money market
investments of the Company that are valued by using observable inputs other than
quoted prices, also provide valuation risk exposure.
As stated in note 2, the General Partners of the Funds provide quarterly NAV
statements as calculated from the Investment Advisor's valuations, which the
Directors of the Company use to determine the fair value of a Fund. The financial
year-end Directors' valuation at 30 June, will be audited by the Company's auditors.
By being a limited partner in the Funds and where applicable, having a
representative on an Advisory Committee, the Board of Directors have access to
detailed information on the performance and valuations of the underlying Portfolio
Company to make an assessment of the Funds' fair value. Representatives of the
Investment Advisor are also available to provide full and timely access to information
and any concerns that the Board might have or provide any additional information
requests. The Board will also regularly review and assess the appropriateness of its
own valuation policy and the Investment Advisor's valuation policy and processes, as
noted below and elsewhere in the report.
The Investment Advisor determines the individual fair value of each Fund's underlying
Portfolio Companies at the end of each quarter. The individual valuations, as
prepared by Ethos' investment executives, are independently reviewed by senior
executives/partners of Ethos. These executives will then submit and present the
valuations to the Ethos valuation committee, which consists of a number of senior
executives/partners of Ethos. Once the committee has approved the valuations, the
valuations are submitted to the General Partner, who will then issue the quarterly
NAV statements and information on the valuations to each Funds' Advisory
Committee and its limited partners. In addition, the June and December valuations
will also be reviewed and audited by the Funds' auditors, before being issued to the
General Partner.
15.3.2 Fair value classification on investments
Financial assets and liabilities which are carried at fair value, need to be classified
within the appropriate level of hierarchy on which their fair values are based on.
The information below sets out the different levels as well as the classification of the
Company's assets and liabilities where appropriate.
Investments that trade in active markets and derive their fair value from quoted
market prices of identical assets, are classified within level 1. These prices provide
the most reliable fair value classification and the Company does need to adjust the
quoted prices to measure the fair value of investments. The quoted market price
used for investments held by the Company is the current bid price.
Investments that trade in markets that are not considered to be active and derive
their fair value from observable inputs other than quoted prices included within level
1, are classified within level 2. These inputs need to be directly or indirectly
observable for the investment and can include: quoted market prices for similar
assets in active or non-active markets; observable inputs other than quoted prices;
and inputs that are derived or corroborated by observable market date. The
Company's money market investments will typically be classified within level 2.
Level 3 classification applies to investments where observable inputs are not
available for the asset to determine its fair value. Unobservable inputs are used to
measure fair value where relevant observable inputs are not available. The unlisted
investments in fund limited partnerships are within this level.
The financial assets and liabilities that are measured at fair value in the Condensed
Statement of Financial Position can be summarised as follows within the fair value
hierarchy:
Level 1 Level 2 Level 3 Total
Assets R'000 R'000 R'000 R'000
Unlisted investments - - 340,175 340,175
Money market investments - 1,421,383 - 1,421,383
Accrued income on money - 22,569 - 22,569
- 1,443,952 340,175 1,784,127
During the period, there were no transfers of assets from level 1 to level 2 or 3, level
2 to level 1 or 3 and level 3 to level 1 or 2.
The following table presents the movement in level 3 assets during the period by
class of financial instrument:
Unlisted investments
R'000
Non-current assets
Purchases 349,160
Realisations at carrying value of purchases (4,888)
Net losses included in the Condensed Statement of Comprehensive
Income (4,097)
340,175
15.4 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 Board agrees and reviews the Company's
policies for managing these risks.
15.4.1 Currency risk
Currency risk is the risk that the value of a financial instrument will fluctuate
because of changes in foreign exchange rates. The Company's unlisted investments
are currently all held in ZAR denominated Funds, as is the Funds' underlying
investments in portfolio companies. The portfolio companies might operate in multi-
currency jurisdictions and will manage their own currency risk, which could be
through funding their debt in multiple currencies that match their operations or
foreign exchange hedging policies. The Company actively monitors its currency
exposure and will consider its own hedging strategies if required and as appropriate.
In addition, relatively small amounts of cash and cash equivalents are held in USD to
fund operating expenses, which will not be materially impacted by changes in foreign
exchange rates.
15.4.2 Interest rate risk
Interest rate risk is the risk that the value of a financial instrument will fluctuate
based on changes in market interest rates. The Company has exposure to interest
rate risk through its Temporary Investments (money-market investments) that are
largely invested in fixed rate instruments and floating rate notes with a relatively
short re-pricing period. The fair value of the money market instruments is largely
dependent on the market interest rates and could fluctuate with changes in the
latter.
The table below demonstrates the sensitivity in the fair value at 31 December 2016
of the Temporary Investments held at 31 December 2016 based on assumed changes
to the market interest rates (measured in basis points ("bp") at different intervals
and taking into account the maturity dates of the securities.
