TIDMJZCP TIDMJZCC TIDMJZCN
JZ CAPITAL PARTNERS LIMITED (the "Company" or "JZCP")
(a closed-end investment company incorporated with limited liability under the
laws of Guernsey with registered number 48761)
ANNUAL RESULTS FOR THE YEARED
28 FEBRUARY 2022
LEI: 549300TZCK08Q16HHU44
(Classified Regulated Information, under DTR 6 Annex 1 section 1.1)
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF THE MARKET
ABUSE REGULATION (EU) NO. 596/2014 WHICH FORMS PART OF UK LAW BY VIRTUE OF THE
EUROPEAN UNION (WITHDRAWAL) ACT 2018 ("MAR").
15 June 2022
JZ Capital Partners, the London listed fund that has investments in US and
European micro-cap companies and US real estate, announces its preliminary
results for the year ended 28 February 2022.
Financial Highlights
· NAV per share of $4.29 (FYE 28/02/21: $4.25)
· NAV of $332.3 million (FYE 28/02/21: $329.5 million)
· Total realisations of $65.8 million, including: the sale of JZCP's
investment in Salter Labs, proceeds from selling down the "funded portion" of
its commitment to the Orangewood Fund; and the sale of George Industries, Igloo
and Vitalyst.
Investment Policy and Liquidity
· The Company's objective remains realising the maximum value from its
investment portfolio and, after repaying its debt obligations (which includes
the £57.6 million of Zero Dividend Preference Shares ("ZDPs") due 1 October
2022), the return of capital to shareholders.
· The US and European micro-cap portfolios have generally performed well,
and both portfolios are working towards several realizations.
· To meet this challenge and afford the Company more time to maximise the
value of its portfolio and bring these businesses to market, the following
transactions have taken place in regard to the Company's indebtedness:
o The Company realised its investment in Salter Labs above NAV, receiving net
proceeds of approximately $41 million.
o The Company drew down $31.5 million of Subordinated Notes (payable on 11
September 2022) under a facility made available by affiliates of Jay Jordan and
David Zalaznick (as approved by shareholders).
o The Company redeemed approximately £38.8 million (approximately $54.1
million) of Convertible Unsecured Loan Stock on its maturity date of 30 July
2021.
o The Company repaid its previous senior facility (the "Previous Senior
Facility") which was provided by clients and funds managed by Cohanzick
Management, LLC and CrossingBridge Advisors, LLC in an amount of approximately
$52.9 million, prior to such facility's maturity date of 12 June 2022.
o On 26 January 2022, the Company entered into a new five-year term senior
secured loan facility (the "New Senior Facility") with WhiteHorse Capital
Management LLC. The New Senior facility consists of a $45.0 million first lien
term loan (which was drawn at close) and up to an additional $25.0 million in
first lien delayed draw term loan (which remains undrawn) - the New Senior
Facility is due on 26 January 2027.
o In March 2022 (post-period), the Secondary Fund, in which the Company has a
Special Limited Partnership ("LP") Interest, sold its interest in Flow Control
Holdings LLC ("Flow Control") for a consideration of approximately $77.7
million. Whilst reflected in the Company's valuation of its Special LP Interest
as at 28 February 2022, this transaction conferred no immediate cash benefit
to the Company, as the other investors in the Secondary Fund (the "Secondary
Investors") have an entitlement to a priority return of 1.4x invested capital
prior to any distributions being made to the Company. However, as a result of
the distribution made to the Secondary Investors from the Flow Control
realization (as well as other smaller transactions), the balance outstanding on
the Secondary Investors' priority return was significantly reduced from
approximately $132.6 million to approximately $35.5 million. Once the remaining
balance on the priority return has been distributed to the Secondary Investors,
the Company will be entitled to receive 95% of all subsequent distributions
until the Company has received $67.6 million in proceeds. Thereafter, the
Company will receive 37.5% of all further distributions.
o In May 2022 (post-period), a portfolio company of the Secondary Fund
executed an agreement to sell certain of its interests, with the Secondary Fund
expecting to receive a distribution from such portfolio company of net proceeds
it receives in such sale of approximately $165-$180 million. Pursuant to the
Secondary Fund's waterfall, such portfolio company sale is expected to result
in JZCP receiving a distribution from the Secondary Fund of approximately
$89-$94 million, which would correspond to a NAV uplift to JZCP in the range of
approximately 56-63 cents per ordinary share. It is hoped that closing of this
transaction is imminent but at the moment it remains conditional. Such uplift
has not been reflected in the Company's valuation of its Special LP Interest in
the Secondary Fund as at 28 February 2022.
· In summary, the Company's key outstanding debt obligations are (i) $45.0
million outstanding on the New Senior Facility due 26 January 2027, (ii)
approximately £57.6 million of ZDPs due 1 October 2022, and (iii) $31.5 million
of Subordinated Notes due 11 September 2022.
David Macfarlane, Chairman of JZCP, said: "The Board believes that the
Company's outlook has improved dramatically. We continue to see significant
value to be realised from our US and European microcap portfolios and are
working towards several realisations that will provide potentially significant
liquidity events in the near future.
In addition, on the back of the expected substantial distribution from the
Secondary Fund, the Board is very optimistic that all the Company's obligations
will be repaid in full and that a significant amount of capital will be
returned to shareholders.
"We look forward to the next twelve months with renewed confidence."
Market Abuse Regulation:
The information contained within this announcement is inside information as
stipulated under MAR. Upon the publication of this announcement, this inside
information is now considered to be in the public domain. The person
responsible for arranging the release of this announcement on behalf of the
Company is David Macfarlane, Chairman.
For further information:
Ed Berry / Kit Dunford +44 (0)7703 330 199 / +44 (0)7717 417 038
FTI Consulting
David Zalaznick
+1 212
485 9410
Jordan/Zalaznick Advisers, Inc.
Martin Chapman
+44 (0) 1481
745183
Northern Trust International Fund
Administration Services (Guernsey) Limited
About JZ Capital Partners
JZCP has investments in US and European micro-cap companies, as well as real
estate properties in the US.
JZCP's Investment Adviser is Jordan/Zalaznick Advisers, Inc. ("JZAI") which was
founded by David Zalaznick and Jay Jordan in 1986. JZAI has investment
professionals in New York, Chicago, London and Madrid.
In August 2020, the Company's shareholders approved changes to the Company's
investment policy. Under the new policy, the Company will make no further
investments except in respect of which it has existing obligations and to
continue selectively to support the existing portfolio. The intention is to
realise the maximum value of the Company's investments and, after repayment of
all debt, to return capital to shareholders.
JZCP is a Guernsey domiciled closed-ended investment company authorised by the
Guernsey Financial Services Commission. JZCP's shares trade on the Specialist
Fund Segment of the London Stock Exchange.
For more information please visit www.jzcp.com.
Important Notice:
This announcement includes statements that are, or may be deemed to be,
"forward-looking statements". These forward-looking statements can be
identified by the use of forward-looking terminology, including the terms
"believes", "estimates", "anticipates", "expects", "intends", "may", "will" or
"should" or, in each case, their negative or other variations or comparable
terminology. These forward-looking statements relate to matters that are not
historical facts. By their nature, forward-looking statements involve risks and
uncertainties because they relate to events and depend on circumstances that
may or may not occur in the future. Forward-looking statements are not
guarantees of future performance. The Company's actual investment performance,
results of operations, financial condition, liquidity, policies and the
development of its strategies may differ materially from the impression created
by the forward-looking statements contained in this announcement. In addition,
even if the investment performance, result of operations, financial condition,
liquidity and policies of the Company and development of its strategies, are
consistent with the forward-looking statements contained in this announcement,
those results or developments may not be indicative of results or developments
in subsequent periods. These forward-looking statements speak only as at the
date of this announcement. Subject to their legal and regulatory obligations,
each of the Company, the Investment Adviser and their respective affiliates
expressly disclaims any obligations to update, review or revise any
forward-looking statement contained herein whether to reflect any change in
expectations with regard thereto or any change in events, conditions or
circumstances on which any statement is based or as a result of new
information, future developments or otherwise.
Chairman's Statement
We present the results of the Company for the financial year ended 28 February
2022, which show that the NAV of the Company increased from $4.25 per share at
28 February 2021 to $4.29 per share at 28 February 2022 ($4.08 at 31 August
2021). This modest increase is primarily attributable to strong performance of
JZHL Secondary Fund LP (the "Secondary Fund") and the realisations of Salter
Labs and Igloo above NAV, offset by finance and administration costs as well as
write-downs at two US micro-cap investments, Deflecto and Vitalyst, and net
write downs in the European portfolio at JZI Fund III, L.P. and our direct loan
to Xacom.
Investment Policy and Liquidity
The Company's objective remains to realise the maximum value from its
investment portfolio and, after repaying its debt obligations (which includes
the £57.6 million of Zero Dividend Preference Shares ("ZDPs") due 1 October
2022), to return capital to shareholders.
The following are the key events affecting the Company's liquidity over the
past year:
× The Company realised its investment in Salter Labs above NAV, receiving
net proceeds of approximately $41 million.
× The Company drew down $31.5 million of Subordinated Notes (payable on 11
September 2022) under a facility made available by affiliates of Jay Jordan and
David Zalaznick (as approved by shareholders).
× The Company redeemed approximately £38.8 million (approximately $54.1
million) of Convertible Unsecured Loan Stock on its maturity date of 30 July
2021.
× The Company repaid its previous senior facility (the "Previous Senior
Facility") which was provided by clients and funds managed by Cohanzick
Management, LLC and CrossingBridge Advisors, LLC in an amount of approximately
$52.9 million, prior to such facility's maturity date of 12 June 2022.
× On 26 January 2022, the Company entered into a new five-year term senior
secured loan facility (the "New Senior Facility") with WhiteHorse Capital
Management LLC. The New Senior facility consists of a $45.0 million first lien
term loan (which was drawn at close) and up to an additional $25.0 million in
first lien delayed draw term loan (which remains undrawn). The terms of the New
Senior Facility represent a substantial improvement to those of the Previous
Senior Facility, including as to interest cost and maturity -the New Senior
Facility is due on 26 January 2027.
× In March 2022 (post-period), the Secondary Fund, in which the Company
has a Special LP Interest, sold its interest in Flow Control Holdings LLC
("Flow Control") for a consideration of approximately $77.7 million. Whilst
reflected in the Company's valuation of its Special Limited Partnership ("LP")
Interest as at 28 February 2022, this transaction conferred no immediate cash
benefit to the Company, as the other investors in the Secondary Fund (the
"Secondary Investors") have an entitlement to a priority return of 1.4x
invested capital prior to any distributions being made to the Company. However,
as a result of the distribution made to the Secondary Investors from the Flow
Control realization (as well as other smaller transactions) the balance
outstanding on the Secondary Investors' priority return was significantly
reduced from approximately $132.6 million to approximately $35.5 million. Once
the remaining balance on the priority return has been distributed to the
Secondary Investors, the Company will be entitled to receive 95% of all
subsequent distributions until the Company has received $67.6 million in
proceeds. Thereafter, the Company will receive 37.5% of all further
distributions.
× As announced in a press release dated 23 May 2022, a portfolio company
of the Secondary Fund executed an agreement to sell certain of its interests,
with the Secondary Fund expecting to receive a distribution from such portfolio
company of net proceeds it receives in such sale of approximately $165-$180
million. Pursuant to the Secondary Fund's waterfall, in which JZCP has a
Special LP Interest, such portfolio company sale is expected to result in JZCP
receiving a distribution from the Secondary Fund of approximately $89-$94
million, which would correspond to a NAV uplift to JZCP in the range of
approximately 56-63 cents per ordinary share. It is hoped that closing of this
transaction is imminent but at the moment it remains conditional. Such uplift
has not been reflected in the Company's valuation of its Special LP Interest in
the Secondary Fund as at 28 February 2022.
In summary, the Company's key outstanding debt obligations are (i) $45.0
million outstanding on the New Senior Facility due 26 January 2027, (ii)
approximately £57.6 million of ZDPs due 1 October 2022 and (iii) $31.5 million
of Subordinated Notes due 11 September 2022.
Subject to compliance with its financial covenants, the New Senior Facility
permits, and, in fact, requires, the repayment of the Subordinated Notes and
ZDPs on their respective maturities. While the Company's ability to repay its
Subordinated Notes and ZDPs remains dependent upon the Company achieving
sufficient realisations in due time, the Board is confident that following the
Company's receipt of its expected distribution from the Secondary Fund, the
Company will have sufficient cash to redeem its ZDPs. As noted in the press
release dated 23 May 2022, the redemption of the ZDPs remains subject to
compliance with the New Senior Facility's financial covenants and the extension
of the maturity of the Subordinated Notes. It has been indicated that when the
Company has sufficient cash to redeem the ZDPs such an extension will be
negotiated.
In consequence of the conditionality of the portfolio company sale referred to
above, uncertainty remains regarding the Company's ability to redeem the ZDPs
on their maturity date as well as the Company's expected ability to extend the
Subordinated Notes. Accordingly, the Report of the Directors accompanying these
results discloses a material uncertainty as to the Company's ability to
continue as a going concern.
US and European Micro-cap Portfolios
Our US and European micro-cap portfolios have generally performed well, and we
are working towards several realisations in both portfolios. The Board looks
forward to reporting on further potential realisations at the interim period.
In a press release dated 21 March 2022, the Company announced that it had come
to the Board's attention that allegations of fraudulent conduct had been made
against two individuals who were members of the management team that manages
JZCP's investments in European micro-cap companies. A claim has been made in
respect thereof in the New York State Supreme Court. The claimants are a fund
in which JZCP has only an approximate 1% interest (carried at approximately
$0.75 million) as well as a fund in which JZCP has no interest.
The Board understands that the investigation into the allegations has
concluded; the information available to the Board at this time indicates that
the Company has no reason to believe that the alleged conduct will have a
material adverse effect on the Company's investments held through JZI Fund III,
L.P.
The Board will however make further announcements as and when appropriate
should any further information concerning the investigation and any potential
impact on the Company become available.
No allegations of fraudulent conduct were made against employees of the
Company's investment adviser, Jordan/Zalaznick Advisers, Inc.
Real Estate portfolio
The Company has two remaining properties with equity value, Esperante, an
office building in West Palm Beach, Florida, and 247 Bedford Avenue, a retail
building with Apple as the primary tenant, in Williamsburg, Brooklyn.
Based on newly received appraisals at the calendar year-end, both assets were
written up from their values at the interim period (31 August 2021). However,
the real estate portfolio remained flat as compared to the previous year-end
(28 February 2021).
Outlook
The Board believes that the Company's outlook has improved dramatically. On the
back of the expected substantial distribution from the Secondary Fund, the
Board is very optimistic that all the Company's obligations will be repaid in
full and that a significant amount of capital will be returned to shareholders.
David Macfarlane
Chairman
14 June 2022
Investment Adviser's Report
Dear Fellow Shareholders,
We are very pleased to announce that the Company has completed the fiscal year
in a stronger financial position than in recent years. Several major
realizations (both during the year and post-period), combined with our
successful efforts to fortify JZCP's balance sheet, have strengthened the
Company's position.
As announced in a press release dated May 23, 2022, a portfolio company of JZHL
Secondary Fund LP, the ("Secondary Fund") executed an agreement to sell certain
of its interests, with the Secondary Fund expecting to receive a distribution
from such portfolio company of net proceeds it receives in such sale of
approximately $165-$180 million. Pursuant to the Secondary Fund's waterfall, in
which JZCP has a Special LP Interest, such portfolio company sale is expected
to result in JZCP receiving a distribution from the Secondary Fund of
approximately $89-$94 million, which would correspond to a NAV uplift to JZCP
in the range of approximately 56-63 cents per ordinary share.
Including this expected distribution from such portfolio company (anticipated
imminently), the Company would have cash on hand today of more than $125
million.
With regards to our efforts to reinforce JZCP's balance sheet, we successfully
executed the following transactions, among others, during the year:
. We agreed to personally provide a $31.5 million liquidity facility at
6.0% interest to JZCP (i.e., at the same rate as the CULS), which was approved
by shareholders.
. JZCP paid off its CULS (£38.8 million) in full and on their stated due
date while at the same time maintaining a cash cushion.
. The Company repaid its previous senior facility (the "Previous Senior
Facility") with clients and funds managed by Cohanzick Management, LLC and
CrossingBridge Advisors, LLC in an amount of approximately $52.9 million, prior
to such facility's maturity date of 12 June 2022.
On 26 January 2022, the Company entered into a new five-year term senior
secured loan facility (the "New Senior Facility") with WhiteHorse Capital
Management LLC. The New Senior facility consists of a $45.0 million first lien
term loan (which was drawn at close) and up to an additional $25.0 million in
first lien delayed draw term loan (which remains undrawn). The terms of the New
Senior Facility represent a substantial improvement to those of the Previous
Senior Facility, including a lower interest cost and longer maturity - the New
Senior Facility is due on 26 January 2027.
Our US and European micro-cap portfolios have generally performed well. We are
working towards several realizations in both portfolios.
The Company's two remaining real estate assets that have equity value are 247
Bedford Avenue in Brooklyn, New York (where Apple is the principal tenant), and
the Esperante office building in West Palm Beach, Florida. Both assets were
written up at the year-end based on newly received appraisals. We look forward
to reporting on our progress at both properties in the coming months.
As of 28 February 2022, our US micro-cap portfolio consisted of 14 businesses,
which includes four 'verticals' and six co-investments, across nine industries.
Our European micro-cap portfolio consisted of 17 companies across six
industries and seven countries.
Net Asset Value ("NAV")
JZCP's NAV per share increased 4 cents, or 0.9%, during the twelve-month
period:
NAV per Ordinary share as of 1 March 2021 $4.25
Change in NAV due to capital gains and accrued income
+ US micro-cap 0.57
- European micro-cap (0.10)
Other decreases in NAV
- Change in CULS fair value (0.02)
- Foreign exchange effect (0.08)
- Finance costs (0.18)
- Expenses (0.15)
NAV per Ordinary share as of 28 February 2022 $4.29
The US micro-cap portfolio continued to perform well during the year,
delivering a net increase of 57 cents per share. This was primarily due to net
accrued income of 6 cents and write-ups at co-investments Salter Labs (4 cents)
and Igloo (4 cents) and the JZHL Secondary Fund portfolio (58 cents).
Offsetting these increases were decreases at co-investments George Industries,
New Vitality, Deflecto and Vitalyst (1 cent, 1 cent, 6 cents and 6 cents
respectively) and Avante (2 cents).
Our European portfolio decreased 10 cents during the year, due to net write
downs at European portfolio companies.
The real estate portfolio was flat for the year; after a one-time write-down at
the interim period at Esperante, the property was written-up at the year-end
based on a newly received appraisal.
Returns
The chart below summarizes cumulative total shareholder returns and total NAV
returns for the most recent six-month, one-year, three-year and five-year
periods.
28.2.2022 31.8.2021 28.2.2021 28.2.2019 28.2.2017
Share price (in GBP) £1.05 £1.20 £0.78 £4.35 £5.38
Share price (in USD) 1 $1.41 $1.65 $1.09 $5.79 $6.69
NAV per share (in USD) $4.29 $4.08 $4.25 $10.04 $10.12
NAV to market price discount 67.2% 59.5% 74.3% 42.4% 33.8%
6 month 1 year 3 year 5 year
return return return return
Total Shareholders' return (GBP) (12.5%) 34.6% (75.9%) (80.5%)
Total NAV return per share (USD) 5.1% 0.9% (57.3%) (57.6%)
1Translated at the relevant year end exchange rate.
Portfolio Summary
Our portfolio is well-diversified by asset type and geography, with 31 US and
European micro-cap investments across eleven industries. The European portfolio
itself is well-diversified geographically across Spain, Italy, Portugal,
Luxembourg, Scandinavia and the UK.
Below is a summary of JZCP's assets and liabilities at 28 February 2022 as
compared to 28 February 2021. An explanation of the changes in the portfolio
follows:
28.2.2022 28.2.2021
US$'000 US$'000
US micro-cap portfolio 284,162 299,339
European micro-cap portfolio 105,475 117,781
Real estate portfolio 23,597 23,376
Other investments 23,533 23,147
Total Private Investments 436,767 463,643
Treasury bills 3,394 3,394
Cash and cash equivalents 43,656 59,784
Total Listed Investments and Cash 47,050 63,178
Other assets 70 22
Total Assets 483,887 526,843
Senior debt facility 42,573 68,694
Zero Dividend Preferred shares 75,038 74,303
Loan Notes 32,293 -
Convertible Unsecured Loan Stock - 52,430
Other liabilities 1,719 1,857
Total Liabilities 151,623 197,284
Total Net Assets 332,264 329,559
US Micro-Cap Portfolio
As you know from previous reports, our US portfolio is grouped into industry
'verticals' and co-investments. As of December 4, 2020, certain of our
verticals and co-investments are now grouped under JZHL Secondary Fund, LP
("JZHL" or the "Secondary Fund"). JZCP has a continuing interest in the
Secondary Fund through a Special LP Interest, which entitles JZCP to certain
distributions from the Secondary Fund.
Our 'verticals' strategy focuses on consolidating businesses under industry
executives who can add value via organic growth and cross company synergies.
Our co-investments strategy allows for greater diversification of our portfolio
by investing in larger companies alongside well-known private equity groups.
The US micro-cap portfolio continued to perform well during the year,
delivering a net increase of 57 cents per share. This was primarily due to net
accrued income of 6 cents and write-ups at co-investments Salter Labs (4 cents)
and Igloo (4 cents) and the JZHL Secondary Fund portfolio (58 cents).
Offsetting these increases were decreases at co-investments George Industries,
New Vitality, Deflecto and Vitalyst (1 cent, 1 cent, 6 cents and 6 cents
respectively) and Avante (2 cents).
European Micro-Cap Portfolio
Our European portfolio decreased 10 cents during the year, due to net write
downs at European portfolio companies.
JZCP invests in the European micro-cap sector through its approximately 18.8%
ownership of Fund III. As of 28 February 2022, Fund III held 13 investments:
five in Spain, two in Scandinavia, two in Italy, two in the UK and one each in
Portugal and Luxembourg. JZCP held direct loans to a further three companies in
Spain: Docout, Xacom and Toro Finance.
JZAI has offices in London and Madrid and an experienced team with over fifteen
years of investing together in European micro-cap deals.
Real estate Portfolio
The Company's two remaining real estate assets that have equity value are 247
Bedford Avenue in Brooklyn, New York (where Apple is the principal tenant), and
the Esperante office building in West Palm Beach, Florida.
Both assets were written up at the year-end based on newly received appraisals.
We look forward to reporting on our progress at both properties in the coming
months.
Other investments
Our asset management business in the US, Spruceview Capital Partners, has
continued to make encouraging progress since our last report to you.
Spruceview addresses the growing demand from corporate pensions, endowments,
family offices and foundations for fiduciary management services through an
Outsourced Chief Investment Officer ("OCIO") model as well as customized
products/solutions per asset class.
During the period, Spruceview's mandate for a portfolio of alternative
investments for a Mexican trust (or "CERPI") was increased by $177 million,
bringing total assets to $1 billion, with the potential to further increase the
size of the CERPI to $1.5 billion, pending regulatory approvals, over the
coming year. In addition, Spruceview won an advisory mandate for a global
equity portfolio sponsored by a Mexican mutual fund administrator.
Spruceview's third private markets fund, focused on co-investment opportunities
in the US, ended the period with commitments of over $77 million. The firm also
received additional commitments to its second private markets fund, bringing
total commitments to $86 million, as well as over $90 million in additional
contributions to the pension plans to which it provides advisory services.
Spruceview also maintained a pipeline of potential client opportunities and
continued to provide investment management oversight to the pension funds of
the Mexican and Canadian subsidiaries of an international packaged foods
company, as well as portfolios for family office clients, and a growing series
of private market funds.
As previously reported, Richard Sabo, former Chief Investment Officer of Global
Pension and Retirement Plans at JPMorgan and a member of that firm's executive
committee, is leading a team of 20 investment, business and product
development, legal and operations professionals.
Realisations
Orangewood Fund
In May 2021 and June 2021, JZCP received approximately $6.2 million in proceeds
from selling down the "funded portion" of its commitment to the Orangewood Fund
as well as from investor re-allocations from the final close of the Orangewood
Fund. JZCP has sold down its entire commitment to the Orangewood Fund.
Salter Labs
In June 2021, JZCP received a $41 million distribution from the sale of Salter.
In November 2021, JZCP received an escrow distribution from Salter in the
amount of approximately $0.5 million.
George
In April 2021, JZCP sold its investment in George, receiving approximately $9.5
million in sale proceeds.
New Vitality
In May 2021 and December 2021, JZCP received distributions from New Vitality
totaling approximately $0.5 million.
Igloo
In October 2021, JZCP sold its investment in Igloo, receiving approximately
$3.8 million in sale proceeds.
EuroMicrocap Fund 2010, L.P.
In October 2021, JZCP received a distribution from EuroMicrocap Fund 2010, L.P.
in the amount of $2.2 million.
Vitalyst
In February 2022, JZCP sold its investment in Vitalyst, receiving approximately
$1.9 million in sale proceeds.
JZHL Secondary Fund LP
In December 2021, the Secondary Fund, in which the Company has a Special LP
Interest, received a distribution of approximately $2.2 million from Peaceable.
In February 2022, the Secondary Fund received a distribution of approximately
$17.2 million from TierPoint, the result of a partial sale of the Secondary
Fund's interest in TierPoint.
In March 2022 (post-period), the Secondary Fund sold its interest in Flow
Control Holdings LLC ("Flow Control") for consideration of approximately $77.7
million.
These three transactions conferred no immediate cash benefit to the Company, as
the other investors in the Secondary Fund (the "Secondary Investors") have an
entitlement to a priority return of 1.4x invested capital prior to any
distributions being made to the Company. However, as a result of the above
distributions made to the Secondary Investors, the balance outstanding on the
Secondary Investors' priority return was significantly reduced from
approximately $132.6 million to approximately $35.5 million.
Once this remaining balance on the priority return has been distributed to the
Secondary Investors, the Company is entitled to receive 95% of all subsequent
distributions until the Company receives $67.6 million in proceeds. Thereafter,
the Company receives 37.5% of all further distributions.
In May 2022 (post-period), a portfolio company of JZHL Secondary Fund LP, the
("Secondary Fund") executed an agreement to sell certain of its interests, with
the Secondary Fund expecting to receive a distribution from such portfolio
company of net proceeds it receives in such sale of approximately $165-$180
million. Pursuant to the Secondary Fund's waterfall, in which JZCP has a
Special LP Interest, such portfolio company sale is expected to result in JZCP
receiving a distribution from the Secondary Fund of approximately $89-$94
million, which would correspond to a NAV uplift to JZCP in the range of
approximately 56-63 cents per ordinary share.
Outlook
We believe that JZCP's outlook has dramatically improved. Once the Company
receives the above-mentioned distribution from the Secondary Fund (expected
imminently), JZCP expects to have cash on hand of more than $125
million.
As detailed above, we have restructured JZCP's liabilities and believe that our
current balance sheet is in a much stronger position than previously reported.
In summary, the Company's key outstanding debt obligations are (i) $45.0
million outstanding on the New Senior Facility due 26 January 2027, (ii)
approximately £57.6 million of ZDPs due 1 October 2022 and (iii) $31.5 million
of Subordinated Notes due 11 September 2022. Subject to compliance with its
financial covenants, the New Senior Facility allows for the repayment of the
ZDPs on their maturity date.
We see significant value to be realized from our US and European microcap
portfolios and will continue to selectively invest in the underlying companies
in each portfolio, in accordance with the new investment policy, to maximize
their values. We believe this is the most effective way for us to be able to
return significant capital to our ordinary shareholders. We continue to pursue
several realizations and look forward to making further announcements regarding
potentially significant liquidity events in the near future.
Thank you again for your continued support through a difficult period; we
firmly believe that we are now on the other side. As always, we remain
dedicated to maximizing value for our fellow shareholders.
Yours faithfully,
Jordan/Zalaznick Advisers, Inc.
14 June 2022
Investment Portfolio
28 February 2022 Percentage
of
Cost1 Value Portfolio
US$'000 US$'000 %
US Micro-cap portfolio
US Micro-cap Fund
JZHL Secondary Fund L.P.2
JZHL Secondary Fund L.P.
Invested in six companies in the US micro-cap sector:
(See below for further information)
Total JZHL Secondary Fund L.P. valuation 40,965 117,339 26.7
US Micro-cap (Vertical)
Industrial Services Solutions3
INDUSTRIAL SERVICES SOLUTIONS ("ISS")
Provider of aftermarket maintenance, repair, and field services
for critical process equipment throughout the US
Total Industrial Services Solutions valuation 48,250 95,889 21.8
US Micro-cap (Co-investments)
DEFLECTO 45,010 42,119 9.6
Deflecto designs, manufactures and sells innovative plastic
products to multiple industry segments
NEW 3,354 11,301 2.5
VITALITY3
Direct-to-consumer provider of nutritional supplements and
personal care products
ORIZON 3,899 7,000 1.6
Manufacturer of high precision machine parts and tools for
aerospace and defence industries
Total US Micro-cap (Co-investments) 52,263 60,420 13.7
US Micro-cap (Other)
AVANTE HEALTH SOLUTIONS 7,823 9,514 2.2
Provider of new and professionally refurbished healthcare
equipment
HEALTHCARE PRODUCTS HOLDINGS 17,636 - -
Designer and manufacturer of motorised vehicles
NATIONWIDE STUDIOS 26,324 1,000 0.2
Processor of digital photos for pre-schoolers
Total US Micro-cap (Other) 51,783 10,514 2.4
Total US Micro-cap portfolio 193,261 284,162 64.6
European Micro-cap portfolio
EUROMICROCAP FUND 2010, L.P. 1 596 0.1
Invested in European Micro-cap entities
JZI FUND III, L.P. 55,185 76,286 17.4
At 28 February 2022, was invested in thirteen companies in the
European micro-cap sector (see below for further information)
Total European Micro-cap (measured at Fair Value) 55,186 76,882 17.5
Debt Investments
DOCOUT 2,777 3,913 0.9
Provider of digitalisation, document processing and storage
services
TORO FINANCE 21,619 24,680 5.6
Provides short term receivables finance to the suppliers of major
Spanish companies
XACOM 2,055 - -
Supplier of telecom products and technologies
Debt Investments (classified at amortised cost) 26,451 28,593 6.5
Total European Micro-cap portfolio 81,637 105,475 24.0
Real Estate portfolio
247 BEDFORD AVENUE 17,717 8,913 2.0
Prime retail asset in northern Brooklyn, NY
ESPERANTE 14,158 14,684 3.3
An iconic building on the downtown, West Palm Beach skyline
JZCP REALTY 39,178 - -
Other Properties held - no equity value
Total Real Estate portfolio 71,053 23,597 5.3
Other investments
BSM ENGENHARIA 6,115 459 0.1
Brazilian-based provider of supply chain logistics,
infrastructure services and equipment rental
JZ INTERNATIONAL - 750 0.2
Fund of European LBO investments
SPRUCEVIEW CAPITAL 32,355 22,324 5.0
Asset management company focusing primarily on managing
endowments and pension funds
Total Other investments 38,470 23,533 5.3
Listed investments
U.S. Treasury Bill - Maturity 21 April 2022 3,395 3,394 0.8
Total Listed investments 3,395 3,394 0.8
Total - portfolio 387,816 440,161 100.0
1 Original book cost incurred by JZCP adjusted for subsequent transactions.
Other than JZHL Secondary Fund (see foot note 2), the book cost represents cash
outflows and excludes PIK investments.
