Issue 21 Summer 2010 NVM News 25 years of investing in growing UK companies Celebrating 25 years of investing in growing UK companies Contents Weldex lifts returns for NVM funds 1 From the Chairman 2 Fund performance 3 Portfolio news 4-5 Any other business 6 Weldex lifts returns for NVM funds Northern Investors Company and Northern Venture Trust have achieved a partial exit from their long-standing investment in Weldex (International) Offshore, reaping over 7 million of cash in the process. The UK s largest crawler crane hire company has been acquired by a new holding company funded by Dunedin Capital Partners, with the two NVM funds retaining a minority equity stake and loan stock valued at a further 6 million. Over the 14 year life of the investment, the total income and capital proceeds received by the NVM funds represented a multiple of over 13 times the amount invested and an internal rate of return (IRR) of 25% per annum. Inverness-based Weldex was founded over 30 years ago by chief executive Dougie McGilvray, and has remained a family-run business with Dougie s son Iain and daughter Margaret holding key board positions. Northern Investors Company and Northern Venture Trust provided 1.2 million of development capital funding in 1996 to support the company s growth plans. Weldex now has over 100 employees running its large and modern fleet of crawler cranes, which have been deployed on a number of the UK s largest construction projects including Heathrow Terminal 5, Wembley Stadium, the London 2012 Olympic Stadium and various offshore wind farms. Weldex has been an outstanding long-term investment for NVM s funds Weldex was ranked at number 15 in the International Cranes IC50 listing of the world s largest crane-owning companies in 2009. In the same year Dougie McGilvray received the BVCA Venture Capital Backed CEO of the Year Award for Scotland and Northern Ireland. NVM director Norman Yarrow, who has represented the investors on the board of Weldex since 1996, reflects: Weldex has been an outstanding long-term investment for NVM s funds and its success is largely due to Dougie McGilvray s vision of investing in the best and most modern equipment, ensuring that each client s specific requirements can be readily accommodated. As a result the company has developed into one of the largest and most respected within the industry. INVESTMENT TRUST AWARDS 2010 BEST VENTURE CAPITAL TRUST Northern Venture Trust See page 3 See page 6 1
From the Chairman We live in uncertain times. I don t think that the old adage has ever been more relevant than it is now. In the past three months we have seen the first UK coalition government for 65 years, the near collapse of the Greek economy, fears about the future of the Euro, a sharp fall in the FTSE index and a dramatic reduction in the market value of BP. Whilst none of these events on its own necessarily has a direct effect on small unquoted UK companies, sentiment plays a big part in the private equity marketplace and at the moment risk aversion is prevalent. What will impact directly on our market is the Chancellor s Austerity Budget. Cutting the Government s departmental budgets by 25% whilst at the same time increasing VAT is bound to take liquidity out of the market, creating unemployment in the short term. This will inevitably have a direct effect on construction and leisure businesses, to take only two examples. However the impact cuts both ways, and reducing public sector expenditure will undoubtedly create opportunities for the private sector to step in. We expect this not only to benefit our existing portfolio companies but also to open up new areas for investment. There was a surprising silver lining to the Budget. There was a surprising silver lining to the Budget: although the Chancellor announced an increase in the higher rate of capital gains tax to 28%, he also increased the scope of the 10% rate band on gains qualifying for entrepreneurs relief to cover the first 5 million of lifetime gains rather than 2 million as previously. NVM s target new deal size is between 3 million and 9 million, and it is likely that many of the owner-managers from whom we purchase businesses will benefit from the extension of the 10% band and will take the opportunity to crystallise gains. We expect that this will generate good opportunities for us to invest in the future. Over the past year NVM s funds have seen a strong inflow of cash from a series of investment sales, in addition to which Northern 3 VCT has raised 12 million through a public share issue. This puts us in a strong position to make new investments in a market in which we are seeing an increasing number of attractive opportunities, and we expect to be reporting on a bigger portfolio by the end of 2010. One area where disappointingly little progress has been made is the secondary market for Venture Capital Trust (VCT) shares. Many investors remain unreceptive to the message that dividends and gains on second-hand VCT shares are tax-free, and that the investment risk attached to small unquoted companies can be greatly mitigated by a well-managed portfolio approach. As can be seen from the performance data on page 3, the tax-free dividend yields on NVM s generalist VCTs range from 5.2% in Northern 3 VCT to 11.2% in Northern Venture Trust. All three funds are ranked in the top quartile of generalist VCTs based on total returns over the past five years. NVM is not alone in this, all VCT managers are facing the same challenge of creating a secondary market and a great deal is being done to stimulate media interest. Market liquidity is a very important issue for the future and I hope that we will be able to report better progress soon. 2
