CT Private Equity Trust

BMO Private Equity Trust PLC

Annual Financial Report for the Year to 31 December 2020

Following the release on 26 March 2021 of the Company's preliminary results announcement for the year ended 31 December 2020 (the "Preliminary Announcement"), the Company announces that its annual report and financial statements for the year ended 31 December 2020 (the "Annual Report and Financial Statements") will be published today.   

A copy of the Annual Report and Financial Statements will be submitted to the National Storage Mechanism and will shortly be available for inspection at www.Hemscott.com/nsm.do 

The information below, which is extracted in unedited full text from the Annual Report and Financial Statements, is included in this announcement solely for the purposes of compliance with Disclosure and Transparency Rule 6.3.5 and the requirements it imposes on issuers as to how to make public annual financial reports. It should be read in conjunction with the Preliminary Announcement. Together these constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the full Annual Report and Financial Statements.

Principal Risks and Uncertainties and Risk Management

The principal risks and uncertainties faced by the Company are described below and note 1 provides detailed explanations of the risks associated with the Company's financial instruments:

Risk description: Economic, macro and political - External events such as global financial/political instability including terrorism, climate change, disease including pandemics, protectionism, inflation or deflation, economic shocks or recessions, the availability of credit and movements in interest rates could affect share prices and the valuation of investments.

Mitigation: Each regular meeting of the Board provides a forum to discuss with the Managers the general economic environment and to consider any impact upon the investment portfolio and objectives. The investment portfolio is diversified across end markets and regions.

Increase in overall risk in year

Risk description: Liquidity and capital structure - Failure by the Company to meet its outstanding undrawn commitments could lead to financial loss for shareholders. Failure to replace maturing borrowings or enter agreement for new borrowings.

Mitigation: The Board receives a detailed analysis of outstanding commitments at each meeting. A medium term cashflow projection is also provided.  The Company has a borrowing facility which will not expire until 30 June 2024. At 31 December 2020 the facility was composed of a €25 million term loan and a £75 million revolving credit facility.

Increase in overall risk in year

Risk description: Regulatory - Failure by the Company to meet or adhere to regulatory/legislative standards. Regulatory or taxation changes resulting in disincentives or market barriers limiting demand for the Company's shares.

Mitigation: At each Board meeting the Company's legal counsel provides an update on regulatory and legislative developments. The Company employs BMO Asset Management as Company Secretary.

No change in overall risk in year.

Risk description: Service Delivery Failure at the Manager - Failure of the Manager's accounting systems or disruption to the Manager's business or business continuity failure could lead to an inability to provide accurate reporting and monitoring, leading to loss of shareholders' confidence. Loss of key personnel from the BMO Private Equity team.

Mitigation: The Board receives an annual internal controls report from the Manager. Regular meetings between the Board and senior staff of the Manager. There is a six month notice period to the investment management agreement.

No change in overall risk in year.

Risk description: Fraud and cyber risks - Theft of Company and customer assets or data, including cyber risks.

Mitigation: The Depositary oversees custody of investments and cash in accordance with the requirements of the AIFMD. The Manager has extensive internal controls in place. The Board receives a regular report on its effectiveness. The Board also receives an annual internal controls report from the Registrar.

No change in overall risk in year.

Risk description - Poor long term investment performance relative to the peer group or other asset classes

Mitigation: Investment policy and absolute and relative to peer group performance are reviewed at each meeting.

No change in overall risk in year.

Risk description: - Share price discount

Objective and strategy are inappropriate in relation to investor demands, adversely affecting the Company's share price discount.

Mitigation: At each meeting of the Board, the Directors monitor performance against peer group and returns from the FTSE All Share Index.  Market intelligence is maintained via the Company's broker, N+1 Singer and the provision of shareholder analyses.

No change in overall risk in year.

Rolling five year viability assessment and statement

The 2018 UK Corporate Governance Code requires a Board to assess the future prospects for the Company, and report on the assessment within the Annual Report. The Board considered that a number of characteristics of the Company's business model and strategy were relevant to this assessment:

•     The Board looks to long-term performance rather than short term opportunities.

•     The Company's investment objective, strategy and policy, which are subject to regular Board monitoring, mean that the Company is invested in a well-diversified portfolio of funds and direct investments and that the level of borrowings is restricted.

•     The Company has a single class of Ordinary Shares.

•     The Company's business model and strategy is not time limited.

Also relevant were a number of aspects of the Company's operational arrangements:

•     The Company has title to all assets held.

•   The Company's five-year borrowing facility is composed of a €25 million term loan and a £95 million multi-currency revolving credit facility. The interest rate payable is variable.

•    The Company aims to pay quarterly dividends with an annual yield equivalent to not less than four per cent of the average of the published net asset values per ordinary share for the previous four financial quarters, or if higher in pence per share the highest quarterly dividend previously paid. Dividends can be funded from the capital reserves of the Company.

•   Revenue and expenditure forecasts and projected cash requirements are reviewed by the Directors at each Board Meeting.