2 Notional cost of the Company's interest in JZHL Secondary Fund being $40.965
million which is calculated in accordance with IFRS, and represents the fair
value of the Company's LP interest on recognition.
3 Co-investment with Fund A, a Related Party (Note 24).
JZHL Secondary Fund LP
In December 2020, the Company completed the sale its of its interests in
certain US microcap portfolio companies (the "Secondary Sale") to a secondary
fund led by Hamilton Lane Advisors, L.L.C. ("Hamilton Lane"), one of the
world's largest allocators and managers of private markets capital. The
Secondary Sale was structured as a sale to a newly formed fund, JZHL Secondary
Fund LP (the "Secondary Fund"), managed by an affiliate of JZAI.
The US microcap assets (detailed below) were sold to the Secondary Fund at
their agreed valuation. In return, the Company received cash consideration and
a Special LP Interest in the Secondary Fund entitling the Company to certain
distributions from the Secondary Fund.
The Company's limited partner interest in the Secondary Fund's year-end
valuation is $117.3 million and is valued by considering the valuation of the
underlying investments and the order of returning capital to investors being:
i) First, 100 per cent. will be distributed to Hamilton Lane and various
members of the Fund's management team (the "Other Investors") pro rata in
accordance with their respective contributions until each Other Investor has
received distributions equal to its total aggregate contributions to the
Secondary Fund (amounting in total to US$90 million plus any further
contributions made thereafter, expected to be in the aggregate of up to an
additional US$20 million);
ii) Second, 100 per cent. to the Other Investors pro rata in accordance with
their respective contributions until each other investor has realised the
greater of a 15 per cent. net internal rate of return on its total aggregate
contributions or an amount equal to 140 per cent. of its total aggregate
contributions.
iii) Third, 95 per cent. to the Company (in its capacity as the special limited
partner of the Secondary Fund) and 5 per cent. to the Other Investors until the
Company has received distributions equal to US$67.6 million; and
iv) Fourth, 62.5 per cent. to the Other Investors (pro rata in accordance with
their respective contributions) and 37.5 per cent. to the Company.
In April 2022 (post year end), JZHL realised its investment in Flow Control,
LLC receiving proceeds of $77.7 million. The sale of Flow Control resulted in
the Secondary Investors receiving a distribution from the Secondary Fund,
together with other distributions so far made and received, totalling
approximately $97.1 million for the benefit of the Secondary Investors. The
Secondary Investors are therefore still entitled to receive further
distributions from the Secondary Fund totalling approximately $35.5 million
before JZCP becomes entitled to any distributions as a result of its Special LP
Interest and in accordance with the distribution waterfall as described above.
In May 2022 (post-period), a portfolio company of the Secondary Fund executed
an agreement to sell certain of its interests, with the Secondary Fund
expecting to receive a distribution from such portfolio company of
approximately $165-$180 million. Pursuant to the Secondary Fund's waterfall,
JZCP is expected to receive a distribution from the anticipated sale of
approximately $89-$94 million resulting in an uplift in NAV. Such uplift has
not been reflected in the Company's valuation of its Special LP Interest in the
Secondary Fund as at 28 February 2022 (below), as the closing of this
transaction remains subject to conditions.
JZCP's valuation of Special LP interest in JZHL Secondary Fund
JZHL JZHL
Cost1 Valuation
$'000s $'000s
ACW FLEX PACK, LLC 13,955 12,750
FLOW CONTROL, LLC 15,115 77,723
TESTING SERVICES HOLDINGS 23,426 49,385
FELIX STORCH 24,500 111,000
PEACEABLE STREET CAPITAL 34,321 36,541
TIERPOINT 29,632 29,632
140,949 317,031
Less interest of Hamilton Lane and other secondary investments (199,692)
JZCP's interest in JZHL Secondary Fund 117,339
1The cost of the JZHL's investments represent the agreed transfer value from
JZCP to JZHL plus additional contributions from secondary investors less
distributions made.
JZHL Secondary Fund LP includes investments in the following companies:
ACW Flex Pack, LLC
Flex Pack is a provider of a variety of custom flexible packaging solutions to
converters and end-users.
Further information can be found at www.flex-pack.com
Felix Storch
Felix Storch is a leading provider of specialty refrigeration and custom
appliances to residential small kitchen, professional, life sciences, food
service and hospitality markets. Felix Storch is a second generation family
business, founded in 1969 and based in The Bronx, NY. Felix Storch's products
now include a wide range of major appliances sold both nationally and
internationally.
Further information can be found at www.felixstorchinc.com
Flow Control, LLC
Flow Controls is incorporated in Delaware and is a manufacturer and distributor
of high-performance, mission-critical flow handling products and components
utilised to connect processing line equipment.
Further information can be found at www.flowcontrolinc.com
Peaceable Street Capital
Peaceable is a specialty finance platform focused on making structured
investments in small and mid-sized income producing commercial real estate. The
company is built on a foundation of know-how, creatively structuring preferred
equity to provide senior equity in complex situations. With extensive
investment experience throughout the United States and Canada, Peaceable's
underwriting and decision making process is designed to deliver creative,
flexible and dependable solutions quickly. Peaceable focuses on a diverse
portfolio of property types including multi-family, office, self-storage,
industrial, retail, RV parks, mobile home parks, parking health care and
hotels.
Testing Services Holdings
Testing Services is a provider of safety focused solutions for the industrial,
environmental and life science related markets, and testing, certification and
validation services for cleanroom, critical environments and containment
systems.
Further information can be found at www.techholdings.com
Tierpoint
TierPoint is incorporated in Delaware and is a leading provider of information
technology and data centre services, including colocation, cloud computing,
disaster recovery and managed IT services. TierPoint's hybrid IT solutions help
clients increase business agility, drive performance and manage risk. TierPoint
operates via a network of 43 data centres in 20 markets across the United
States.
Further information can be found at www.tierpoint.com
Summary of JZCP's investment in JZI Fund III"s Investment Portfolio at 28
February 2022
JZCP Cost (EURO)1 JZCP Value (EURO)1 JZCP Value (USD)
Country As at As at As at
28.2.2022 28.2.2022 28.2.2022
?'000s ?'000s $'000s
ALIANZAS EN ACEROS
Steel service center Spain 4,267 4,619 5,188
BLUESITES
Build-up in cell tower land Portugal 3,615 5,512 6,191
leases
COLLINGWOOD
Niche UK motor insurer UK 3,015 3,094 3,475
ERSI
Reinforced steel Lux 8,541 1,882 2,114
modules
FACTOR ENERGIA
Electricity supplier Spain 4,028 8,437 9,476
FINCONTINUO
Niche consumer lender Italy 4,715 6,240 7,009
GUANCHE
Build-up of petrol stations Spain 4,375 4,750 5,335
KARIUM
Personal care consumer brands UK 4,321 9,900 11,120
LUXIDA
Build-up in electricity Spain 3,315 4,969 5,581
distribution
MY LER
Niche consumer lender Finland 4,863 2,067 2,322
S.A.C
Operational van Denmark 3,497 8,100 9,098
leasing
TREEE
e-waste recycling Italy 3,255 9,019 10,130
UFASA
Niche consumer lender Spain 5,119 6,803 7,641
Other net Liabilities (8,394)
Total valuation 76,286
1Represents JZCP's 18.75% of Fund III's investment portfolio
JZCP's Top Ten Investments
Portfolio Value Percentage
of
US$'000 Portfolio
1. INDUSTRIAL SERVICES SOLUTIONS ("ISS") U.S. micro-cap 21.8%
95,889
2, DEFLECTO U.S. micro-cap 9.6%
42,119
3. FELIX STORCH1 U.S. micro-cap 9.3%
41,083
4. FLOW CONTROL1 U.S. micro-cap 6.5%
28,767
5. TORO FINANCE Euro debt 5.6%
investment 24,680
6. SPRUCEVIEW CAPITAL Other 5.1%
22,324
7. TESTING SERVICES HOLDINGS1 U.S. micro-cap 4.2%
18,278
8. ESPERANTE Real estate 3.3%
14,684
9. PEACEABLE STREET CAPITAL1 U.S. micro-cap 3.1%
13,524
10. KARIUM Euro micro-cap 2.5%
11,120
OTHER INVESTMENTS 29.0%
127,693
100.0%
440,161
1 JZCP value calculated net of JZHL secondary investors valuation
Board of Directors
David Macfarlane (Chairman) 1
Mr Macfarlane was appointed to the Board of JZCP in 2008 as Chairman and a
non-executive Director. Until 2002, he was a Senior Corporate Partner at
Ashurst. He was a non-executive director of the Platinum Investment Trust Plc
from 2002 until January 2007.
James Jordan
Mr Jordan is a private investor who was appointed to the Board of JZCP in 2008.
He is a director of the First Eagle family of mutual funds, and of Alpha
Andromeda Investment Trust Company, S.A. Until 30 June 2005, he was the
managing director of Arnhold and S. Bleichroeder Advisers, LLC, a privately
owned investment bank and asset management firm; and until 25 July 2013, he was
a non-executive director of Leucadia National Corporation. He is an Overseer of
the Gennadius Library of the American School of Classical Studies in Athens,
and a Director of Pro Natura de Yucatan.
Sharon Parr2
Mrs Parr was appointed to the Board of JZCP in June 2018. In 2003, she
completed a private equity backed MBO of the trust and fund administration
division of Deloitte and Touche, called Walbrook, selling it to Barclays Wealth
in 2007. As a Managing Director of Barclays, she ultimately became global head
of their trust and fund administration businesses, comprising over 450 staff in
10 countries. She stepped down from her executive roles in 2011 to focus on
other areas and interests but has maintained directorships in several
companies. She is a Fellow of the Institute of Chartered Accountants in England
and Wales and a member of the Society of Trust and Estate Practitioners, and is
a resident of Guernsey.
Ashley Paxton
Mr Paxton was appointed to the Board in August 2020. He has more than 25 years
of funds and financial services industry experience, with a demonstrable track
record in advising closed-ended London listed boards and their audit committees
on IPOs, capital market transactions, audit and other corporate governance
matters. He was previously C.I. Head of Advisory for KPMG in the Channel
Islands, a position he held from 2008 through to his retirement from the firm
in 2019. He is a Fellow of the Institute of Chartered Accountants in England
and Wales and a resident of Guernsey. Amongst other appointments he is Chairman
of the Youth Commission for Guernsey & Alderney, a locally based charity whose
vision is that all children and young people in the Guernsey Bailiwick are
ambitious to reach their full potential.
1Chairman of the nominations committee of which
all Directors are members.
2Chairman of the audit committee of which all
Directors are members.
Report of the Directors
The Directors present their annual report together with the audited financial
statements of JZ Capital Partners ("JZCP" or the "Company") for the year ended
28 February 2022.
Principal Activities
JZ Capital Partners Limited is a closed-ended investment company with limited
liability which was incorporated in Guernsey on 14 April 2008 under the
Companies (Guernsey) Law, 1994. The Company is subject to the Companies
(Guernsey) Law, 2008. The Company's Capital consists of Ordinary shares and
Zero Dividend Preference ("ZDP") shares. The Company's Convertible Unsecured
Loan Stock ("CULS") were redeemed on 30 July 2021. The Company's Ordinary
shares and ZDP Shares are traded on the London Stock Exchange's Specialist Fund
Segment.
The Company's debt structure consists of a Senior debt facility and
subordinated, second lien loan notes (the "Loan notes").
The Company's Investment Policy has been to target predominantly private
investments, seeking to back exceptional management teams to deliver on
attractive investment propositions. In executing its strategy, the Company
takes a long term view.
The Company focused on investing in the following areas, and is now focused on
supporting these investments:
(i) small or micro-cap buyouts in the form of debt and equity and preferred
stock in both the US and Europe; and
(ii) US real estate.
The Company's shareholders agreed changes to the Company's investment policy on
12 August 2020. In line with the new investment policy, the Company will make
no further investments except in respect of which it has existing obligations
or to the extent that investment is required to support existing investments.
The intention is to realise the maximum value of its investments and, after
repayment of all debt, to return capital to shareholders
Business Review
The total comprehensive profit attributable to Ordinary shareholders for the
year ended 28 February 2022 was $2,680,000 (year ended 28 February 2021: loss
of $146,175,000). The net asset value ("NAV") of the Company at the year end
was $332,264,000 (28 February 2021: $329,559,000) equal to $4.29 (28 February
2021: $4.25) per Ordinary share. The losses recorded during the comparative
year ended 28 February 2021 were predominantly attributable to valuation write
downs in the Company's real estate portfolio.
A review of the Company's activities and performance is detailed in the
Chairman's Statement and the Investment Adviser's Report. The valuations of the
unlisted investments are detailed in the Investment Portfolio.
Principal Risks and Uncertainties
The Company's Board believes the principal risks and uncertainties that relate
to an investment in JZCP are as follows:
Portfolio Liquidity
The Company invests predominantly in unquoted companies and real estate.
Therefore, this potential illiquidity means there can be no assurance
investments will be realised at their latest valuation or on the timing of such
realisations. The Board considers this illiquidity when planning to meet its
future obligations, whether committed investments or the repayment of the
Senior Debt Facility, Loan Notes and Zero Dividend Preference ("ZDP") shares.
On a quarterly basis, the Board reviews a working capital model produced by the
Investment Adviser which highlights the Company's projected liquidity and
financial commitments.
Investment Performance and Impact on NAV
The Company is reliant on the Investment Adviser to support the Company's
investment portfolio by executing suitable investment decisions. The Investment
Adviser provides the Board with an explanation of all investment decisions and
also provides quarterly investment reports and valuation proposals of investee
companies. The Board reviews investment performance quarterly and investment
decisions are checked to ensure they are consistent with the agreed investment
strategy.
Macroeconomic Risks and Impact on NAV
The Company's performance, and underlying NAV, is influenced by economic
factors that affect the demand for products or services supplied by investee
companies and the valuation of Real Estate interests held. Economic factors
will also influence the Company's ability to invest and realise investments and
the level of realised returns. Approximately 24% (28 February 2021: 25%) of
the Company's investments are denominated in non-US dollar currencies,
primarily the euro. Also, the Company's ZDP shares are denominated in sterling.
Fluctuations to these exchange rates will affect the NAV of the Company.
Uncertainties in today's world that influence economic factors include:
(i) COVID-19
Whilst reporting its interim results for the year ended 28 February 2022, the
Board disclosed in its Going Concern Assessment, that the encouraging
performance of the micro-cap portfolios in the face of unprecedented
circumstances gave the Board confidence in the valuation of the portfolios and
the potential for growth and future valuation uplifts. The Board has confidence
that the micro-cap portfolios are continuing to perform robustly but is mindful
that market conditions mean that realisations may be delayed or become more
difficult.
(ii) War in Ukraine
The Board has been shocked to witness the devastating events unfold since
Russia's unprovoked invasion of Ukraine and strongly condemn the actions of the
Russian government.
JZCP's investments are focused in the U.S. and Western Europe as such the
portfolio has no direct exposure to the affected regions. However, certain
portfolio companies have exposure to the rising energy costs resulting from the
conflict. The Board continue to receive reports from the Investment Adviser on
the impact of these increased costs. To the best of its knowledge, the Board is
not aware that the Company, has had Russian investors, either today or
historically.
(iii) Global Warming
The Board considers the impact of climate change on the firm's business
strategy and risk profile and, where appropriate will make timely climate
change related disclosures. Regular updates, given by the Investment Advisor,
on portfolio companies and properties will include potential risk factors
pertaining to climate change and how/if able these risks are to be mitigated.
The Board also has regard to the impact of the company's operations on the
environment and other stakeholders. There are expectations that portfolio
companies operate is a manner that contributes to sustainability by considering
the social, environmental, and economic impacts of doing business. The Board
request the Investment Adviser report on any circumstances where expected
standards are not met.
Share Price Trading at Discount to NAV
JZCP's share price is subject to market sentiment and will also reflect any
periods of illiquidity when it may be difficult for shareholders to realise
shares without having a negative impact on share price. The Directors review
the share price in relation to Net Asset Value on a regular basis and determine
whether to take any action to manage the discount. The Directors, with the
support of the Investment Adviser, work with brokers to maintain interest in
the Company's shares through market contact and research reports.
Operational and Personnel
Although the Company has no direct employees, the Company considers what
dependence there is on key individuals within the Investment Adviser and
service providers that are key to the Company meeting its operational and
control requirements.
The Board considers the principal risks and uncertainties above are broadly
consistent with those reported at the prior year end, but wishes to note the
following:
. The Board recognises the Company will have an increased exposure to
liquidity risk as future debt obligations near maturity;
. Gearing and the finance costs within the real estate portfolio have
become less of a future risk to the Company as the current valuation of $23.6
million (28 February 2021: $23.4 million) now reflects the majority of write
downs that could be generated by the gearing structure and costs incurred; and
. The effect of the war in Ukraine on market conditions means that
there are challenges to completing corporate transactions within the European
micro-cap portfolio and planned realisations may be delayed. The Board deem the
risks posed by COVID-19 to the Company's investment portfolio, in terms of
valuation and ability to complete realisations are lessening as economies learn
to live and adapt to the virus.
Going Concern
A fundamental principle of the preparation of financial statements in
accordance with IFRS is the judgement that an entity will continue in existence
as a going concern for a period of at least 12 months from signing of the
financial statements, which contemplates continuity of operations and the
realisation of assets and settlement of liabilities occurring in the ordinary
course of business.
Due to the uncertainty that the Company will not have sufficient liquidity to
repay its Loan notes (due 11 September 2022) and redeem its ZDP shares (due 1
October 2022), there is a material uncertainty which casts significant doubt on
the ability of the Company to continue as a going concern. However, the
Financial Statements for the year ended 28 February 2022 have been prepared on
a going concern basis given the Board's assessment of future realisations and
likelihood that, should it be necessary, agreement would be able to be reached
with debt providers which would allow the timely repayment of its obligations,
including the redemption of its ZDP shares. The Board, with recommendation from
the Audit Committee, has a reasonable expectation that the Company has adequate
resources to continue in operational existence for the foreseeable future.
In reaching its conclusion, the Board has considered the risks that could
impact the Company's liquidity over the period from 14 June 2022 to 30 June
2023 (the "going concern period") being approximately 12 months from the
signing of the Financial Statements.
As part of their assessment the Audit Committee highlighted the following key
consideration:
Whether the Company can generate sufficient cash through realisations of its
underlying investments to discharge its liabilities over the period to 30 June
2023 or failing to do so can agree terms with its debt providers to repay its
obligations, including the redemption of its ZDP shares, over an extended
timeframe.
In summary, the Company's key outstanding debt obligations during the going
concern period are:
(i) $31.5 million of Subordinated Notes due 11 September 2022; and
(ii) Approximately $77.3 million of ZDP shares due 1 October 2022, being
£57.6 million translated at the year end exchange rate.
The Company needs to generate realisation proceeds of approximately $90 million
during the going concern period of which $70 million is required before 1
October 2022 to enable the settlement of the debt obligations on their due
date.
Key financing activities during the year:
On 30 July 2021, the Company redeemed its CULS totalling £38.9 million ($54
million) on their maturity and entered into a note purchase agreement with the
founders and principals of the Company's investment adviser, for the Company to
issue subordinated, second lien loan notes (the "Loan Notes") of additional
financing totalling $31.5 million.
On 26 January 2022, the Company entered into an agreement with a New Senior
Lender replacing the Company's previous senior debt facility. The key
highlights of the new facility are as follows:
.Extended maturity date on five year term (26 January 2027
previously 12 June 2022);
.Lower interest rate reducing future finance costs;
.Allowance for the repayment of the Loan notes and ZDP shares assuming the
required asset coverage is maintained; and
.Ability to draw down a further $25 million from time to time in its
discretion, provided certain conditions are met, in the 24 month period
following the closing date.
Update on material liabilities due for settlement:
The below table shows the Company's net debt position at the year end and the
previous two year ends:
28.2.2022 28.2.2021 29.2.2020
$'000 $'000 $'000
Senior Debt Facility - extended maturity date 26 42,573 68,694 150,362
January 2027
ZDP shares - maturity date 1 October 20221 77,281 80,527 73,569
Loan notes - maturity date 11 September 2022 32,293 - -
CULS (£38.9 million) - maturity date 30 July - 54,332 49,637
2021
152,147 203,553 273,568
Cash and cash equivalents held 47,050 63,178 56,298
Net debt position 105,097 140,375 217,270
1Forecast ZDP maturity Dollar amount is the total redemption amount of £57.6
million translated using the 28.2.2022 year end rate being £1/$1.34175.
Realisations
The Company's ability to repay the above debt obligations remains dependent
upon the Company achieving sufficient realisations of its assets within the
relevant timeframes. During the year ended 28 February 2022, the Company had
realisations of investments totalling $65.8 million (2021: $139.5 million and
2020: $148.2 million).
Realisations and refinancings during the last three fiscal years are as
follows:
Year End Year End Year End
28.2.2022 28.2.2021 29.2.2020
$ million $ million $ million
Salter Labs U.S. 41.1 Secondary U.S. 87.7 Avante U.S. 37.5
Sale
George U.S. 9.5 Real estate 13.6 Orizon U.S. 28.0
Industries
Orangewood Fund U.S. 6.2 ABTA U.S. 9.4 Waterline U.S. 23.3
Renewal
Igloo U.S. 3.8 Eliantus Euro 9.4 Priority U.S. 18.5
Express
Vitalyst U.S. 1.9 K2 Towers II Euro 9.2 Felix Storch U.S. 14.0
EMC 2010 Euro 2.2 Other U.S. 9.0 Other U.S. 8.7
Fund III Euro 1.1 Cerpi Other 1.2 Fund III Euro 13.6
Real estate 4.6
65.8 139.5 148.2
Considering the Company's projected cash position, including the Company's
ongoing operating costs and the anticipated further investment required to
support the Company's portfolio, the Board anticipates further proceeds of
approximately $90 million are required from the realisation of investments
during the going concern period, to enable the Company to settle its debts as
they fall due. Of this amount approximately $70 million is required before 1
October 2022 to enable settlement of the ZDP shares. The required amounts from
realisations assumes the drawdown of the further $25 million available under
the terms of the senior debt facility.
The Company's Investment Adviser, JZAI, is currently pursuing various
opportunities to realise value, and these forecast realisations include several
anticipated sales of micro-cap companies.
The Board continues to consider the levels of realisation proceeds historically
generated by the Company's micro-cap portfolios as well as the accuracy of
previous forecasts whilst concluding on the predicted accuracy of forecasts
presented.
The Board recognises that, the raising of the required total realisation amount
is a considerable task but remains confident in the value of its underlying
micro-cap investments. This is supported by the completed post year end
realisation, above NAV, of Flow Control LLC (JZHL Secondary Fund's portfolio
company) and the agreement of a further sale of a portfolio company of the
Secondary Fund as announced on 23 May 2022. This sale, is anticipated to result
in the receipt of approximately $89-$94 million from the Secondary Fund.
However, the Board notes that the completion of the sale remains subject to
certain conditions, and at the time of signing there can be no assurance that
these conditions will be satisfied and accordingly, that completion of the sale
and subsequent distribution will occur.
Other than the realisation of Flow Control LLC, which did not result in a cash
distribution to JZCP from the Secondary Fund, there were no further completed
realisations post year end to the date of this report.
The restructuring of the Company's debt structure during the year affords the
Company time to realise its remaining investments within a timeframe that will
help maximise the portfolio's value. Should sufficient realisations proceeds
not be raised, within the going concern period to meet the Company's debt
liabilities, the Board is confident the Company can work with its lenders to
ensure alternative financing plans are in place to extend the timeframe over
which its debt obligations are repaid.
Going Concern Conclusion
After careful consideration and based on the reasons outlined above, the Board
is satisfied, as at the date of the signing of the Annual Report and Financial
Statements, that it is appropriate to adopt the going concern basis in
preparing the financial statements and it has a reasonable expectation that the
Company will continue in existence as a going concern for the period ending 30
June 2023.
However, the Board has concluded that the following consideration creates a
material uncertainty which casts significant doubt over the ability of the
Company to continue as a Going Concern, being:
Whether the Company can generate sufficient cash through realisations of its
underlying investments to discharge its liabilities over the period to 30 June
2023 or failing to do so can agree terms with its debt providers to repay its
obligations, including the redemption of its ZDP shares, over an extended
timeframe.
The Financial Statements do not include any adjustments that might result from
the outcome of this uncertainty.
Viability Statement
In accordance with the UK Corporate Governance Code (the "UK Code"), the Board
has assessed the expectations that the Company will be able to continue in
operation and meet ongoing debt obligations. In order to make the assessment,
as noted above, the Board has carried out a robust review of the principal
risks and uncertainties, to which the Company is exposed and that potentially
threaten future performance and liquidity and has assessed the Company's
current position and prospects as detailed in the Chairman's Statement and
Investment Adviser's Report. The period covered by the viability statement is
the next three financial years to 28 February 2025.
As set out in the going concern statement, the viability of the Company is
dependent on actions that are being and will be taken over the course of the
going concern period ended 30 June 2023. However, there is a material
uncertainty which casts significant doubt over the ability of the Company to
continue as a going concern and its longer-term viability, being:
Whether the Company can generate sufficient cash through realisations of its
underlying investments to discharge its liabilities over the period to 30 June
2023 or failing to do so can agree terms with its debt providers to repay its
obligations, including the redemption of its ZDP shares, over an extended
timeframe.
The Board has continued to use the period of three years to assess viability
that has been used historically. This period is considered appropriate as the
actions will be directed at achieving liquidity from sales of investments at a
level that will reasonably ensure the longer-term viability of the operations
of the Company. It is also considered the three year period is consistent with
the Company's investment policy to make no further investments except in
respect of which it has existing obligations and to continue selectively to
support the existing portfolio. The Board will continue to review the period of
assessment on an annual basis and may in future adjust if considered
appropriate.
In reaching its conclusion on the Company's viability, the Directors have
considered the following:
(i) Stability in Company's Net Asset Value
During the February 2022 fiscal year, the Company's investment portfolio
contributed to NAV growth this follows two fiscal years of material valuation
losses. The Board has confidence in the valuation of the Company's micro-cap
portfolios, which is backed up by historic realisations and current
performance.
In order to stabilise the Company's balance sheet, the Board is focused on
repaying debt. Investment is being curtailed to commitments and what is
necessary to maximise the value of the existing portfolio. No repayment of
capital will be made to shareholders until debt obligations have been met.
(ii) New senior debt facility terms
During the year, the Company successfully restructured its senior debt
facility. The new facility has greatly improved terms being;
. Extended maturity date (January 2027);
. Lower interest rate reducing future finance costs;
. New facility allows for the repayment of the Loan Notes and ZDP
shares assuming the required asset coverage is maintained; and
. The Company can draw down a further $25 million from time to time
in its discretion in the 24 month period following the closing date.
(iii) Financing obligations
Loan notes - Maturity date 11 September 2022
During the year ended 28 February 2022, the Company entered into a note
purchase agreement with David W. Zalaznick and John (Jay) Jordan II, the
founders and principals of the Company's Investment Adviser, Jordan/Zalaznick
Advisers, Inc., pursuant to which they purchased directly or through their
affiliates, Loan notes in the amount of $31.5 million, with an interest rate of
6 per cent. per annum and maturing on 11 September 2022. It is expected the
Loan notes will be repaid from the proceeds of realisations and/or refinancing
of investments.
Zero Dividend Preference (2022) shares - Maturity date 1 October 2022
JZCP is due to redeem £57.6 million (approximately $77.3 million at year end
exchange rate) of ZDP shares on 1 October 2022, again it is expected the
redemption of the ZDPs will be met from the proceeds of realisations and/or
refinancing of investments.
Senior debt facility
The new senior debt facility has a maturity date of January 2027, the balance
outstanding at 28 February 2022 was approximately $42.6 million. It is expected
the extended debt facility will be repaid from the proceeds of realisations and
/or refinancing of investments.
Commitments
At 28 February 2022, JZCP had financial commitments of $16.2 million (28
February 2021: $31.9 million) outstanding in relation to fund investments.
Convertible Unsecured Loan Stock - Matured date 30 July 2021
On 30 July 2021, JZCP successfully redeemed 3,884,279 £10 CULS.
(iv) Investment performance and portfolio liquidity
The Board reviews, on a quarterly basis, the valuation and prospects of all
underlying investee companies. The performance of JZCP's real estate portfolio
has limited the potential to realise liquidity from this portfolio and
therefore increased the risk to both liquidity and therefore viability.
However, the Board is satisfied in large with the performance of the JZCP's
micro-cap portfolios and believe there will be suitable realisation
opportunities and proceeds in order for the Company to meet its debt and other
obligations. JZCP's micro-cap portfolio has averaged annual realisations of
$121 million over the five years ending 28 February 2022. JZAI is currently
pursuing various opportunities to realise value, the Board has concluded that
there is a reasonable expectation that forecast realisations will be completed.
