AIFMD Disclosure Document for STRATEGIC EQUITY CAPITAL PLC (the "Company") Last updated: 31 January 2018 ADDITIONAL DISCLOSURE TO INVESTORS PURSUANT TO ARTICLE 23.1 OF THE ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE (DIRECTIVE 2011/61/EU) ("AIFMD") The AIFMD requires the Company's alternative investment fund manager (or "AIFM") to ensure that certain information is made available to investors before they invest in the Company, as well as any material changes thereof. The Company has disclosed certain of the information required under the AIFMD in its Prospectus dated 3 August 2015 (the "Prospectus") and latest Report & Financial Statements (the "Report"), both of which are available on the Company's website www.strategicequitycapital.com. This document refers to, and should be read in conjunction with, the Prospectus and the Report. Investors should monitor the Company's website and public announcements by the Company for any changes in the information disclosed. The Company hereby discloses the additional information set out below. Alternative Investment Fund Manager The Company is an alternative investment fund, or "AIF", for the purposes of the AIFMD. The Company has appointed its existing investment manager, GVQ Investment Management Limited (Registered Company No. 04493500), a limited company incorporated in England & Wales in 2002 and authorised and regulated by the Financial Conduct Authority (FRN 220997) (the "Investment Manager"), as its AIFM within the meaning of the AIFMD to provide portfolio management and risk management services to the Company. Leverage As of the date of this document, the Company is an unleveraged closed-ended fund and has no borrowing arrangements in place. The Company is permitted to borrow up to 25 per cent of the Company s Net Asset Value ("NAV") (calculated at the time of borrowing) for investment purposes. Currently there are no specific restrictions on the type of borrowing that the Company may engage in, restrictions relating to the identity of lenders or the jurisdictions in which such lenders may be located, or any other restrictions on borrowing by the Company. The Investment Manager is permitted to leverage the Company's portfolio only if it is considered appropriate by and approved by the Board of Directors of the Company. Investment Strategy and Investment Policy Further information regarding the Company's Investment Strategy and Investment Policy can be found in the Report. In accordance with the Company's Articles of Association, the Board of Directors has a general power to make non-material changes to the Company's investment objective or investment policy without shareholder approval. As explained in the Prospectus, material changes require the approval of the Company's shareholders. Investors' relationship with the Company Contractual relationships between investors and the Company are governed by English law and the courts of England have jurisdiction in relation to any contractual or non-contractual dispute between 1
the parties subject to the provisions in Council Regulation (EC) No 44/2001 ("Brussels Regulation"), Regulation (EC) 593/2008 ("Rome I") and Regulation (EC) 864/2007 ("Rome II"). The Brussels Regulation sets out the rules for determining jurisdiction, and the recognition and enforcement of judgments in civil and commercial matters and applies to all EU Member States. The general rule under the Brussels Regulation is that a person should be sued in the Member State in which they are domiciled. However, an exception applies for contractual disputes which means that a person can be sued in the Member State in which performance of the disputed obligation was to take place. Rome I sets out the rules for determining the law applicable to contractual obligations and applies to all EU Member States (other than Denmark). Accordingly, where a matter comes before the courts of a relevant Member State, the choice of a governing law in any contract is subject to the provisions of Rome I. Under Rome I, parties have the freedom to expressly choose the governing law of the contract, but such a choice is subject to any overriding mandatory provisions of the forum. Overriding mandatory provisions are regarded as crucial by a country for safeguarding its public interest, such as political, social or economic organisation and they apply irrespective of the law chosen to govern the contract. Rome II sets out the rules for determining the law applicable to non-contractual obligations and applies to all EU Member States (other than Denmark). Under Rome II, parties have the freedom to expressly choose the governing law applicable to any non-contractual obligations between parties and it is the counterpart to Rome I. Prospective investors should note that there are a number of legal instruments providing for the recognition and enforcement of foreign judgments in England. Depending on the country where the judgment originates from, the enforcement regime will differ: (i) EU Member States use the Brussels Regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, and Regulation (EC) No 805/2004 of the European Parliament and of the Council of 21 April 2004 creating a European Enforcement Order for uncontested claims; (ii) Iceland, Norway and Switzerland use the Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters concluded in Lugano on 30 October 2007 ("Lugano Convention") and (iii) many Commonwealth countries use the Administration of Justice Act 1920 and the Foreign Judgments (Reciprocal Enforcement) Act 1933. There are no legal instruments providing for the recognition and enforcement of judgments obtained in jurisdictions outside those covered by the instruments listed above, although such judgments should be enforced under common law. Fees, Charges and Expenses The Company is liable for a range of fees, charges and expenses. These fees are, therefore, indirectly