Fund performance to 30 June 2010 Northern Investors Company PLC Launch date 1984 (listed since 1990) Share price 157.0p Latest NAV per share 272.9p (31 March 2010) Number of shares in issue 19,395,440 Market capitalisation 30.5 million Dividend yield 4.9% Northern 2 VCT PLC Launch date 1999 Share price 64.5p Latest NAV per share 78.9p (30 April 2010) Number of shares in issue 56,903,761 Market capitalisation 36.7 million Dividend yield 8.5% NAV total return company 116.8 106.4 132.9 184.0 sector average 113.1 72.2 101.6 97.2 company 111.4 82.8 87.4 124.9 sector average 129.9 58.9 102.9 91.9 NAV total return company 107.1 104.1 120.5 132.9 sector average 105.5 92.6 113.9 123.9 company 160.1 113.7 125.8 128.1 sector average 116.3 89.4 114.4 134.3 Northern Venture Trust PLC Launch date 1995 Share price 67.0p Latest NAV per share 78.9p (31 March 2010) Number of shares in issue 59,139,418 Market capitalisation 39.6 million Dividend yield 11.2% NAV total return company 120.4 131.7 160.2 164.7 sector average 105.5 92.6 113.9 123.9 company 134.4 135.5 165.6 219.6 sector average 116.3 89.4 114.4 134.3 Northern Venture Trust has won the prestigious What Investment Best VCT Investment Trust Award 2010. The award is presented to funds that consistently generate value for investors. Northern 3 VCT PLC Launch date 2001 Share price 77.0p Latest NAV per share 90.2p (31 March 2010) Number of shares in issue 38,990,760 Market capitalisation 30.0 million Dividend yield 5.2% Northern AIM VCT PLC Launch date 2000 Share price 25.75p Latest NAV per share 31.0p (31 May 2010) Number of shares in issue 22,321,112 Market capitalisation 5.7 million Dividend yield 11.7% NAV total return company 107.4 106.1 120.4 N/A sector average 105.5 92.6 113.9 123.9 company 168.2 110.5 118.0 N/A sector average 116.3 89.4 114.4 134.3 NAV total return company 102.7 63.0 69.4 N/A sector average 108.3 67.9 71.0 43.0 company 117.2 61.0 62.2 N/A sector average 115.1 64.1 68.4 36.1 Share price is mid-market price as at 30 June 2010. Dividend yield is based on dividends paid and proposed in respect of latest full financial year, expressed as a percentage of share price. Total return statistics are for periods to 30 June 2010, return shown is on 100 invested, based on mid to mid share price/latest published NAV, assuming net income re-invested (source: AIC). Sector average refers to the following sectors: Private equity VCT Generalist VCT AIM-quoted Northern Investors Company PLC Northern Venture Trust PLC Northern 2 VCT PLC Northern 3 VCT PLC Northern AIM VCT PLC 3
Portfolio news Good deals can be found in a quiet market The first half of 2010 has been a busy period for NVM s investment team. The recovery in the UK economy remains sluggish, but good deals can be found in a quiet market. NVM completed two new management buy-outs during March, in Kerridge Commercial Systems and Lanner Group. Both investments are in the software sector which is still an industry with huge potential for growth. Clive Austin, who is responsible for NVM s Northern investments, completed the 9 million management buy-out of Kerridge Commercial Systems (KCS). KCS specialises in the provision of fully integrated Enterprise Resource Planning (ERP) systems to niche vertical markets such as builders merchants, automotive parts suppliers and industrial component distributors. The company has built up a reputation as the leading specialist offering high levels of understanding and product fit with quicker, cheaper and less risky system implementation. KCS is an excellent example of the type of investment NVM is looking to make. Under independent ownership the KCS team now has a great opportunity to increase the presence of the business both in the UK and abroad says Clive. James Arrowsmith, NVM s Midlands-based investment director, led the 3 million management buy-out of Lanner Group. The company provides leading-edge simulation software for blue chip organisations worldwide and has rolled out a number of new products over the last three years. Its clients include Ford, GlaxoSmithKline and British Nuclear Group. The current, proven management team took over leadership of the business in 2006 and has since transformed the performance of Lanner. The company is now in a position to build a fantastic platform for growth, based around a growing demand for this type of software and expansion of the product range comments James. 4
Portfolio news Backing the experts Following on from NVM s investments in KPJ Software Services and Phusion Healthcare, reported in NVM News issue 20, NVM funds have invested in two more buyand-build opportunities. With the help of experienced managers within key sector markets, NVM plans to build a portfolio of companies with the potential to grow in value during the life of its investment and beyond. RCC Lifesciences Clive Austin has joined forces with Ron Long and Chris Lyddon, the non-executive team from DxS a record exit for NVM s funds in 2009 to create RCC Lifesciences. The new company will target development capital opportunities within the UK healthcare sector, primarily the life sciences and medical devices markets. Healthcare is one of the few markets forecasting growth as spending on services and products increases worldwide. Clive concludes that the UK has an excellent track record in life sciences innovation, and the team believes that RCC is in a prime position to target companies which need