(v) Loan covenants
A covenant on the senior debt facility states the fair value of collateral must
be 4x the loan value (which equates to approximately $170.3 million at the year
end) and the Company is also required to hold a minimum cash balance of $12.5
million. At 28 February 2022, investments and cash valued at $471.09 million
were held as collateral on the senior debt facility. The collateral value used
in the asset coverage ratio of $351.9 million is after adjustments to the
collateral value including a ceiling value on any one investment. The Board are
confident the loan covenants will not be breached.
(vi) Mitigation of other risks as outlined in the Principal Risks and
Uncertainties.
Viability Conclusion
In concluding on the viability of the Company, the Board has concluded that
there is a reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the three year period
ended 28 February 2025, being the period of the assessment. The Board considers
the going concern assumptions, material uncertainties and conclusion set out
above to be relevant.
Dividends
No dividends were paid or proposed for the years ended 28 February 2022 and 28
February 2021.
Ongoing Charges
Ongoing charges for the years ended 28 February 2022 and 28 February 2021 have
been prepared consistently with the methodology used in the previous year. The
ongoing charges ratio represents annualised recurring operational expenses as a
percentage of the average net asset value. The Ongoing charges for the year
ended 28 February 2022 were 3.31% (28 February 2021: 3.52%).
Directors
The Directors listed below, who served on the Board during the year and are all
deemed independent and non-executive, were in office at the end of the year
and subsequent to the date of this report. The biographical details of the
Directors are shown above.
David Macfarlane (Chairman)
James Jordan
Sharon Parr
Ashley Paxton
Substantial Shareholders
As at 14 June 2022, the Company has been notified in accordance with the
Disclosure Guidance and Transparency Rules of the following interests of 5% or
more of the total Ordinary share capital of the Company. The number and
percentage of Ordinary shares relate to the number informed by shareholders on
the relevant notification rather than the current share register. The number
and percentage of Ordinary shares set out below for each substantial
shareholder will therefore not take account of any Ordinary shares bought or
sold by them or the effect of any share buy backs undertaken by the Company on
their shareholdings, in each case, not so notified as required by, or in
accordance with, the Disclosure Guidance and Transparency Rules. For the
avoidance of doubt, the number and percentage of Ordinary shares set out below
should not therefore be used for the purposes determining if the Company is or
is to become a controlled foreign corporation within the meaning of The United
States Internal Revenue Code of 1986, as amended (further information on the
Company's controlled foreign corporation status can be found in US Tax Matters
under the section Useful Information for Shareholders). Shareholders and
prospective shareholders must consult their own tax advisers concerning US tax
laws.
Ordinary % of Ordinary
shares shares
Edgewater Growth Capital 18,335,944 23.7%
Partners L.P.
David W. Zalaznick 10,550,294 13.6%
John W. Jordan II & Affiliates 10,550,294 13.6%
Jefferies Financial Group 8,021,552 10.4%
Abrams Capital Management L.P. 7,744,366 10.0%
Arnhold, LLC 4,573,007 5.9%
Finepoint Capital L.P. 4,413,067 5.7%
The percentage of Ordinary shares shown above represents the ownership of
voting rights at the date of this report, before weighting for votes on
Directors.
It is the responsibility of the shareholders to notify the Company of any
change to their shareholdings when it reaches 5% of shares in issue and any
subsequent change when the shareholding increases or decreases by a further 5%
(up to 30% of shares in issue i.e. 10%, 15%, 20%, 25% and 30%) and thereafter
50% and 75%.
Share Capital, Purchase of Own Shares and Convertible Unsecured Loan Stock
"CULS"
The beneficial interests of the Directors in the Ordinary shares of the Company
are shown below:
Number of Purchased Sold Number of
Ordinary in year in year Ordinary
shares at 1 shares at 28
March 2021 February
2022
David Macfarlane 71,550 - - 71,550
James Jordan 39,124 - - 39,124
Sharon Parr - 10,000 - 10,000
Ashley Paxton - 12,250 - 12,250
110,674 22,250 - 132,924
The beneficial interests of the Directors in the ZDP shares of the Company are
shown below:
Number of Purchased Sold Number of
ZDP shares in year in year ZDP shares
at 1 March at
2021 28 February
2022
David Macfarlane - - - -
James Jordan - - - -
Sharon Parr - - - -
Ashley Paxton - 4,250 - 4,250
4,250 - 4,250
David Macfarlane held 734 CULS which were redeemed on 30 July 2021. No
Directors hold Loan notes issued on 30 July 2021. There have been no changes in
the Directors' interests of any share class between 28 February 2022 and the
date of this report.
Details of the ZDP shares and the Ordinary shares can be found in Notes 15 and
19. Details of the CULS can be found in Note 17.
Annual General Meeting
The Company's Annual General Meeting is due to be held on 3 August 2022.
Engaging with Stakeholders
In line with best practice, the Board is required to ensure effective
engagement with, and participation from, its shareholders and stakeholders. The
Board should also understand the views of the Company's key stakeholders and
describe in the annual report how their interests and the matters set out in
Section 172 of the Companies Act 2006 have been considered in board discussions
and decision-making.
The Board identifies its key stakeholders as the following:
. Shareholders and prospective investors;
. JZAI, the Investment Adviser of its portfolio investments and other
service providers.
The Company has no employees.
Engaging with Shareholders
The Board believes that the maintenance of good relations with both
institutional and retail shareholders is important for the prospects of the
Company. It therefore seeks active engagement with investors, bearing in mind
the duties regarding equal treatment of shareholders and the dissemination of
inside information. The Board receives feedback on shareholder views from its
Corporate Broker and Investment Adviser, and is circulated with Broker reports
on the Company.
The Board considers that the Annual General Meeting, a meeting for all
shareholders, is the key point in the year when the Board of Directors accounts
to all shareholders for the performance of the Company. In usual circumstances
the Directors encourage all shareholders to attend where Directors will be
present and available to engage with shareholders. In light of the COVID-19
pandemic, the Company will continue to closely monitor the situation in the
lead up to the Annual General Meeting and will make any further updates as
required about the Meeting on its website at www.jzcp.com.
The Board believes that the Company policy of reporting to shareholders as soon
as possible after the Company's year end and the holding of the Annual General
Meeting at the earliest opportunity is valuable.
The Company, provides an Interim Report and Accounts in accordance with IAS 34
and will aim to issue monthly NAV announcements within 21 day of the month end,
these announcements will be posted on JZCP's website at the same time, or soon
thereafter.
Engaging with Service Providers
In usual 'non-COVID-19' circumstances, the Board visits the Investment Adviser
at least annually for a comprehensive review of the portfolio, its valuation
methodology and general strategy. The Board is also in regular communication
with the Investment Adviser to discuss the Company's strategy as well as being
kept up to date with portfolio matters.
A Management Engagement Committee, was established in 2018, to review the
performance and contractual arrangements of the Company's service providers.
The Board looks to engage with service providers and encourage communication of
any concerns of matters arising and deal with them appropriately.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and Financial
Statements in accordance with applicable laws and regulations. Guernsey Company
Law requires the Directors to prepare financial statements for each financial
year which give a true and fair view of the state of affairs of the Company as
at the end of the financial year and of the profit or loss for that year.
In preparing Financial Statements the Directors are required to:
. select suitable accounting policies and apply them consistently;
. make judgements and estimates that are reasonable and prudent;
. state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the Financial
Statements;
. prepare the Financial Statements on the going concern basis unless
it is inappropriate to presume that the Company will continue in business;
. confirm that there is no relevant audit information of which the
Company's Auditor is unaware; and
. confirm that they have taken all reasonable steps which they ought
to have taken as Directors to make themselves aware of any relevant audit
information and to establish that the Company's Auditor is aware of that
information.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and to enable them to ensure that the Financial Statements have been
properly prepared in accordance with the Companies (Guernsey) Law, 2008 and
International Financial Reporting Standards as adopted by the European Union
("IFRS"). 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 Directors confirm that they have complied with these requirements in
preparing the Financial Statements.
Responsibility Statement of the Directors in respect of the Financial
Statements
The Directors confirm that to the best of their knowledge:
. the Financial Statements have been prepared in accordance with IFRS
and give a true and fair view of the assets, liabilities and financial
position, and profit or loss of the Company;
. the Annual Report includes a fair review of the development and
performance of the business and position of the Company together with the
description of the principal risks and uncertainties that the Company faces, as
required by the Disclosure Guidance and Transparency Rules of the UK Listing
Authority; and
. the Directors confirm that the Annual Report and Financial
Statements, taken as a whole, is fair, balanced and understandable and provides
the information necessary for Shareholders to assess the Company's performance
and strategy.
Directors' Statement
So far as each of the Directors is aware, there is no relevant audit
information of which the Company's auditor is unaware, and each Director has
taken all the steps they ought to have taken as a Director to make themselves
aware of any relevant audit information and to establish that the Company's
auditor is aware of that information.
Approved by the Board of Directors and signed on behalf of the Board on 14 June
2022.
David Macfarlane
Chairman
Sharon Parr
Director
Corporate Governance
Introduction
As a Guernsey incorporated company with a UK listing, JZCP's governance
policies and procedures are based on the principles of the UK Corporate
Governance Code (the "UK Code") as required under the Disclosure Guidance and
Transparency Rules. The UK Code is available on the Financial Reporting
Council's website, www.frc.org.uk. The Company is subject to the GFSC Code,
which applies to all companies registered as collective investment schemes in
Guernsey. The GFSC has also confirmed that companies that report against the UK
Code are deemed to meet the GFSC Code. In prior years the Company reported
against the AIC Code of Corporate Governance (the "AIC Code"), which addresses
all the principles set out in the UK Code, as well as setting out additional
principles and recommendations on issues that are of specific relevance to
investment companies. The Company resigned its membership from the AIC in 2020.
Throughout the accounting period the Company has complied with the
recommendations of the UK Code and thus the relevant provisions of the UK
Corporate Governance Code, except as set out below.
- the tenure of the Chairman.
- the Chairman serving as a member of the Audit Committee.
The Board considers the following UK Code provisions are not relevant to the
position of JZ Capital Partners Limited, being an externally managed investment
company. The Company has therefore not reported further in respect of these
provisions.
- the role of the chief executive;
- executive directors remuneration; and
- appointment of a senior independent director.
There have been no other instances of non-compliance, other than those noted
above.
Guernsey Code of Corporate Governance
The Guernsey Financial Services Commission's (the "GFSC") "Finance Sector Code
of Corporate Governance" (the "Guernsey Code") came into effect on 1 January
2012 and was subsequently amended on 18 February 2016. The introduction to the
Guernsey Code states that companies which report against the UK Corporate
Governance Code or the AIC's Code of Corporate Governance are deemed to meet
the Guernsey Code.
The Board
Corporate Governance of JZCP is monitored by the Board which at the end of the
year comprised four Directors, all of whom are non-executive. Biographical
details of the Board members at the date of signing these Financial Statements
are shown on in 'Board of Directors' and their interests in the shares of JZCP
are shown in the Report of the Directors. The Directors' biographies highlight
their wide range of relevant financial and sector experience.
Directors' Independence
The Board continually considers the independence of the Directors, including in
light of the circumstances which are set out in the UK Code as likely to impair
a director's independence.
There are no circumstances that exist, including those under the UK Code, which
the Board considers likely to impair the independence of any of the Directors.
Two Board members (David Macfarlane and James Jordan) have, however, served on
the Board for a period of longer than nine years which is one of those
circumstances set out in the UK Code. The conclusion the Board has reached is
that despite having served on the Board for more than nine years, this has not
impacted the independence of such Directors. However, the Board will continue
to assess on an annual basis how length of service could impair judgement and
decision making both on the basis of an individual Director and the Board as a
whole.
Previously, each Director having served longer than nine years was subject to
annual re-election and each Director having served less than nine years was
subject to re-election at the third annual general meeting after appointment
or (as the case may be) the general meeting at which he or she was last
appointed. In line with best practice, all Directors are now subject to annual
re-election
Further details on the Board's processes and criteria for the appointment of
directors can be found under the section of this Annual Report detailing the
work of the Nomination Committee.
Succession Planning
The Board acknowledges that the Board and its Committees should have a
combination of skills, experience and knowledge and that membership should be
regularly refreshed. The Board annually evaluates its composition, diversity
and how effectively each member contributes and how they work together to
achieve objectives. Further details on the evaluation of the Board and its
Committees can be found below in this section of the Annual Report.
Chairman Tenure
The UK Code, states the Chairman should not remain in post beyond nine years
from the date of their first appointment to the Board. However, to facilitate
effective succession planning and the development of a diverse board, this
period can be extended for a limited time.
The Board's policy on the Chairman's tenure is that continuity and experience
are considered to add significantly to the strength of the Board and as such
these attributes need to be weighed against any advantages that a new
appointment may bring. Therefore, no limit on the overall length of service of
the Chairman is imposed.
The Chairman has served on the Board since the Company's inception (April
2008) and the Board therefore acknowledges that succession to the role needs to
be anticipated in line with effective succession planning. A substantial
refreshment of the board was planned to take place in 2021, including the
appointment of a new Chairman. However, in the light of the events which saw a
material decline in the Company's Net Asset Value, it was decided the Chairman
would continue to oversee the stabilisation of the Company and implementation
of the new investment policy. The Chairman will therefore continue to seek
re-election to the Board annually.
Proceedings of the Board
The Board has overall responsibility for the Company's activities and the
determination of its investment policy and strategy. The Company has entered
into an investment advisory and management agreement with its Investment
Adviser, JZAI, pursuant to which, subject to the overall supervision of the
Directors, the Investment Adviser acts as the investment manager to the Company
and manages the investment and reinvestment of the assets of the Company in
pursuit of the investment objective of the Company and in accordance with the
investment policies and investment guidelines from time to time of the Company
and any investment limits and restrictions notified by the Directors (following
consultation with the Investment Adviser). Within its strategic
responsibilities, the Board regularly considers corporate strategy as well as
dividend policy, the policy on share buy backs and corporate governance
issues.
The Directors meet at least quarterly to direct and supervise the Company's
affairs. This includes reviewing the investment strategy, risk profile, gearing
strategy and performance of the Company and the performance of the Company's
functionaries, and monitoring compliance with the Company's objectives.
In usual circumstances, the Directors visit the Investment Adviser at least
annually for a comprehensive review of the portfolio, its valuation methodology
and general strategy. The Directors deem it appropriate to review the
valuations of the investment portfolio on a quarterly basis. The schedule of
Board and Committee meetings is shown in this statement.
Continuing terms of Investment Adviser agreement
In the opinion of the Directors, the continuing appointment of the Investment
Adviser on the terms agreed continues to be in the interests of Shareholders.
In reaching its conclusion the Board considers the Investment Adviser's
performance, expertise and ability in effectively assisting the management of
portfolio companies.
Supply of information
The Chairman ensures that all Directors are properly briefed on issues arising
at, and when necessary in advance of, Board meetings. The Company's advisers
provide the Board with appropriate and timely information in order that the
Board may reach proper decisions. Directors can, if necessary, obtain
independent professional advice at the Company's expense.
Directors' training
The Board is provided with information concerning changes to the regulatory or
statutory regimes as they may affect the Company, and the Directors are offered
the opportunity to attend courses or seminars on such changes, or other
relevant matters. An induction programme is available for any new Director
appointments. The induction programme offers training about the Company, its
managers, their legal responsibilities and investment company industry matters.
Chairman and Senior Independent Director
The Chairman is a non-executive Director, together with the rest of the Board.
There is no executive Director position within the Company. Day-to-day
management of the Company's affairs has been delegated to third party service
providers. Currently there is no appointment of a Senior Independent Director.
Board diversity
The Board has also given careful consideration to the recommendations of the
Davies Review and the findings of the Hampton-Alexander Review on the evolving
gender diversity debate. The Board continues to review its composition in terms
of diversity, appropriate range of skills and experience and the Board is
committed to ensuring that diversity is considered when appointments to the
Board are under consideration - as indeed has always been its practice.
The Board's evaluation
The Board, Audit Committee, and Nomination Committee undertake an evaluation of
their own performance and that of individual Directors on an annual basis. In
order to review their effectiveness, the Board and its Committees carry out a
process of formal self-appraisal. The Board and Committees consider how they
function as a whole and also review the individual performance of its members.
This process is conducted by the Chairman reviewing each member's performance,
contribution and their commitment to the Company. The Board, as a whole,
reviews the performance of the Chairman. Each Board member is also required to
submit details of training they have undertaken on an annual basis. Currently,
no third party evaluation of the Directors effectiveness is undertaken. The
results of the evaluation process concluded the Board was functioning
effectively and the Board and its committees provided a suitable mix of skills
and experience.
Board Committees
In accordance with the UK Code, the Board has established an Audit Committee
and a Nomination Committee, in each case with formally delegated duties and
responsibilities within written terms of reference. The identity of each of the
Chairmen of the committees referred to below is reviewed on an annual basis.
The Board, consisting of all non-executive Directors, has decided that the
entire Board should fulfil the role of the Audit and Nomination Committees. The
terms of reference of the committees are kept under review and can be viewed on
the Company's website www.jzcp.com.
Nomination Committee
In accordance with the Code, the Company has established a Nomination
Committee. The Nomination Committee leads the process for all board
appointments, oversees the development of and reports on, amongst other things,
its approach to a diverse pipeline for succession.
The Nomination Committee takes into consideration the Code's rules on
independence of the Board in relation to the Company, its senior management and
major shareholders. The Nomination Committee is chaired by David Macfarlane,
and each of the other Directors is also a member. The members of the committee
are independent of the Investment Adviser. The Nomination Committee has
responsibility for considering the size, structure and composition of the
Board, retirements and appointments of additional and replacement Directors and
making appropriate recommendations to the Board.
Due to the nature of the Company being a listed investment company investing in
private equity with an international shareholder base, the Company needs
Directors with a broad range of financial experience. For this reason,
Directors use external consultants as well as using their own contacts to
identify suitable candidates.
The final decision with regard to appointments always rests with the Board and
all such appointments are subject to confirmation by shareholders.
Audit Committee
The Audit Committee is chaired by Sharon Parr and all other Directors are
members. Contrary to the recommendations of the UK Code, the Board consider it
is appropriate for the Company's Chairman to serve as a member of the Audit
Committee due to his considered independence and the skills/experience
contributed. The Board also notes the AIC Code, previously followed by the
Company, permits a chairman to be a member of an audit committee if independent
on appointment. Members of the Committee are independent of the Company's
external auditors and the Investment Adviser. All members have the necessary
financial and sector experience to contribute effectively to the Committee. The
Audit Committee meets at least twice a year and meets the external auditors at
least twice a year. The Audit Committee is responsible for overseeing the
Company's relationship with the external auditors, including making
recommendations to the Board on the appointment of the external auditors and
their remuneration. The Committee also considers the nature, scope and results
of the auditors' work and reviews, and develops and implements policies on the
supply of any non-audit services that are to be provided by the external
auditors.
Post year end, the Audit Committee has re-considered whether the Company is
able to continue as a going concern for the period ending 30 June 2023 and
whether it considers it appropriate to adopt the going concern basis of
accounting in preparing them, and identify any material uncertainties to the
company's ability to continue to do so. Also, the Audit Committee, has
considered the Company's current position and principal risks, and assessed the
prospects of the Company, over the viability period of three years to 28
February 2025.
The activities and responsibilities of the Audit Committee are further
described the Audit Committee Report and the recommendations to the Board made
by the Audit Committee, regarding the going concern and viability of the
Company are detailed in the Report of the Directors.
Management Engagement Committee
The Management Engagement Committee is chaired by David Macfarlane and
comprises the entire Board. Responsibilities include reviewing the performance
and contractual arrangements of the Company's service providers.
Remuneration Committee
In view of its non-executive and independent nature, the Board considers that
it is not appropriate for there to be a separate Remuneration Committee as
prescribed by the UK Code. The process for agreeing the non-executive
Directors' fees is set out in the Directors' Remuneration Report.
Board and Committee meeting attendance
The number of formal meetings of the Board and its committees held during the
fiscal year and the attendance of individual Directors at these meetings was as
follows:
Number of meetings
Management
Board Ad Hoc Audit Engagement
Main AGM Meetings Committee EGM Committee
Total number of meetings 4 1 21 5 1 1
David Macfarlane 4 1 21 5 1 1
James Jordan 4 1 20 4 1 1
Sharon Parr 4 1 21 5 1 1
Ashley Paxton 4 1 21 5 1 1
The main Board meetings are held to agree the Company's valuation of its
investments, agree the Company's financial statements and discuss and agree
other strategic issues. Other meetings are held when required to agree board
decisions on ad-hoc issues.
UK Criminal Finances Act 2017
In respect of the UK Criminal Finances Act 2017 which has introduced a new
Corporate Criminal Offence of 'failing to take reasonable steps to prevent the
facilitation of tax evasion', the Board confirms that it is committed to zero
tolerance towards the criminal facilitation of tax evasion.
The Board also keeps under review developments involving other social and
environmental issues, such as Modern Slavery and General Data Protection
Regulation, and will report on those to the extent they are considered relevant
to the Company's operations.
Internal Controls
The Board is ultimately responsible for establishing and maintaining the
Company's system of internal financial and operating control and for
maintaining and reviewing its effectiveness on an annual basis. The Company's
risk matrix continues to be the core element of the Company's risk management
process in establishing the Company's system of internal financial and
reporting control. The risk matrix is prepared and maintained by the Board
which initially identifies the risks facing the Company and then collectively
assesses the likelihood of each risk, the impact of those risks and the
strength of the controls operating over each risk. The system of internal
financial and operating control is designed to manage rather than to eliminate
the risk of failure to achieve business objectives and by their nature can only
provide reasonable and not absolute assurance against misstatement and loss.
These controls aim to ensure that assets of the Company are safeguarded, proper
accounting records are maintained and the financial information for publication
is reliable. The Board confirms that there is an ongoing process for
identifying, evaluating and managing the principal risks faced by the Company.
This process has been in place for the year under review and up to the date of
approval of this Annual Report and Financial Statements and is reviewed by the
Board and is in accordance with the Internal controls: Guidance on Risk
Management, Internal Control and Related Financial and Business Reporting.
The Board has evaluated the systems of internal controls of the Company. In
particular, it has prepared a process for identifying and evaluating the
principal risks affecting the Company and the policies by which these risks are
managed.
The Board has delegated the day to day responsibilities for the management of
the Company's investment portfolio, the provision of depositary services and
administration, registrar and corporate secretarial functions including the
independent calculation of the Company's NAV and the production of the Annual
Report and Financial Statements which are independently audited.
Formal contractual agreements have been put in place between the Company and
providers of these services.
Even though the Board has delegated responsibility, it retains accountability
for these functions and is responsible for the systems of internal control. At
each quarterly board meeting, compliance reports are provided by the
Administrator, Company Secretary and Investment Adviser. The Board also
receives confirmation from the Administrator of its accreditation under its
Service Organisation Controls 1 report.
The Company's risk exposure and the effectiveness of its risk management and
internal control systems are reviewed by the Audit Committee at its quarterly
meetings and annually by the Board.
The Board believes that the Company has adequate and effective systems in place
to identify, mitigate and manage the risks to which it is exposed.
Whistle Blowing Policy
The Directors are non-executive and the Company does not have employees, hence
no whistle blowing policy is required. However, the Directors have satisfied
themselves that the Company's service providers have appropriate whistle
blowing policies and procedures and have received confirmation from the service
providers that nothing has arisen under those policies and procedures which
should be brought to the attention of the Board.
International Tax Reporting
For purposes of the US Foreign Account Tax Compliance Act ("FATCA"), the
Company registered with the US Internal Revenue Services ("IRS") as a Guernsey
reporting Foreign Financial Institution ("FFI"), received a Global Intermediary
Identification Number CAVBUD.999999.SL.831, and can be found on the IRS FFI
list.
The Common Reporting Standard ("CRS") is a global standard for the automatic
exchange of financial account information developed by the Organisation for
Economic Co-operation and Development ("OECD"), which has been adopted by
Guernsey and which came into effect on 1 January 2016. The CRS replaced the
intergovernmental agreement between the UK and Guernsey to improve
international tax compliance that had previously applied.
The Board will take necessary actions to ensure that the Company is compliant
with Guernsey regulations and guidance in this regard.
Directors' Remuneration Report
The Company's policy in regard to Directors' remuneration is to ensure that the
Company maintains a competitive fee structure in order to recruit, retain and
motivate non-executive Directors of excellent quality in the overall interests
of shareholders.
Remuneration Policy
The Directors do not consider it necessary for the Company to establish a
separate Remuneration Committee. All of the matters recommended by the Code
that would be delegated to such a committee are considered by the Board as a
whole.
It is the responsibility of the Board to determine and approve the Directors'
fees, following a recommendation from the Chairman who will have given the
matter proper consideration, having regard to the level of fees payable to
non-executive Directors in the industry generally, the role that individual
Directors fulfil in respect of Board and Committee responsibilities and the
time committed to the Company's affairs. The Chairman's remuneration is decided
separately and is approved by the Board.
The Company's Articles state that Directors' remuneration payable in any
accounting year shall not exceed in the aggregate an annual sum of $650,000.
Each Director is also entitled to reimbursement of their reasonable expenses.
There are no commission or profit sharing arrangements between the Company and
the Directors. Similarly, none of the Directors is entitled to pension,
retirement or similar benefits. No element of the Directors' remuneration is
performance related.
The remuneration policy set out above is the one applied for the year ended 28
February 2022 and is not expected to change in the foreseeable future.
Directors' and Officers' liability insurance cover is maintained by the Company
on behalf of the Directors.
Remuneration for Services to the Company as Non-Executive Directors
Year Ended Year Ended
28 February 2022 28 February
2021
US$ US$
David Macfarlane (Chairman) 120,000 120,000
James Jordan 50,000 50,000
Sharon Parr 70,000 95,000
Ashley Paxton (appointed 12 August 2020) 50,000 27,000
Tanja Tibaldi (resigned 12 August 2020) - 27,000
290,000 319,000
Fees payable to the Chairman and Directors are $120,000 per annum and $50,000
per annum respectively. The Chairman of the Audit Committee will receive an
additional amount of $20,000 per annum and in the prior year received a further
fee of $25,000 for additional work relating to events in the 2020 financial
year.
No Director has a service contract with the Company, nor are any such contracts
proposed.
Directors' Term of Appointment
In line with the UK Code of Corporate Governance, all Directors seeking
re-election to the Board will do so on an annual basis regardless of their
tenure not yet exceeding nine years.
The Directors were appointed as non-executive Directors by letters issued in
April 2008, June 2018 and August 2020 which state that their appointment and
any subsequent termination or retirement shall be subject to three-months'
notice from either party in accordance with the Articles. Each Director's
appointment letter provides that, upon the termination of his/her appointment,
that he/she must resign in writing and all records remain the property of the
Company. The Directors' appointments can be terminated in accordance with the
Articles and without compensation. There is no notice period specified in the
Articles for the removal of Directors. The Articles provide that the office
of director shall be terminated by, among other things: (a) written
resignation; (b) unauthorised absences from board meetings for six months or
more; (c) unanimous written request of the other directors; and (d) an
ordinary resolution of the Company.
Signed on behalf of the Board of Directors on 14 June 2022 by:
David Macfarlane
Chairman
Sharon Parr
Director
Audit Committee Report
Dear Shareholder,
We present the Audit Committee's Report, setting out the responsibilities of
the Audit Committee and its key activities during the year ended 28 February
2022. The Audit Committee has reviewed the Company's financial reporting, the
independence and effectiveness of the external auditor and the internal control
and risk management systems of the Company's service providers. In order to
assist the Audit Committee in discharging these responsibilities, regular
reports are received and reviewed from the Investment Manager, Administrator
and external auditor.
A member of the Audit Committee will continue to be available at each Annual
General Meeting to respond to any shareholder questions on the activities of
the Audit Committee.
Responsibilities
The terms of reference of the Audit Committee include the requirement to:
. monitor the integrity of the published Financial Statements of the
Company;
. review and report to the Board on the significant issues and
judgements made in the preparation of the Company's published Financial
Statements, (having regard to matters communicated by the external Auditors)
and other financial information;
. monitor and review the quality and effectiveness of the external
Auditors and their independence;
. consider and make recommendations to the Board on the appointment,
reappointment, replacement and remuneration of the Company's external Auditor;
. advise the Board that the annual report and accounts, taken as a
whole, is fair, balanced and understandable;
. review and consider the Company's Principal risks and
uncertainties;
. consider the long-term viability of the Company;
. review the Company's procedures for prevention, detection and
reporting of fraud, bribery and corruption; and
. monitor and review the internal control and risk management systems
of the service providers.
The Audit Committee's full terms of reference can be viewed on the Company's
website www.jzcp.com
Key Activities of the Audit Committee
The following sections discuss the assessments made by the Audit Committee
during the year:
Financial Reporting:
The Audit Committee's review of the Annual Financial Statements focused on the
following significant areas:
. Assessment of Going Concern and Viability
The Audit Committee has considered the ability of the Company to continue as a
going concern over the period ending 30 June 2023. After careful consideration
the Committee have recommended to the Board that it is satisfied that it is
appropriate to adopt the going concern basis in preparing these Financial
Statements and they have a reasonable expectation that the Company will
continue in existence as a going concern for the period. The reasons for
reaching this judgement are detailed in the Report of the Directors. However,
there is a material uncertainty which casts significant doubt over the ability
of the Company to continue as a Going Concern, being:
Whether the Company can generate sufficient cash through realisations of its
underlying investments to discharge its liabilities over the period to 30 June
2023 or failing to do so can agree terms with its debt providers to repay its
obligations, including the redemption of its ZDP shares, over an extended
timeframe.
For the viability assessment, the Audit Committee has assessed the expectations
that the Company will be able to continue in operation and meet ongoing debt
obligations over the period ending 28 February 2025. In making its
recommendation to the Board the Committee has carried out a robust review of
the Company's principal risks and uncertainties to which the Company is exposed
and that potentially threaten future performance and liquidity and has assessed
the Company's current position and prospects as detailed in the Chairman's
Statement and Investment Adviser's Report.
The key factors considered by the Committee are detailed in the Report of the
Directors.
The Committee have concluded that they have a reasonable expectation that the
Company will be able to continue in operation and meet its liabilities as they
fall due over the period of the assessment. They consider the going concern
assumptions, material uncertainty and conclusion set out above to be relevant.