borne by the Company's investors. Except in respect of the fees payable to the Company's Investment Manager, Auditor and Depositary (which are set out below) details of the basis on which fees, charges and expenses arising from the Company's material agreements are calculated, and applicable minimum and maximum amounts, can be found in the Prospectus. The amounts paid for the last financial year are set out in the Report. The Company has relationships with third parties (such as professional advisers) to whom the Company pays fees from time to time. The Company may also incur extraordinary and miscellaneous expenses from time to time. The amount of such fees and expenses is not always ascertainable in advance. The Company includes such fees in its financial statements. A further description of the fees, charges and expenses incurred in the last financial year can be found in the Report. Investment Manager The Investment Manager is entitled to receive a management fee payable quarterly in arrear on the tenth business day of each quarter (the "Management Fee"). The Management Fee in respect of a 2
quarterly period shall be equal to the NAV Management Fee for that quarterly period. The "NAV Management Fee" shall be the aggregate of the NAV Weekly Amounts that are relevant for the relevant quarter. A "NAV Weekly Amount" is an amount calculated by applying the rate of 0.75 per cent. per annum to the NAV of the Company as at each date during a quarter than the NAV of the Company is calculated, it being agreed and acknowledged that the Company shall in the absence of unforeseen circumstances calculate its NAV not less than once per week. The NAV Weekly Amounts that are relevant for a particular quarterly period are all such amounts that are calculated by reference to an announcement of NAV that is made during that quarter. In addition to the Management Fee, the Investment Manager is also entitled to receive a performance fee in certain circumstances (the "Performance Fee"). In order for a Performance Fee to be payable (i) a performance hurdle must be met and (ii) a high watermark exceeded. The performance hurdle is that as at the end of the relevant performance period the NAV total return per Share must exceed the Benchmark. The "Benchmark" for these purposes is equal to A increased by B where: A = the NAV per Share as at the beginning of the performance period; and B = the aggregate amount of (i) the total return performance of the FTSE SmallCap (ex. Investment Companies) Index (expressed as a percentage) over the relevant performance period; and (ii) 2 per cent. per annum. For a Performance Fee to be payable, the NAV total return per Share as at the end of a performance period must also exceed the High Watermark. The "High Watermark" for these purposes shall be an amount equal to the higher of (a) 118.82p and (b) the highest previously recorded NAV total return per Share at the end of a performance period in relation to which a performance fee was earned. The amount of the performance fee payable in the event that the above conditions are met at the end of a particular performance period will be equal to 10 per cent. of the excess of the NAV total return per Share at the end of the relevant performance period over the higher of (i) the relevant Benchmark and (ii) High Watermark multiplied by the time weighted average number of shares in issue (excluding shares held in treasury) during the twelve months ending at the end of the relevant performance period. The NAV total return per Share shall be equal to A increased by B where: A = the NAV per Share as at the beginning of the performance period; B = C + D A x 100 A C = the Net Asset Value of the Company as at the end of the relevant performance period, calculated on the basis that does not recognise any liability of the Company to the Investment Manager in respect of any performance fee that is, or may become payable, in respect of that performance period, divided by the number of shares in issue (excluding shares held in treasury) at that time; and D = the aggregate of the amount of any dividends paid or distributions made by the Company to all or nearly all Shareholders during the relevant performance period divided by the time weighted average of the number of shares in issue (excluding shares held in treasury) during that performance period. The aggregate amount of the Management Fee and the Performance Fee in respect of each financial year shall not exceed an amount equal to 1.4 per cent. per annum of the Net Asset Value of the Company as at the end of relevant financial period, provided always that in calculating such Net Asset Value no account shall be taken of any accrued performance fee earned in that period as a liability of 3
the Company (the "Cap"). Any amount in excess of the Cap, which would otherwise be payable but for the Cap, shall not be treated as a liability of or payable by the Company and the Investment Manager shall have no claim in respect thereof. The Performance Fee in respect of each financial year of the Company shall not exceed an amount equal to the Cap for that financial year less the amount of the Management Fee payable in respect of that financial year. Depositary The Company has appointed J.P. Morgan Europe Limited (Registered Company No. 00938937), a limited company incorporated in England & Wales in 1968 (the "Depositary") as its depositary. The Depositary's appointment takes effect from 31 January 2018 pursuant to a Depositary Agreement entered into between the Company, the Investment Manager and the Depositary. The Depositary will act as the depositary of the Company and, in doing so, is required to comply with the applicable provisions of the AIFMD and the terms of the Depositary Agreement. In this capacity, the Depositary's duties under the AIFMD and the Depositary Agreement include the following: (a) (b) ensuring that