Electra Private Equity : Annual Report & Accounts 2019

Electra Private Equity PLC

Annual Report and Financial Statements

30 September 2019

Contents

Strategic and Business Review

1	1	About Electra Private Equity PLC
2	Chairman's Statement
	4	Strategic Report
	8	Portfolio Review
	14	CFO Review

2

3

4

Financial Statements

16 Consolidated Income Statement

1. Consolidated Statement of Comprehensive Income
2. Consolidated Statement of Changes in Equity
3. Company Statement of Changes in Equity
4. Consolidated Balance Sheet
5. Company Balance Sheet
6. Consolidated Cash Flow Statement
7. Notes to the Financial Statements

42 Independent Auditor's Report

Corporate Governance

1. Directors' Report, including Corporate Governance Report

1. Directors' Remuneration Report

1. Report of the Audit and Risk Committee

1. Statement of Directors' Responsibilities
2. Board of Directors

Further Information

1. Alternative Investment Fund Managers Directive (Unaudited)
2. Information for Shareholders

79 Glossary

IBC Contact Details

About Electra Private Equity PLC

Electra Private Equity PLC ("Electra" or the "Company") is a private equity investment trust which has been listed on the London Stock Exchange since 1976. The Company is managed as an HM Revenue and Customs approved investment trust and invests primarily in the private equity mid market. As at 30 September 2019, its net assets were £210 million or 548p per share.

Statements Financial Review Business and Strategic

Investment Objective and Policy

>> Electra's investment objective is to follow a realisation strategy, which aims to crystallise value for shareholders, through balancing the timing of returning cash to shareholders with maximisation of value.

>> The Company will not make any new investments but will continue to support its existing investments to the extent required in order to optimise returns.

>> The Company will retain sufficient cash to meet its obligations and to support its portfolio assets, with cash from realisations being invested in AAA-rated money market funds, pending utilisation or return to shareholders.

>> Should it be appropriate to utilise gearing in order to

optimise the balance between timing of returning cash to shareholders and maximisation of value, the Company will maintain gearing below 40% of its total assets.

>> Since 1 October 2016, the Company has distributed £2.0 billion to shareholders through ordinary dividends, special dividends and a share buyback.

Financial Highlights

>> NAV per share total return over 3 years to 30 September 2019: 8%.

>> Shareholder total return over 3 years to 30 September 2019: 24%.

Governance Corporate

Information Further

Electra Private Equity PLC | Annual Report and Financial Statements 2019

1

Chairman's Statement

Our results demonstrate the progress made at Electra over the last year, reflected in a significant NAV uplift on retained assets, as we actively manage our remaining portfolio of investments. We have made tangible progress in both of our two larger businesses, TGI Fridays ("TGI") and Hotter Shoes ("Hotter"). At TGI the new management's focus both on improving customer experience and on operational excellence gives confidence that it is on the right track to further develop the business and deliver profitable growth. The changes at Hotter are now progressing, with improved trading, under a much-strengthened management team.

The recent sale of Special Product Company ("SPC") reflects the transformation of that business since we internalised management of our portfolio in 2017 and demonstrates our commitment to the timely realisation and distribution of cash to shareholders. I look, with confidence, to more progress from our key portfolio investments in 2020 and further delivery of our strategy.

Following the successful exit from our larger non-controlling investments early in the year, at the General Meeting in October 2018 over 99% of our shareholders endorsed the Board's proposal to adopt a strategy to optimise value through a managed wind‑down of our portfolio and the return of cash to shareholders.

That decision was taken in the context of us having doubled shareholder value over the prior three years, and it is our firm intent to target similar levels of return for shareholders over the two to three years that we believe it will take to optimise the value of our remaining portfolio, although we are vigilant for opportunities to accelerate this time frame. Following consultation with shareholders the Remuneration Committee intends to seek shareholder support at our Annual General Meeting ("AGM") to align our existing executive incentive arrangements with this timeframe for targeted realisation.

After a challenging year in 2018 for the markets in which our larger investments, TGI and Hotter, operate we have been active in working to ensure that the performance of these businesses recovers and in implementing our plans to deliver stronger, more profitable, resilient and desirable businesses. A key element of this work has been to put in place strengthened leadership and management at both businesses.

Ian Watson joined Hotter as CEO in March 2019 and, whilst market conditions continue to be challenging, excellent progress has been made in strengthening management and implementing the key strategic changes to the business and its products, necessary to significantly improve the performance and resilience of the business. The immediate actions taken by the new management improved trading performance which is reflected in Hotter's improved valuation. We anticipate that the sustainable benefits of longer-term initiatives will be increasingly apparent from the third quarter of 2020.

Whilst the changes being made at Hotter are structural and transformational, the management changes we have implemented at TGI are intended to take what is already a good business to the next level. Robert Cook joined TGI as CEO at the beginning of December 2019 with a remit to focus on growth through improved customer experience, operational excellence and accelerated evolution of the business, with profitable growth, to adapt to evolving market conditions and customer expectations.

We are confident that Robert and the strengthened team that he has assembled will revitalise and grow the TGI brand and business. I would thank Karen Forrester, the outgoing CEO of TGI, for her long and significant contribution to the business, and wish her well.

Whilst TGI and Hotter will provide the majority of our targeted value growth and cash returns, we are also encouraged by progress at SPC and Sentinel Performance Solutions ("Sentinel"). Both were distressed investments when we internalised our portfolio management in 2017. Through focus and support for management, the performance, business and prospects of SPC have improved significantly and I am pleased to confirm that we have very recently completed an exit that realised our increased valuation of £9 million in cash at close, with a further £1.5 million due on expiry of an escrow period. Sentinel continued to be controlled by a third party until we obtained control in July 2019. We have moved quickly to strengthen the management team, simplify and focus the business and have agreed renewed banking facilities with £1.5 million to be invested by the Company to support restructuring and growth. With these actions implemented and with continued focus, Sentinel provides an opportunity to build a strong and sustainable business and to realise good value growth within our targeted time frame.

Post year end we have also completed the disposal of two of our smaller investments, bringing in £3 million of cash at a small uplift to carrying value.

To allow future focus on value creation within our portfolio, we have taken action to materially reduce our internal cost base early in 2019. With a head office relocation later in December 2019, we will have successfully reduced our cash overheads from over £26 million p.a. as recently as early 2017 to under £3 million p.a. going forward. Even with costs at this reduced level, we remain conscious of the need both to continue to manage our costs and to ensure that we conclude the delivery of our strategy within the targeted time frame.

As indicated at the half year, in reflection of the reduced scale of our business, we have also reduced the size of our Board. Roger Perkins and Ian Brindle both stepped down at our AGM in February 2019 following many years of much valued service. With Sherborne Investors Management LP ("Sherborne Investors")

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