The Audit Committee was also satisfied that the disclosures in the basis of
preparation note and the viability statement, relating to the going concern
assessment of the Company, were appropriately clear and transparent. In
particular that the material uncertainty prevalent in the going concern basis
of preparation is disclosed in a fair, balanced and understandable manner.
. Valuation of Unquoted Investment Fair Values including the impact
on management fees
The fair value of the Company's unquoted securities at 28 February 2022, which
are valued using techniques detailed in Note 5 of the financial statements, was
$408,174,000 accounting for 92.3% of the Company's investment portfolio. The
Committee has concentrated on ensuring the Investment Manager has applied
appropriate valuation methodologies to these investments in producing the net
asset value of the Company.
Members of the Audit Committee, discuss the valuation process with the
Investment Adviser on a quarterly basis. The Audit Committee gains comfort in
the valuations produced by reviewing the methodologies used and challenging the
recommendations of the Investment Adviser. The Audit Committee are thus
satisfied that the valuation techniques are appropriate and represent fair
value.
The valuation of the unquoted investments is the key driver of the Company's
gross asset value and the basis of the management fees payable to the
Investment Adviser and therefore the management fees payable could potentially
be misstated if there were to be an error in the calculation of the gross
assets. However, as each monthly NAV calculation is approved by the Investment
Adviser and the year-end NAV has been audited, the Audit Committee is satisfied
that the fees have been correctly calculated as stated in the Annual Report and
Financial Statements.
. Impairment of Direct Loans Measured at Amortised Cost
Risk that the carrying value of the direct loans might be misstated due to
application of inappropriate methodologies, inputs and/or judgemental factors
determining the expected credit loss in accordance with
IFRS 9 - "Financial Instruments".
Risk Management:
The Audit Committee continued to consider the process for managing the risk of
the Company and its service providers. Risk management procedures for the
Company, as detailed in the Company's risk assessment matrix, were reviewed and
approved by the Audit Committee. New risks are added to the matrix when deemed
appropriate.
Fraud, Bribery and Corruption:
The Audit Committee continues to monitor the fraud, bribery and corruption
policies of the Company. The Board receives a confirmation from all service
providers that there have been no instances of fraud, bribery or corruption.
In a press release dated 21 March 2022, the Company announced that it had come
to the Board's attention that allegations of fraudulent conduct had been made
against two individuals who were members of the management team that manages
JZCP's investments in European micro-cap companies. A claim has been made in
respect thereof in the New York State Supreme Court. The claimants are a fund
in which JZCP has only an approximate 1% interest (carried at approximately
$0.75 million) as well as a fund in which JZCP has no interest. The information
available to the Board at the date of this report indicates that the Company
has no reason to believe that the alleged conduct will have a material adverse
effect on the Company's investments held through JZI Fund III.
The External Auditor
Ernst & Young LLP have acted as external auditor since the Company's inception
in April 2008. This is the fourth year of Andrew Dann's anticipated five year
tenure as audit partner. A full tender process was undertaken during December
2018 and January 2019 resulting in Ernst & Young LLP being reappointed.
Independence, objectivity and fees:
The independence and objectivity of the external auditor is reviewed by the
Audit Committee which also reviews the terms under which the external auditor
is appointed to perform non-audit services.
In line with the historic policies, the Audit Committee does not consider that
the provision of non-audit services, to have been a threat to the objectivity
and independence of the external auditor. However, following the introduction
of the UK FRC Revised Ethical Standard (effective on 15 March 2020), the Audit
Committee has introduced a general prohibition on the external auditor
providing non-audit services to the Company. This general prohibition will not
extend to an interim review report providing the fee for such interim review is
subject to a 70% fee cap when compared to the audit fee.
The following table summarises the remuneration paid and payable by the Company
to Ernst & Young LLP and to other Ernst & Young LLP member firms for audit and
other services during the years ended 28 February 2022 and 28 February 2021.
$ $
Equivalent Equivalent
Year ended Year ended Year ended Year ended
28.2.2022 28.2.2022 28.2.2021 28.2.2021
Ernst & Young LLP
- Annual audit £256,000 $343,000 £275,000 $384,478
- Auditor's interim £53,000 $71,000 £50,000 $69,000
review
PFIC services for the years ended 28 February 2022 and 2021 are now provided by
PricewaterhouseCoopers LLP.
Performance and effectiveness:
During the year, when considering the effectiveness of the external auditor,
the Audit Committee has taken into account the following factors:
. the audit plan presented to them before each audit;
. the post audit report including variations from the original plan;
. changes in audit personnel;
. the external auditor's own internal procedures to identify threats
to independence; and
. feedback received from both the Investment Adviser and
Administrator.
The Audit Committee reviewed and challenged the audit plan and the post audit
report of the external auditor and concluded that audit risks had been
sufficiently identified and were sufficiently addressed. The Audit Committee
considered reports from the external auditor on their procedures to identify
threats to independence and concluded that the procedures were sufficient to
identify potential threats to independence.
There were no significant adverse findings from this evaluation.
The Audit Committee has examined the scope and results of the audit, its cost
effectiveness and the independence and objectivity of the external auditor and
considers Ernst & Young LLP, as external auditor, to be independent of the
Company.
Internal control and risk management systems:
Additional work performed by the Audit Committee in the areas of internal
control and risk management are disclosed above.
The Audit Committee has also reviewed the need for an internal audit function.
The Audit Committee has decided that the systems and procedures employed by the
Investment Adviser and the Administrator, including the Administrator's
internal audit function, provide sufficient assurance that a sound system of
internal control, which safeguards the Company's assets, is maintained. An
internal audit function specific to the Company is therefore considered
unnecessary.
In finalising the Annual Report and Accounts for recommendation to the Board
for approval, the Audit Committee has also recommended to the Board that the
Annual Report and Accounts should be considered fair, balanced and
understandable.
Sharon Parr
Chairman, Audit Committee
14 June 2022
Independent Auditor's Report
To The Members of JZ Capital Partners Limited
Opinion
We have audited the financial statements of JZ Capital Partners Limited (the
"Company") for the year ended 28 February 2022 which comprise the Statement of
Financial Position, the Statement of Comprehensive Income, the Statement of
Changes in Equity, the Statement of Cash Flows and the related notes 1 to 32,
including a summary of significant accounting policies. The financial reporting
framework that has been applied in their preparation is applicable law and
International Financial Reporting Standards as adopted by the European Union
("IFRS").
In our opinion, the financial statements:
. give a true and fair view of the state of the Company's affairs as at 28
February 2022 and of its profit for the year then ended;
. have been properly prepared in accordance with IFRS; and
. have been properly prepared in accordance with the requirements of The
Companies (Guernsey) Law, 2008.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
(UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards
are further described in the Auditor's responsibilities for the audit of the
financial statements section of our report. We believe that the audit evidence
we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Independence
We are independent of the Company in accordance with the ethical requirements
that are relevant to our audit of the financial statements, including the UK
FRC's Ethical Standard as applied to listed public interest entities, and we
have fulfilled our other ethical responsibilities in accordance with these
requirements.
The non-audit services prohibited by the FRC's Ethical Standard were not
provided to the Company and we remain independent of the Company in conducting
the audit.
Material uncertainty relating to going concern
We draw your attention to Note 3 in the financial statements, which indicates
that there is a material uncertainty as to whether the Company can generate
sufficient cash through realisations of its underlying investments to discharge
its liabilities over the period to 30 June 2023 or failing to do so can agree
terms with its debt providers to repay its obligations, including the
redemption of its ZDP shares, over an extended timeframe, which casts
significant doubt over the ability of the Company to continue as a Going
Concern. Our opinion is not modified in respect of this matter.
We draw attention to the viability statement in the Annual Report, which
indicates that the viability of the Company is dependent entirely on actions
that are being and will be taken over the course of the going concern period to
30 June 2023. The Directors consider that the material uncertainty referred to
in respect of going concern may cast significant doubt over the future
viability of the Company should these actions not complete. Our opinion is not
modified in respect of this matter.
In auditing the financial statements, we have concluded that the directors' use
of the going concern basis of accounting in the preparation of the financial
statements is appropriate. Our evaluation of the directors' assessment of the
Company's ability to continue to adopt the going concern basis of accounting
included;
. The audit engagement partner directed and supervised the audit procedures
on going concern;
. We obtained the cash flow forecasts prepared by the Investment Adviser,
Jordan/Zalaznick Advisers, Inc ("JZAI") and tested the arithmetical accuracy of
the models including reperforming the covenant tests therein;
. We obtained the agreements and enquired of management to understand the
WhiteHorse loan facility and associated agreement amendments, including the
nature of facilities, repayment terms and covenants.
. We performed a reverse-stress test for covenant compliance to assess the
likelihood of a reduction in fair value and/ or cash balance, triggering a
covenant breach;
. We challenged the appropriateness of management's forecasts by assessing
historical forecasting accuracy, challenging management's consideration of
downside sensitivity analysis and applied further stress testing to understand
the sensitivity of the assessment to the timing and quantum of asset
realisations;
. We assessed whether available funds are sufficient to cover commitments
made to underlying investments and other ongoing commitments including
investment adviser and other expenses;
. We held discussions with the Investment Adviser and the Audit Committee
in relation to the status of the asset realisations;
. We have reviewed the management provided stock purchase agreement which
supported management's cash flow forecast;
. We assessed the likely success and risk factors of the Company's
alternative investing and financing plans with its Investment Adviser; and
. We assessed the disclosures in the Annual Report and Financial Statements
relating to going concern, including the material uncertainties, to ensure they
were fair, balanced and understandable and in compliance with IAS 1.
In relation to the Company's reporting on how they have applied the UK
Corporate Governance Code, we have nothing material to add or draw attention to
in relation to the directors' statement in the financial statements about
whether the directors considered it appropriate to adopt the going concern
basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to
going concern are described in the relevant sections of this report. However,
because not all future events or conditions can be predicted, this statement is
not a guarantee as to the Company's ability to continue as a going concern.
Overview of our audit approach
Key audit matters Misstatement of unquoted investment fair values, including the
impact on management fees: The risk that the fair value of
investments might be misstated due to application of
inappropriate methodologies or inputs to the valuations and/or
inappropriate judgemental factors. This will include the
possible impact on the management fees.
Impairment of direct loans measured at amortised cost: The
risk that the carrying value of the direct loans might be
misstated due to application of inappropriate methodologies or
inputs determining the amortised cost and/or inappropriate
judgemental factors Expected Credit Loss ("ECL") in accordance
with IFRS 9.
Materiality Overall materiality of $3.41m (2021: $3.30m) which represents
1% of total equity.
An overview of the scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation
of performance materiality determine our audit scope for the Company. This
enables us to form an opinion on the financial statements. We take into account
size, risk profile, the organisation of the Company and effectiveness of
controls, including controls and changes in the business environment when
assessing the level of work to be performed.
All audit work was performed directly by the audit engagement team. The audit
was led from Guernsey. In addition, we engaged our Valuation, Modelling, and
Economics ("VME") industry valuation specialists from the Brooklyn and Miami
offices, who assisted us in auditing the valuation of the real estate
investments, and the Montreal office, who assisted us in auditing the valuation
of unquoted private equity investments. The scope of their work was consistent
with the prior year.
Climate change
The Company has explained climate-related risks in the 'Macroeconomic Risks and
Impact on NAV' section of the Report of the Directors and form part of the
"Other information", rather than the audited financial statements. Our
procedures on these disclosures therefore consisted solely of considering
whether these disclosures are materially inconsistent with the Company's
financial statements, or our knowledge obtained in the course of the audit, or
otherwise appear to be materially misstated.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were
of most significance in our audit of the financial statements of the current
period and include the most significant assessed risks of material misstatement
(whether or not due to fraud) that we identified. These matters included those
which had the greatest effect on: the overall audit strategy, the allocation of
resources in the audit; and directing the efforts of the engagement team. These
matters were addressed in the context of our audit of the financial statements
as a whole, and in our opinion thereon, and we do not provide a separate
opinion on these matters.
Risk Our response to the risk Key observations
communicated to the
Audit Committee
Misstatement of unquoted Our audit procedures consisted We have no matters to
investment fair values, of: report to the Audit
including the impact on Committee in this
management fees (2022: $408 regard.
million; 2021: $430 Updating and confirming our
million) understanding of the Company's
processes and methodologies,
Refer to the Audit including the use of industry
Committee Report; specific measures, and policies
Accounting policies; and for valuing unquoted
Note 5 of the financial investments held by the
statements Company;
99% (2021: 99%) of the
carrying value of Obtaining and inspecting the
investments relates to the valuation decks and supporting
Company's holdings in data for the private equity
unquoted investments, which investments, to assess whether
are valued using different the data used is appropriate
valuation techniques, as and relevant, and discussing
described in note 5 to the these with the Investment
financial statements. Adviser to evaluate whether the
fair value of the Company's
The valuation is private equity investments are
subjective, with a high reasonably stated, challenging
level of judgement and the assumptions made by the
estimation linked to the Investment Adviser and Board of
determination of the values Directors of the Company;
with limited market
information available, as a
result of the low level of Obtaining and inspecting the
liquidity in the private independent appraisals and
equity and real estate supporting data regarding the
markets at the year-end. real estate assets, to assess
whether the data used is
The Investment Advisory appropriate and relevant, and
fees are calculated based discussing these with the
on NAV, which is driven by Investment Adviser to evaluate
investment valuation and is whether the fair value of the
therefore related to this Company's real estate
key audit matter. investments are reasonably
As a result, there is a stated, challenging the
risk of an inappropriate assumptions made by the
valuation model being Investment Adviser and Board of
applied, together with the Directors of the Company;
risk of inappropriate
inputs to the model/
calculation being selected Attending fair value
including the possible discussions in relation to 28
impact on the management February 2022 valuations, for
fees. private equity investments.
These included the Investment
The valuation of the Adviser, EY Guernsey and EY
unquoted investments is the valuation specialists;
key driver of the Company's
net asset value and total
return. Incorrect valuation Vouching valuation inputs that
could have a significant do not require specialist
impact on the net asset knowledge to independent
value of the Company and sources and testing the
therefore the return arithmetical accuracy of the
generated for shareholders. Company's calculations for a
sample of significant private
equity investments selected
based on their size/value;
Performing back testing on the
Level 3 investment sensitivity
disclosures to understand the
drivers of movements in fair
value;
Performing back testing to
compare realisation proceeds
during the period to the
previously reported fair values
for those disposed assets;
For a sample of significant
private equity investments
selected based on their size/
value, we engaged EY Montreal.
It was considered appropriate
for EY Montreal to review both
US and European assets as
use their knowledge of the
market to assess and
corroborate the Investment
Adviser's and the Company's
specialist's market related
judgements and valuation
inputs (in relation to the
private equity investments
discount rates and EBITDA
multiples and in relation to
real estate assets discount
rates, rental per square
foot, selling price per
square foot) by reference to
comparable transactions, and
independently compiled
databases/indices;
assist us to determine
whether the methodologies
used to value private equity
investments and real estate
assets were consistent with
methods usually used by
market participants;
perform procedures to assess
whether, in light of market
data, the fair values of
certain recently acquired
private equity investments
continue to approximate to
their consideration paid;
and
assist us in determining
whether the Company's
specialist, for the real
estate assets, was
appropriately qualified and
independent.
Agreeing the valuation per the
financial statements back to
the models per the valuation
decks, relating to private
equity investments, prepared by
the Investment Adviser and
agreeing the proposed values
per the valuation decks to the
investment portfolio report
prepared by the Administrator;
Reviewing the waterfall
calculations on the flow of
valuation through the SPV
structures to the Company and
reviewing the inputs to, and
arithmetic accuracy of, the
valuation calculations/
waterfall;
Identifying the significant
unobservable inputs to
valuations and reviewed and
assessed the reasonableness of
the sensitivity workings and
disclosures, comparing the
Investment Adviser's position
with EY's range of acceptable
inputs;
Challenging management on the
appropriateness of their chosen
comparable public companies
used to compute multiples as
well as corroborating those
multiples with independent
data;
Reporting to the Audit
Committee on the calibration of
investment valuations against
EY's ranges and commenting on
any specific movements of
valuation marks in those ranges
vs prior periods; and
Re-performing the management
fee calculations for
arithmetical accuracy and
consistency with the terms of
the investment advisory
agreement.
Impairment of direct loans For all direct loans we We have no matters to
measured at amortised cost performed the following report to the Audit
(2022: $29 million; 2021 procedures: Committee in this
$34 million) regard.
Refer to the Audit Obtaining copies of the signed
Committee Report; loan agreements including any
Accounting policies; and changes to the terms and
Note 7 of the financial conditions of the loans;
statements
Re-performing the amortised
There is a risk that the cost calculations for
carrying value of the mathematical accuracy and
direct loans might be consistency with the terms of
misstated due to the loan agreements;
methodologies, inputs, and/
or judgmental factors Obtaining the expected credit
determining the expected loss calculation from the
credit loss in accordance Investment Advisor for each
with IFRS 9. material loan and determining
that the estimate and
judgements applied by
management specific to each
loan were in accordance with
IFRS 9;
Reviewing the possible default
scenarios and credit risk of
each loan separately and
applying probabilities of
default to assess the expected
credit loss over the next 12
months;
Assessing the reasonableness of
the effective interest rate
calculations used to recognise
lifetime expected losses, with
interest revenue based on the
net amount;
Assessing the impact the
potential material
uncertainties in respect of
going concern might have on the
valuation of the expected
credit loss; and
Reviewing to ensure that the
presentation and disclosure
requirements of IFRS 9 are
adequate in the financial
statements.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in
evaluating the effect of identified misstatements on the audit and in forming
our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the
aggregate, could reasonably be expected to influence the economic decisions of
the users of the financial statements. Materiality provides a basis for
determining the nature and extent of our audit procedures.
We determined materiality for the Company to be $3.41 million (2021: $3.30
million), which is 1% (2021: 1%) of Total Equity. We believe that Total Equity
provides a basis for determining the nature, timing and extent of risk
assessment procedures, identifying and assessing the risk of material
misstatement and determining the nature, timing and extent of further audit
procedures. We believe that Total Equity provides us with the best measure of
planning materiality as the Company's primary performance measures for internal
and external reporting are based on Total Equity.
During the course of our audit, we reassessed initial materiality and updated
its calculation to align with the year-end Total Equity figure.
Performance materiality
The application of materiality at the individual account or balance level. It
is set at an amount to reduce to an appropriately low level the probability
that the aggregate of uncorrected and undetected misstatements exceeds
materiality.
On the basis of our risk assessments, together with our assessment of the
Company's overall control environment, our judgement was that performance
materiality was 50% (2021: 50%) of our planning materiality, namely $1.70m
(2021: $1.65m). We have set performance materiality at this percentage to
ensure that the total uncorrected and undetected audit differences in the
financial statements did not exceed our materiality level.
Reporting threshold
An amount below which identified misstatements are considered as being clearly
trivial.
We agreed with the Audit Committee that we would report to them all uncorrected
audit differences in excess of $0.17m (2021: $0.16m), which is set at 5% of
planning materiality, as well as differences below that threshold that, in our
view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative
measures of materiality discussed above and in light of other relevant
qualitative considerations in forming our opinion.
Other information
The other information comprises the information included in the annual report
set out other than the financial statements and our auditor's report thereon.
The directors are responsible for the other information contained within the
Annual Report.
Our opinion on the financial statements does not cover the other information
and, except to the extent otherwise explicitly stated in this report, we do not
express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the course of the audit or otherwise
appears to be materially misstated. If we identify such material
inconsistencies or apparent material misstatements, we are required to
determine whether there is a material misstatement in the financial statements
themselves. If, based on the work we have performed, we conclude that there is
a material misstatement of the other information, we are required to report
that fact.
We have nothing to report in this regard.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters in relation to
which The Companies (Guernsey) Law, 2008 requires us to report to you if, in
our opinion:
. proper accounting records have not been kept by the Company; or
. the financial statements are not in agreement with the Company's
accounting records and returns; or
. we have not received all the information and explanations we
require for our audit.
Corporate Governance Statement
The Listing Rules require us to review the directors' statement in relation to
going concern, longer-term viability and that part of the Corporate Governance
Statement relating to the Company's compliance with the provisions of the UK
Corporate Governance Code specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each
of the following elements of the Corporate Governance Statement is materially
consistent with the financial statements or our knowledge obtained during the
audit:
. Directors' statement with regards to the appropriateness of adopting the
going concern basis of accounting and any material uncertainties identified set
out above;
. Directors' explanation as to its assessment of the company's prospects,
the period this assessment covers and why the period is appropriate set
. Directors' statement on fair, balanced and understandable;
. Board's confirmation that it has carried out a robust assessment of the
emerging and principal risks;
. The section of the annual report that describes the review of
effectiveness of risk management and internal control systems set out; and
. The section describing the work of the audit committee.
Responsibilities of Directors
As explained more fully in the directors' responsibilities statement set out in
the Report of the Directors, the directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and
fair view, and for such internal control as the directors determine is
necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for
assessing the Company's ability to continue as a going concern, disclosing, as
applicable, matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the Company or to
cease operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud
or error, and to issue an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on
the basis of these financial statements.
Explanation as to what extent the audit was considered capable of detecting
irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and
regulations. We design procedures in line with our responsibilities, outlined
above, to detect irregularities, including fraud. The risk of not detecting a
material misstatement due to fraud is higher than the risk of not detecting one
resulting from error, as fraud may involve deliberate concealment by, for
example, forgery or intentional misrepresentations, or through collusion. The
extent to which our procedures are capable of detecting irregularities,
including fraud is detailed below.
However, the primary responsibility for the prevention and detection of fraud
rests with both those charged with governance of the Company and the Investment
Adviser. Our approach was as follows:
. We obtained an understanding of the legal and regulatory frameworks that
are applicable to the Company and determined that the most significant are the
Companies (Guernsey) Law, 2008, the 2018 UK Corporate Governance Code and the
listing requirements of London Stock Exchange and the Disclosure Guidance and
Transparency Rules of the UK Listing Authority;
. We understood how the Company is complying with those frameworks by
making enquiries of the Investment Adviser and those charged with governance
regarding:
their knowledge of any non-compliance or potential non-compliance with laws
and regulations that could affect the financial statements;
the Company's methods of enforcing and monitoring non-compliance with such
policies;
management's process for identifying and responding to fraud risks,
including programs and controls the Company has established to address risks
identified by the entity, or that otherwise prevent, deter and detect fraud;
and
how management monitors those programs and controls;
. Administration and maintenance of the Company's books and records is
performed by Northern Trust International Fund Administration Services
(Guernsey) Limited which is a regulated firm, independent of the Investment
Adviser. We corroborated our enquiries through our review of Board minutes and
any correspondence received from regulatory bodies. We also obtained their SOC1
controls report and reviewed it for findings relevant to the Company. We noted
no contradictory evidence during these procedures;
× We assessed the susceptibility of the Company's financial statements to
material misstatement, including how fraud might occur by:
obtaining an understanding of entity-level controls and considering the
influence of the control environment;
obtaining management's assessment of fraud risks including an understanding
of the nature, extent and frequency of such assessment documented in the
Board's risk matrix;
making inquiries with those charged with governance as to how they exercise
oversight of management's processes for identifying and responding to fraud
risks and the controls established by management to mitigate specifically those
risks the entity has identified, or that otherwise help to prevent, deter and
detect fraud;
making inquiries with management and those charged with governance regarding
how they identify related parties including circumstances related to the
existence of a related party with dominant influence; and
making inquiries with management and those charged with governance regarding
their knowledge of any actual or suspected fraud or allegations of fraudulent
financial reporting affecting the Company.
. Based on this understanding we designed our audit procedures to identify
non-compliance with such laws and regulations identified above. Our procedures
involved a review of Board minutes and inquiries of the Investment Adviser and
those charged with governance including:
Through discussion, gaining an understanding of how those charged with
governance, the Investment Adviser and Administrator identify instances of
non-compliance by the Company with relevant laws and regulations;
Inspecting the relevant policies, processes and procedures to further our
understanding;
Reviewing Board minutes and internal compliance reporting;
Inspecting correspondence with regulators; and
Obtaining relevant written representations from the Board of Directors.
A further description of our responsibilities for the audit of the financial
statements is located on the Financial Reporting Council's website at https://
www.frc.org.uk/auditorsresponsibilities. This description forms part of our
auditor's report.
Other matters we are required to address
. Following the recommendation from the audit committee, we were appointed
by the Company to audit the financial statements for the year ended 28 February
2009 and subsequent financial periods. We signed an engagement letter on 27
November 2008.
. The period of total uninterrupted engagement including previous renewals
and reappointments is 14 years, covering the years ended 28 February 2009 to 28
February 2022.
. The audit opinion is consistent with the additional report to the audit
committee.
Use of our report
This report is made solely to the Company's members, as a body, in accordance
with Section 262 of The Companies (Guernsey) Law 2008. Our audit work has been
undertaken so that we might state to the Company's members those matters we are
required to state to them in an auditor's report and for no other purpose. To
the fullest extent permitted by law, we do not accept or assume responsibility
to anyone other than the Company and the Company's members as a body, for our
audit work, for this report, or for the opinions we have formed.
Andrew Jonathan Dann, FCA
for and on behalf of Ernst & Young LLP
Guernsey, Channel Islands
14 June 2022
1. The maintenance and integrity of the JZ Capital Partners Limited website
is the responsibility of the Directors; the work carried out by the auditors
does not involve consideration of these matters and, accordingly, the auditors
accept no responsibility for any changes that may have occurred to the
Financial Statements since they were initially presented on the website.
2. Legislation in Guernsey governing the preparation and dissemination of
Financial Statements may differ from legislation in other jurisdictions.
Independent Auditors Report For Audit Conducted In Accordance With Auditing
Standards Generally Accepted In The United States1
Opinion
We have audited the Financial Statements of JZ Capital Limited (the "Company"),
which comprise the Statement of Financial Position as of 28 February 2022 and
2021, and the related Statements of Comprehensive Income, the Statements of
Changes in Equity, the Statements of Cash Flows for the years then ended, and
the related notes (collectively referred to as the "Financial Statements").
In our opinion, the accompanying Financial Statements present fairly, in all
material respects, the financial position of the Company as of 28 February 2022
and 2021, and the results of its operations, changes in equity, and its cash
flows for the years then ended, in accordance with International Financial
Reporting Standards as adopted by the European Union ("IFRS").
Basis for Opinion
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America ("GAAS"). Our responsibilities under those
standards are further described in the Auditor's Responsibilities for the Audit
of the Financial Statements section of our report. We are required to be
independent of the Company and to meet our other ethical responsibilities in
accordance with the relevant ethical requirements relating to our audit. We
believe that the audit evidence we have obtained is sufficient and appropriate
to provide a basis for our audit opinion.
Substantial Doubt About the Company's Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 and 31 to the
financial statements, the Company has stated that there is a material
uncertainty relating to whether the Company can generate sufficient cash
through realisations of its underlying investments to discharge its
liabilities over the period to 14 June 2023 or failing to do so can agree terms
with its debt providers to repay its obligations, including the redemption of
its ZDP shares, over an extended timeframe. The Company has stated that
substantial doubt exists about the Company's ability to continue as a going
concern. Management's evaluation of the events and conditions and management's
plans regarding these matters are also described in Note 3. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. Our opinion is not modified with respect to this matter.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the
Financial Statements in accordance with IFRS and for the design,
implementation, and maintenance of internal control relevant to the preparation
and fair presentation of Financial Statements that are free of material
misstatement, whether due to fraud or error.
In preparing the Financial Statements, management is required to evaluate
whether there are conditions or events, considered in the aggregate, that raise
substantial doubt about the Company's ability to continue as a going concern
for one year after the date that the Financial Statements are available to be
issued.
Auditor's Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the Financial
Statements as a whole are free of material misstatement, whether due to fraud
or error, and to issue an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance but is not absolute assurance
and therefore is not a guarantee that an audit conducted in accordance with
GAAS will always detect a material misstatement when it exists. The risk of not
detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.
Misstatements are considered material if there is a substantial likelihood
that, individually or in the aggregate, they would influence the judgment made
by a reasonable user based on the Financial Statements.
In performing an audit in accordance with GAAS, we:
× Exercise professional judgment and maintain professional scepticism
throughout the audit.
× Identify and assess the risks of material misstatement of the Financial
Statements, whether due to fraud or error, and design and perform audit
procedures responsive to those risks. Such procedures include examining, on a
test basis, evidence regarding the amounts and disclosures in the Financial
Statements.
× Obtain an understanding of internal control relevant to the audit in
order to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control. Accordingly, no such opinion is expressed.
× Evaluate the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well
as evaluate the overall presentation of the Financial Statements.
× Conclude whether, in our judgment, there are conditions or events,
considered in the aggregate, that raise substantial doubt about the Company's
ability to continue as a going concern for a reasonable period of time.
We are required to communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit, significant
audit findings, and certain internal control-related matters that we identified
during the audit.
Other Information
The Directors are responsible for the other information. The other information
comprises the information included in the Annual Report, but does not include
the Financial Statements and our auditor's report thereon. Our opinion on the
Financial Statements does not cover the other information, and we do not
express an opinion or any form of assurance thereon.
In connection with our audit of the Financial Statements, our responsibility is
to read the other information and consider whether a material inconsistency
exists between the other information and the Financial Statements, or the other
information otherwise appears to be materially misstated. If, based on the work
performed, we conclude that an uncorrected material misstatement of the other
information exists, we are required to describe it in our report.
Ernst & Young LLP
Guernsey, Channel Islands
14 June 2022
1In order to comply with the U.S. Securities and Exchange Commission's custody
rule, an audit opinion was requested, by the Company's Investment Adviser,
which satisfies the requirements of auditing standards generally accepted in
the United States.