Given the current volatility in stock markets and the economic disruption arising from the COVID-19 pandemic, the Directors also considered detailed cashflow projections modelling various scenarios relating to the COVID-19 pandemic on the future drawdowns to be paid and distributions to be received by the Company. These projections were adjusted to consider various plausible scenarios and took account of possible impacts upon the future NAV of the Company and the ability of the Company to meet its loan covenants. The Board concluded that there was a low probability that a covenant breach related to capacity to meet cashflow requirements would occur. Furthermore, the Board has considered the remedies available if it appears that a covenant breach is possible. Having considered the likelihood of the events which could cause a covenant breach and the remedies available to the Company, the Directors are of the view that the Company is well placed to manage such an eventuality satisfactorily. In addition, the Directors carried out a robust assessment of the principal risks which could threaten the Company's objective, strategy, future performance, liquidity and solvency.

The principal risks identified as relevant to the viability assessment were those relating to external risks, poor long term investment performance and the failure of the Company to manage financial resources to allow it to meet its outstanding undrawn commitments.

The Board took into account the forecasted cash requirements of the Company, the long-term nature of the investments held, the existence of the borrowing facility and the effects of any significant future falls in investment values on the ability to repay and re-negotiate borrowings, maintain dividend payments and retain  investors.

These matters were assessed over a five year period to April 2026, and the Board will continue to assess viability over five year rolling periods, taking account of foreseeable severe but plausible scenarios. A rolling five year period represents the horizon over which the Directors believe they can form a reasonable expectation of the Company's prospects, balancing the Company's financial flexibility and scope with the current uncertain outlook for longer-term economic conditions affecting the Company and its shareholders.

Based on their assessment, and in the context of the Company's business model, strategy and operational arrangements set out above, the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period to April 2026. For this reason, the Board also considers it appropriate to continue adopting the going concern basis in preparing the Report and Accounts.

Independent Auditor

Following the conclusion of a formal tender process led by the Company's Audit Committee, the Board has approved the proposed appointment of BDO LLP as Auditor for the financial year commencing 1 January 2021. BDO LLP has expressed its willingness to be appointed Auditor to the Company. The appointment is subject to Shareholder approval at the Annual General Meeting scheduled to be held on 27 May 2021 and resolutions concerning BDO LLP's appointment and remuneration will be submitted to the Annual General Meeting.

The Board extends its appreciation to Ernst and Young LLP for its services as Auditor since the inception of the Company in 1999. The Board also confirms that there are no matters in connection with Ernst and Young LLP ceasing to hold office as Auditor following the 2020 audit which need to be brought to the attention of Shareholders.

Statement of Directors' Responsibilities in Relation to the Financial Statements

The Directors are responsible for preparing the Report and Accounts, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to

•     select suitable accounting policies and then apply them consistently;

•     make judgements and accounting estimates that are reasonable and prudent;

•     state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements respectively; and

•    prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors confirm that they have complied with the above requirements in preparing the financial statements. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the

assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Report and Accounts is published on the bmoprivateequitytrust.com website, which is maintained by BMO. The Directors are responsible for the maintenance and integrity of the Company's website. Visitors to the website need to be aware that legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the Directors confirm to the best of their knowledge that:

•     the financial statements, prepared in accordance with applicable accounting standards give a true and fair view of the assets, liabilities, financial position and profit of the Company;

•    the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces; and

•     the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

On behalf of the Board

Mark Tennant

Chairman

Notes

1.           Financial instruments

The Company's financial instruments comprise equity investments, cash balances, a bank loan and liquid resources including debtors and creditors. As an investment trust, the Company holds a portfolio of financial assets in pursuit of its investment objective. From time to time the Company may make use of borrowings to fund outstanding commitments and achieve improved performance in rising markets. The downside risk of borrowings may be reduced by raising the level of cash balances held.

The Company's investing activities expose it to various types of risk that are associated with the financial instruments and markets in which it invests. The most important types of financial risk to which the Company is exposed are market price risk, interest rate risk, liquidity and funding risk, credit risk and foreign currency risk.

The nature and extent of the financial instruments outstanding at the balance sheet date and the risk management policies employed by the Company are discussed below.

Market price risk

The Company's strategy for the management of market price risk is driven by the Company's investment policy. The management of market price risk is part of the investment management process and is typical of private equity investment. The portfolio is managed with an awareness of the effects of adverse price movements through detailed continuing analysis, with an objective of maximising overall returns to shareholders. Investments in unquoted stocks, by their nature, involve a higher degree of risk than investments in the listed market. Some of that risk can be, and is, mitigated by diversifying the portfolio across geographies, business sectors and asset classes, and by having a variety of underlying private equity managers. New private equity managers are only chosen following a rigorous due diligence process. The Company's overall market positions are monitored by the Board on a quarterly basis.

Interest rate risk

Some of the Company's financial assets are interest bearing and, as a result, the Company is subject to exposure to fair value interest rate risk due to fluctuations in the prevailing levels of market interest rates.

