Northern Investors : 12 November 2018 - Half-year report

12 NOVEMBER 2018

NORTHERN INVESTORS COMPANY PLC

UNAUDITED HALF-YEARLY FINANCIAL REPORT
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2018

Northern Investors Company PLC is a private equity investment trust managed by NVM Private Equity LLP. The trust was launched in 1984 and has been listed on the London Stock Exchange since 1990. In July 2011 shareholders approved a change in investment strategy, whereby the trust ceased making new investments and began an orderly realisation of its portfolio with a view to returning capital to shareholders. Since then the trust has returned a total of £90.7 million to shareholders through dividends and capital distributions.

Financial highlights (comparative figures as at 30 September 2017 and 31 March 2018):

For further information, please contact:

Northern Investors Company PLC
Nigel Guy/James Bryce 0191 244 6000

HALF-YEARLY MANAGEMENT REPORT TO SHAREHOLDERS

Overview
Our company is approaching the final stage of a process which began in July 2011, when a general meeting of shareholders approved a radical change in corporate strategy. As a result the company ceased making new investments and began an orderly realisation of its portfolio, with a view to returning capital to shareholders through a series of cash distributions. At the time of the change the company's net assets were £59.0 million, comprising 30 venture capital investments with a carrying value of £47.7 million and net current assets of £11.3 million (including cash balances of £12.2 million).

It was recognised that the task of realising the underlying value of a portfolio of minority holdings in small unquoted companies was challenging and would require patience and careful management, so it is pleasing to record that over the past seven years the company has been able to distribute over £90 million to shareholders, with now only three of the original 30 investments still to be sold.

As a result of successful realisations and cash distributions, the company's remaining net assets have been progressively reduced and stand at £5.6 million at 30 September 2018. Your directors believe that the point has now been reached where the expense of maintaining the present corporate form, including a Stock Exchange listing, is disproportionate in relation to the remaining asset base. Accordingly it is intended that on 16 November 2018 we will publish a circular convening a general meeting of shareholders to be held on 11 December 2018, at which a resolution will be proposed to appoint liquidators to carry out a members' voluntary liquidation of the company. We believe this will be the most cost-effective and tax-efficient way of completing the final stages of the portfolio run-off process and distributing the resulting funds to shareholders.

This half-yearly management report will therefore be the last report which your board will be making to shareholders. Following the appointment of the liquidators, the company's directors will resign and its Stock Exchange listing will be cancelled.

Results for the six months ended 30 September 2018
During the half year the company's income statement showed a loss before tax of 9.4 pence per share, comprising a surplus of 1.8 pence per share on the revenue account and a deficit of 11.2 pence per share on the capital account. A capital profit of £0.1 million was realised on the sale of CGI Group Holdings, but this was more than offset by an overall reduction of £0.4 million in the directors' valuation of the three remaining investments. Unfortunately global trade conflicts and rising US interest rates, whose effects have already been reflected in stock market weakness, and the continuing uncertainty around Britain's proposed withdrawal from the European Union, are not particularly conducive to investee companies' trading or exit prospects.

The net asset value per share at 30 September 2018 was 222.7 pence, a reduction of 9.4 pence from the audited figure of 232.1 pence as at 31 March 2018. The directors' valuation of the three remaining investments was £3.7 million. Cash balances at 30 September 2018 amounted to £3.2 million (31 March 2018 £1.9 million), of which we estimate that £3.0 million will be passed over to the liquidators on their appointment. The other significant balance sheet item is the provision of £1.3 million for the total incentive fee which will be payable to NVM if the remaining investments are realised at their current valuation and when the company's cash balances (net of liquidation expenses) are distributed to shareholders. The corresponding provision at 31 March 2018 was £1.8 million, of which £0.5 million became due and was paid in June 2018.

No dividend has been declared in respect of the period.

Investment portfolio
In September 2018 the company's investment in CGI Group Holdings was sold for proceeds of £1.8 million, compared to an original cost of £1.9 million and a 31 March 2018 carrying value of £1.7 million. This was a satisfactory final outcome to an investment which had already returned significant amounts of cash through capital reconstructions in 2004 and 2008.

Our manager, NVM Private Equity, has continued to seek appropriate exit opportunities for the three remaining investments, Axial Systems Holdings, Lanner Group and Weldex (International) Offshore Holdings. It is highly unlikely that any of these holdings will be sold prior to the general meeting, and NVM will be retained to work with the liquidators, once appointed, on the continuing realisation process. At this stage it is not possible to give a reliable indication as to the likely timing of future disposals.

Appointment of liquidators
Shareholders are strongly recommended to read the circular which is expected to be published by the company on 16 November 2018, which will contain notice of the general meeting to be held on 11 December 2018 and will set out the background to, and implications of, the liquidators' appointment, as well as a description of risk factors and tax considerations relevant to shareholders. The following paragraphs set out the directors' understanding of certain key aspects but are not a substitute for reading the circular itself.