Statement of Comprehensive Income
For the Year Ended 28 February 2022
Year Ended Year Ended
28 February 28 February
2022 2021
Notes US$'000 US$'000
Income and investment and other gains
Net gain on investments at fair value through 6 17,530 -
profit or loss
Investment income 8 16,770 22,160
Bank and deposit interest 174 220
Realisations from investments held in escrow 28 597 1,147
accounts
Net foreign currency exchange gains 84 -
35,155 23,527
Expenses and losses
Net loss on investments at fair value through 6 - (126,386)
profit or loss
Expected credit losses 7 (5,277) (3,062)
Loss on financial liabilities at fair value through 17 (1,869) (3,618)
profit or loss
Investment Adviser's base fee 10 (7,414) (9,722)
Administrative expenses 10 (3,457) (4,707)
Directors' remuneration 10 (290) (319)
Net foreign currency exchange loss - (4,897)
18,307 (152,711)
Operating profit/(loss) 16,848 (129,184)
Finance costs 9 (13,094) (18,191)
Profit/(loss) before taxation 3,754 (147,375)
Withholding taxes 11 - 126
Profit/(loss) for the year 3,754 (147,249)
Other comprehensive (loss)/income that will not be reclassified to the Income
Statement
Other comprehensive income that will not be reclassified to the Income
Statement
(Loss)/Gain on financial liabilities due to change 17 (1,074) 1,074
in credit risk
Total comprehensive profit/(loss) for the year 2,680 (146,175)
Weighted average number of Ordinary shares in issue 25 77,475,932 77,474,175
during the year
Basic earnings/(loss) per Ordinary share 25 4.85c (190.06)c
Diluted earnings/(loss) per Ordinary share 25 4.85c (190.06)c
All of the profits and losses presented in this statement are from continuing
operations.
The accompanying notes form an integral part of the Audited Financial
Statements.
Statement of Financial Position
As at 28 February 2022
28 February 28 February
2022 2021
Notes US$'000 US$'000
Assets
Investments at fair value through profit or loss 12 411,568 433,224
Loans at amortised cost 12 28,593 33,813
Other receivables 13 70 22
Cash at bank 43,656 59,784
Total Assets 483,887 526,843
Liabilities
Senior debt facility 14 42,573 68,694
Zero Dividend Preference (2022) shares 15 75,038 74,303
Loan notes 16 32,293 -
Investment Adviser's base fee 10 276 573
Other payables 18 1,443 1,284
Convertible Unsecured Loan Stock 17 - 52,430
Total Liabilities 151,623 197,284
Equity
Share capital 19 216,650 216,625
Other reserve 21 353,528 354,602
Retained deficit 21 (237,914) (241,668)
Total Equity 332,264 329,559
Total Liabilities and Equity 483,887 526,843
Number of Ordinary shares in issue at year end 19 77,477,214 77,474,175
Basic and Diluted Net Asset Value per Ordinary share 27 $4.29 $4.25
These Audited Financial Statements were approved by the Board of Directors and
authorised for issuance on 14 June 2022. They were signed on its behalf by:
David Macfarlane
Chairman
Sharon Parr
Director
The accompanying notes form an integral part of the Audited Financial
Statements.
Statement of Changes in Equity
For the Year Ended 28 February 2022
Share Other Retained
Deficit
Capital Reserve Total
Notes US$'000 US$'000 US$'000 US$'000
Balance as at 1 March 2021 216,625 354,602 329,559
(241,668)
Profit for the year - - 3,754 3,754
Loss on financial liabilities due to change 17 - (1,074) -
in credit risk (1,074)
Issue of Ordinary shares 19 25 - - 25
Balance at 28 February 2022 216,650 353,528 332,264
(237,914)
Comparative for the Year ended 28 February 2021
Share Other Retained
Capital Reserve Deficit Total
US$'000 US$'000 US$'000 US$'000
Balance as at 1 March 2020 216,625 353,528 (94,419) 475,734
Loss for the year - - (147,249)
(147,249)
Gain on financial liabilities due to change 17 - 1,074 - 1,074
in credit risk
Balance at 28 February 2021 216,625 354,602 329,559
(241,668)
The accompanying notes form an integral part of the Audited Financial
Statements.
Statement of Cash Flows
For the Year Ended 28 February 2022
28 February 28 February
2022 2021
Notes US$'000 US$'000
Cash flows from operating activities
Cash inflows
Realisation of investments 12 65,799 138,336
Maturity of treasury bills 12 3,395 6,790
Escrow receipts received 28 597 1,147
Interest received from unlisted investments - 361
Income distributions received from investments 520 379
Bank Interest received 174 220
Cash outflows
Direct investments and capital calls 12 (13,008) (17,966)
Purchase of treasury bills 12 (3,395) (6,787)
Investment Adviser's base fee paid 10 (7,711) (10,328)
Other operating expenses paid (3,637) (4,744)
Investment Adviser's incentive fee paid - (2,307)
Net cash inflow from operating activities 42,734 105,101
Cash flows from financing activities
Advance of Loan notes 16 31,500 -
Advance of Senior debt facility 14 16,000 -
Repayment of Senior debt facility 14 (40,585) (82,912)
Repayment of Convertible Unsecured Loan Stock 17 (54,401) -
Finance costs paid:
Convertible Unsecured Loan Stock (2,677) (2,953)
Senior debt facility (8,379) (12,331)
Loan notes (315) -
Net cash outflow from financing activities (58,857) (98,196)
(Decrease)/increase in cash and cash equivalents (16,123) 6,905
Reconciliation of Net Cash Flow to Movements in Cash and Cash Equivalents
Cash at bank at beginning of year 59,784 52,912
(Decrease)/increase in cash and cash equivalents as (16,123) 6,905
above
Foreign exchange movements on cash balance (5) (33)
Cash at bank at year end 43,656 59,784
The accompanying notes form an integral part of the Audited Financial
Statements.
Notes to the Financial Statements
1. General Information
JZ Capital Partners Limited ("JZCP" or the "Company") is a Guernsey domiciled
closed-ended investment company which was incorporated in Guernsey on 14 April
2008 under the Companies (Guernsey) Law, 1994. The Company is now subject to
the Companies (Guernsey) Law, 2008. The Company is classified as an authorised
fund under the Protection of Investors (Bailiwick of Guernsey) Law 2020. The
Company's Capital consists of Ordinary shares and Zero Dividend Preference
("ZDP") shares. The Company had issued Convertible Unsecured Loan Stock
("CULS"), which were redeemed on 30 July 2021. The Company's shares trade on
the London Stock Exchange's Specialist Fund Segment ("SFS").
The Company's debt structure consists of a Senior debt facility and
subordinated, second lien loan notes (the "Loan notes").
The Company's new investment policy, adopted in August 2020, is for the Company
to make no further investments outside of its existing obligations or to the
extent that investment may be made to support selected existing portfolio
investments. The intention is to realise the maximum value of the Company's
investments and, after repayment of all debt, to return capital to
shareholders. The Company's previous Investment Policy was to target
predominantly private investments and back management teams to deliver on
attractive investment propositions. In executing this strategy, the Company
took a long term view. The Company looked to invest directly in its target
investments and was able to invest globally but with a particular focus on
opportunities in the United States and Europe.
The Company is currently mainly focused on supporting its investments in the
following areas:
(a) small or micro-cap buyouts in the form of debt and equity and preferred
stock in both the US and Europe; and
(b) US real estate
The Company has no direct employees. For its services, the Investment Adviser
receives a management fee as described in Note 10. The Company has no ownership
interest in the Investment Adviser. During the period under review, the Company
was administered by Northern Trust International Fund Administration Services
(Guernsey) Limited.
2. Basis of Accounting and Significant Accounting Policies
Statement of compliance
The Financial Statements have been prepared in accordance with the
International Financial Reporting Standards as adopted by the European Union
("IFRS"), which comprise standards and interpretations approved by the
International Accounting Standards Board ("IASB") together with applicable
legal and regulatory requirements of Guernsey Law, and the SFS.
Basis of preparation
The Financial Statements of the Company have been prepared in accordance with
IFRS. The Financial Statements have been prepared on a historical-cost basis,
except for financial assets and financial liabilities held at fair value
through profit or loss ("FVTPL").
The Financial Statements are presented in US dollars and all values are
presented to the nearest thousand dollars ($000), except where otherwise
indicated. The functional currency of the Company as determined in accordance
with IFRS is the US Dollar because this is the currency that best reflects the
economic substance of the underlying events and circumstances of the
Company.
The Company presents its Statement of Cash Flows statement on a direct-basis.
The Company's Statement of Financial Position's is presented in order of
liquidity, which provides information in a format that is deemed relevant to
the Company.
New and amended standards and interpretations
There were no new standards or amendments to existing standard and
interpretations, effective for annual periods beginning on or after 1 January
2021, that had significant effect on the Company's Financial Statements. The
new standards or amendments to existing standards and interpretations,
effective from 1 March 2021, did not have a material impact of the Company's
Financial Statements. The Company has assessed the impact of standards issued
but not yet applicable, and have concluded that they will not have a material
impact on the Financial Statements.
Changes in accounting policy and disclosure
The accounting policies adopted in the preparation of these Audited Annual
Financial Statements have been consistently applied during the year and are
consistent with those of the previous year, unless otherwise stated.
Significant Accounting Policies
Financial instruments
In accordance with IFRS 9 - "Financial Instruments", the Company classifies its
financial assets and financial liabilities at initial recognition into the
categories of financial assets and financial liabilities discussed below.
Financial assets
The Company classifies its financial assets as subsequently measured at
amortised cost or measured at FVTPL on the basis of both:
- The entity's business model for managing the financial
assets; and
- The contractual cash flow characteristics of the financial
asset.
i) Financial assets measured at amortised cost
A debt instrument is measured at amortised cost if it is held within a business
model whose objective is to hold financial assets in order to collect
contractual cash flows and its contractual terms give rise on specified dates
to cash flows that are solely payments of principal and interest on the
principal amount outstanding. The Company includes in this category loans at
amortised cost, short-term non-financing receivables and other receivables.
ii) Financial assets measured at FVTPL
Fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
ii a) Classification
Financial assets classified at FVTPL are those that are managed and their
performance evaluated on a fair value basis in accordance with the Company's
investment strategy as documented in its prospectus.
The Company includes in this category:
Investments in the equity and preferred stock of micro cap, real estate and
other investments;
Investments in subsidiaries and associates:
× Investment in subsidiaries: In accordance with the exception under IFRS
10 - "Consolidated Financial Statements", the Company does not consolidate
subsidiaries in the financial statements unless the subsidiary is not itself an
investment entity and its main purpose and activities are providing services
that relate to the Company's investment activities. The Company has no
consolidated subsidiaries.
× Investment in associates: In accordance with the exemption in IAS 28 -
"Investments in Associates and Joint Ventures", the Company does not account
for its investments in associates using the equity method. Instead, the Company
has elected to measure its investments in associates at FVTPL.
× Investments in debt instruments which include investments that are held
under a business model to manage them on a fair value basis for investment
income and fair value gains.
ii b) Measurement
Investments made by the Company are measured initially and subsequently at fair
value, with changes in fair value taken to the Statement of Comprehensive
Income. Transaction costs are expensed in the year in which they arise for
those financial instruments classified at FVTPL.
ii c) Fair value estimate
The fair value of financial assets traded in active markets (such as publicly
traded securities) is based on quoted market prices at the Statement of
Financial Position date. The quoted market price used for financial assets held
by the Company is the bid price.
Unquoted preferred shares, micro cap loans, unquoted equities and equity
related securities investments are typically valued by reference to their
enterprise value, which is generally calculated by applying an appropriate
multiple to the last twelve months' earnings before interest, tax, depreciation
and amortisation ("EBITDA"). In determining the multiple, the Directors
consider inter alia, where practical, the multiples used in recent transactions
in comparable unquoted companies, previous valuation multiples used and where
appropriate, multiples of comparable publicly traded companies. In accordance
with the International Private Equity and Venture Capital Association
("IPEVCA") valuation guidelines, a marketability discount is applied which
reflects the discount that in the opinion of the Directors, market participants
would apply in a transaction in the investment in question.
The valuation techniques to derive the fair value of real estate interests and
other investments are detailed in Note 5.
iii) Other receivables
Other receivables do not carry any interest and are short-term in nature and
are accordingly stated at their carrying value as reduced by appropriate
allowances for expected credit losses.
iv) Cash on deposit and cash and cash equivalents
Cash on deposit comprises bank deposits with an original maturity of three
months or more. Cash and cash equivalents comprise bank balances and cash held
by the Company, including short-term bank deposits with a maturity of three
months or less. Cash also includes amounts held in interest-bearing overnight
accounts.
Financial liabilities
For financial liabilities designated as FVTPL using the fair value option
("FVO"), the amount of change in the fair value of such financial liabilities
that is attributable to changes in the Company's credit risk must be presented
in Other Comprehensive Income ("OCI"). The remainder of the change in fair
value is presented in profit or loss, unless presentation in OCI of the fair
value change in respect of the liability's credit risk would create or enlarge
an accounting mismatch in profit or loss.
Financial liabilities are classified according to the substance of the
contractual arrangements entered into. Financial liabilities, other than CULS
(see below) are recorded at the amount of proceeds received, net of issue
costs.
Financial liabilities may be designated at fair value through profit or loss
rather than stated at amortised cost, when the Board have considered the
appropriate accounting treatment for the specific liability.
i) Financial liabilities measured at FVTPL
Convertible Unsecured Loan Stock ("CULS")
The CULS issued by the Company were denominated in a currency (GBP) other than
the Company's functional currency and hence fails the 'fixed-for-fixed'
criteria for equity classification. Rather than account for the host debt and
embedded conversion element separately, the Company elected to account for the
CULS in its entirety in accordance with the IFRS 9 'Fair Value Option'.
The CULS' fair value was deemed to be the listed offer price at the year end.
CULS were translated at the exchange rate at the reporting date and both
differences in fair value due to the listed offer price and exchange rates were
recognised in the Statement of Comprehensive Income. Changes in fair value due
to changes in credit risk were presented as Other Comprehensive Income.
ii) Financial liabilities measured at amortised cost
This category includes all financial liabilities, other than those measured at
fair value through profit or loss. The Company includes in this category, Zero
Dividend Preference ("ZDP") shares, senior debt facility, Loan notes and other
short-term payables.
a) Zero Dividend Preference ("ZDP") shares
ZDP shares meet the definition of a financial liability in accordance with IAS
32 - "Financial Instruments: Presentation", as the shares are redeemable at a
fixed date and holders are entitled to a fixed return. ZDP shares are recorded
at amortised cost using the effective interest rate method.
b) Senior debt facility
The loan is recorded at amortised cost using the effective interest rate
method.
c) Loan notes
Loan Notes are recorded at amortised cost using the effective interest rate
method.
d) Other payables
Other payables (include the accrual of Investment Adviser's fees) are
classified as financial liabilities at amortised cost. Other payables are not
interest-bearing and are stated at their nominal value.
Equity
Equity is classified according to the substance of the contractual arrangements
entered into. An equity instrument is any contract that evidences a residual
interest in the assets of the Company after deducting all of its liabilities.
Equity are recorded at the amount of proceeds received, net of issue costs.
Ordinary Shares are classified as equity in accordance with IAS 32 - "Financial
Instruments: Presentation" as these instruments include no contractual
obligation to deliver cash and the redemption mechanism is not mandatory.
Interest revenue
Interest revenues are recognised in the Statement of Comprehensive Income for
all interest-bearing financial instruments using the effective interest
method.
Dividend income
Dividend income is recognised when the Company's right to receive payment is
established. When there is reasonable doubt that income due to be received will
actually be received, such income is not accrued until it is clear that its
receipt is probable. Where, following an accrual of income, receipt becomes
doubtful, the accrual is either fully or partly written off until the
reasonable doubt is removed.
Expenses
All expenses are recognised in the Statement of Comprehensive Income on an
accruals basis.
Finance costs
Finance costs are interest expenses in respect of the ZDP shares, Senior debt
facility and Loan Notes, and are recognised in the Statement of Comprehensive
Income using the effective interest rate method.
Escrow accounts
Where investments are disposed of, the consideration given may include
contractual terms requiring that a percentage of the consideration is held in
an escrow account pending resolution of any indemnifiable claims that may arise
and as such the value of these escrow amounts is not immediately known. The
Company records gains realised on investments held in escrow in the Statement
of Comprehensive Income following confirmation that any such indemnifiable
claims have been resolved and none is expected in the future.
Taxation
The Company has been granted Guernsey tax exempt status in accordance with The
Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 (as amended). However, in
some jurisdictions, investment income and capital gains are subject to
withholding tax deducted at the source of the income. The Company presents the
withholding tax separately from the gross investment income in the Statement of
Comprehensive Income.
3. Estimates and Judgements
The preparation of the Company's financial statements requires management to
make estimates, judgements, and assumptions that affect the reported amounts
recognised in the financial statements. However, uncertainty about these
assumptions and estimates could result in outcomes that could require a
material adjustment to the carrying amount of the asset or liability affected
in future periods.
The following are the key judgements and other key sources of estimation
uncertainty at the end of the reporting year, that have a significant risk of
causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year:
Estimates
Fair Value of Investments at Fair Value Through Profit or Loss
Certain investments are classified as FVTPL, and valued accordingly, as
disclosed in Note 2. The key source of estimation uncertainty is on the
valuation of unquoted equities, equity-related securities and real estate
investments.
In reaching its valuation of the unquoted equities, equity-related securities
and real estate investments, the key estimates management has to make are those
relating to the multiples, discount factors and real estate valuation factors
(Note 5) used in the valuation models.
Expected Credit Losses ("ECL")
Certain financial assets are classified as Loans at Amortised cost, and valued
accordingly as disclosed in Note 2. The key source of estimation uncertainty is
on the various default scenarios for prescribed future periods and the
probability of each scenario occurring which are considered when estimating the
ECLs.
Judgements
Assessment as an Investment Entity
Entities that meet the definition of an investment entity within IFRS 10 are
required to measure their subsidiaries at fair value through profit or loss
rather than consolidate them. The criteria which define an investment entity
are as follows:
× An entity that obtains funds from one or more investors for the purpose
of providing those investors with investment services;
× An entity that commits to its investors that its business purpose is to
invest funds solely for returns from capital appreciation, investment income or
both; and
× An entity that measures and evaluates the performance of substantially
all of its investments on a fair value basis.
The Company has a wide range of investors; through its Investment Adviser
management services it enables investors to access private equity, real estate
and similar investments.
The Company's objective to provide a "significant capital appreciation" is
consistent with that of an investment entity. The Company has clearly defined
exit strategies for each of its investment classes, these strategies are again
consistent with an investment entity.
The management of JZCP, measure and evaluate the performance of its investments
on a fair value basis.
The Board has also concluded that the Company meets the additional
characteristics of an investment entity, in that it has more than one
investment; the investments are predominantly in the form of equities and
similar securities and it has more than one investor.
Investment in Associates
An associate is an entity over which the Company has significant influence. An
entity is regarded as a subsidiary only if the Company has control over its
strategic, operating and financial policies and intends to hold the investment
on a long-term basis for the purpose of securing a contribution to the
Company's activities. The Directors have determined that although the Company
has over 50% economic interest in EuroMicrocap Fund 2010, L.P. and JZI Fund III
GP, L.P1., it does not have the power to govern the financial and operating
policies of the entities, but does have significant influence over the
strategic, operating and financial policies. The Company also has significant
influence over the strategic, operating and financial policies of Spruceview
Capital Partners, LLC and JZHL Secondary Fund.
In accordance with the exemption within IAS 28 - "Investments in Associates and
Joint Ventures", the Company does not account for its investment in
EuroMicrocap Fund 2010, L.P., JZHL Secondary Fund, JZI Fund III GP, L.P. and
Spruceview Capital Partners, LLC using the equity method. Instead, the Company
has elected to measure its investment in its associates at FVTPL.
1JZCP holds indirectly a 18.75% partnership interest in JZI Fund III, L.P.
through its interest in JZI Fund III GP, L.P.
Going Concern
A fundamental principle of the preparation of financial statements in
accordance with IFRS is the judgement that an entity will continue in existence
as a going concern for a period of at least 12 months from signing of the
financial statements, which contemplates continuity of operations and the
realisation of assets and settlement of liabilities occurring in the ordinary
course of business.
Due to the uncertainty that the Company will not have sufficient liquidity to
repay its Loan notes (due 11 September 2022) and redeem its ZDP shares (due 1
October 2022), there is a material uncertainty which casts significant doubt on
the ability of the Company to continue as a going concern. However, the
Financial Statements for the year ended 28 February 2022 have been prepared on
a going concern basis given the Board's assessment of future realisations and
likelihood that, should it be necessary, agreement would be able to be reached
with debt providers which would allow the timely repayment of its obligations,
including the redemption of its ZDP shares. The Board, with recommendation from
the Audit Committee, has a reasonable expectation that the Company has adequate
resources to continue in operational existence for the foreseeable future.
In reaching its conclusion, the Board has considered the risks that could
impact the Company's liquidity over the period from 14 June 2022 to 30 June
2023 (the "going concern period") being approximately 12 months from the
signing of the Financial Statements.
As part of their assessment the Audit Committee highlighted the following key
consideration:
Whether the Company can generate sufficient cash through realisations of its
underlying investments to discharge its liabilities over the period to 30 June
2023 or failing to do so can agree terms with its debt providers to repay its
obligations, including the redemption of its ZDP shares, over an extended
timeframe.
In summary, the Company's key outstanding debt obligations during the going
concern period are:
(i) $31.5 million of Subordinated Notes due 11 September 2022; and
(ii) Approximately $77.3 million of ZDP shares due 1 October 2022,
being £57.6 million translated at the year end exchange rate.
The Company needs to generate realisation proceeds of approximately $90 million
during the going concern period of which $70 million is required before 1
October 2022 to enable the settlement of the debt obligations on their due
date.
Key financing activities during the year
On 30 July 2021, the Company redeemed its CULS totalling £38.9 million ($54
million) on their maturity and entered into a note purchase agreement with the
founders and principals of the Company's investment adviser, for the Company to
issue subordinated, second lien loan notes (the "Loan Notes") of additional
financing totalling $31.5 million.
On 26 January 2022, the Company entered into an agreement with a New Senior
Lender replacing the Company's previous senior debt facility. The key
highlights of the new facility are as follows:
× Extended maturity date on five year term (26 January 2027 previously 12
June 2022);
× Lower interest rate reducing future finance costs;
× Allowance for the repayment of the Loan notes and ZDP shares assuming
the required asset coverage is maintained; and
× Ability to draw down a further $25 million from time to time in its
discretion, provided certain conditions are met, in the 24 month period
following the closing date.
Update on material liabilities due for settlement
The below table shows the Company's net debt position at the year end and the
previous two year ends:
28.2.2022 28.2.2021 29.2.2020
$'000 $'000 $'000
Senior Debt Facility - extended maturity date 42,573 68,694 150,362
26 January 2027
ZDP shares - maturity date 1 October 77,281 80,527 73,569
20221
Loan notes - maturity date 11 32,293 - -
September 2022
CULS (£38.9 million) - maturity date - 54,332 49,637
30 July 2021
152,147 203,553 273,568
Cash and cash equivalents held 47,050 63,178 56,298
Net debt position 105,097 140,375 217,270
1Forecast ZDP maturity Dollar amount is the total redemption amount of £
57.6million translated using the 28.2.2022 year end rate being £1/$1.34175.
Realisations
The Company's ability to repay the above debt obligations remains dependent
upon the Company achieving sufficient realisations of its assets within the
relevant timeframes. During the year ended 28 February 2022, the Company had
realisations of investments totalling $65.8 million (2021:$139.5 million and
2020: $148.2 million).
Realisations and refinancings during the last three fiscal years are as
follows:
Year End Year End Year End
28.2.2022 28.2.2021 29.2.2020
$ million $ million $ million
Salter Labs U.S. 41.1 Secondary U.S. 87.7 Avante U.S. 37.5
Sale
George U.S. 9.5 Real Estate 13.6 Orizon U.S. 28.0
Industries
Orangewood U.S. 6.2 ABTA U.S. 9.4 Waterline U.S. 23.3
Fund Renewal
Igloo U.S. 3.8 Eliantus Euro 9.4 Priority U.S. 18.5
Express
Vitalyst U.S. 1.9 K2 Towers II Euro 9.2 Felix Storch U.S. 14.0
EMC 2010 Euro 2.2 Other U.S. 9.0 Other U.S. 8.7
Fund III Euro 1.1 Cerpi Other 1.2 Fund III Euro 13.6
Real estate 4.6
65.8 139.5 148.2
Considering the Company's projected cash position, including the Company's
ongoing operating costs and the anticipated further investment required to
support the Company's portfolio, the Board anticipates further proceeds of
approximately $90 million are required from the realisation of investments
during the going concern period, to enable the Company to settle its debts as
they fall due. Of this amount approximately $70 million is required before 1
October 2022 to enable settlement of the ZDP shares. The required amounts from
realisations assumes the drawdown of the further $25 million available under
the terms of the senior debt facility.
The Company's investment adviser, JZAI, is currently pursuing various
opportunities to realise value, and these forecast realisations include several
anticipated sales of micro-cap companies.
The Board continues to consider the levels of realisation proceeds historically
generated by the Company's micro-cap portfolios as well as the accuracy of
previous forecasts whilst concluding on the predicted accuracy of forecasts
presented.
The Board recognises that, the raising of the required total realisation amount
is a considerable task but remains confident in the value of its underlying
micro-cap investments. This is supported by the completed post year end
realisation, above NAV, of Flow Control LLC (JZHL Secondary Fund's portfolio
company) and the agreement of a further sale of a portfolio company of the
Secondary Fund as announced on 23 May 2022. This sale, is anticipated to result
in the receipt of approximately $89-$94 million from the Secondary Fund.
However, the Board notes that the completion of the sale remains subject to
certain conditions, and at the time of signing there can be no assurance that
these conditions will be satisfied and accordingly, that completion of the sale
and subsequent distribution will occur.
Other than the realisation of Flow Control LLC, which did not result in a cash
distribution to JZCP from the Secondary Fund, there were no further completed
realisations post year end to the date of these Financial Statements were
approved.
The restructuring of the Company's debt structure during the year affords the
Company time to realise its remaining investments within a timeframe that will
help maximise the portfolio's value. Should sufficient realisations proceeds
not be raised, within the going concern period to meet the Company's debt
liabilities, the Board is confident the Company can work with its lenders to
ensure alternative financing plans are in place to extend the timeframe over
which its debt obligations are repaid.
Going Concern Conclusion
After careful consideration and based on the reasons outlined above, the Board
is satisfied, as at the date of the signing of the Annual Report and Financial
Statements, that it is appropriate to adopt the going concern basis in
preparing the financial statements and they have a reasonable expectation that
the Company will continue in existence as a going concern for the period ending
30 June 2023.
However, the Board has concluded that the following consideration creates a
material uncertainty which casts significant doubt over the ability of the
Company to continue as a Going Concern, being:
Whether the Company can generate sufficient cash through realisations of its
underlying investments to discharge its liabilities over the period to 30 June
2023 or failing to do so can agree terms with its debt providers to repay its
obligations, including the redemption of its ZDP shares, over an extended
timeframe.
The Financial Statements do not include any adjustments that might result from
the outcome of this uncertainty.
4. Segment Information
The Investment Manager is responsible for allocating resources available to the
Company in accordance with the overall business strategies as set out in the
Investment Guidelines of the Company. The Company is organised into the
following segments:
× Portfolio of US micro-cap investments
× Portfolio of European micro-cap investments
× Portfolio of Real estate investments
× Portfolio of Other investments - (not falling into above categories)
The investment objective of each segment is to achieve consistent medium-term
returns from the investments in each segment while safeguarding capital by
investing in a diversified portfolio.
Investments in treasury bills and corporate bonds are not considered as part of
the investment strategy and are therefore excluded from this segmental
analysis.
Segmental Profit/(Loss)
For the year ended 28 February 2022 US European Real Other
Micro-Cap Micro-Cap Estate Investments Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Interest revenue 13,667 2,583 - - 16,250
Other portfolio income 520 - - - 520
Total segmental income 14,187 2,583 - - 16,770
Net gain/(loss) on investments at 28,723 (11,400) 221 (14) 17,530
FVTPL
Expected credit losses - (5,277) - - (5,277)
Realisations from investments held in 597 - - - 597
Escrow
Investment Adviser's base fee (4,106) (1,742) (317) (348) (6,513)
Total segmental operating profit/(loss) 39,401 (15,836) (96) (362) 23,107
For the year ended 28 February 2021 US European Real Other
Micro-Cap Micro-Cap Estate Investments Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Interest revenue 19,132 2,638 - - 21,770
Other portfolio income 379 - - - 379
Total segmental income 19,511 2,638 - - 22,149
Net (loss)/gain on investments at (13,772) 11,819 (13)
FVTPL (124,420) (126,386)
Expected credit losses - (3,062) - - (3,062)
Realisations from investments held in 1,147 - - - 1,147
Escrow
Withholding tax 126 - - - 126
Investment Adviser's base fee (5,839) (1,642) (1,187) (346) (9,014)
Total segmental operating profit/(loss) 1,173 9,753 (125,607) (359) (115,040)
Certain income and expenditure is not considered part of the performance of an
individual segment. This includes net foreign exchange gain/(loss), gain/(loss)
on financial liabilities at fair value through profit or loss, interest on
cash, finance costs, and expenses other than the Investment Adviser fees which
can be allocated to an individual segment.
The following table provides a reconciliation between total segmental operating
profit/(loss) and operating profit/(loss) less withholding tax.
28.2.2022 28.2.2021
US$ '000 US$ '000
Total Segmental Operating Profit/ 23,107
(Loss) (115,040)
Loss on financial liabilities at fair value through profit (1,869) (3,618)
or loss
Net foreign exchange gain/(loss) 84 (4,897)
Fees payable to Investment Adviser based on non-segmental (901) (708)
assets
Expenses not attributable to segments (3,747) (5,026)
Interest on cash 174 220
Interest on treasury notes and - 11
corporate bonds
Operating profit/(loss) less 16,848
withholding tax (129,058)
The following table provides a reconciliation between total segmental income
and total income which comprises the Company's income from investments and bank
deposits.