Fair value adjustment
Change in market interest rates assumed: R'000
-75 bp 2,019
-50 bp 1,346
-25 bp 673
+25 bp (673)
+50 bp (1,346)
+75 bp (2,019)
15.4.3 Equity price risk
Whilst the Company does not currently hold any direct equity securities, it is
indirectly exposed to equity price risk through the valuation of the underlying
portfolio investments held by its investments into Funds. The fair value of these
companies are largely derived from comparable market ratings, which is derived
from public companies' quoted market prices and their earnings. The underlying
portfolio companies are valued quarterly and the Board has access to the valuation
information to monitor and review the fair value of the investments and consider any
impairments where appropriate.
The table below illustrates the sensitivity in the fair value of the unlisted
investments held at 31 December 2016 based on fluctuations in the price of its
unlisted investments.
Fair value adjustment
Change in equity prices assumed: R'000
+5% 17,009
-5% (17,009)
15.5 Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty
to a financial instrument fails to meet its contractual obligations. The Company's
credit risk is limited to the carrying amount of financial assets at the reporting date.
The Company believes that, through investing in Funds that are managed by a well-
experienced Manager with a proven track record, given the diverse number of
portfolio companies that each Fund invests in and by managing concentration risk in
its portfolio, the risk is reduced. In addition the Company has an Investment
Committee with well experienced members that enforce a rigorous assessment,
review and due diligence with each investment decision. The Board receives regular
updates from the Investment Advisor to enable it to monitor the performance of the
underlying investments.
In addition, the Company's Temporary Investments are managed by Ashburton who is
mandated to invest in Treasury Bills issued by the Government of the Republic of
South Africa as well as short term paper issued by the Big Four South African Banks.
Cash and cash equivalents are held with FirstRand Bank Limited (South Africa) and
Investec Mauritius. The carrying amount of the financial assets in the financial
statements represents the Company's maximum exposure to credit risk.
15.6 Liquidity risk
This risk occurs when the Company is unable to meet its short term obligations,
largely due to its inability to convert its financial assets into cash and cash
equivalents. The Company's strategy is to make long-term commitments into fund
limited partnerships that invest in unlisted portfolio companies, which are not as
readily realisable as quoted investments. The Company may have difficulty in
generating liquidity on short notice and the Board therefore regularly monitors its
forecasts, cash flows, commitment levels and available liquidity resources; the latter
consisting of Temporary Investments, that are tradeable on short notice in active
markets, and cash and cash equivalents. The Company currently has a significant
proportion of its net assets invested in such liquid resources.
16. RELATED PARTIES AND KEY AGREEMENTS
Related parties are entities which have the ability to control the other party or
exercise significant influence over such party in making financial and operating
decisions. The Board of Directors believes that the Company has no related parties.
Whilst Ocorian (Mauritius) Limited ("Ocorian") acts as the Company Secretary and
one of its directors acts as a Director of Ethos Capital, we believe that neither
Ocorian nor the director controls or has significant influence over Ethos Capital.
The Company has entered into an Investment Services Agreement with Ethos in terms
of which the latter, as Investment Advisor, will provide investment advice (including
sourcing investments), administrative and back-office services to the Company. As
payment for these services, Ethos receives an investment services fee, management
fee and administration fee that are all calculated and paid quarterly.
The investment services fee is 1.5% on the average of the opening invested NAV and
closing invested NAV for Direct Investments, whereas the management fee is 1.5% on
the average of the opening invested NAV and closing invested NAV for Primary
Investments. In no event shall any of the above fees be less than zero and both fees
are only effective from 1 July 2017. In respect of any Secondary Investments
acquired, the management fee payable thereon will be the Company's proportionate
share of any management fee charged by and payable to the manager of such Fund.
Ethos receives a fee of 0.25% of the average balance of the Temporary Investments
as an administration fee for providing the administrative and back-office services. As
noted above, the Company has an Investment Management Agreement with
Ashburton to manage its Temporary Investments. The administration fee paid to
Ethos is reduced by any fees payable to Ashburton.
The Company has also entered into a subscription agreement with the EPE Trust that
sets out and manages the terms of the A and B Ordinary Shares, that the EPE Trust
subscribed for, as well as the annual performance participation that EPE Trust is
entitled to. The annual notional performance participation, and annual performance
participation thereafter, is based on 20% of the growth in NAV of invested assets and
is triggered each year if the NAV growth exceeds a preferred hurdle, currently 10%.
The performance is also measured over a cumulative three-year measurement period to
ensure that the average NAV growth over such period exceeds the preferred hurdle;
to the extent that the aggregate of the three annual participations is more or less
than the 3-year average calculation, an adjustment to or provision for the
performance participation will be made in the final year of the measurement period
and adjusted in subsequent periods if necessary.
17. SUBSEQUENT EVENTS
There have been no material events after the reporting date which would require
disclosure or adjustment to the Condensed Financial Statements for the period ended
31 December 2016.
18. COMPARATIVE FINANCIAL INFORMATION
The comparative financial information as at 30 June 2016, that consisted of Cash and
Share Capital of R1 each, has not been presented as the Condensed Financial
Statements have been presented to the nearest thousand rand.
Johannesburg
16 March,2017
SPONSOR
RAND MERCHANT BANK (A division of FristRand Bank Limited)
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