The remit of the liquidators will be to oversee the realisation of the company's remaining assets and to complete the process of distributing cash to shareholders. On the appointment of the liquidators, the directors will cease to have any powers or functions in relation to the affairs of the company and will therefore resign from the board. NVM's responsibility to provide administrative and secretarial services to the company will also cease. However NVM will enter into a new agreement to provide advisory services in connection with the sale of the remaining investments. NVM will also retain its existing entitlement to receive an incentive fee based on cash distributions to shareholders. Details will be provided in the circular.

It is envisaged that the company's listing on the London Stock Exchange will be cancelled with effect from 12 December 2018. The share register will be closed at the close of business on 10 December 2018 and registration of transfers of shares will no longer be possible after that date without the prior consent of the liquidators. Shareholders who hold their shares through ISAs are therefore urged to check that their ISA provider will permit the shares to be retained once the company's listing is cancelled. The production of audited annual and unaudited half-yearly reports in their present form will cease, although the liquidators are required by statute to report to shareholders annually for as long as the liquidation continues.

Since the adoption of the revised investment policy in 2011, your directors have from time to time provided shareholders with updated estimates of the range of possible outcomes in terms of cash distributions to shareholders. Our last such estimate, in May 2018, was that the total cash returned to shareholders would be equivalent to between 162% and 167% of the starting net assets of £59 million. We believe that this range remains valid, though it must be emphasised that the timing of further investment sales and the values realised will be at the discretion of the liquidators and will also depend on the companies' trading performance and on market conditions at the relevant time. Nevertheless this points to a highly creditable outcome which validates the orderly realisation strategy maintained by the board over the past seven years.

The liquidators have indicated that, based on the information currently available to them, they expect to make an initial distribution of not less than £1.8 million (equivalent to approximately 72 pence per share) to shareholders no later than 31 January 2019. The timing and amount of further distributions will depend on investment realisations, but it is currently estimated that it may take a further 24 months or more to complete the realisation process. The liquidators are obliged to settle all known liabilities and claims and seek tax clearance from HM Revenue & Customs before making any final distribution to shareholders and then concluding the liquidation. Based on the directors' appraisal of the range of possible outcomes mentioned above, and allowing for the payment of estimated liquidation expenses and the NVM incentive fee, we believe that cash distributions to shareholders in the liquidation period, including the initial distribution by the liquidators, could be in the range from 215 pence to 295 pence per share. This information is provided for illustration purposes only and clearly is in no way binding on the company or the liquidators.

Conclusion
Northern Investors was launched in 1984 with an initial capital of £5 million and has been listed as an investment trust on the London Stock Exchange since 1990. The company's impending demise is in some ways to be regretted, but it is a fact of life that modern investors, particularly institutions, have become increasingly reluctant to invest in listed private equity investment trusts which make direct investments in unquoted companies rather than in managed funds.

I know that shareholders will want to join me in thanking the present board and their predecessors for their wise oversight of the company's affairs, as well as our manager NVM whose investment executives have been consistent, professional and effective in their approach over the years. We have also been fortunate to have the benefit of long and productive relationships with our various professional advisers. On behalf of the board I would also like to thank those shareholders who have remained with us for their continued support.

On behalf of the Board

Nigel Guy
Chairman

The unaudited half-yearly financial statements for the six months ended 30 September 2018 are set out below.

INCOME STATEMENT
(unaudited) for the six months ended 30 September 2018

BALANCE SHEET
(unaudited) as at 30 September 2018

STATEMENT OF CHANGES IN EQUITY

(unaudited) for the six months ended 30 September 2018

STATEMENT OF CHANGES IN EQUITY

(unaudited) for the six months ended 30 September 2017

STATEMENT OF CHANGES IN EQUITY

for the year ended 31 March 2018

STATEMENT OF CASH FLOWS
(unaudited) for the six months ended 30 September 2018

INVESTMENT PORTFOLIO SUMMARY
(unaudited) as at 30 September 2018

BUSINESS RISKS

The board carries out a regular and robust review of the risk environment in which the company operates. The principal risks and uncertainties identified by the board which might affect the company's business model and performance, and the steps taken with a view to their mitigation, are as follows:

Investment and liquidity risk: the company's investments comprise minority holdings in small and medium-sized unquoted companies, which by their nature entail a higher level of risk and lower liquidity than investments in large quoted companies. The company's ability to exert influence over these investments may be limited relative to other shareholders. Mitigation: the investment manager aims to limit the risk attaching to the portfolio as a whole by close monitoring of individual holdings, including the appointment of investor directors where appropriate. The board reviews the portfolio, including the schedule of projected exits, with the investment manager on a regular basis with a view to ensuring that the orderly realisation process remains on track.