funding and expertise to commercialise their products. evolve investments James Arrowsmith has led the launch of Evolve Investments, to seek out fundamentally sound or overleveraged UK businesses suffering reduced profitability as a result of the recession. NVM is partnering with business improvement and turnaround experts Ross Stuart and Ken Davies, using their extensive experience to release sound businesses from the restrictions of their financial position, helping them to return to profitability and grow value. The Evolve team believes that the environment for underperforming businesses will change significantly over the next twelve months, as government funding dries up and banks are under more pressure to deal with nonperforming loans says James. CloserStill, the business-to-business (B2B) events management company, is an excellent example of the benefits of backing an experienced management team to acquire dynamic companies with strong growth potential. The buy-and-build strategy is working well for CloserStill and NVM. Three established businesses have been sought and bought since inception: CloserStill recently acquired First City Events, organiser of the media, marketing and digital communications event mediapro, and exhibition companies Pioneer Global Media and Principal Media. The company has also bought the rights to publish The Print Business and PrintMedia Management magazines and websites, both prominent publications within their industry. Peter Hodson is responsible for NVM s London-based investments and sits on the board of CloserStill. Relationships matter in this business. The CloserStill team are highly experienced individuals within their industry and we had no hesitation in backing their buy-and-build strategy. The team generated great returns for our fund shareholders following the sale of their old business, Ithaca Business Media, in 2007. We are excited to be able to capitalise on opportunities within the events industry a sector the CloserStill team knows extremely well. says Peter. Relationships matter in this business. 5
Any other business VCT Investor Seminar 26 November 2010 NVM will be holding another VCT seminar for all shareholders on Friday 26 November 2010 at 11.00am in the Turner Suite at the Holiday Inn, Coram Street, London WC1N 1HT. An official invitation will be posted to all shareholders in due course. In the meantime, if you have any queries, please do not hesitate to contact Wendy Arkle on 0191 244 6024 or e-mail at wendy.arkle@nvm.co.uk. NVM wins top deal award for DxS NVM has lifted the coveted BVCA/Real Deals Deal of the Year Award 2010 for its investment in companion diagnostics company, DxS. NVM had invested in DxS since 2001 and helped the company to grow from a small business with two founders to an 80-strong workforce. The sale of DxS to QIAGEN has created a global leading partnership in personalised medicine and created impressive returns for NVM s shareholders. The deal also received the 2009 North West Insider Dealmaker Award for best New Technology Deal of the Year. Dominic Ely has joined NVM s regional investment team and will be responsible for generating new deals and managing NVM s portfolio in the South of England. NVM managing director Martin Green says: With over 12 years experience in the UK private equity mid-market, Dominic is a highly valuable addition to our team. Shareholder meeting dates: VCT Investor Seminar Friday 26 November 2010, 11.00am Turner Suite, Holiday Inn, Coram Street London WC1N 1HT Northern Venture Trust PLC AGM Thursday 13 January 2011, 11.30am Edinburgh Northern AIM VCT PLC AGM Wednesday 2 March 2011, 11.00am Edinburgh Deal leaders: Bill Edge, Tim Levett and Clive Austin of NVM Contact us: NVM Private Equity Limited Northumberland House Princess Square Newcastle upon Tyne NE1 8ER Tel: 0191 244 6000 E-mail: new@nvm.co.uk Forbury Court 12 Forbury Road Reading RG1 1SB Tel: 0118 951 7000 E-mail: rdg@nvm.co.uk 3111 Beetham Tower 301 Deansgate Manchester M3 4LQ Tel: 0845 272 7023 E-mail: clive.austin@nvm.co.uk Past performance is not a guide to the future and you should be aware that share values and income from them may go down as well as up and that you may not get back the amount you originally invested. Potential investors are strongly urged to seek independent professional advice before considering investment in a VCT. Investments made in smaller companies or specialist sectors such as technology related stocks can be more volatile than investments in developed markets and more established companies and above average price movements can be expected. Exposure to a single country market also increases potential volatility. Investments should be viewed as for the medium to long term. Existing tax levels, bases and reliefs may change and the value of reliefs depends on personal circumstances. Investments made by VCTs will normally be in companies whose securities are not publicly traded or fully marketable and may therefore be difficult to realise, as may the shares in the VCT. In the event of a VCT losing its HM Revenue & Customs approval, it is likely that its shares will become illiquid. Government Stamp Duty of 0.5% is payable on all investment trust shares purchased. The value of investment trust shares purchased will immediately be reduced by the difference between buying and selling prices (market maker s spread). Performance figures do not include market maker s spread which can be substantial in these trusts. NVM Private Equity Limited is authorised and regulated by the Financial Services Authority. 6