the Company's cash flows are properly monitored, and implementing effective procedures to reconcile cash flow movements relating to the Company; holding and safeguarding: (i) (ii) in its physical possession, and separately from any assets in bearer form belonging to the Depositary, all assets in bearer form delivered to the Depositary as depositary of the Company; and all other custody assets that are delivered to the Depositary as depositary of the Company in one or more securities accounts opened in the name of the Company or the Investment Manager, so that they can clearly be identified as belonging to the Company. The Depositary Agreement envisages that the custody services that the Depositary is appointed to perform will be delegated to JPMorgan Chase Bank National Association, London branch ("JPMCB") and pursuant to a Global Custody Agreement entered into between the Company, the Depositary and JPMCB, JPMCB has been appointed to provide custody services to the Company. JPMCB may appoint sub-custodians to hold the Company's assets. The Depositary is liable under the Depositary Agreement and AIFMD for the loss of assets held in custody by JPMCB and any sub-custodian(s), unless the Depositary has agreed to discharge its liability. Such a discharge can only be effective where certain conditions are met, including that the Depositary can demonstrate that it had no other option but to delegate the performance of custody services to the relevant sub-custodian.. (c) (d) (e) (f) in respect of assets of the Company that are not capable of being held in custody, verifying the Company's ownership of such assets and maintaining a record of such assets for which it is satisfied that the Company is the owner; ensuring that the sale, issue, re-purchase, redemption and cancellation of shares of the Company are carried out in accordance with applicable law, the articles of association of the Company and the Prospectus; ensuring that the net asset value of the shares of the Company is calculated in accordance with applicable law, the articles of association of the Company and the Prospectus; carrying out the instructions of the Company, unless they conflict with applicable law, the Articles of Association of the Company or the Prospectus; 4
(g) (h) (i) (j) ensuring that in transactions involving the Company's assets any consideration is remitted to the Company within time limits which accord with acceptable market practice in the context of the particular transaction and, where transactions do not take place on a regulated market, within the usual time limits assessed having regard to the conditions attached to the transactions; ensuring that the Company's income is applied in accordance with applicable law, the articles of association of the Company or the Prospectus; providing certain information to the Investment Manager and the Company, including reports as to the Depositary's performance of its duties and details of inconsistent cash flows identified; and escalating matters relating to the management of the Company that the Depositary identifies. Pursuant to the Depositary Agreement, the Depositary is liable to the Company in respect of losses of custody assets by the Depositary or any sub-custodians (including JPMCB) or a delegate of such a sub-custodian and losses resulting from a negligent or intentional failure by the Depositary to fulfil its obligations under the Depositary Agreement and comply with applicable law, as well as certain other losses. Under the Depositary Agreement, the Depositary has no general right of re-use in respect of the Company's assets and, except where expressly provided for in the Depositary Agreement, the Depositary must not transfer, hypothecate, pledge, or otherwise dispose of or encumber any Company's assets held from time to time or for the benefit of any person. The Depositary has a continuing lien on all assets of the Company to secure payments due to the Depositary under the Depositary Agreement. The Depositary may apply or set off against such amounts any amounts credited by or due from the Depositary to the Company. The Depositary is permitted, upon receipt of an instruction from a duly authorised person (for example, the Investment Manager), to provide the Company's assets to counterparties as collateral in respect of options, futures, or other financial derivatives contracts trading engaged in by the Company. The fees payable to the Depositary are 0.015% of the NAV of the Company subject, however, to a minimum fee of 32,500 per annum. Based on the NAV of the Company it is expected that the annual fees payable to the Depositary should not exceed the agreed minimum fees of 32,500 per annum for the duration of the Depositary's appointment by the Company. Auditors The Company has appointed Ernst & Young LLP (the "Auditor") as its auditor. In this capacity, the Auditor must comply with its duties under Companies Act 2006 which include, amongst others, the following: (a) (b) (c) carrying out such investigations as will enable the Auditor to form an opinion as to whether adequate accounting records have been kept by the Company and returns adequate for their audit have been received from branches not visited by the Auditor, and whether the Company's individual accounts are in agreement with the accounting records and returns, and whether the auditable part of the Company's directors' remuneration report is in agreement with the accounting records and returns; obtaining all the information and explanations which, to the best of Auditor's knowledge and belief, are necessary for the purposes of audit; disclosing in the Auditor's report, so far as it is reasonable, any irregularities in relation to disclosure of directors' benefits. 5