28.2.2022 28.2.2021
Total segmental income US$ '000 US$ '000
16,770 22,149
Non-segmental income
Interest on treasury bills - 11
Bank and deposit interest 174 220
Total income 16,944 22,380
Segmental Net Assets US European Real Other
The Company's segmental net
assets
At 28 February 2022
Micro-Cap Micro-Cap Estate Investments Total
Segmental assets US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Investments at FVTPL 284,162 76,882 23,597 23,533 408,174
Loans at amortised cost - 28,593 - - 28,593
Total segmental assets 284,162 105,475 23,597 23,533 436,767
Segmental liabilities
Payables and accrued expenses (551) (72) (11) (14) (648)
Total segmental liabilities (551) (72) (11) (14) (648)
Total segmental net assets 283,611 105,403 23,586 23,519 436,119
At 28 February 2021 US European Real Other
Micro-Cap Micro-Cap Estate Investments Total
Segmental assets US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Investments at FVTPL 299,339 83,968 23,376 23,147 429,830
Loans at amortised cost - 33,813 - - 33,813
Total segmental assets 299,339 117,781 23,376 23,147 463,643
Segmental liabilities
Payables and accrued expenses (771) (101) (43) (21) (936)
Total segmental liabilities (771) (101) (43) (21) (936)
Total segmental net assets 298,568 117,680 23,333 23,126 462,707
Treasury Bills, Cash at bank and cash equivalents and prepayments are not
considered to be part of individual segment assets. Certain liabilities are not
considered to be part of the net assets of an individual segment. These include
custodian and administration fees payable, directors' fees payable and other
payables and accrued expenses.
The following table provides a reconciliation between total segmental assets/
liabilities and total assets/liabilities.
28.2.2022 28.2.2021
US$ '000 US$ '000
Total Segmental Assets 436,767 463,643
Non Segmental Assets
Cash at bank 43,656 59,784
Treasury bills 3,394 3,394
Other receivables 70 22
Total Assets 483,887 526,843
Total Segmental Liabilities (648) (936)
Non Segmental Liabilities
Senior debt facility (42,573) (68,694)
Zero Dividend Preference (2022) shares (75,038) (74,303)
Loan notes (32,293) -
Convertible Unsecured Loan Stock - (52,430)
Other payables (1,071) (921)
Total Liabilities (151,623) (197,284)
Total Net Assets 332,264 329,559
5. Fair Value of Financial Instruments
The Company classifies fair value measurements of its financial instruments at
FVTPL using a fair value hierarchy that reflects the significance of the inputs
used in making the measurements. The financial assets valued at FVTPL are
analysed in a fair value hierarchy based on the following levels:
Level 1
Quoted prices (unadjusted) in active markets for identical assets or
liabilities.
Level 2
Those involving inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly (that is, as prices)
or indirectly (that is, derived from prices). For example, investments which
are valued based on quotes from brokers (intermediary market participants) are
generally indicative of Level 2 when the quotes are executable and do not
contain any waiver notices indicating that they are not necessarily tradeable.
Another example would be when assets/liabilities with quoted prices, that would
normally meet the criteria of Level 1, do not meet the definition of being
traded on an active market.
Level 3
Those involving inputs for the asset or liability that are not based on
observable market data (that is, unobservable inputs). Investments in JZCP's
portfolio valued using unobservable inputs such as multiples, capitalisation
rates, discount rates fall within Level 3.
Differentiating between Level 2 and Level 3 fair value measurements i.e.,
assessing whether inputs are observable and whether the unobservable inputs are
significant, may require judgement and a careful analysis of the inputs used to
measure fair value including consideration of factors specific to the asset or
liability.
The following table shows the financial instruments at FVTPL by fair value
hierarchy category:
Financial assets at 28 February 2022 Level 1 Level 2 Level 3 Total
US$ '000 US$ US$ '000 US$ '000
'000
US micro-cap - - 284,162 284,162
European micro-cap - - 76,882 76,882
Real estate - - 23,597 23,597
Other - - 23,533 23,533
investments
Listed 3,394 - - 3,394
investments
3,394 - 408,174 411,568
Financial assets at 28 February 2021 Level 1 Level 2 Level 3 Total
US$ '000 US$ US$ '000 US$ '000
'000
US micro-cap - - 299,339
299,339
European micro-cap - - 83,968 83,968
Real estate - - 23,376 23,376
Other - - 23,147 23,147
investments
Listed 3,394 - - 3,394
investments
3,394 - 429,830 433,224
Financial liabilities designated at fair value through profit or loss at
inception
Financial liabilities at 28 February 2022 Level 1 Level 2 Level 3 Total
US$ '000 US$ US$ '000 US$ '000
'000
Convertible Unsecured Loan Stock - - - -
- - - -
Financial liabilities at 28 February 2021 Level 1 Level 2 Level 3 Total
US$ '000 US$ US$ '000 US$ '000
'000
Convertible Unsecured Loan Stock - 52,430 - 52,430
- 52,430 - 52,430
It was concluded that market transactions for the CULS did not take place with
sufficient frequency and volume to provide adequate pricing information on an
ongoing basis and therefore did not justify a Level 1 categorisation.
Therefore, it was considered the CULS were not traded in an active market and
were therefore categorised at Level 2 as defined by IFRS. The CULS were valued
at fair value being the listed offer price at the year end. Given the illiquid
nature of the instruments, the Company considered the potential need to apply
an adjustment to the listed offer price.
Valuation techniques
In valuing investments in accordance with IFRS, the Board follows the
principles as detailed in the IPEVCA guidelines.
When fair values of listed equity and debt securities at the reporting date are
based on quoted market prices or binding dealer price quotations (bid prices
for long positions), without any deduction for transaction costs, the
instruments are included within Level 1 of the hierarchy.
Investments for which there are no active markets are valued according to one
of the following methods:
Real estate
JZCP makes its real estate investments through a wholly-owned subsidiary, which
in turn owns interests in various residential, commercial, and development real
estate properties. The net asset value of the subsidiary is used for the
measurement of fair value. The underlying fair value of JZCP's Real Estate
holdings, however, is represented by the properties themselves. The Company's
Investment Adviser and Board review the fair value methods and measurement of
the underlying properties on a quarterly basis. Where available, the Company
will use third party appraisals on the subject property, to assist the fair
value measurement of the underlying property. Third-party appraisals are
prepared in accordance with the Appraisal and Valuation Standards (6th edition)
issued by the Royal Institution of Chartered Surveyors. Fair value techniques
used in the underlying valuations are:
- Use of comparable market values per square foot of properties in recent
transactions in the vicinity in which the property is located, and in similar
condition, of the relevant property, multiplied by the property's square
footage.
- Discounted Cash Flow ("DCF") analysis, using the relevant rental stream,
less expenses, for future periods, discounted at a Market Capitalisation ("MC")
rate, or interest rate.
- Relevant rental stream less expenses divided by the market capitalization
rate; this method approximates the enterprise value construct used for non-real
estate assets.
- Income capital approach using the relevant sell out analysis, less expenses
and costs.
For each of the above techniques third party debt is deducted to arrive at fair
value.
The valuations obtained in relation to the real estate portfolio are dated 31
December 2021. Subsequent discussions with appraisers indicate there would be
no significant change in property values between 31 December 2021 and 28
February 2022. Due to the inherent uncertainties of real estate valuation, the
values reflected in the financial statements may differ significantly from the
values that would be determined by negotiation between parties in a sales
transaction and those differences could be material.
Unquoted preferred shares, unquoted equities and equity related securities
Unquoted equities and equity related securities investments are classified in
the Statement of Financial Position as Investments at fair value through profit
or loss. These investments are typically valued by reference to their
enterprise value, which is generally calculated by applying an appropriate
multiple to the last twelve months' earnings before interest, tax, depreciation
and amortisation ("EBITDA"). In determining the multiple, the Board consider
inter alia, where practical, the multiples used in recent transactions in
comparable unquoted companies, previous valuation multiples used and where
appropriate, multiples of comparable publicly traded companies. In accordance
with IPEVCA guidelines, a marketability discount is applied which reflects the
discount that in the opinion of the Board, market participants would apply in a
transaction in the investment in question. The increase of the fair value of
the aggregate investment is reflected through the unquoted equity component of
the investment and a decrease in the fair value is reflected across all
financial instruments invested in an underlying company.
In respect of unquoted preferred shares the Company values these investments at
fair value by reference to the attributable enterprise value as the exit
strategy in respect to these investments would be a one tranche disposal
together with the equity component. The fair value of the investment is
determined by reference to the attributable enterprise value reduced by senior
debt and marketability discount.
Micro-cap loans
Investments in micro-cap debt are valued at fair value by reference to the
attributable enterprise value when the Company also holds an equity position in
the investee company.
When the Company invests in micro-cap loans and does not hold an equity
position in the underlying investee company these loans are valued at amortised
cost in accordance with IFRS 9 (Note 2). The carrying value at amortised cost
is considered to approximate to fair value.
Other Investments
Other investments at year end, comprise of mainly the Company's investment in
the asset management business -Spruceview Capital Partners ("Spruceview").
Spruceview is valued using a valuation model which considers a forward looking
revenue approach. Previously, Spruceview was valued using a valuation model
which considers both current assets under management ("AUM") and the potential
for new AUM. The Board considers the new approach to be more consistent with
the valuation methods used by peer companies.
Quantitative information of significant unobservable inputs and sensitivity
analysis to significant changes in unobservable inputs within Level 3 hierarchy
The significant unobservable inputs used in fair value measurement categorised
within Level 3 of the fair value hierarchy together with a quantitative
sensitivity as at 28 February 2022 and 28 February 2021 are shown below:
Value Effect on Fair
Value
28.2.2022 Valuation Unobservable Range (weighted Sensitivity
average)
US$'000 Technique input used US$'000
US micro-cap 284,162 EBITDA Average EBITDA 7.0x - 13.5x 23,998
investments Multiple Multiple of (9.0x) (23,876)
Peers
Discount to 5% - 30% (14.7%) 31,887
Average (32,217)
Multiple
European 76,286 EBITDA Average EBITDA 5.5x - 14.2x
micro-cap Multiple Multiple of (9.4x) (5,293) 5,293
investments Peers
Discount to 2% - 50% (23%)
Average (4,533) 4,533
Multiple
Real estate 23,597 Cap Rate/ Capitalisation 5.25%-5.75% +50bps/ (5,338) 6,552
1,2 Income Rate (5.56%) -50bps
Approach
Other 22,324 Forward Revenue $8.3 million (2,187) 1,824
investments3 looking Multiple
Revenue
Approach 5.3x (2,206) 1,809
Value Unobservable Range (weighted Sensitivity Effect on Fair
28.2.2021 average) Value
US$'000 input used US$'000
US micro-cap 299,339 EBITDA Average EBITDA 7.5x - 13.5x -0.5x/+0.5x 22,859
investments Multiple Multiple of (9.6x) (26,888)
Peers
Discount to 10% - 30% (17%) +5%/-5% 35,604
Average (36,420)
Multiple
European 80,689 EBITDA Average EBITDA 7.4x - 14.0x (4,615) 4,597
micro-cap Multiple Multiple of (10.0x)
investments Peers
Discount to 11% - 69% (29%) (4,225) 4,205
Average
Multiple
Real 23,376 Cap Rate/ Capitalisation 5.25%-6.25% +50bps/ (7,925) 9,834
estate1,2 Income Rate (5.94%) -50bps
Approach
Other 21,938 AUM AUM $3.8 Billion (4,989) 4,989
investments Approach
% Applied to 2.3% (2,194) 2,194
AUM
1 The Fair Value of JZCP's investment in financial interests in Real Estate is
measured as JZCP's percentage interest in the value of the underlying
properties.
2 Sensitivity is applied to the property value and then the debt associated to
the property is deducted before the impact to JZCP's equity value is
calculated. Due to gearing levels in the property structures an increase in the
sensitivity of measurement metrics at property level will result in a
relatively greater impact at JZCP's equity level.
3 JZCP's investment in Spruceview.
The following table shows a reconciliation of all movements in the fair value
of financial instruments categorised within Level 3 between the beginning and
the end of the reporting year.
Year ended 28 February 2022 US European Real Other
Micro-Cap Micro-Cap Estate Investments Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
At 1 March 2021 299,339 83,968 23,376 23,147 429,830
Investments in year including capital 4,898 7,647 - 400 12,945
calls
Payment In Kind ("PIK") 14,190 - - - 14,190
Proceeds from investments realised (62,466) (3,333) - - (65,799)
Net gains/(losses) on investments 28,723 (11,400) 221 (14) 17,530
Movement in accrued interest (522) - - - (522)
At 28 February 2022 284,162 76,882 23,597 23,533 408,174
Year ended 28 February 2021 US European Real Other
Micro-Cap Micro-Cap Estate Investments Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
At 1 March 2020 404,880 71,619 158,712 22,603 657,814
Investments in year including capital 3,629 9,858 2,639 1,840 17,966
calls
Payment In Kind ("PIK") 20,027 - - - 20,027
Proceeds from investments realised (114,170) (9,328) (13,555) (1,283)
(138,336)
Net (losses)/gains on investments (13,772) 11,819 (13)
(124,420) (126,386)
Movement in accrued interest (1,255) - - - (1,255)
At 28 February 2021 299,339 83,968 23,376 23,147 429,830
Fair value of Zero Dividend Preference ("ZDP") shares
The fair value of the ZDP shares is deemed to be their quoted market price. As
at 28 February 2022, the offer price for the ZDP (2022) shares was £4.74 (28
February 2021: £3.80) and the total fair value of the ZDP shares was
$75,732,000 (28 February 2021: $63,263,000) which is $694,000 higher (28
February 2021: $11,040,000 lower) than the liability recorded in the Statement
of Financial Position.
ZDP shares are recorded at amortised cost and would fall in to the Level 2
hierarchy if valued at FVTPL.
6. Net Gain/(Loss) on Investments at Fair Value Through Profit or Loss
Year Year
Ended Ended
28.2.2022 28.2.2021
US$ '000 US$ '000
Net gain/(loss) on investments held in investment portfolio at
year end
Net movement in unrealised gains/(loss) positions 71,242 199,715
during the year
Net unrealised loss in prior years now (54,048) (215,285)
realised
Net unrealised gain/(loss) on investments held at 17,194 (15,570)
the year end
Gains/(loss) on investments realised in
the year
Proceeds from investments realised 65,799 179,301
Cost of investments
realised (119,511) (505,402)
Net realised (53,712)
loss (326,101)
Net unrealised loss in prior years now 54,048 215,285
realised
Total gain/(loss) in the year on investments 336
realised (110,816)
Net gain/(loss) on investments during 17,530
the year (126,386)
The losses recorded for the year ended 28 February 2021 are predominantly
attributable to valuation write downs in the Company's real estate
portfolio.
7. Expected Credit Losses
Year Year
Ended Ended
28.2.2022 28.2.2021
US$ '000 US$ '000
Impairments on loans during 5,277 3,062
year
Expected Credit Losses ("ECLs") are recognised in three stages. Stage one being
for credit exposures for which there has not been a significant increase in
credit risk since initial recognition, ECLs are provided for credit losses that
result from default events that are possible within the next 12-months (a
12-month ECL). Stage two being for those credit exposures for which there has
been a significant increase in credit risk since initial recognition, a loss
allowance is required for credit losses expected over the remaining life of the
exposure, irrespective of the timing of the default (a lifetime ECL). Stage
three being credit exposures which are considered credit-impaired, interest
revenue is calculated based on the amortised cost (i.e. the gross carrying
amount less the loss allowance). Financial assets in this stage will generally
be assessed individually. Lifetime expected credit losses are recognised on
these financial assets.
Year Year
Ended Ended
28.2.2022 28.2.2021
US$ '000 US$ '000
Impairment on loans classified as 1,892 815
Stage 1
Impairment on loans classified as - 2,247
Stage 2
Impairment on loans classified as 3,385 -
Stage 3
Total impairment on loans during 5,277 3,062
the year
8. Investment Income
Year Ended Year Ended
28.2.2022 28.2.2021
US$ '000 US$ '000
Interest revenue calculated using the effective interest 2,583 2,987
method
Other interest and similar income 14,187 19,173
16,770 22,160
Income for the year ended 28 February 2022
Preferred Loan note Other
Dividends Dividends PIK Cash Income Total
US$ '000 US$ '000 US$ US$ US$ '000 US$ '000
'000 '000
US micro-cap portfolio 520 13,667 - - - 14,187
European micro-cap - - 2,583 - - 2,583
portfolio
520 13,667 2,583 - - 16,770
Income for the year ended 28 February 2021
Preferred Loan note Other
Dividends Dividends PIK Cash Income Total
US$ '000 US$ '000 US$ US$ US$ '000 US$ '000
'000 '000
US micro-cap portfolio 379 18,783 70 279 - 19,511
European micro-cap - - 2,638 - - 2,638
portfolio
Treasury bills - - - 11 11
379 18,783 2,708 279 11 22,160
9. Finance Costs
Year Year
Ended Ended
28.2.2022 28.2.2021
US$ '000 US$ '000
Interest expense calculated using the effective interest
method
Senior debt facility (note 14) 6,843 11,797
ZDP shares (note 15) 3,807 3,441
Loan notes (note 16) 1,108 -
11,758 15,238
Other interest and similar expense
CULS finance costs paid (note 17) 1,336 2,953
13,094 18,191
10. Expenses
Year Year
Ended Ended
28.2.2022 28.2.2021
US$ '000 US$ '000
Investment Adviser's base fee 7,414 9,722
Directors' remuneration 290 319
7,704 10,041
Administrative expenses:
Legal fees 1,675 2,934
Other professional fees 432 565
Accounting, secretarial and 350 350
administration fees
Auditors' remuneration 350 500
Auditors' remuneration - non-audit 71 134
fees
Directors' insurance 226 59
Custodian fees 24 17
Other expenses 329 148
3,457 4,707
Total expenses 11,161 14,748
Directors' Remuneration
For the year ended 28 February 2022 total Directors' fees included in the
Statement of Comprehensive Income were $290,000 (year ended 28 February 2021:
$319,000), of this amount $47,000 was outstanding at the year end (28 February
2021: $46,000). The Directors' remuneration report in the annual report
provides further details of the remuneration paid.
Investment Advisory and Performance fees
The Company entered into the amended and restated investment advisory and
management agreement with Jordan/Zalaznick Advisers, Inc. (the "Investment
Adviser") on 23 December 2010 (the "Advisory Agreement").
Pursuant to the Advisory Agreement, the Investment Adviser is entitled to a
base management fee and to an incentive fee. The base management fee is an
amount equal to 1.5 per cent. per annum of the average total assets under
management of the Company less excluded assets as defined under the terms of
the Advisory Agreement. The base management fee is payable quarterly in
arrears; the agreement provides that payments in advance on account of the base
management fee will be made.
For the year ended 28 February 2022, total investment advisory and management
expenses, based on the average total assets of the Company, were included in
the Statement of Comprehensive Income of $7,414,000 (year ended 28 February
2021: $9,722,000). Of this amount $276,000 (28 February 2021: $573,000) was due
and payable at the year end
The incentive fee has two parts. The first part is calculated by reference to
the net investment income of the Company ("Income Incentive fee") and the
second part of the incentive fee is calculated by reference to the net realised
capital gains ("Capital Gains Incentive Fee", or "CGIF").
In December 2019 following significant losses reported in the Company's real
estate portfolio, the Investment Adviser agreed to waive fees payable by the
Company of $14.5 million relating to realised gains in the year ended 28
February 2019. Further fees payable for realised gains in the year ended 29
February 2020 of $10.1 million were also waived. No further incentive fees will
be paid to the Investment Adviser until the Company and Investment Adviser have
mutually agreed to reinstate such payments.
The Advisory Agreement may be terminated by the Company or the Investment
Adviser upon not less than two and one-half years' (i.e. 913 days') prior
notice (or such lesser period as may be agreed by the Company and Investment
Adviser).
Administration Fees
Northern Trust International Fund Administration Services (Guernsey) Limited
was appointed as Administrator to the Company on 1 September 2012. The
Administrator is entitled to an annual fee of $350,000 (28 February 2021:
$350,000) payable quarterly in arrears. Fees payable to the Administrator are
subject to an annual fee review.
Custodian Fees
HSBC Bank (USA) N.A, (the "Custodian") was appointed on 12 May 2008 under a
custodian agreement. The Custodian is entitled to receive an annual fee of
$2,000 and a transaction fee of $50 per transaction. For the year ended 28
February 2022, total Custodian expenses of $24,000 (28 February 2021: $17,000)
were included in the Statement of Comprehensive Income of which $10,000 (28
February 2021: $10,000) was outstanding at the year end and is included within
Other Payables.
Auditors' Remuneration
During the year ended 28 February 2022, the Company incurred fees for audit
services of $350,000 (28 February 2021: $500,000). Fees were are also payable
to Ernst & Young for non-audit services including taxation services in relation
to the Company's status as a Passive Foreign Investment Company ("PFIC"). PFIC
services payable in the year ended 28 February 2022 were provided by
PricewaterhouseCoopers LLP and are classified as other professional fees.
28.2.2022 28.2.2021
Audit Fees US$ '000 US$ '000
Audit fees - 2022 (based on estimate received: £256,000) 343 -
Audit fees - 2021 (based on estimate received: £275,000) 7 385
Audit fees - 2020: additional fees - 115
Total audit fees 350 500
Non-audit Fees Paid to Ernst & Young US$ '000 US$ '000
Interim Review - £53,000 (2021: £50,000) 71 69
Taxation services - 65
Total non-audit fees 71 134
11. Taxation
The Company has been granted Guernsey tax exempt status in accordance with The
Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 (as amended).
During the current year, there were no provisions or deductions of withholding
taxes. During the prior year, a withholding tax provision of $126,000 provided
for on receipt of a dividend from an unlisted investment was reversed. At 28
February 2022, the Company has provided for $398,000 (28 February 2021:
$398,000 of potential withholding tax).
12. Investments
Category of financial instruments
Listed Unlisted Unlisted Carrying
Value
FVTPL FVTPL Loans Total
28.2.2022 28.2.2022 28.2.2022 28.2.2022
US$ '000 US$ '000 US$ '000 US$ '000
Book cost at 1 March 2021 3,393 543,740 74,651 621,784
Investments in year including 3,395 12,9451 - 16,340
capital calls
Payment in kind ("PIK")1 - 14,190 2,877 17,067
Proceeds from investments matured/ (3,395) (65,799) - (69,194)
realised
Interest received on maturity 2 - - 2
Net realised loss - (53,712) - (53,712)
Realised impairment loss2 - - (31,757) (31,757)
Realised currency loss2 - - (2,674) (2,674)
Book cost at 28 February 2022 3,395 451,364 43,097 497,856
Unrealised net investment and foreign - (45,192) (4,664) (49,856)
exchange loss
Impairment on loans at amortised - - (10,148) (10,148)
cost
Accrued interest (1) 2,002 308 2,309
Carrying value at 28 February 2022 3,394 408,174 28,593 440,161
1The cost of PIK investments is deemed to be interest not received in cash but
settled by the issue of further securities when that interest has been
recognised in the Statement of Comprehensive Income.
2Realised impairment loss is due to the Company's direct loan in Ombuds
(European micro-cap). The loss was recognised in prior periods and was included
within the comparative number for Impairment on loans at amortised cost.
Comparative reconciliation for the year ended 28 February 2021
Category of financial instruments
Listed Unlisted Unlisted Carrying
Value
FVTPL FVTPL Loans Total
28.2.2021 28.2.2021 28.2.2021 28.2.2021
US$ '000 US$ '000 US$ '000 US$ '000
Book cost at 1 March 2020 3,385 970,184 71,939 1,045,508
Investments in year including 6,787 58,931 - 65,718
capital calls
Payment in kind ("PIK")1 - 20,027 2,712 22,739
Proceeds from realisation and repayment of (6,790) (179,301) - (186,091)
investments
Interest received on maturity 11 - - 11
Net realised investment and foreign - - (326,101)
exchange loss (326,101)
Book cost at 28 February 2021 3,393 543,740 74,651 621,784
Unrealised net investment and foreign exchange - (7,973) (124,407)
loss (116,434)
Impairment on loans at amortised - - (33,323) (33,323)
cost2
Accrued interest 1 2,524 458 2,983
Carrying value at 28 February 2021 3,394 429,830 33,813 467,037
1The cost of PIK investments is deemed to be interest not received in cash but
settled by the issue of further securities when that interest has been
recognised in the Statement of Comprehensive Income.
2Includes unrealised impairment loss of the Company's direct loan in Ombuds
(European micro-cap) which has been realised during the current year.
Loans at amortised cost
Loans to European micro-cap companies are classified and measured as Loans at
amortised under IFRS 9.
Interest on the loans accrues at the following rates:
As At 28 February As At 28 February
2022 2021
8% 10% 14% Total 8% 10% 14% Total
Loans at 26,357 2,236 - 28,593 28,652 2,247 2,914 33,813
amortised cost
Maturity dates are as follows:
As At 28 As At 28 February
February 2022 2021
0-6 7-12 1-2 Total 0-6 7-12 1-2 Total
months months years months months years
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
Loans at - 28,593 - 28,593 - - 33,813 33,813
amortised cost
Tthe Company agreed to extend the maturity date of all loans to European
micro-cap companies to 31 December 2022.
Investment in Associates
An associate is an entity over which the Company has significant influence. An
entity is regarded as a subsidiary only if the Company has control over its
strategic, operating and financial policies and intends to hold the investment
on a long-term basis for the purpose of securing a contribution to the
Company's activities. The Company has elected for an exemption from 'equity
accounting' for associates and instead classifies its associates as Investments
at fair value through profit or loss.
Entity % 28.2.2022 28.2.2021
Interest US$'000 US$'000
JZI Fund III GP, L.P. (has 25% partnership interest Cayman 75% 76,286 80,689
in JZI Fund III, L.P.) 1
JZHL Secondary Fund L.P. Delaware n/a 117,339 72,154
Spruceview Capital Partners, LLC Delaware 49% 22,324 21,938
EuroMicrocap Fund 2010, L.P. Cayman 75% 596 3,279
Orangewood Partners Platform LLC Delaware 79% - 10,876
216,545 188,936
1JZCP holds indirectly a 18.75% partnership interest in JZI Fund III, L.P.
The principal activity of all the JZI Fund III, JZHL Secondary Fund,
EuroMicrocap Fund 2010,L.P. and Orangewood Partners Platform LLC is the
acquisition of micro- cap companies. The principal activity of Spruceview
Capital Partners, LLC is that of an asset management company. There are no
significant restrictions on the ability of associates to transfer funds to the
Company in the form of dividends or repayment of loans or advances.
The Company's maximum exposure to losses from the associates (shown below)
equates to the carrying value plus outstanding commitments:
Entity 28.2.2022 28.2.2021
US$'000 US$'000
JZI Fund III GP, L.P. 91,974
104,514
JZHL Secondary Fund L.P. 117,339
72,154
Spruceview Capital Partners, LLC 22,824
22,838
EuroMicrocap Fund 2010, L.P.
596 3,279
Orangewood Partners Platform LLC
- 25,980
232,733 228,765
Investment in Subsidiaries
The principal place of business for subsidiaries is the USA. The Company meets
the definition of an Investment Entity in accordance with IFRS 10. Therefore,
it does not consolidate its subsidiaries but rather recognises them as
investments at fair value through profit or loss.
Entity Place of % 28.2.2022 28.2.2021
incorporation Interest US$'000 US$'000
JZCP Realty, Ltd Cayman 100% 23,597 23,376
Investments in subsidiaries at fair value 23,597 23,376
There are no significant restrictions on the ability of subsidiaries to
transfer funds to the Company. The Company has no contractual commitments to
provide any financial or other support to its unconsolidated subsidiaries.
JZCP Realty Ltd has a 100% interest in the following Delaware incorporated
entities: JZCP Loan 1 Corp, JZCP Loan Fulton Corp, JZCP Loan Flatbush Corp,
JZCP Loan Flatbush Portfolio Corp, JZCP Loan Design Corp and JZCP Loan
Esperante Corp
JZCP Realty Ltd has a 99% interest in the following Delaware incorporated
entities: JZBC, Inc., JZ REIT Fund 1, LLC, JZ REIT Fund Fulton, LLC, JZ REIT
Fund Flatbush, LLC, JZ REIT Fund Flatbush Portfolio, LLC, JZ REIT Fund Design
LLC and JZ REIT Fund Esperante LLC.
13. Other Receivables
28.2.2022 28.2.2021
US$ '000 US$ '000
Prepayments 70 22
70 22
14. Senior Debt Facility
New Senior Secured Loan Facility
On 26 January 2022, JZCP entered into an agreement with WhiteHorse Capital
Management, LLC (the "New Senior Lender") providing for a new five year term
senior secured loan facility (the "New Senior Debt Facility"). The New Senior
Debt Facility matures on 26 January 2027 and replaced the Company's Previous
Senior Secured Loan Facility with clients and funds advised and sub-advised by
Cohanzick Management, LLC and CrossingBridge Advisors, LLC (the "Previous
Senior Lenders").
The New Senior Debt Facility consists of a $45.0 million first lien term loan
(the "Closing Date Term Loan"), fully funded as of the closing date (being 26
January 2022), and up to $25.0 million in first lien delayed draw term loans
(the "DDT Loans"), which remain undrawn as of the closing date and the year
end. The Company can draw down the DDT Loans from time to time in its
discretion in the 24 month period following the closing date. Customary fees
and expenses were payable upon the drawing of the Closing Date Term Loan. The
proceeds of the Closing Date Term Loan, together with cash at hand, were used
by the Company to repay the Previous Senior Secured Facility of approximately
$52.9 million due 12 June 2022 and for the payment of fees and expenses related
to the New Senior Facility.
The interest rate charged to The New Senior Facility at the year end is the
LIBOR Rate plus 7.001 per cent., or if the Company elects for a portion of the
interest to be paid in kind, the LIBOR Rate plus 9.00 per cent., of which 4.00
per cent. would be charged as payment-in kind (PIK) interest. The Closing Date
Term Loans are subject to a prepayment penalty if they are repaid before
yielding an aggregate 15 per cent. The prepayment penalty ranges from 3.00 per
cent. to 1.00 per cent. depending on whether it is repaid within 1 year, 2
years or 3 years of funding.
The New Senior Debt Facility Agreement includes covenants from the Company
customary for an agreement of this nature, including (a) maintaining a minimum
asset coverage ratio (calculated by reference to eligible assets, subject to
customary ineligibility criteria and concentration limits, plus unrestricted
cash) of not less than 4.00 to 1.00, and (b) ensuring the Company retains an
aggregate amount of unrestricted cash and cash equivalents of not less than
$12.5 million. As at 28 February 2022, eligible assets of $471.0 million
adjusted to $351.9 were held as collateral. The New Senior Facility allows for
the repayment of the Company's other debt obligations assuming the above
covenants are not breached as a result of repayment.