When the Company retains cash balances the majority of the cash is held in deposit accounts. The benchmark rate which determines the interest payments received on cash balances is the bank base rate for the relevant currency.

Liquidity and funding risk

The Company's financial instruments include investments in unlisted equity investments which are not traded in an organised public market and which generally may be illiquid. As a result, the Company may not be able to liquidate quickly some of its investments in these instruments at an amount close to their fair value in order to meet its liquidity requirements, including the need to meet outstanding undrawn commitments or to respond to specific events such as a deterioration in the creditworthiness of any particular issuer.

The Company's listed securities are considered to be readily realisable.

The Company's liquidity risk is managed on an ongoing basis by the Manager in accordance with policies and procedures in place. The Company's overall liquidity risks are currently monitored on a quarterly basis by the Board.

The Company maintains sufficient investments in cash and readily realisable securities to pay accounts payable and accrued expenses.

Credit risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Manager has in place a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis. The carrying amounts of financial assets best represents the maximum credit risk exposure at the balance sheet date, hence no separate disclosure is required.

Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the high credit quality of the brokers used. The Manager monitors the quality of service provided by the brokers used to further mitigate this risk.

All the listed assets of the Company (which are traded on a recognised exchange) are held by JPMorgan Chase Bank, the Company's custodian. The Company has an ongoing contract with the Custodian for the provision of custody services. The contract was reviewed and updated in 2014. Details of securities held in custody on behalf of the Company are received and reconciled monthly. The Depositary has regulatory responsibilities relating to segregation and safe keeping of the Company's financial assets, amongst other duties, as set out in the Directors' Report. The Board has direct access to the Depositary and receives regular reports from it via the Manager.

To the extent that the Manager carries out management and administrative duties (or causes similar duties to be carried out by third parties) on the Company's behalf, the Company is exposed to counterparty risk. The Board assesses this risk continuously through regular meetings with the management of BMO (including the Fund Manager) and with BMO's Risk Management function. In reaching its conclusions, the Board also reviews BMO's annual Audit and Assurance Faculty Report.

The Company's cash balances are held by a number of counterparties. Bankruptcy or insolvency of these counterparties may cause the Company's rights with respect to the cash balances to be delayed or limited. The Manager monitors the credit quality of the relevant counterparties and should the credit quality or the financial position of these counterparties deteriorate significantly the Manager would move the cash holdings to another bank.

Foreign currency risk

The Company invests in overseas securities and holds foreign currency cash balances which give rise to currency risks. It is not the Company's policy to hedge this risk on a continuing basis but it may do so from time to time. The Company has a multi-currency revolving credit facility which allows it to be drawdown in multiple currencies. There were no currency forwards open at the year end. 

2.          The Annual General Meeting ("AGM") of the Company will be held on 27 May 2021 at 12 noon at Quartermile 4, 7a Nightingale Way, Edinburgh, EH3 9EG.

Mindful of the potential for travel and gathering restrictions arising from the COVID-19 pandemic the Board has amended the format of this year's AGM. Due to the restrictions on gatherings and travel in place, Shareholders will not be permitted to attend this year's AGM in person but can be represented by the Chairman of the meeting acting as their proxy. The AGM will be held as a closed meeting with the minimum attendance required to form a quorum.

To allow shareholder engagement, Shareholders can attend an online presentation by the Company's Chairman and Investment Manager, to be held at 12.00 noon on 27 May 2021, immediately prior to the formal business of the AGM. A special email account has been created and Shareholders are requested to direct any questions they may have about the resolutions proposed at the AGM or the performance of the Company, in advance of the meeting to this address: [email protected]. The Board will endeavor to ensure that all such questions are fully addressed during the presentation or on the Company's website as described below.

The Manager's presentation will also be available on the Company's website www.bmoprivateequitytrust.com as soon as possible after the presentation accompanied with a regularly updated Questions and Answers Schedule. Online access details for the presentation will be included on the Form of Proxy or Form of Direction.

The formal AGM, including voting on the resolutions at the meeting will be held following the presentation as a closed meeting. Accordingly, and to ensure that their votes will count Shareholders are strongly encouraged to complete and submit their Form of Proxy or Form of Direction appointing the Chairman of the AGM as their proxy. Appointment of a proxy other than the Chairman of the meeting will result in a Shareholder's vote not being counted at the AGM as the person appointed as proxy will not be admitted to the formal meeting. The results of voting on the resolutions proposed at the AGM will be announced to the market as soon as possible following the close of the meeting.

The Board acknowledges the evolving nature of the current gathering and travel restrictions and will seek to change the format of this year's AGM if they are able to do so in a safe and compliant manner. If the Board does take such a decision, Shareholders will be notified of any change of format by London Stock Exchange Announcement and on the Company's website.

3.         Copies of the Annual Report and Financial Statements will be sent to shareholders and will be  available at the Company's registered office, Quartermile 4, 7a Nightingale Way, Edinburgh, EH3 9EG and on its website www.bmoprivateequitytrust.com 

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