LMS Capital’s interims for the first half of 2015 show its NAV rising by a penny to 94p. They sold off investments worth £26.6m including the sale of five fund positions in the secondary market which raised £9.2m after costs; ChyronHego Corporation (one of our US quoted investments) was bought by Vector Capital – the cash proceeds to the Company were £5.1m; the sale of shares in Weatherford International for £3.8m; and £5.3m as Voreda Real Estate (one of their UK fund interests) completed the sale of its principal asset.
The had net cash and quoted securities of £48.5m at the end of June.
The Company has today announced proposals to change its investment policy to enable it to invest in opportunities in the energy sector and full details are included in a circular which is being sent to shareholders. The Company would continue its realisation programme in respect of its existing portfolio and the disposal proceeds (net of any amount required for working capital purposes) would then be invested in accordance with the proposed investment policy. An investment team comprising Robert Rayne, Tom Daniel, Bernard Duroc-Danner and Tony Hayward (ex BP) will oversee the new strategy (the “Investment Team”). Julian Metherell will act as a senior adviser to the Investment Team. The fees would be 2&20 and they hope to start with £100m and expand this to £250m.
The Company will initially use its existing cash balances and the proceeds generated from the realisation of its existing portfolio (net of an amount required for working capital purposes) to make new investments in accordance with the proposed investment policy (such investments to be the “Energy Assets”). The Company has committed to make available for the purposes of the Energy Assets cash proceeds from the realisation of the legacy assets (the “Legacy Assets”) of a minimum £100m. A proportion of this amount (comprising net cash and certain other assets) will be available for investment from the effective date of the change of investment policy.
Longer term, it is intended that at least £150m in equity capital will be raised within 24 months of adoption of the Change of Investment Policy. If this capital is not raised in this timeframe, the Board will review the options available to the Company. FCA and Shareholder approval will be sought if the Board decides to change the investment policy of the Company at that time.
Nick Friedlos will step down from the Board when the Change of Investment Policy becomes effective, but will continue to oversee realisation of the assets held by the Company as at the date of the Change of Investment Policy. Tony Sweet will remain on the Board as an executive director, continuing in his role as Chief Financial Officer. His role will include assisting with the realisation of Legacy Assets, transitioning the administration of the Company to an externally managed structure and aiming significantly to reduce the costs associated with the legacy structure, over what is currently expected to be a 12 month period. In order to meet the independence requirements for closed-ended investment funds in the Listing Rules, two additional independent non-executive directors will be appointed to the Board before the Company implements the Change of Investment Policy. The Company will announce these appointments when they are made.
The Company is proposing to appoint Frostrow Capital LLP, an independent FCA regulated investment firm, as its external alternative investment fund manger. This appointment is subject to FCA approval, which the Company and Frostrow Capital LLP expect to be forthcoming by the end of September 2015. Frostrow Capital LLP will delegate key elements of its portfolio management functions to St James’s Asset Management (an investment management firm established by Tom Daniel, in which it is intended that the rest of the Investment Team will become partners).
The Company intends to apply to HMRC for approval as an investment trust. The advantage of obtaining investment trust status is that, for each accounting period for which the Company continues to be approved by HMRC as an investment trust, the Company will be exempt from UK taxation on its capital gains. The Company is intending to qualify as an investment trust in respect of its accounting period which commenced on 1 January 2015 and its accounting periods commencing thereafter.
Under the agreement to be entered into between the Company, Frostrow Capital LLP and St James’s Asset Management (the “Portfolio Management Agreement”), St James’s Asset Management will be entitled to an annual fee of 2% of the Company’s committed capital and assets under management in respect of the Energy Assets. This fee (as well as certain other agreed costs until a further successful fundraising is completed) will be payable by the Company on a monthly basis. In order to cover the costs of terminating and winding up its operations, a £2.5m termination fee will be payable to St James’s Asset Management if the Company is not able to raise at least £150m of equity capital within 24 months of the Change of Investment Policy becoming effective (unless a longer period is agreed between the parties).
Performance fees will be charged in the form of “Carry”. This will be calculated based on the net asset value of the Energy Assets. Gains on the Legacy Assets will not be subject to the carry arrangements. Carry will be allocated based on both realised and unrealised gains. Carry will be calculated by reference to changes in the adjusted NAV of the Energy Assets at the end of each financial year, and will only be allocated in respect of a financial year in which there is a profit as a result of an increase in such NAV. Subject to the high water mark provision described below, any such profit will be allocated, before the allocation of carried interest, to the Company until the aggregate amount allocated to the Company is equal to a preferred return of 5% per annum. Further profits would then be allocated (subject to certain adjustments) 80% to the Company and 20% to the Carry Partnership. The high watermark provision is designed to ensure that carry is not allocated in instances where the NAV of the Energy Assets, adjusted to take into account capital movements, has fallen and where increases in the adjusted NAV of the Energy Assets are only putting the adjusted NAV of the Energy Assets back to the level it was at before this fall occurred.
Shareholders will be asked to approve this idea at a meeting on 12 August. the Rayne family interests (34%) will be voting in favour.
UPDATE 28/7 – meeting adjourned
The Board of LMS announces that it has received representations from certain shareholders in relation to the proposals for changing the Company’s Investment Policy. The Board wishes to give careful consideration to these representations and accordingly has decided to adjourn the General Meeting convened for 12 August 2015 to enable discussions with shareholders to take place.
UPDATE 27/8 – plan abandoned
The Company says that after discussions and representations from certain shareholders, the proposals have been withdrawn and the meeting adjourned indefinitely.
LMS thinking of investing in energy