Previous Senior Secured Loan Facility
On 12 June 2015, JZCP entered into a Senior Secured Debt Facility agreement
with Guggenheim Partners Limited (the "Original Senior Lenders"). The original
facility was structured as $80 million and ?18 million and increased by a
further $50 million in April 2017. The facility, before the extension noted
below, was due to mature on 12 June 2021 (6-year term). During the year ended
28 February 2021 and following a repayment of $82.9 million, the outstanding
principal was assigned from the Original Senior Lenders to the Previous Senior
Lenders.
On 14 May 2021, the Company entered into an amendment agreement with its
Previous Senior Lenders to further amend the terms of its senior debt facility,
which extended the maturity date of the senior debt facility by one year until
12 June 2022 and amended the interest rate charged for the First Out Loans from
a rate of LIBOR + 5.75 per cent. to a rate of LIBOR + 9.75 per cent. (with a 1
per cent. floor). The interest rate charged under the amended agreement for the
Last Out Loans was amended from a rate of LIBOR + 11 per cent. to a rate of
LIBOR + 15 per cent. (with a 1 per cent. floor), of which 4 per cent. were
charged as payment-in-kind interest. At this juncture, the modified terms of
the loan were not deemed to be substantially different from the original terms.
Therefore, as per IFRS-9, the senior debt facility was accounted for as a
continuation of the original facility rather than an extinguishment of the
original facility and the recognition of a new facility.
On 18 June 2021, the Company repaid a further $33.3 million of the outstanding
principal amount following a material investment realisation. On 7 October
2021, the Company received a further drawdown of $16 million on the terms of
the First Out facility. On 26 January 2022, the Company repaid a further $7.3
million on the repayment of the facility and the transfer of $45 million to the
New Senior Secured Loan Facility.
1There is an interest rate floor that stipulates LIBOR will not be lower than
1%. In this agreement, the presence of the floor does not significantly alter
the amortised cost of the instrument, therefore separation is not required and
the loan is valued at amortised cost using the effective interest rate method.
During the year, the relevant 3 month LIBOR rates were below 1%. LIBOR
regulators (including the UK Financial Conduct Authority and the US Commodity
Futures Trading Commission) have announced a transition away from LIBOR,
however it is expected that the 3 month USD LIBOR which is relevant to the
Company will continue to be available until the end of June 2023.
New Senior Secured Loan Facility
28.2.2022 28.2.2021
US$ '000 US$ '000
Principal - drawdown 26 January 45,000 -
2022
Issue costs (2,787) -
Amortised cost - 26 January 2022 42,213 -
Finance costs charged to Statement of 360 -
Comprehensive Income
Amortised cost at year end 42,573 -
Previous Senior Secured Loan Facility
28.2.2022 28.2.2021
US$ '000 US$ '000
Amortised cost (Dollar drawdown) - 1 March 68,694 130,523
Amortised cost (Euro drawdown) - 1 March - 19,839
Loan advance 16,000 -
Loan repayments1 (85,585) (82,912)
Finance costs charged to Statement of 6,483 11,797
Comprehensive Income
Interest and finance costs paid (5,592) (12,331)
Unrealised currency gain on translation of Euro drawdown - 1,778
Amortised cost at year end - 68,694
The carrying value of the loans approximates to fair value.
1Total principal repaid during the year includes cash payments of $43.041
million and the transfer to the New Senior Lender of $45.0 million principal
less expenses deducted of $2.456 million.
15. Zero Dividend Preference ("ZDP") Shares
On 1 October 2015, the Company rolled over 11,907,720 existing ZDP (2016)
shares in to new ZDP shares with a 2022 maturity date. The ZDP (2022) shares
have a gross redemption yield of 4.75% and a total redemption value of £
57,597,000 (approximately $77,281,000 using the exchange rate at year end).
ZDP shares are designed to provide a pre-determined final capital entitlement
which ranks behind the Company's creditors but in priority to the capital
entitlements of the Ordinary shares. The ZDP shares carry no entitlement to
income and the whole of their return will therefore take the form of capital.
In certain circumstances, ZDP shares carry the right to vote at general
meetings of the Company as detailed in the Company's Memorandum of Articles and
Incorporation. Issue costs are deducted from the cost of the liability and
allocated to the Statement of Comprehensive Income over the life of the ZDP
shares.
ZDP (2022) Shares 28.2.2022 28.2.2021
US$ '000 US$ '000
Amortised cost at 1 March 74,303 64,510
Finance costs allocated to Statement of Comprehensive Income 3,807 3,441
Unrealised currency (gain)/loss to the Company on translation (3,072) 6,352
during the year
Amortised cost at year end 75,038 74,303
Total number of ZDP (2022) shares in issue 11,907,720 11,907,720
16. Loan Notes
During the period, the Company entered into a note purchase agreement with
David Zalaznick and John (Jay) Jordan, the founders and principals of the
Company's investment adviser, Jordan/Zalaznick Advisers, Inc. ("JZAI"),
pursuant to which they purchased on 31 July 2021, directly or through their
affiliates, subordinated, second lien loan notes totalling $31.5 million, with
a maturity date of 11 September 2022 (the "Loan notes").
The interest rate on the Loan notes will be 6 per cent. per annum payable
semi-annually on each of 31 March and 30 September of each year, commencing on
the first such date to occur after the issuance of the Loan Notes.
28.2.2022 28.2.2021
US$ '000 US$ '000
Loan notes issued in period 31,500 -
Finance costs charged to Statement of Comprehensive 1,108 -
Income
Interest and finance costs paid (315) -
Amortised cost at year end 32,293 -
17. Convertible Unsecured Loan Stock ("CULS")
On 30 July 2021, JZCP redeemed 3,884,279 £10 CULS and converted on request,
1,835 £10 CULS into 3,039 Ordinary Shares at the agreed conversion price.
JZCP issued £38,861,140 6% CULS on 30 July 2014. The holders of the CULS had
the option to convert the whole or part (being an integral multiple of £10 in
nominal amount) of their CULS into Ordinary Shares at the agreed conversion
price of £6.0373 per Ordinary Share, which was subject to adjustment to deal
with certain events which would otherwise dilute the conversion of the CULS.
CULS bore interest on their nominal amount at the rate of 6.00 per cent. per
annum, payable semi-annually in arrears. During the year ended 28 February
2022: $2,679,000 (28 February 2021: $2,953,000) of interest was paid to holders
of CULS and $1,336,000 (28 February 2021: $2,953,000) is shown as a finance
cost in the Statement of Comprehensive Income.
In accordance with IFRS, the Company has calculated the movement in fair value
due to the change in the credit risk of the CULS which is allocated as Other
Comprehensive Income in the Statement of Comprehensive Income. The loss on
financial liabilities at fair value through profit or loss comprises the
movement in the fair value attributable to the change in the benchmark interest
rate and the movement attributable to foreign exchange gain/loss on
translation.
28.2.2022 28.2.2021
US$ '000 US$ '000
Fair Value of CULS at 1 March 52,430 49,886
Interest expense 1,336 2,953
Coupon paid (2,679) (2,953)
Unrealised movement in value of CULS due to change in Company's 1,074 (1,074)
Credit Risk
Unrealised movement in fair value 2,170 (912)
of CULS
Unrealised currency (gain)/loss on translation during the year (301) 4,530
Loss on financial liabilities at fair value 1,869 3,618
through profit or loss
Redemption of CULS (54,005) 2,953
Conversion of CULS into Ordinary (25) -
Shares
Fair Value of CULS based on offer - 52,430
price
18. Other Payables
28.2.2022 28.2.2021
US$ '000 US$ '000
Provision for tax on dividends received not 398 398
withheld at source
Legal fee provision 505 250
Audit fees 325 363
Directors' remuneration 47 48
Other expenses 168 225
1,443 1,284
19. Share Capital
Authorised Capital
Unlimited number of ordinary shares of no par value.
Ordinary shares - Issued Capital
28.2.2022 28.2.2021
Number of Number of
shares shares
Balance at 1 March 77,474,175 77,474,175
Ordinary shares issued during the 3,039 -
year
Total Ordinary shares in issue 77,477,214 77,474,175
On 2 August 2021, the Company issued 3,039 Ordinary shares resulting from the
conversion of 1,835 CULS. The conversion price was £6.0373 per Ordinary Share,
resulting in a credit to the Share capital account of £18,000 ($25,000).
The Company's shares trade on the London Stock Exchange's Specialist Fund
Segment.
The Ordinary shares carry a right to receive the profits of the Company
available for distribution by dividend and resolved to be distributed by way of
dividend to be made at such time as determined by the Directors.
In addition to receiving the income distributed, the Ordinary shares are
entitled to the net assets of the Company on a winding up, after all
liabilities have been settled and the entitlement of the ZDP shares have been
met. In addition, holders of Ordinary shares will be entitled on a winding up
to receive any accumulated but unpaid revenue reserves of the Company, subject
to all creditors having been paid out in full but in priority to the
entitlements of the ZDP shares. Any distribution of revenue reserves on a
winding up is currently expected to be made by way of a final special dividend
prior to the Company's eventual liquidation.
Holders of Ordinary shares have the rights to receive notice of, to attend and
to vote at all general meetings of the Company.
Capital raised on issue of new shares and capital repaid on buy back of shares
Subsequent amounts raised by the issue of new shares (net of issue costs) and
amounts paid to buy back Ordinary shares, are credited/debited to the share
capital account.
Share Capital
28.2.2022 28.2.2021
US$ '000 US$ '000
At beginning of year 216,625 216,625
Issue of Ordinary shares 25 -
At year end 216,650 216,625
20. Capital Management
The Company's capital is represented by the Ordinary shares, ZDP shares and
CULS.
As a result of the ability to issue, repurchase and resell shares, the capital
of the Company can vary. The Company is not subject to externally imposed
capital requirements and has no restrictions on the issue, repurchase or resale
of its shares.
The Company's objectives for managing capital are:
. To invest the capital in investments meeting the description, risk
exposure and expected return indicated in its prospectus;
. To achieve consistent returns while safeguarding capital by investing in
a diversified portfolio;
. To maintain sufficient liquidity to meet the expenses of the Company; and
. To maintain sufficient size to make the operation of the Company
cost-efficient.
The Company's current focus is on realising the maximum value of the Company's
investments and repaying debt. Once this has been achieved, and after the
repayment of all debt, the Company intends to return capital to shareholders
and will at this point keep under review opportunities to buy back Ordinary
shares or ZDP shares. The Company will be seeking shareholder approval for the
return of capital to shareholders, should the Company be in a position to do
so.
The Company monitors capital by analysing the NAV per share over time and
tracking the discount to the Company's share price.
21. Reserves
Summary of reserves attributable to Ordinary shareholders
28.2.2022 28.2.2021
US$ '000 US$ '000
Share capital 216,650 216,625
Other reserve 353,528 354,602
Retained deficit (237,914) (241,668)
332,264 329,559
Other reserve
On formation of the Company, the Royal Court of Guernsey granted that on the
admission of the Company's shares to the Official List and to trading on the
London Stock Exchange's market, the amount credited to the share premium
account of the Company immediately following the admission of such shares be
cancelled and any surplus thereby created accrue to the Company's distributable
reserves to be used for all purposes permitted by The Companies (Guernsey) Law,
2008, including the purchase of shares and the payment of dividends. This
distributable reserve was subsequently renamed 'Other reserve'.
The movement in the Other reserve during the year was the Gain on financial
liabilities due to reversal of the previously recorded losses of $1,074,000 due
to the changes in the Company's credit risk, calculated in accordance with
IFRS.
Subject to satisfaction of the solvency test, all of the Company's capital and
reserves are distributable in accordance with The Companies (Guernsey) Law,
2008.
Retained deficit
28.2.2022 28.2.2021
US$ '000 US$ '000
At beginning of year (241,668) (94,419)
Profit/(loss) for the year 3,754
attributable to revenue (147,249)
At year end
(237,914) (241,668)
22. Financial Risk Management Objectives and Policies
Introduction
The Company's objective in managing risk is the creation and protection of
shareholder value. Risk is inherent in the Company's activities, but it is
managed through a process of ongoing identification, measurement and
monitoring, subject to risk limits and other controls. The process of risk
management is critical to the Company's continuing profitability. The Company
is exposed to market risk (including currency risk, fair value interest rate
risk, cash flow interest rate risk and price risk), credit risk and liquidity
risk arising from the financial instruments it holds.
Risk management structure and Risk mitigation
The Company's Investment Adviser is responsible for identifying and controlling
risks. The Directors supervise the Investment Adviser and are ultimately
responsible for the overall risk management approach within the Company. The
Company's prospectus sets out its overall business strategies, its tolerance
for risk and its general risk management philosophy. The Company may use
derivatives and other instruments for trading purposes and in connection with
its risk management activities.
Market risk
Market risk is defined as "the risk that the fair value or future cash flows of
a financial instrument will fluctuate because of changes in variables such as
equity price, interest rate and foreign currency rate".
The Company's investments are subject to normal market fluctuations and there
can be no assurance that no depreciation in the value of those investments will
occur. There can be no guarantee that any realisation of an investment will be
on a basis which necessarily reflects the Company's valuation of that
investment for the purposes of calculating the NAV of the Company.
Changes in industry conditions, competition, political and diplomatic events,
tax, environmental and other laws and other factors, whether affecting the
United States alone or other countries and regions more widely, can
substantially and either adversely or favourably affect the value of the
securities in which the Company invests and, therefore, the Company's
performance and prospects.
The Company's market price risk is managed through diversification of the
investment portfolio across various sectors. The Investment Adviser considers
each investment purchase to ensure that an acquisition will enable the Company
to continue to have an appropriate spread of market risk and that an
appropriate risk/reward profile is maintained.
Equity price risk
Equity price risk is the risk of unfavourable changes in the fair values of
equity investments as a result of changes in the value of individual shares.
The equity price risk exposure arose from the Company's investments in equity
securities.
The Company does not generally invest in liquid equity investments and the
previous portfolio of listed equity investments resulted from the successful
flotation of unlisted investments.
For unlisted equity and non-equity shares the market risk is deemed to be
inherent in the appropriate valuation methodology (earnings, multiples,
capitalisation rates etc). The impact on fair value and subsequent profit or
loss, due to movements in these variables, is set out in Note 5.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates
will affect future cash flows or the fair values of financial instruments. It
has not been the Company's policy to use derivative instruments to mitigate
interest rate risk, as the Investment Adviser believes that the effectiveness
of such instruments does not justify the costs involved.
The table below summarises the Company's exposure to interest rate risks:
Interest bearing Non
interest
Fixed Floating bearing Total
rate rate
28.2.2022 28.2.2022 28.2.2022 28.2.2022
US$ '000 US$ '000 US$ '000 US$ '000
Investments at FVTPL 139,543 - 272,025 411,568
Loans at amortised cost 28,593 - - 28,593
Cash and cash equivalents - 43,656 - 43,656
Other receivables and - - 70 70
prepayments
Senior debt facility - (42,573) - (42,573)
ZDP shares (2022) (75,038) - - (75,038)
Loan notes (32,293) - - (32,293)
Other payables - - (1,719) (1,719)
60,805 1,083 270,376 332,264
The table below summarises the Company's exposure to interest rate risks:
Interest bearing Non
interest
Fixed Floating bearing Total
rate rate
28.2.2021 28.2.2021 28.2.2021 28.2.2021
US$ '000 US$ '000 US$ '000 US$ '000
Investments at FVTPL 174,433 - 258,791 433,224
Loans at amortised cost 33,813 - - 33,813
Cash and cash equivalents - 59,784 - 59,784
Other receivables and - - 22 22
prepayments
Loans payable - (68,694) - (68,694)
ZDP shares (2022) (74,303) - - (74,303)
CULS (52,430) - - (52,430)
Other payables - - (1,857) (1,857)
81,513 (8,910) 256,956 329,559
The following table analyses the Company's exposure in terms of the interest
bearing assets and liabilities maturity dates. The Company's assets and
liabilities are included at their carrying value.
As at 28 February
2022
0-3 4-12 1 - <3 3 - <5 Past due No Total
months months years years maturity
date
US$ US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
'000
Investments at FVTPL 3,394 - - 1,000 141,258 145,652
Loans at amortised - 28,593 - - - - 28,593
cost
Cash and cash - - - - - 43,656 43,656
equivalents
Senior debt facility - - - - (42,573)
(42,573)
ZDP shares (2022) - - - - -
(75,038) (75,038)
Loan notes - - - - (32,293)
(32,293)
3,394 - 1,000 184,914 67,997
(78,738) (42,573)
As at 28 February
2021
0-3 4-12 1 - <3 3 - <5 <5 years No Total
months months years years maturity
date
US$ US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
'000
Investments at FVTPL - 3,394 - - 1,000 173,433 177,827
Loans at amortised - 33,813 - - - - 33,813
cost
Cash and cash - - - - - 59,784 59,784
equivalents
Senior debt facility - - - -
(68,694) (68,694)
ZDP shares (2022) - - - - -
(74,303) (74,303)
CULS - - - -
(52,430) (52,430)
- - 1,000 233,217 75,997
(83,917) (74,303)
The income receivable by the Company is not subject to significant amounts of
risk due to fluctuations in the prevailing levels of market interest rates.
However, whilst the income received from fixed rate securities is unaffected by
changes in interest rates, the investments are subject to risk in the movement
of fair value. The Investment Adviser considers the risk in the movement of
fair value as a result of changes in the market interest rate for fixed rate
securities to be insignificant, hence no sensitivity analysis is provided.
The Company valued the CULS issued at fair value, being the quoted offer price.
As the stock has a fixed interest rate of 6% an increase/decrease of prevailing
interest rates will potentially have an effect on the demand for the CULS and
the subsequent fair value. Other factors such as the Company's ordinary share
price and credit rating will also determine the quoted offer price. The overall
risk to the Company due to the impact of interest rate changes to the CULS'
fair value was deemed immaterial. Therefore no sensitivity analysis is
presented.
Of the cash and cash equivalents held, $43,656,000 (28 February 2021:
$59,784,000) earns interest at variable rates and the income may rise and fall
depending on changes to interest rates.
The Investment Adviser monitors the Company's overall interest sensitivity on a
regular basis by reference to the current market rate and the level of the
Company's cash balances. The Company has not used derivatives to mitigate the
impact of changes in interest rates.
The table below demonstrates the sensitivity of the Company's profit/(loss) for
the year to a reasonably possible change in interest rates. The Company has
cash at bank and loans payable for which interest receivable and payable are
sensitive to a fluctuation to rates. The below sensitivity analysis assumes
year end balances and interest rates are constant through the year.
Interest Interest Payable2,3
Receivable1,3
28.2.2022 28.2.2021 28.2.2022 28.2.2021
Change in basis points increase/decrease US$ '000 US$ '000 US$ '000 US$ '000
+100/-100 350/(175) 503/(252) (230)/ (137)/
nil nil
+300/-300 1,051/ 1,510/ (1,130)/ (1,511)/
(175) (252) nil nil
1 Sensitivity applied to money market account balance and applying the year end
rate of 0.5%
2 Sensitivity applied to year end balances at relevant rates being $40 million
at 12% and $28.7 million at 6.75%
3 The reduction in interest receivable and interest payable is floored as the
sensitivity applied reduces the interest rate to zero
Currency risk
Currency risk is the risk that the value of a financial instrument will
fluctuate due to changes in foreign exchange rates.
Changes in exchange rates are considered to impact the fair value of the
Company's investments denominated in Euros and Sterling. However, under IFRS
the foreign currency risk on these investments is deemed to be part of the
market price risk associated with holding such non-monetary investments. As the
information relating to the non-monetary investments is significant, the
Company also provides the total exposure and sensitivity changes on
non-monetary investments on a voluntary basis. The following tables set out the
Company's exposure by currency to foreign currency risk.
Exposure to Monetary Assets/Liabilities (held in foreign currencies)
Euro Sterling Total Euro Sterling Total
28.2.2022 28.2.2022 28.2.2022 28.2.2021 28.2.2021 28.2.2021
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Loans at Amortised 28,593 - 28,593 33,813 - 33,813
Cost
Cash at Bank 507 38 545 406 44 450
Other Receivables - 70 70 - 22 22
Liabilities
ZDP (2022) shares - (75,038) (75,038) - (74,303) (74,303)
CULS - - - - (52,430) (52,430)
Other payables - (415) (415) - (528) (528)
Net Currency 29,100 (75,345) (46,245) 34,219 (127,195) (92,976)
Exposure
The sensitivity analysis for monetary and non-monetary net assets calculates
the effect of a reasonably possible movement of the currency rate against the
US dollar on an increase or decrease in net assets attributable to shareholders
with all other variables held constant. An equivalent decrease in each of the
aforementioned currencies against the US dollar would have resulted in an
equivalent but opposite impact.
Change in Effect on net assets attributable to shareholders
Currency Currency (relates to monetary financial assets and liabilities)
Rate
28.2.2022 28.2.2021
US$ '000 US$ '000
Euro +10% 2,910 3,422
GBP +10% (7,535) (12,722)
Exposure to Non-Monetary Assets (held in foreign currencies)
Euro Sterling Total Euro Sterling Total
28.2.2022 28.2.2022 28.2.2022 28.2.2021 28.2.2021 28.2.2021
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000
Financial assets 62,287 14,595 76,882 69,956 14,762 84,718
at FVTPL
Net Currency 62,287 14,595 76,882 69,956 14,762 84,718
Exposure
Change in Effect on net assets attributable to
shareholders
Currency Currency (relates to non-monetary financial
Rate assets)
28.2.2022 28.2.2021
US$ '000 US$ '000
Euro +10% 6,229 6,996
GBP +10% 1,460 1,476
Credit risk
The Company takes on exposures to credit risk, which is the risk that a
counterparty to a financial instrument will cause a financial loss to the
Company by failing to discharge an obligation. These credit exposures exist
within debt instruments and cash & cash equivalents. They may arise, for
example, from a decline in the financial condition of a counterparty or from
entering into derivative contracts under which counterparties have obligations
to make payments to the Company. As the Company's credit exposure increases, it
could have an adverse effect on the Company's business and profitability if
material unexpected credit losses were to occur. In the event of any default on
the Company's loan investments by a counterparty, the Company will bear a risk
of loss of principal and accrued interest of the investment, which could have a
material adverse effect on the Company's income and ability to meet financial
obligations.
In accordance with the Company's policy, the Investment Adviser regularly
monitors the Company's exposure to credit risk in its investment portfolio, by
reviewing the financial statements, budgets and forecasts of underlying
investee companies. Agency credit ratings do not apply to the Company's
investment in investee company debt. The 'credit quality' of the debt is deemed
to be reflected in the fair value valuation of the investee company. The
Company's investment in accumulated preferred stock is excluded from below
analysis as the instruments are deemed to be more closely associated with the
investment in the portfolio companies' equity than its debt.
The table below analyses the Company's maximum exposure to credit Total Total
risk.
28.2.2022 28.2.2021
US$ '000 US$ '000
US micro-cap debt 1,000 1,000
European micro-cap debt 28,593 33,813
US Treasury Bills 3,394 3,394
Cash and cash equivalents 43,656 59,784
76,643 97,991
A proportion of micro-cap debt held does not entitle the Company to interest
payment in cash. This interest is capitalised (PIK) and as a result there is a
credit risk to the Company, as there is no return until the loan plus all the
interest, is repaid in full.
The following table analyses the concentration of credit risk in the Company's
debt portfolio by industrial distribution.
28.2.2022 28.2.2021
US$ '000 US$ '000
Financial General 84% 77%
Document Processing 13% 12%
House, Leisure & 3% 3%
Personal Goods
Telecom - 8%
100% 100%
Loans at Amortised Cost and Expected Credit Losses ("ECL")
The Company's loans to European micro-cap companies are classified as loans at
amortised cost. The credit risk in these investments is deemed to be reflected
in the performance and valuation of the investee company. Using IFRS 9's
"expected credit loss" model, the Company calculates the allowance for credit
losses by considering the cash shortfalls it would incur in various default
scenarios for prescribed future periods and multiplying the shortfalls by the
probability of each scenario occurring. The allowance is the sum of these
probability weighted outcomes. The IFRS ECL model assumes all loans and
receivables carries with it some risk of default, every such asset has an
expected loss attached to it from the moment of its origination or acquisition.
At the reporting date, the credit risk on the loans to Docout and Toro Finance
are deemed low-risk and therefore the ECL are considered over the future 12
months or maturity if sooner. The credit risk on the loan to Xacom was deemed
to have increased significantly during the year. On assessment of the
recoverability of the Xacon loan post year end, it was concluded there would
not be proceeds from Xacom, to pay any portion of JZCP's loan hence a provision
has been made to bring the carrying value to $nil. ECL realised is due to the
Company's direct loan in Ombuds being written off during the year, a loss
provision to recognise the carrying value of the Ombuds' loans at $nil, were
previously recognised when the company entered bankruptcy (July 2019).
ECL Provision
Year ended 28 February 2022 Year ended 28 February 2021
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$ '000 US$
'000
ECL at 1 1,370 3,177 32,559 37,106 905 - 29,356 30,261
March
Provision 1,892 3,385 - 5,277 815 2,247 - 3,062
during the
year
Level - (6,318) 6,318 - (749) 749 - -
Transfer
ECL - - (31,664) (31,664) - - - -
realised
Foreign (110) (244) (895) (1,249) 399 181 3,203 3,783
exchange
movement
ECL at 3,152 - 6,318 9,470 1,370 3,177 32,559 37,106
year end
Information on the three stages on which ECLs are recognised is provided within
Note 7.
The table below analyses the Company's cash and cash equivalents by rating
agency category.
Credit ratings Outlook LT Issuer Default 28.2.2022
Rating $'000
HSBC Bank USA NA S&P Stable (2021: S&P A+ (2021: A+) 40,588
Stable)
City National Bank S&P Stable (2021: S&P AA- (2021: 2,500
Stable) A+)
Raymond James Bank S&P Positive (2021: S&P BBB+ (2021: 4
Stable) BBB+)
Northern Trust S&P Stable (2021: S&P AA- (2021: 564
(Guernsey) Limited Stable) AA-)
43,656
Bankruptcy or insolvency of the Banks may cause the Company's rights with
respect to these assets to be delayed or limited. The Investment Adviser
monitors risk by reviewing the credit rating of the Bank. If credit quality
deteriorates, the Investment Adviser may move the holdings to another bank.
Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter
difficulty in meeting obligations associated with financial liabilities.
Liquidity risk arises because of the possibility that the Company could be
required to pay its liabilities earlier than expected. There has been no change
during the year in the Company's processes and arrangements for managing
liquidity.
The Company's investments are predominately private equity, real estate and
other unlisted investments. By their nature, these investments will generally
be of a long term and illiquid nature and there may be no readily available
market for sale of these investments. None of the Company's assets/liabilities
are subject to special arrangement due to their illiquid nature.
The Company has capital requirements to repay Loan Notes and ZDP shareholders
in 2022. At the year end the Company has outstanding investment commitments of
$16,188,000 (28 February 2021: $31,897,000) see Note 23.
The Company manages liquidity risk and the ability to meet its obligations by
monitoring current and expected cash balances from forecasted investment
activity.
The table below analyses JZCP's financial liabilities into relevant maturity
groups based on the remaining period at the reporting date to the contractual
maturity date. Amounts attributed to the Senior debt facility, ZDP shares and
Loan Notes include future contractual interest payments. Financial commitments
are contractual outflows of cash and are included within the liquidity
statement.
At 28 February 2022 Less >1 year >3 >5 No
than 1 - 3 years - years stated
year years 5 years maturity
US$ '000 US$ US$ US$ US$ '000
'000 '000 '000
Senior debt facility - - 63,000 - -
ZDP (2022) shares 77,281 - - - -
Loan notes 33,075 - - - -
Other payables 1,299 - - - 398
Financial commitments (see note 23) 5,729 10,459 - - -
117,384 10,459 63,000 - 398
At 28 February 2021 Less >1 year >3 >5 No
than 1 - 3 years - years stated
year years 5 years maturity
US$ '000 US$ US$ US$ US$ '000
'000 '000 '000
ZDP (2022) shares - 80,527 - - -
CULS 57,048 - - - -
Senior debt facility 70,639 - - - -
Other payables 1,459 - - - 398
Financial commitments (see note 23) 12,832 18,825 240 - -
141,978 99,352 240 - 398
23. Commitments
At 28 February 2022 and 28 February 2021, JZCP had the following financial
commitments outstanding in relation to fund investments:
Expected 28.2.2022 28.2.2021
date
of Call US$ '000 US$ '000
JZI Fund III GP, L.P. ?13,967,295 (28.2.2021: ? over 3 years 15,688 23,825
19,628,404)
Spruceview Capital Partners, over 1 year 500 900
LLC1
Orangewood Partners II-A LP2 - 6,932
Igloo Products Corp - 240
16,188 31,897
1As approved by a shareholder vote on 12 August 2020, JZCP has the option to
increase further commitments to Spruceview up to approximately $4.1 million,
above the $0.5 million unfunded commitments as at 28 February 2022.
2During the period, the Company received shareholder approval for Jay Jordan
and David Zalaznick to relieve the Company of all of its remaining commitments
to the Orangewood Fund being $12.35 million, of which approximately $3 million
of this commitment was "funded" and $9.35 million "unfunded" (following the
Orangewood Fund's final close in April 2021 which resulted in a reallocation of
unfunded commitments).
24. Related Party Transactions
JZAI is a US based company founded by David Zalaznick and John ("Jay") Jordan
II, that provides advisory services to the Company in exchange for management
fees, paid quarterly. Fees paid by the Company to the Investment Adviser are
detailed in Note 10. JZAI and various affiliates provide services to certain
JZCP portfolio companies and may receive fees for providing these services
pursuant to the Advisory Agreement.
JZCP invests in European micro-cap companies through JZI Fund III, L.P. ("Fund
III"). Previously investments were made via the EuroMicrocap Fund 2010, L.P.
("EMC 2010"). Fund III and EMC 2010 are managed by an affiliate of JZAI. At 28
February 2022, JZCP's investment in Fund III was valued at $76.3 million (28
February 2021: $80.7 million). JZCP's investment in EMC 2010 was valued at $0.6
million (28 February 2021: $3.3 million).