Portfolio concentration risk: following the adoption of the company's revised investment policy in July 2011, the portfolio has become more concentrated as investments are realised and cash is returned to shareholders. This has increased the proportionate impact of changes in the value of individual investments on the value of the company as a whole. The directors' valuation of the company's investments represents their best assessment of the fair value of the investments as at the valuation date and the amounts eventually realised from such investments may be more or less than the directors' valuation. Mitigation: the directors and manager keep the changing composition of the portfolio under review and focus closely on those holdings which represent the largest proportions of total value.

Financial risk: the company's investments are relatively illiquid. Mitigation: the directors consider that it is inappropriate to finance the company's activities through borrowing except on an occasional short-term basis. Accordingly they seek to maintain a proportion of the company's assets in cash or cash equivalents in order to be in a position to meet expenditure commitments including any investments which may be made under the company's revised investment policy. The company has very little exposure to foreign currency risk and does not enter into derivative transactions.

Economic risk: events such as economic recession or general fluctuations in stock markets and interest rates may affect the valuation of investee companies and their ability to access adequate financial resources, as well as affecting the company's own share price and discount to net asset value. Mitigation: the company maintains sufficient cash reserves to be able to provide additional funding to investee companies should this be necessary.

Liquidation risk: in order to complete the implementation of the company's corporate strategy, the directors intend to propose that liquidators will be appointed to carry out a members' voluntary liquidation, following which the directors will resign and the company's shares will cease to be listed on the London Stock Exchange. This will result in shareholders having a lesser degree of influence over the affairs of the company than previously and to a loss of liquidity as regards their shareholdings.

Credit risk: the company holds a number of financial instruments and cash deposits and is dependent on the counterparties discharging their commitment. Mitigation: the directors review the creditworthiness of the counterparties to these instruments and cash deposits and seek to ensure there is no undue concentration of credit risk with any one party.

Internal control risk: the company's assets could be at risk in the absence of an appropriate internal control regime. Mitigation: the board regularly reviews the system of internal controls, both financial and non-financial, operated by the company and the manager. These include controls designed to ensure that the company's assets are safeguarded and that proper accounting records are maintained.

It is expected that a circular to shareholders will be published on 16 November 2018 containing proposals for the appointment of liquidators and setting out the risk factors relating to such appointment.

OTHER MATTERS

The unaudited half-yearly financial statements for the six months ended 30 September 2018 do not constitute statutory financial statements within the meaning of Section 434 of the Companies Act 2006, have not been reviewed or audited by the company's independent auditor and have not been delivered to the Registrar of Companies. The comparative figures for the year ended 31 March 2018 have been extracted from the audited financial statements for that year, which have been delivered to the Registrar of Companies; the auditor's report on those financial statements (i) was unqualified, (ii) drew attention by way of emphasis of matter to the fact that the financial statements had not been prepared on the going concern basis and (iii) did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

The half-yearly financial statements have been prepared on the basis of the accounting policies set out in the annual financial statements for the year ended 31 March 2018. The financial statements have not been prepared on the going concern basis, since the company's current objective is to conduct an orderly realisation of the investment portfolio and return cash to shareholders. No adjustments were necessary to the investment valuations or other assets and liabilities included in the financial statements as a consequence of the change in the basis of preparation.

The directors of the company at the date of this announcement were Mr N R A Guy (Chairman), Mr J C Barnsley and Mr P W F Marsden.

Each of the directors confirms that to the best of his knowledge the half-yearly financial statements have been prepared in accordance with the Statement 'Half-yearly financial reports' issued by the UK Accounting Standards Board and the half-yearly financial report includes a fair review of the information required by (a) DTR 4.2.7R of the Disclosure Rules and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year, and (b) DTR 4.2.8R of the Disclosure Rules and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last annual report that could do so.

The calculation of the revenue and capital return per share is based on the return on ordinary activities after tax for the six months ended 30 September 2018 and on 2,496,767 (2017 2,496,767) ordinary shares, being the weighted average number of shares in issue during the period.

The calculation of the net asset value per share is based on the net assets at 30 September 2018 divided by the 2,496,767 (2017 2,496,767) ordinary shares in issue at that date.

A copy of the half-yearly financial report for the six months ended 30 September 2018 is expected to be posted to shareholders on 16 November 2018 and will be available to the public at the registered office of the company at Time Central, 32 Gallowgate, Newcastle upon Tyne NE1 4SN and on the NVM Private Equity LLP website, www.nvm.co.uk.

Neither the contents of the NVM Private Equity LLP website nor the contents of any website accessible from hyperlinks on the NVM Private Equity LLP website (or any other website) is incorporated into, or forms part of, this announcement.