The Auditor's fees are determined and agreed by the Board of Directors of the Company on annual basis. The amount of fees paid to the Auditor in relation to its services for the last financial year are disclosed in the Report, which is available on the following page of the Company's website: http://www.strategicequitycapital.com/secapital/en/investors Contracts with Service Providers - Investors' Rights Investors in the Company generally do not have directly enforceable rights under contracts entered into between the Company and its service providers. The Depositary Agreement does, however, provide that the Depositary shall be liable to the Company and its investors for any loss suffered by them arising from the negligent or intentional failure of the Depositary to fulfil its obligations pursuant to the terms of the Depositary Agreement or applicable law and, subject to the fulfilment of certain conditions, for the permanent loss by the Depositary or JPMCB of custody assets. AIFM's Professional Liability Professional liability risks resulting from those activities which the Investment Manager will carry out pursuant to the AIFMD, are covered by the Investment Manager through maintaining "own funds" above the minimum level required by AIFMD. Delegation The Investment Manager has not delegated any of its AIFM management functions to any third party. The Depositary has delegated certain safe-keeping functions to JPMCB. As noted above under "Depositary", the Depositary Agreement envisages that JPMCB may delegate certain safekeeping functions to Sub-custodians. The Depositary is solely responsible for payment of all fees, expenses, commissions, costs or other charges payable to JPMCB or any other Sub-custodian. The Depositary is liable to the Company for the loss of assets of the Company which are held in custody as part of the safe-keeping. The liability of the Depositary will not be affected by the fact that it has entrusted the safe-keeping function to a third party (i.e. a sub-custodian) save where this liability has been lawfully discharged to a sub-custodian or where the loss of Company's assets arises as a result of an external event beyond reasonable control of the Depositary as provided for under AIFMD. Under the terms of the Depositary Agreement, the Company authorises the Depositary to act as depositary to the Company notwithstanding that (a) the Depositary may have a material interest in the transaction or a potential conflict of duty or interest and (b) the Depositary may be in possession of information tending to show that an instruction received by the Depositary may not be in the best interests of the Company. In such circumstances, the Depositary is under no duty to disclose any such information provided always that (i) the Depositary shall not enter into any transaction referred to at (a) above, unless such transaction is carried out as if effected on normal commercial terms negotiated at arm's length and such transaction must be in the best interests of the Shareholders; and (ii) either a certified valuation of the transaction by a person approved by the Depositary as independent and competent is obtained or the transaction is executed on the best terms available on an organised investment exchange under its rules; and (iii) if any conflict of interest shall arise on the Depositary's part in any of the activities or transactions referred to above, the Depositary shall ensure that such conflict is resolved fairly in the interests of the Company. Valuation Valuations are performed by the Investment Manager s Finance Director, using external price sources (e.g. Bloomberg) for listed securities and for any unlisted securities (private equity funds), valuations received from the administrator of the unlisted fund. Initial valuations and supporting data for listed securities are provided by Capita Sinclair Henderson Limited (the Company's administrator) and for 6
unlisted securities provided by the administrator of the unlisted fund. The Investment Manager then conducts its own valuations in accordance with the AIFMD. In particular, the Investment Manager's valuation function is functionally separate from its portfolio management function. Fund investments, foreign currency exposure and other investments are valued in accordance with International Financial Reporting Standards. All investments in the scope of IAS 39 held by the Company are classified as fair value through profit or loss. The Company does not hold derivatives. In relation to foreign currency exposure assets and liabilities translated at closing FX rates on the balance sheet date. In respect of unquoted instruments, or where the market for a financial instrument is not active, fair value is established by using recognised valuation methodologies, in accordance with International Private Equity and Venture Capital Valuation Guidelines ( IPEVC Guidelines ). New investments are initially carried at cost, for a limited period, being the price of the most recent investment in the investee company. This is in accordance with IPEVC Guidelines as the cost of recent investments will generally provide a good indication of fair value. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm s length transaction. After initial recognition, investments are measured at fair value. For investments actively traded in organised financial markets, fair value is generally determined by reference to Stock Exchange quoted market bid prices at the close of business on the balance sheet date, without adjustment for transaction costs necessary to realise the asset. Liquidity risks As the Company does not currently operate with any leverage, the Investment Manager is not required to employ a liquidity management system or adopt procedures for monitoring liquidity risks. Should the Company or the Investment Manager decide that leverage arrangements are appropriate in the future, the Investment Manager will adopt a new liquidity management system and procedures in line with the requirements of the AIFMD, which intend to ensure that (a) the liquidity profile of the Company s investments is aligned with the its obligations, based on an assessment of the relative liquidity of the Company s assets in the market, taking account of the time required for liquidation and the price or value at which those assets can be liquidated, and their sensitivity to other market risks or factors (b) the Company's investment strategy and liquidity profile are consistent with each other, and (c) the Investment Manager monitors the Company s liquidity risk, including by performing regular stress tests against both normal and exceptional liquidity conditions. Furthermore, as the Company is a closed-ended fund with indefinite life, investors have no ability to redeem their investment apart from selling their shares in the Company on the secondary market through an executing broker. The Company predominately holds listed securities which can be easily liquidated. As of the date of this document, the Company's investment in unlisted securities represents less than 2% of the fund s underlying NAV and is in the repayment cycle of its life. The Investment Manager may invest on behalf of the Company in securities which are not readily tradeable, which can lead to volatile share price movements. It may be difficult for the Investment Manager to sell such investments. Although the Company s AIM quoted investments and unquoted investments are less liquid than securities listed on the London Stock Exchange, the Investment Manager seeks to ensure that an appropriate proportion of the Company s investment portfolio is invested in cash and readily realisable investments, which are sufficient to meet any funding requirements that may arise. 7
The Investment Manager takes the following actions for the Company in order to assess and manage the exposure of the Company to the relevant risks, including market risks, liquidity risks, counterparty risks and operational risks: through the mechanism of the Research Committee and the Investment Committee, there are in place appropriate risk measurement arrangements, processes and techniques which are necessary to ensure that the risks of positions and their contribution to the overall risk profile are accurately measured on the basis of sound and reliable data and that the risk measurement arrangements, processes and techniques are adequately documented; reviews the validity of risk measurement arrangements; conducts, where appropriate, scenario analyses to address risks arising from potential changes in market conditions and uncertain fund cash flows (as they relate to unlisted securities) that might adversely impact the relevant investee company; establishes, implements and maintains a documented system of internal limits concerning the measures used to manage and control the relevant risks (utilising the Investment Manager's order management system) taking into account all risks which may be material to the Company and ensuring consistency with the Company s risk-profile; ensures that the current level of risk complies with the risk limits set by the Company; establishes, implements and maintains adequate procedures that, in the event of actual or anticipated breaches to the Company s risk limit, result in timely remedial actions in the best interests of investors. Net Asset Value The net asset value and market price of the share of the Company are regularly updated and published on the Company's website. The latest net asset value and market price of the share of the Company can be accessed following this link: http://www.strategicequitycapital.com/secapital/en/home Historical performance of the Company Information about historical performance of the Company can be found on the part of the Company's official website dedicated to investors, which can be accessed following this link: http://www.strategicequitycapital.com/secapital/en/investors Prime broker The Company does not use or currently contemplate using a prime broker. Periodic disclosure Under the AIFMD, the Investment Manager must periodically disclose to investors certain information in relation to the Company. This includes providing disclosure on the Company's risk profile, which, as prescribed in the AIFMD, shall outline: (i) the measures used to assess the sensitivity of the Company's portfolio to the most relevant risks to which the Company is or could be exposed; and (ii) if risk limits set by the Investment Manager have been or are likely to be exceeded and, where these risk limits have been exceeded, a description of the circumstances and the remedial measures taken. The Investment Manager intends to comply with its periodic disclosure requirements in the manner set out below. 8
The following information will be made available to shareholders, as a minimum, as part of a Company's annual report: (a) (d) (e) the percentage of the Company's assets which are subject to special arrangements arising from their illiquid nature; the current risk profile of the Company and the risk management systems employed by the Investment Manager to manage those risks; and the total amount of leverage employed by the Company. Shareholders will also be provided with information regarding changes to (i) the maximum level of leverage which the Company, or the Investment Manager on the Company's behalf, may employ; or (ii) the rights for re-use of collateral under the Company's leveraging arrangements; or (iii) any guarantee granted under the Company's leveraging arrangements. This information will be made available to shareholders, without undue delay following the occurrence of that change, usually by way of a London Stock Exchange announcement on Regulatory News Service and the Company's website. It is intended that shareholders will be notified if the Investment Manager makes material changes to liquidity management systems and procedures employed in respect of the Company. 9