JZCP has invested in Spruceview Capital Partners, LLC on a 50:50 basis with Jay
Jordan and David Zalaznick (or their respective affiliates). The total amount
committed by JZCP to this investment at 28 February 2022, was $33.5 million
with $0.5 million of this amount remaining unfunded and outstanding. As
approved by a shareholder vote on 12 August 2020, JZCP has the option to
increase further commitments to Spruceview by approximately $4.1 million, above
the $33.5 million committed as of 28 February 2022. Should this approved
capital be committed to Spruceview, it would be committed on the same 50:50
basis with Jay Jordan and David Zalaznick (or their respective affiliates).
During the year ended 28 February 2021, the Company announced that it had
agreed and received shareholder approval to sell its interests in certain US
microcap portfolio companies (the "Secondary Sale") to a secondary fund led by
Hamilton Lane Advisors, L.L.C. The Secondary Sale was structured as a sale and
contribution to a newly formed fund, JZHL Secondary Fund LP, managed by an
affiliate of JZAI. At 28 February 2022, JZCP's investment in Fund III was
valued at $99.2 million (28 February 2021: $72.2 million).
JZCP has co-invested with Fund A, Fund A Parallel I, II and III Limited
Partnerships in a number of US micro-cap buyouts. These Limited Partnerships
are managed by an affiliate of JZAI. JZCP invested in a ratio of 82%/18% with
the Fund A entities. At 28 February 2022, these co-investments, with Fund A,
were in the following portfolio companies: Industrial Services Solutions and
New Vitality. Fund A and its parallel funds are also co-investors alongside
JZHL Secondary Fund LP in Testing Services Holdings and TierPoint.
During the year, following shareholder approval, JZAI Founders Jay Jordan and
David Zalaznick relieved the Company of $12.35 million of its remaining
commitments to the Orangewood Fund (approximately $3 million of this commitment
being "funded" and $9.35 million "unfunded").
During the year, the Company entered into a note purchase agreement with David
Zalaznick and Jay Jordan, pursuant to which they have purchased directly or
through their affiliates, subordinated, second llien loan notes in the amount
of $31.5 million, with an interest rate of 6 per cent. per annum and maturing
on 11 September 2022 (the "Loan Notes"). The issuance of the Loan Notes was
subject to a number of conditions, including shareholder approval.
Total Directors' remuneration for the year ended 28 February 2022 was $290,000
(28 February 2021: $319,000).
25. Basic and Diluted Earnings/(Loss) Per Share
Basic earnings/(loss) per share is calculated by dividing the profit/(loss) for
the year by the weighted average number of Ordinary shares outstanding during
the year.
For the year ended 28 February 2022, the weighted average number of Ordinary
shares outstanding during the year was 77,475,932 (Year ended 28 February 2021:
77,474,175).
The diluted earnings/(loss) per share is calculated by considering adjustments
required to the earnings/(loss) and weighted average number of shares for the
effects of potential dilutive Ordinary shares. The weighted average of the
number of Ordinary shares is adjusted assuming the conversion of the CULS
("If-converted method"). The Company's CULS have now been repaid and therefore
the Company no longer holds financial instruments that have the potential to
dilute the holdings of Ordinary shares. Therefore, for the year ended 28
February 2022 the diluted earnings per share was presented as per the basic
earnings per share calculation. The adjusted weighted average of the number of
Ordinary shares for the year ended 28 February 2021 was 83,911,016. Conversion
was assumed even though at 28 February 2021 the exercise price of the CULS is
higher than the market price of the Company's Ordinary shares and are therefore
deemed 'out of the money'. Losses for the year ended 28 February 2021 were
adjusted to remove the fair value loss of $3,618,000, unrealised movement in
value due to credit risk being a gain of $1,074,000 and finance costs
attributable to CULS of $2,953,000. For the year ended 28 February 2021, the
potential conversion of the CULS would have been anti-dilutive to the total
loss per share, therefore the diluted loss per share was presented as per the
basic loss per share calculation.
26. Controlling Party
The issued shares of the Company are owned by a number of parties, and
therefore, in the opinion of the Directors, there is no ultimate controlling
party of the Company, as defined by IAS 24 - Related Party Disclosures.
27. Net Asset Value Per Share
The net asset value per Ordinary share of $4.29 (28 February 2021: $4.25) is
based on the net assets at the year end of $332,264,000 (28 February 2021:
$329,559,000) and on 77,477,214 (28 February 2021: 77,474,175) Ordinary shares,
being the number of Ordinary shares in issue at the year end.
28. Contingent Assets
Amounts held in escrow accounts
When investments have been disposed of by the Company, proceeds may reflect
contractual terms requiring that a percentage is held in an escrow account
pending resolution of any indemnifiable claims that may arise. At 28 February
2022 and 28 February 2021, the Company has assessed that the likelihood of the
recovery of these escrow accounts cannot be determined and has therefore
classified the escrow accounts as a contingent asset.
As at 28 February 2022 and 28 February 2021, the Company had the following
contingent assets held in escrow accounts which had not been recognised as
assets of the Company:
Company Amount in Escrow
28.2.2022 28.2.2021
US$'000 US$'000
Salter Labs 536 -
Southern Petroleum Laboratories 509 -
(received March 2022)
Igloo 49 -
JZHL Secondary Fund (being 202 -
37.5% of the total amount held
in escrow)
Triwater Holdings - 309
Xpress Logistics (AKA Priority - 19
Express)
1,296 328
During the year ended 28 February 2022 proceeds of $597,000 (28 February 2021:
$1,147,000) were realised during the year and recorded in the Statement of
Comprehensive Income.
Year Year
Ended Ended
28.2.2022 28.2.2021
US$'000 US$'000
Escrows at beginning of year 328 1,140
Escrows added on realisation of 1,321 -
investments
Potential escrows at prior year end no longer (265) -
recorded
Escrow receipts during the year (597) (1,147)
Additional escrows recognised in year not reflected in 509 335
opening position
Escrows at year end 1,296 328
29. Notes to the Statement of Cash Flows
Investment income and interest received during the Year Year
year Ended Ended
28.2.2022 28.2.2021
US$ '000 US$ '000
Interest on investments - 279
Dividends on unlisted investments 520 379
Bank interest 174 220
Treasury interest - 11
694 889
Purchases and sales of investments are considered to be operating activities of
the Company, given its purpose, rather than investing activities. The cash
flows arising from these activities are shown in the Statement of Cash Flows.
Changes in financing liabilities arising from both cash flow and non-cash flow
items
Non-cash changes
1.3.2021 Cash Fair Finance Foreign 28.2.2022
flows Value Costs Exchange
US$ '000 US$ '000 US$ US$ '000 US$ '000 US$ '000
'000
Senior debt facility 68,694 - 6,843 - 42,573
(32,964)
Zero Dividend Preference 74,303 - - 3,807 (3,072) 75,038
(2022) shares
Loan notes - 31,185 - 1,108 - 32,293
Convertible Unsecured Loan 52,430 565 1,336 (301) -
Stock (54,030)
195,427 565 13,094 (3,373) 149,904
(55,809)
Non-cash changes
1.3.2020 Cash Fair Finance Foreign 28.2.2021
flows Value Costs Exchange
US$ '000 US$ '000 US$ US$ '000 US$ '000 US$ '000
'000
Zero Dividend Preference (2022) 64,510 - - 3,441 6,352 74,303
shares
Convertible Unsecured Loan 49,886 (2,953) 2,953 4,530 52,430
Stock (1,986)
Senior debt facility - 11,797 1,778 68,694
150,362 (95,243)
18,191 12,660 195,427
264,758 (98,196) (1,986)
30. Dividends Paid and Proposed
No dividends were paid or proposed for the years ended 28 February 2022 and 28
February 2021.
31. IFRS to US GAAP Reconciliation
The Company's Financial Statements are prepared in accordance with IFRS, which
in certain respects differ from US GAAP. These differences are not material and
therefore no reconciliation between IFRS and US GAAP has been presented. For
reference, please see below for a summary of the key judgments and estimates
taken into account with regards to the Company as of 28 February 2022, as well
as the Shareholders' financial highlights required under US GAAP.
Assessment as an Investment Entity
As stated in Note 2, the Company meets the definition of an investment entity
under IFRS 10 and is therefore required to measure its subsidiaries at fair
value through profit or loss rather ("FVTPL") than consolidate them. Per US
GAAP (Financial Services - Investment Companies (Topic 946): Amendments to the
Scope, Measurement, and Disclosure Requirements or "ASC 946"), the Company
meets the definition of an investment company, and as required by ASC 946, JZCP
measures its investment in Subsidiaries at FVTPL.
Fair Value Measurement of Investments
The fair value of the underlying investments held by the Company are determined
in accordance with US GAAP and IFRS based on valuation techniques and inputs
that are observable in the market which market participants have access to and
will use to determine the exit price or selling price of the investments.
Consideration of going concern
As described in Note 3, there is substantial doubt about the Company's ability
to continue as a going concern. For the purposes of the US GAAP Going concern
assessment, the Directors considered that the period to 14 June 2023 was
covered by the assessment to 30 June 2023 as described in note 3.
Measurement of Liabilities
The Company's Senior debt facility, Loan Notes and ZDP shares are recorded at
amortised cost using the effective interest rate method in accordance with US
GAAP and IFRS. The CULS' fair value is deemed to be the listed offer price at
the year end.
The following table presents performance information derived from the Financial
Statements.
28.2.2022 28.2.2021
US$ US$
Net asset value per share at the 4.25 6.14
beginning of the year
Performance during the year
(per share):
Net investment income 0.22 0.29
Net realised and unrealised 0.13 (1.76)
loss
Incentive fee - -
Operating expenses (0.14) (0.19)
Finance costs (0.17) (0.23)
Total return 0.04 (1.89)
Net asset value per share at the end of 4.29 4.25
the year
Total Return 0.83% (30.78%)
Net investment income to average net assets excluding 5.23% 5.72%
incentive fee
Operating expenses to average (3.45%) (3.75%)
net assets
Finance costs to average net (4.04%) (4.54%)
assets
32. Subsequent Events
These financial statements were approved by the Board on 14 June 2022.
Subsequent events have been evaluated until this date.
In April 2022, the Company announced JZHL Secondary Fund LP (the "Secondary
Fund") had sold its interest in Flow Control Holdings LLC for consideration of
approximately $77.7 million. This transaction confers no immediate cash benefit
to JZCP because the other investors in the Secondary Fund have an entitlement
to a priority return before any distribution may be made to JZCP.
In May 2022, the Company announced that a portfolio company of the Secondary
Fund executed an agreement to sell certain of its interests, with the Secondary
Fund expecting to receive a distribution of approximately $165-$180 million.
Accordingly, this sale is expected to result in JZCP receiving a distribution
from the Secondary Fund of approximately $89-$94 million, which would
correspond to a NAV uplift to JZCP in the range of approximately 56-63 cents
per ordinary share. This uplift is not reflected in the year end valuation of
the Secondary Fund as the closure of this deal remains subject to certain
conditions.
Company Advisers
Investment Adviser
The Investment Adviser to JZ Capital Partners Limited ("JZCP") is Jordan/
Zalaznick Advisers, Inc., ("JZAI") a company beneficially owned by John (Jay) W
Jordan II and David W Zalaznick. The company offers investment advice to the
Board of JZCP. JZAI has offices in New York and Chicago.
Jordan/Zalaznick Advisers, Inc.
9 West, 57th Street
New York NY 10019
Registered Office
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3QL
JZ Capital Partners Limited is registered in Guernsey Number 48761
Administrator, Registrar and Secretary
Northern Trust International Fund Administration
Services (Guernsey) Limited
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3QL
UK Transfer and Paying Agent
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
US Banker
HSBC Bank USA NA
452 Fifth Avenue
New York NY 10018
(Also provides custodian services to JZ Capital Partners
Limited under the terms of a Custody Agreement).
Guernsey Banker
Northern Trust (Guernsey) Limited
PO Box 71
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3DA
Independent Auditor
Ernst & Young LLP
PO Box 9
Royal Chambers
St Julian's Avenue
St Peter Port
Guernsey GY1 4AF
UK Solicitors
Ashurst LLP
London Fruit & Wool Exchange
1 Duval Square
London E1 6PW
US Lawyers
Monge Law Firm, PLLC
435 South Tryon Street
Charlotte, NC 28202
Mayer Brown LLP
214 North Tryon Street
Suite 3800
Charlotte NC 28202
Winston & Strawn LLP
35 West Wacker Drive
Chicago IL 60601-9703
Guernsey Lawyers
Mourant Ozannes (Guernsey) LLP
Royal Chambers
St Julian's Avenue
St Peter Port
Guernsey GY1 4HP
Financial Adviser and Broker
J.P. Morgan Securities plc
25 Bank Street
London E14 5JP
Useful Information for Shareholders
Listing
JZCP Ordinary and Zero Dividend Preference ("ZDP") shares are listed on the
Official List of the Financial Services Authority of the UK, and are admitted
to trading on the London Stock Exchange Specialist Fund Segment for listed
securities.
The price of the Ordinary shares are shown in the Financial Times under
"Conventional Private Equity" and can also be found at https://markets.ft.com
along with the prices of the ZDP shares.
ISIN/SEDOL numbers
Ticker Symbol ISIN Code SEDOL Number
Ordinary shares JZCP GG00B403HK58 B403HK5
ZDP (2022) shares JZCZ GG00BZ0RY036 BZ0RY03
Key Information Documents
JZCP produces Key Information Documents to assist investors' understanding of
the Company's securities and to enable comparison with other investment
products. These documents are found on the Company's website -www.jzcp.com/
investor-relations/key-information-documents.
Alternative Performance Measures
In accordance with ESMA Guidelines on Alternative Performance Measures ("APMs")
the Board has considered what APMs are included in the annual report and
financial statements which require further clarification. An APM is defined as
a financial measure of historical or future financial performance, financial
position, or cash flows, other than a financial measure defined or specified in
the applicable financial reporting framework. APMs included in the Annual
Report and Financial Statements, which are unaudited and outside the scope of
IFRS, are deemed to be as follows:
Total NAV Return
The Total NAV Return measures how the net asset value ("NAV") per share has
performed over a period of time, taking into account both capital returns and
dividends paid to shareholders. JZCP quotes NAV total return as a percentage
change from the start of the period (one year) and also three-month,
three-year, five-year and seven year periods. It assumes that dividends paid to
shareholders are reinvested back into the Company therefore future NAV gains
are not diminished by the paying of dividends. The Total NAV Return for the
year ended 28 February 2022 was 0.9% (2021:-30.8%), which only reflects the
change in NAV ($) as no dividends were paid during the year.
Total Shareholder Return (Ordinary shares)
A measure showing how the share price has performed over a period of time,
taking into account both capital returns and dividends paid to shareholders.
JZCP quotes shareholder price total return as a percentage change from the
start of the period (one year) and also six-month, three-year, five-year and
seven-year periods. It assumes that dividends paid to shareholders are
reinvested in the shares at the time the shares are quoted ex dividend. The
Shareholder Return for the year ended 28 February 2022 was 34.6%, which only
reflects the change in share price (£) as no dividends were paid during the
year. The Shareholder Return for the year ended 28 February 2021 was -69.8%.
NAV to market price discount
The NAV per share is the value of all the company's assets, less any
liabilities it has, divided by the number of shares. However, because JZCP
shares are traded on the London Stock Exchange's Specialist Fund Segment, the
share price may be higher or lower than the NAV. The difference is known as a
discount or premium. JZCP's discount is calculated by expressing the difference
between the period end dollar equivalent share price and the period end NAV per
share as a percentage of the NAV per share.
At 28 February 2022, JZCP's Ordinary shares traded at £1.05 (28 February 2021:
£0.78) or $1.41 (28 February 2021: $1.09) being the dollar equivalent using the
year end exchange rate of £1: $1.34 (28 February 2021 £1: $1.39). The shares
traded at a 67.2% (28 February 2021: 74.3%) discount to the NAV per share of
$4.29 (2021: $4.25).
Ongoing Charges calculation
A measure expressing the Ongoing annualised expenses as a percentage of the
Company's average annualised net assets over the year 3.31% (2021: 3.52%).
Ongoing charges, or annualised recurring operating expenses, are those expenses
of a type which are likely to recur in the foreseeable future, whether charged
to capital or revenue, and which relate to the operation of the company,
excluding the Investment Adviser's Incentive fee, financing charges and gains/
losses arising on investments.
Ongoing expenses for the year are $10,809,000 (2021: $13,747,000) comprising of
the IA base fee $7,414,000 (2021: $9,722,000), administrative fees $3,105,000
(2021: $3,706,000) and directors fees $290,000 (2021: $319,000). Average net
assets for the year are calculated using quarterly NAVs 323,723,000 (2021:
$390,244,000).
Criminal Facilitation of Tax Evasion
The Board has approved a policy of zero tolerance towards the criminal
facilitation of tax evasion, in compliance with the Criminal Finances Act 2017.
Non-Mainstream Pooled Investments
From 1 January 2014, the FCA rules relating to the restrictions on the retail
distribution of unregulated collective investment schemes and close substitutes
came into effect. JZCP's Ordinary shares qualify as an 'excluded security'
under these rules and will therefore be excluded from the FCA's restrictions
which apply to non-mainstream investment products. Therefore Ordinary shares
issued by JZ Capital Partners can continue to be recommended by financial
advisers as an investment for UK retail investors.
Internet Address
The Company: www.jzcp.com
Financial Diary
Annual General Meeting 3 August
2022
Interim report for the six months ended 31 August 2022 November 2022 (date to
be confirmed)
Results for the year ended 28 February 2023 May 2023 (date to
be confirmed)
JZCP, will aim to issue monthly NAV announcements within 21 day of the month
end, these announcements will be posted on JZCP's website at the same time, or
soon thereafter.
Payment of Dividends
In the event of a cash dividend being paid, the dividend will be sent by
cheque to the first-named shareholder on the register of members at their
registered address, together with a tax voucher. At shareholders' request,
where they have elected to receive dividend proceeds in Sterling, the dividend
may instead be paid direct into the shareholder's bank account through the
Bankers' Automated Clearing System. Payments will be paid in US dollars unless
the shareholder elects to receive the dividend in Sterling. Existing elections
can be changed by contacting the Company's Transfer and Paying Agent, Equiniti
Limited on +44 (0) 121 415 7047.
Share Dealing
Investors wishing to buy or sell shares in the Company may do so through a
stockbroker. Most banks also offer this service.
Foreign Account Tax Compliance Act
The Company is registered (with a Global Intermediary Identification Number
CAVBUD.999999.SL.831) under The Foreign Account Tax Compliance Act ("FATCA").
Share Register Enquiries
The Company's UK Transfer and Paying Agent, Equiniti Limited, maintains the
share registers. In event of queries regarding your holding, please contact the
Registrar on 0871 384 2265, calls to this number cost 8p per minute from a BT
landline, other providers' costs may vary. Lines are open 8.30 a.m. to 5.30
p.m., Monday to Friday, If calling from overseas
+44 (0) 121 415 7047 or access their website at www.equiniti.com. Changes of
name or address must be notified in writing to the Transfer and Paying Agent.
Nominee Share Code
Where notification has been provided in advance, the Company will arrange for
copies of shareholder communications to be provided to the operators of nominee
accounts. Nominee investors may attend general meetings and speak at meetings
when invited to do so by the Chairman.
Documents Available for Inspection
The following documents will be available at the registered office of the
Company during usual business hours on any weekday until the date of the Annual
General Meeting and at the place of the meeting for a period of fifteen minutes
prior to and during the meeting:
(a) the Register of Directors' Interests in the stated capital of the Company;
(b) the Articles of Incorporation of the Company; and
(c) the terms of appointment of the Directors.
Warning to Shareholders - Boiler Room Scams
In recent years, many companies have become aware that their shareholders have
been targeted by unauthorised overseas-based brokers selling what turn out to
be non-existent or high risk shares, or expressing a wish to buy their shares.
If you are offered, for example, unsolicited investment advice, discounted JZCP
shares or a premium price for the JZCP shares you own, you should take these
steps before handing over any money.
. Make sure you get the correct name of the person or organisation
. Check that they are properly authorised by the FCA before getting
involved by visiting https://www.fca.org.uk/firms/financial-services-register
. Report the matter to the FCA by calling 0800 111 6768
. If the calls persist, hang up
. More detailed information on this can be found on the Money Advice
Service website www.moneyadviceservice.org.uk
US Investors
General
The Company's Articles contain provisions allowing the Directors to decline to
register a person as a holder of any class of ordinary shares or other
securities of the Company or to require the transfer of those securities
(including by way of a disposal effected by the Company itself) if they believe
that the person:
(a) is a "US person" (as defined in Regulation S under the US Securities Act of
1933, as amended) and not a "qualified purchaser" (as defined in the US
Investment Company Act of 1940, as amended, and the related rules thereunder);
(b) is a "Benefit Plan Investor" (as described under "Prohibition on Benefit
Plan Investors and Restrictions on Non-ERISA Plans" below); or
(c) is, or is related to, a citizen or resident of the United States, a US
partnership, a US corporation or a certain type of estate or trust and that
ownership of any class of ordinary shares or any other equity securities of the
Company by the person would materially increase the risk that the Company could
be or become a "controlled foreign corporation" (as described under "US Tax
Matters" below).
In addition, the Directors may require any holder of any class of ordinary
shares or other securities of the Company to show to their satisfaction whether
or not the holder is a person described in paragraphs (A), (B) or (C) above.
US Securities Laws
The Company (a) is not subject to the reporting requirements of the US
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and does not
intend to become subject to such reporting requirements and (b) is not
registered as an investment company under the US Investment Company Act of
1940, as amended (the "1940 Act"), and investors in the Company are not
entitled to the protections provided by the 1940 Act.
Prohibition on Benefit Plan Investors and Restrictions on Non-ERISA
Plans
Investment in the Company by "Benefit Plan Investors" is prohibited so that the
assets of the Company will not be deemed to constitute "plan assets" of a
"Benefit Plan Investor". The term "Benefit Plan Investor" shall have the
meaning contained in 29 C.F.R. Section 2510.3-101, as modified by Section 3(42)
of the US Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and includes (a) an "employee benefit plan" as defined in Section 3
(3) of ERISA that is subject to Part 4 of Title I of ERISA; (b) a "plan"
described in Section 4975(e)(1) of the US Internal Revenue Code of 1986, as
amended (the "Code"), that is subject to Section 4975 of the Code; and (c) an
entity whose underlying assets include "plan assets" by reason of an employee
benefit plan's or a plan's investment in such entity. For purposes of the
foregoing, a "Benefit Plan Investor" does not include a governmental plan (as
defined in Section 3(32) of ERISA), a non-US plan (as defined in Section 4(b)
(4) of ERISA) or a church plan (as defined in Section 3(33) of ERISA) that has
not elected to be subject to ERISA.
Each purchaser and subsequent transferee of any class of ordinary shares (or
any other class of equity interest in the Company) will be required to
represent, warrant and covenant, or will be deemed to have represented,
warranted and covenanted, that it is not, and is not acting on behalf of or
with the assets of, a Benefit Plan Investor to acquire such ordinary shares (or
any other class of equity interest in the Company).
Under the Articles, the directors have the power to require the sale or
transfer of the Company's securities in order to avoid the assets of the
Company being treated as "plan assets" for the purposes of ERISA.
The fiduciary provisions of laws applicable to governmental plans, non-US plans
or other employee benefit plans or retirement arrangements that are not subject
to ERISA (collectively, "Non-ERISA Plans") may impose limitations on investment
in the Company. Fiduciaries of Non-ERISA Plans, in consultation with their
advisers, should consider, to the extent applicable, the impact of such
fiduciary rules and regulations on an investment in the Company.
Among other considerations, the fiduciary of a Non-ERISA Plan should take into
account the composition of the Non-ERISA Plan's portfolio with respect to
diversification; the cash flow needs of the Non-ERISA Plan and the effects
thereon of the illiquidity of the investment; the economic terms of the Non-
ERISA Plan's investment in the Company; the Non-ERISA Plan's funding
objectives; the tax effects of the investment and the tax and other risks
associated with the investment; the fact that the investors in the Company are
expected to consist of a diverse group of investors (including taxable,
tax-exempt, domestic and foreign entities) and the fact that the management of
the Company will not take the particular objectives of any investors or class
of investors into account.
Non-ERISA Plan fiduciaries should also take into account the fact that, while
the Company's board of directors and its investment adviser will have certain
general fiduciary duties to the Company, the board and the investment adviser
will not have any direct fiduciary relationship with or duty to any investor,
either with respect to its investment in Shares or with respect to the
management and investment of the assets of the Company. Similarly, it is
intended that the assets of the Company will not be considered plan assets of
any Non-ERISA Plan or be subject to any fiduciary or investment restrictions
that may exist under laws specifically applicable to such Non-ERISA Plans. Each
Non-ERISA Plan will be required to acknowledge and agree in connection with its
investment in any securities to the foregoing status of the Company, the board
and the investment adviser that there is no rule, regulation or requirement
applicable to such investor that is inconsistent with the foregoing description
of the Company, the Board and the Investment Adviser.
Each purchaser or transferee that is a Non-ERISA Plan will be deemed to have
represented, warranted and covenanted as follows:
(a) The Non-ERISA Plan is not a Benefit Plan Investor;
(b) The decision to commit assets of the Non-ERISA Plan for investment in the
Company was made by fiduciaries independent of the Company, the Board, the
Investment adviser and any of their respective agents, representatives or
affiliates, which fiduciaries (i) are duly authorized to make such investment
decision and have not relied on any advice or recommendations of the Company,
the Board, the Investment adviser or any of their respective agents,
representatives or affiliates and (ii) in consultation with their advisers,
have carefully considered the impact of any applicable federal, state or local
law on an investment in the Company;
(c) The Non-ERISA Plan's investment in the Company will not result in a
non-exempt violation of any applicable federal, state or local law;
(d) None of the Company, the Board, the Investment adviser or any of their
respective agents, representatives or affiliates has exercised any
discretionary authority or control with respect to the Non-ERISA Plan's
investment in the Company, nor has the Company, the Board, the Investment
adviser or any of their respective agents, representatives or affiliates
rendered individualized investment advice to the Non-ERISA Plan based upon the
Non-ERISA Plan's investment policies or strategies, overall portfolio
composition or diversification with respect to its commitment to invest in the
Company and the investment program thereunder; and
(e) It acknowledges and agrees that it is intended that the Company will not
hold plan assets of the Non-ERISA Plan and that none of the Company, the Board,
the Investment adviser or any of their respective agents, representatives or
affiliates will be acting as a fiduciary to the Non-ERISA Plan under any
applicable federal, state or local law governing the Non-ERISA Plan, with
respect to either (i) the Non-ERISA Plan's purchase or retention of its
investment in the Company or (ii) the management or operation of the business
or assets of the Company. It also confirms that there is no rule, regulation,
or requirement applicable to such purchaser or transferee that is inconsistent
with the foregoing description of the Company, the Board and the Investment
Adviser.
US Tax Matters
This discussion does not constitute tax advice and is not intended to be a
substitute for tax advice and planning. Prospective holders of the Company's
securities must consult their own tax advisers concerning the US federal, state
and local income tax and estate tax consequences in their particular situations
of the acquisition, ownership and disposition of any of the Company's
securities, as well as any consequences under the laws of any other taxing
jurisdiction.
The Board may decline to register a person as, or to require such person to
cease to be, a holder of any class of ordinary shares or other equity
securities of the Company because of, among other reasons, certain US ownership
and transfer restrictions that relate to "controlled foreign corporations"
contained in the Articles of the Company. A Shareholder of the Company may be
subject to forced sale provisions contained in the Articles in which case such
shareholder could be forced to dispose of its securities if the Company's
directors believe that such shareholder is, or is related to, a citizen or
resident of the United States, a US partnership, a US corporation or a certain
type of estate or trust and that ownership of any class of ordinary shares or
any other equity securities of the Company by such shareholder would materially
increase the risk that the Company could be or become a "controlled foreign
corporation" within the meaning of the Code (a "CFC"). Shareholders of the
Company may also be restricted by such provisions with respect to the persons
to whom they are permitted to transfer their securities.
In general, a foreign corporation is treated as a CFC if, on any date of its
taxable year, its "10% US Shareholders" collectively own (directly, indirectly
or constructively within the meaning of Section 958 of the Code) more than 50%
of the total combined voting power or total value of the corporation's stock.
For this purpose, a "10% US Shareholder" means any US person who owns
(directly, indirectly or constructively within the meaning of Section 958 of
the Code) 10% or more of the total combined voting power of all classes of
stock of a foreign corporation or 10% or more of the total value of shares of
all classes of stock of a foreign corporation. The Tax Cuts and Jobs Act (the
"Tax Act") eliminated the prohibition on "downward attribution" from non-US
persons to US persons under Section 958(b)(4) of the Code for purposes of
determining constructive stock ownership under the CFC rules. As a result, the
Company's US subsidiary will be deemed to own all of the stock of the Company's
non-US subsidiaries held by the Company for purposes of determining such
foreign subsidiaries' CFC status. The legislative history under the Tax Act
indicates that this change was not intended to cause the Company's non-US
subsidiaries to be treated as CFCs with respect to a 10% US Shareholder that is
not related to the Company's US subsidiary. However, the IRS has not yet
issued any guidance confirming this intent and it is not clear whether the IRS
or a court would interpret the change made by the Tax Act in a manner
consistent with such indicated intent. The Company's treatment as a CFC as well
as its foreign subsidiaries' treatment as CFCs could have adverse tax
consequences for 10% US Shareholders.
The Company has been advised that it is be treated as a "passive foreign
investment company" ("PFIC") for the fiscal year ended February 2021. The
Company's treatment as a PFIC is likely to have adverse tax consequences for US
taxpayers. Previously, for the fiscal year ended February 2020 the Company was
found NOT to be a PFIC. An analysis for the financial year ended 28 February
2022 will be undertaken this year.
The taxation of a US taxpayer's investment in the Company's securities is
highly complex. Prospective holders of the Company's securities must consult
their own tax advisers concerning the US federal, state and local income tax
and estate tax consequences in their particular situations of the acquisition,
ownership and disposition of any of the Company's securities, as well as any
consequences under the laws of any other taxing jurisdiction.
Investment Adviser's ADV Form
Shareholders and state securities authorities wishing to view the Investment
Adviser's ADV form can do so by following the link below:
https://adviserinfo.sec.gov/firm/summary/160932
END
(END) Dow Jones Newswires
June 15, 2022 06:03 ET (10:03 GMT)
Jz Capital Partners (LSE:JZCP)
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